12 Jul 2019
Fee-splitting arrangements in Arizona come with a host of ethical concerns that attorneys are often and understandably wary of. Traditional referral fees, fees charged for sending a prospective client to another lawyer, are generally prohibited by the Arizona Rules of Professional Conduct. However, there are other ways to split fees that are perfectly permissible under Arizona’s ethical rules. This article seeks to parse out how fee-splitting can be done ethically, and the obligations that should be considered when splitting fees with other attorneys.
Fee-splitting in Arizona is primarily governed by two Rules of Professional Conduct. Rule 1.5, which governs fees, and Rule 7.2, which prohibits payment from a lawyer to others who recommend the lawyers services. In the context of referral fees, these two rules appear at odds with each other. But there are scenarios where lawyers can split fees with other lawyers when they are both involved in the same or substantially related case.
Rule 7.2(b): The prohibition against traditional referral fees
Arizona Rule of Professional Conduct 7.2(b) prevents a lawyer from giving anything of value to a person for recommending that lawyer’s services to potential clients. In contrast, the Model Rules of Professional Conduct allow compensation for recommendations if there is a non-exclusive agreement that is made known to the client. Under the model rules, lawyers can agree to share referral fees. In other words, if a client comes to an attorney with an issue outside of that attorney’s practice, and the attorney recommends they seek services from another lawyer, the second lawyer can pay the first for the recommendation. Some jurisdictions allow such arrangements, but Arizona rules do not have such an allowance. These traditional referral fees are prohibited by Arizona Rule 7.2(b). However, there are scenarios in which attorneys may share fees with other attorneys, even those who are from different firms.
Rule 1.5(e): Fee-splitting
Arizona Rule 1.5 controls how lawyers charge fees. Section (e) governs fee-splitting between lawyers of different firms. Fee-splitting between lawyers of different firms is allowed, but only if certain conditions are met. Fees can be divided proportionately to the work done by each attorney. If an attorney has done 10% of the work in a case, they can collect 10% of the fee. The rule also allows for disproportionate fee-splitting. For example, a lawyer who does 10% of the work in a case is permitted to collect 20% of the fee if the parties choose. In this way, lawyers can collect a “finder’s fee” or referral fee without violating Rule 7.2(b). There is, however, a catch to such an arrangement. Disproportionate fee-splitting requires that all lawyers involved assume joint responsibility for the representation. In either case, the total fee must be reasonable, and the client must agree in writing to the arrangement.
There are potential liability pitfalls that any lawyer should consider before becoming involved in a fee-splitting arrangement. First, comment 8 to Rule 1.5 mandates that lawyers only refer a matter to someone who they reasonably believe is competent to handle the work. Further, if the referring lawyer knows, or should know, that another attorney has violated ethical rules, the referring lawyer is obligated to take appropriate steps to protect the interests of the client.
Additional care must be taken in disproportionate fee-splitting arrangements. Disproportionate arrangements require that all attorneys involved accept joint responsibility. According to the State Bar of Arizona Ethics Committee, “Joint responsibility requires, at the least, that the referring attorney accept vicarious liability for any malpractice that occurs in the representation.” In sum, lawyers should take great care when deciding to split fees disproportionately and keep a close eye on the case as it proceeds.
It’s true that traditional referral fees are prohibited by Rule 7.2. Lawyers cannot simply collect payment for sending clients to other lawyers. However, Arizona rules do not have a blanket prohibition on fee-splitting. To the contrary, Rule 1.5 allows for fee-splitting arrangements to be made between attorneys of separate firms. Further, arrangements that comply with Rule 1.5 do not run afoul of Rule 7.2.