Imagine you have a friend with what appears to be a rock-solid case who asks you to represent him. The damages are substantial. The problem is, you are a solo practitioner who’s never handled a case of this magnitude. Truth be told, you’d feel a whole lot more comfortable if another attorney was involved. At the same time, taking the case on could mean massive revenue for your practice. Can you ethically refer the case and still collect a fee? Can you stay on the case in some capacity and take a large chunk of the fee?
A recent published case from the Colorado Court of Appeals deals with “referral fees,” the rules of professional conduct, and what happens when lawyers in different firms fight over how to divide massive attorney fee awards.
Clarity on the Rules for Dividing Fees: Scott R. Larson, P.C. v. Grinnan
Here is what happened in the case.
A Colorado personal injury firm (Larson) was referred a case by a general practitioner. The referring attorney’s friends had been in a terrible accident and had asked him to represent them. Because he was a general practitioner with little experience in personal injury practice, he sought out help.
Larson took the case on contingency and entered into an agreement with the family. As part of the contingency agreement, Larson agreed that the referring attorney would be paid a percentage of Larson’s fee, but the lawyers failed to agree on the precise way to divide the fee.
Larson’s firm did the lion’s share of the work on the litigation, which was a multi-defendant case, with different defendants settling along the way. Ultimately, the final defendant settled after the first day of trial. Larson also paid for costs as they were incurred in the case (which ultimately amounted to approximately $300,000). The referring attorney did very little substantive work, but he served as a go-between with the clients, who were his close friends.
Litigation was hard fought, but in the end, Larson ended up obtaining what appeared to be favorable settlements. As a result, Larson ended up with a total fee of over $3 million dollars. The litigation was supposed to be over, but for the attorneys it was just beginning.
The referring lawyer demanded a portion of the fee. When the attorneys could not agree on how to divide the fee, the referring attorney filed a lien and then entered an appearance in the case. Though it was undisputed that the referring lawyer performed little actual work in the case, he argued that he was entitled to somewhere between a quarter and third of the total fee. Given the massive fee at issue, hundreds of thousands of dollars hung in the balance.
The referring attorney argued that he was entitled to a large portion of the fee because he was “jointly responsible” for the representation. The trial court agreed and awarded him 12.5% of the award: 10% as a referral fee, and 2.5% to account for the actual work he performed on the matter. Both sides appealed.
In a published opinion, the Court of Appeals vacated the award and remanded the case back to the trial court to make specific findings about whether the referring attorney was truly jointly responsible. In so ruling, the Court provided guidance on what it means for a lawyer to be jointly responsible for the representation such that fees can be divided without regard to how much work each one did on the case, and provides a reminder for lawyers and clients to get on the same page about dividing fees before things go south.
“Jointly Responsible” for the Representation when Splitting Fees
The Colorado Rules of Professional Conduct have several provisions regarding division of fees. A division of a fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. For example, fee division can arise if one lawyer is submitting another lawyer’s bills to the client. It can also arise in a case like this, where attorney fees or a contingency fee are awarded and you have to split them between attorneys.
As a general matter, referral fees are prohibited. Lawyers cannot simply pay other lawyers for sending a case their way. (This is not true in many jurisdictions, which may even allow for a 25% referral fee.) However, Colorado Rule of Professional Conduct 1.5(d) permits fee splitting between lawyers in different firms if the lawyers are jointly responsible for the engagement or if the split is proportional to the work that each performed.
Because the trial court had awarded a fee to the referring attorney that amounted to more than the proportion of work he actually performed, this case raised one central question: did the referring attorney assume “joint responsibility” for the case? If he didn’t, then he could only take a fee proportional to the work he performed, which wasn’t much. If he did, then a larger portion (in this case, what the trial court awarded) would be proper.
The Court of Appeals tackled what it described as the “novel” question of what it means to be “jointly responsible” for the representation by turning to the comments to the Colo. RPC: “Joint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.” Accordingly, the Court provided guidance on what it means to assume (1) financial and (2) ethical responsibility such that a lawyer is jointly responsible for the representation.
As to financial responsibility, the Court held that financial responsibility means that the referring lawyer has joint and several or vicarious liability for the trial specialist’s legal malpractice. In this case, the Court determined that the lawyers had essentially formed a joint venture for the purpose of litigating the family’s case, such that the referring attorney had financial responsibility for the representation.
The Court then turned to ethical responsibility. This responsibility, the Court explained, “does not entail assuming a supervising lawyer’s ethical obligations.” In other words, assuming ethical responsibility for the representation does not mean that the lawyer is subject to professional discipline just because an associated attorney commits an ethical violation. Instead, the Court articulated a three-part test for courts to use when determining whether a lawyer has assumed ethical responsibility for a case: “[T]o assume ethical responsibility, the referring lawyer must:
- Actively monitor the progress of the case,
- “[M]ake reasonable efforts to ensure that the firm [of the lawyer to whom the case was referred] has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct,” Colo. RPC 5.1(a), and
- Remain available to the client to discuss the case and provide independent judgment as to any concerns the client may have that the lawyer to whom the case was referred is acting in conformity with the Rules of Professional Conduct.
Because the trial court did not make findings about whether the referring attorney had assumed ethical responsibility for the matter, the Court of Appeals vacated the fee award and remanded for the court to make those findings using the new test.
How to Avoid a Dispute Over Splitting Fees
First, this case should not discourage lawyers from bringing on co-counsel when help is needed to ensure the best representation. To the contrary, associating with other lawyers, particularly specialists, is a good practice and one that is encouraged by our ethical rules. But everyone wants to get paid. And this case serves as a cautionary tale on how everyone should be on the same page when it comes to fee splitting. Here are some takeaways from the case on how to avoid a dispute over splitting fees.
Be Clear at the Outset How You Will Split Fees with Another Attorney
Consider making it clear at the outset of a matter how fees will be divided between the lawyers involved in the case. Though the court in this case did not go so far as to say a written agreement between the lawyers is required, it did make a point of noting that the lawyers didn’t have one. And that fact led to the litigation in this case.
Simply having the conversation at the outset is a good start. Do not assume that everyone will be fine with your personal idea of a fair division at the end. Better yet, put this understanding in a writing signed by the attorneys involved.
Make Sure Your Client is in Agreement
Not only should the lawyers know how fees are going to be divided, but the client must agree to this arrangement in writing. This is a clear requirement of Colo. RPC 1.5. While the client wasn’t directly involved in the litigation over the fee splitting in this case, the rule is really in place to protect clients. Be sure the fee agreement contains the reflection of the agreement on fee splitting and that the client is on board.
With these things in place, if you are ever lucky enough to get a big win, you will be able to share it smoothly.
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