As one of the few states that operates as a pure referral jurisdiction, attorneys in California have more flexibility in setting and using referral fees as part of their practice. Pure referral fees means that, unlike the ABA Model Rules, attorneys in California do not need to base referral fees on actual work completed or accept joint responsibility. Following a 2018 revision to the California Rules of Professional Conduct (CRPC), attorneys in California have clear guidelines on how to structure referral fees. The state has also provided additional opinions to give attorney guidance on the subject.
Attorneys should be aware that these rules apply only to referrals from, by, and to attorneys. While the CRPC does address financial arrangements with non-lawyers, those agreements fall under a different part of the law and are not relevant when addressing referral fees.
Under the 2018 revision, Rule 1.5.1 governs referral fees in California. To set up a referral fee agreement, attorneys must be able to show the following:
An accompanying comment mentions that the written agreement may be a single or multiple documents. The State Bar has also provided samples agreements that attorneys can use.
Two reasons for the 2018 revisions were to ensure that clients are fully informed in writing of any referral fee and that any fee division does not adversely affect the attorney who takes the client’s case.
Rule 1.5.1 requires that attorneys inform clients, close in time to the agreement between the attorneys, about the referral fee. This disclosure must be in writing and include:
These new rules are a change from Rule 2-200(A), which allowed an attorney to inform the client at the end of representation and did not require a written document. Clients must agree to the fee arrangement. Without client consent, attorneys cannot engage in any division of fees.
In addition, attorneys cannot increase the amount charged to the client as a result of referral fees. Attorneys must also provide the ability for clients to ask questions about referral fees prior to signing.
While Rule 1.5.1 does not place a limit on the amount of a referral fee, Rule 1.5 bars attorneys from collecting an unconscionable fee. What constitutes an unconscionable depends on the facts and circumstances that existed at the time the attorneys and clients entered into the agreement.
CRPC lists thirteen factors that can be used to determine if a fee is unconscionable. They are not an exclusive list. For referral fees, potentially relevant factors include:
Other than barring an increase in how much a client pays and unconscionable fees, California offers no explicit guidelines on the amount of a referral fee.
The 2018 revisions reaffirmed Morgan v. Harris, which stated:
“If the ultimate goal is to assure the best possible representation for a client, a forwarding fee is an economic incentive to less capable lawyers to seek out experienced specialists to handle a case. Thus, with marketplace forces at work, the specialist develops a continuing source of business, the client is benefited and the conscientious, but less experienced lawyer is subsidized to competently handle the cases he retains and to assure his continued search for referral of complex cases to the best lawyers in particular fields.”
The comment to the 2018 revision reaffirmed Morgan v. Harris.
The Commission also noted that the ABA’s Ethics 2000 Commission had recommended revisions to the Model Rules that would reflect California’s pure referral fees. The ABA House of Delegates rejected this change, which means California attorneys are some of the only attorneys in the country who benefit from this system.
As explained in the Morgan v. Harris, one of the advantages of fee sharing is that it encourages attorneys to send cases to specialists. This benefits clients as attorneys are incentivized to pass along them to the best possible attorney for their specific problem.
California does not require that a referring attorney be paid in proportion to the actual work completed. Some commentary indicates that no work need be performed to pay a referral fee, although a non-binding opinion from the Los Angeles County Bar Association suggests a more nuanced approach.
In a January 2020 opinion, the LACBA raised the issued of referral fees in workers’ compensation cases. While this opinion is advisory and has no force of law, for attorneys who plan to use referral fees in their practice, the opinion is worth reviewing.
In worker’s compensation cases, the LACBA advises attorneys that they may have a referral fee but that the fee may only be paid after a fee exists to divide. What this means is that LACBA recommends attorneys in workers’ compensation cases not pay a referral fee until they have secured the funds from that specific case.
Again, this is merely an advisory opinion, but attorneys should consider whether including language in any agreements that a referral fee will not be paid until the payor attorney has secured the necessary payment or other funds from that specific case.
Attorneys in California benefit from the state’s use of a pure referral fee system. The state provides clear guidelines for attorneys to execute a referral fee agreement. Clients and attorneys benefit from a system that encourages attorneys to pass along cases to attorneys with more knowledge or experience.
