Money, Small Law Firms, Solo Practitioners

Back In The Race: Teaming Up

How should you handle the tricky matter of referral fees? Here's one lawyer's approach.

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Occasionally, someone wants me to do legal work outside of my practice area. I tend to refer the potential client to an attorney who can handle it and ask for a referral fee when appropriate. But sometimes it makes sense to work the case myself with outside help — for example, if the work is for an existing client and he cannot afford the referring attorney’s fee. So as a gesture of appreciation to the client, you want to help him for a reduced fee. Or you want to get experience in the area of law that is involved.

And let’s be anonymously honest. Sometimes the case has potential for large attorney’s fees and you want a bigger cut than the firm’s standard referral percentage. It’s hard not to feel bitter when you get a paltry referral fee up front and later learn that the attorney who handled the matter got a half-million-dollar payout.

So today, I want to write about how I typically (but not always) decide whether to refer a case out completely, or co-counsel with someone else. I assume readers are familiar with and will follow the ABA Model Rules 7.2 and 1.5(e) and your state’s versions of these rules. My first priority is to refer a client to a competent attorney, even if it means a smaller referral fee or none at all. But when there are three or more equally competent and business-savvy attorneys competing for your referrals, the size and girth of the compensation package can be appealing…

Referral Fees – Referral fees are a sensitive subject. Some are against them because of the potential they create for malpractice issues, awkward and possibly contentious disputes involving money, and reduced chances of getting reciprocal referrals. In an ideal world where every attorney makes a comfortable living, referral fees should not be necessary.

I typically do not ask for referral fees unless there is a substantial payout involved. I initially asked for referral fees for every case I turned away, but for one reason or another, it didn’t seem like the right thing to do. For instance, I rarely take referral fees — even large ones — from new attorneys and those who tell me that they are struggling (now whether they are telling the truth is another matter altogether). I also don’t ask for referral fees from someone if she has been helpful in the past or if I think we can be helpful to each other in the future.

Also, enforcing referral fees can sometimes become difficult. In one defense litigation matter I referred out, the attorney who took the matter promised me a percentage of the billings. The problem was that the client paid him sporadically and it just happened to be around the time his office rent and payroll was due. When I realized that collecting money from his was going to be a pain, I called him up and made alternative arrangements.

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I have no qualms about asking for referral fees from attorneys who I consistently refer clients to but for good reason do not send reciprocal referrals.

I have discussed referral fees with almost all of my clients, and they do not care so long as it didn’t increase their legal bill. Some work in sales so they understand that’s how business is done sometimes. And a few clients actually preferred that I get a referral fee, especially if I gave them a discounted fee in the past.

My philosophy on giving referral fees is simple. If the attorney asks for it and I take the referral, I honor the referral fee arrangement. Period. Otherwise I don’t take the case. In some cases (but particularly for new attorneys), I send a sizable birthday or holiday gift card even when they don’t ask for it.

Working under co-counsel – Instead of referring out a case completely, another attorney and I agree to split the work and the co-counsel takes the lead. He meets the client with me observing, determines the fees, sets up and explains the strategy and tells me what to do. I typically conduct the legal research and draft the paperwork. My work will then be evaluated and critiqued. I tend to use this arrangement when the matter involves an area of law I know little to nothing about but want to learn. I also use this arrangement to see if we will work well on other cases and maybe as partners in the future.

How fees are split in this arrangement will vary. I won’t get into numbers here, but let’s just say that a 50-50 division is probably the best arrangement you will get. If the attorney has referred me cases or has been otherwise helpful in the past, I will not ask for compensation unless I anticipate spending a significant amount of time on the case or incur large expenses.

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I do not work for free in exchange for vague promises of future referrals, especially with an attorney I barely know. From my experience, these usually genuine but lofty promises are hard to believe. Unless our practice areas overlap, these “future referrals” will be few and far between.

A co-counsel arrangement can result in a bigger payout as opposed to a conventional referral fee agreement. For example, suppose a case was worth $20,000 in attorneys’ fees and the firm’s referral policy was 15% of billings. You stand to get a $3,000 fee just for referring the case. But if you bill yourself out at $300 per hour and generate 20 billable hours on a split-fee agreement, you will get $6,000. This will work if the lead attorney can use the 20 hours that he would have billed himself on billing other clients. I make it a point to use this strategy with an attorney who constantly brags about how busy he is — which seems to be everyone.

The problem with this arrangement is that you will also be on the malpractice hook if something goes wrong. While I jealously guard my reputation and do everything possible to minimize malpractice risk, I don’t worry about it much. If someone were to threaten me with a malpractice suit, I would reply with a thank you card saying “Thank you for giving a good reason to file bankruptcy.” (Why yes, I do know student loans are not dischargeable unless you can prove brain death.) I would also include a copy of my suicide-inducing student loan bill. My insurance agent got a kick out of that.

Fee splitting, whether done through referral fees or securing co-counsel(s), shouldn’t be about maximizing revenue at the expense of others. Referring matters out should always be done with the best intentions for your client and establishing good relationships with other attorneys.

Earlier: When NOT To Refer That Case

Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached at sachimalbe@excite.com.

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