Fee Splitting: The Ethical Implications of Non-Lawyer Involvement

EVAN ROBINSON—Fee-splitting is a common phenomenon in the legal profession. Typically, fee-splitting occurs between law firms in two ways. The first occurs when two or more law firms work together on a case and split the hourly fees which they have billed the client. The second way occurs, most commonly among plaintiff’s law firms, when one lawyer (or law firm) refers a case or a “lead” to another law firm in return for a percentage of any contingency fees that the referred firm may earn as a result of any judgments or settlements awarded in the case.

While attorneys do refer clients to other attorneys without the expectation of receiving anything in return, it is not uncommon for law firms to engage in referral agreements. Under a referral agreement, the law firm which received the client referral will often times split a percentage of any contingency fees they recover from a judgment or settlement with the attorney (or law firm) that originally referred them the case. So, for example, if the referral firm won a judgment on behalf a client at trial and that judgment was worth $500,000, assuming a standard market contingency fee of 40% of the judgment, the firm that represented the plaintiff will receive $200,000.  From here, the firm that won the judgment will often times give a percentage of their fee (the $200,000) to the firm that referred them the client in the first place. So, if the agreement between the two contracting law firms was 30%, then the firm that received the initial lead and made the subsequent referral could earn $60,000 or 30% of the $200,000 fee. That being said, there does exist a distinction among states as to what requirements must be fulfilled in order to ethically claim a referral fee. While every state requires the client to be informed of the arrangement and to consent to a fee splitting agreement, some states require that “the division of fees [ ] be [ ] proportion[al] to the work performed by each attorney, and some states “do not require that the division of fees be proportional to the work performed by each lawyer. In jurisdictions which do not require proportional work, this “open[s] the door to lawyers being paid a referral fee even where they performed absolutely no work on the [case] whatsoever. Thus, the bottom line is that in some jurisdictions plaintiff’s attorneys can make large amounts of money by simply making a phone call and referring clients to other attorneys.

While this is a common phenomenon amongst members of the Bar, fee-splitting amongst nonlawyers is considered an ethical violation in every United States jurisdiction. However, on January 23, 2020, The Washington DC Bar unveiled a press release in which it announced a potential relaxation of its fee-splitting rule in addition to a new rule which would permit nonlawyers to own law firms.  Currently, the DC Bar is widely regarded as the most lenient Bar in the nation given that it is the only jurisdiction which permits lawyers and nonlawyers to own law firms jointly or in partnerships. The purpose of such a lenient rule is intended to make it easier for law firms to retain skilled nonlawyer professionals such as “mental health professionals, medical doctors, economists, lobbyists, accountants and [ ] executive directors.” That said, a rule which permits outright ownership of law firms by nonlawyers could threaten the market for traditional law firms by adding competition to an already saturated industry. On the other hand, such a rule of construction may also provide for cheaper, more convenient “access to legal services.” For example, large accounting firms typically employ attorneys for a variety of reasons. That said, under this new rule, an accounting firm could, in addition to offering its usual services, also assist consumers with the drafting of legal documents such as “wills, trusts, incorporations, etc.”

As it pertains to fee-splitting, the implementation of such a progressive rule between lawyers and nonlawyers could also spur innovative business structures that generate significant financial opportunities. While the American Bar Association strictly prohibits sharing fees with nonlawyers, if the DC bar adopts its proposed rule this could potentially allow law firms to split their fees with, for example, an advertising company that designed and built the firm’s website, which led a hypothetical client to call the law firm and inquire about its services. This is commonly referred to as “lead generation.” Thus, under this type of business structure, advertising entities could have “skin in the game” when it comes to litigation by receiving a portion of contingency fees. Such a progressive business arrangement could motivate a law firm to strictly operate as a referral service or a “runner,” whereby the firm pays an advertising business to aggressively rank its firm’s advertisements on google through the use of google AdWords. Then, when the firm receives a lead, the firm proceeds to refer that lead to another law firm in exchange for a contingent referral fee. Once the original referring firm receives that fee, it could then provide a kickback percentage of the fee to the advertising firm. Then, the process starts all over again with another lead. This type of business structure could significantly motivate advertising businesses to work hand-in-hand with law firms as there is the potential to make exorbitant amounts of money, especially in the personal injury and mass torts arenas, just by referring cases out to other law firms and collecting fees on those referrals.

However, critics of this type of amended ethics rule contend that “the practice of law is a profession” and that prohibition on the “sharing of fees with nonlawyers is an essential firewall protecting lawyer professionalism.” Essentially, critics fear that permitting fee splitting with nonlawyers could “interfere with a lawyer’s independent professional judgment,” which may adversely affect the client. On the other hand, proponents argue that such a rule could provide, especially smaller law firms, with easier ways to generate business and raise capital in order to satisfy their overhead costs.

While there are compelling arguments on both sides, becoming an attorney means that you are a member of a professional association dedicated to the highest level of integrity. Further, earning the title of “esquire” requires a substantial amount of time and effort. Thus, in my opinion, such a relaxed ethical rule, which permits nonlawyers to own law firms, threatens the integrity of the profession and takes away from what it means to be a lawyer. Although new alternative business structures like the DC Bar rule may provide consumers with more affordable access to legal services, there are too many risks and drawbacks to completely endorse the rule. Of these notable risks include undermining the extent to which the interests of the client truly  “remain[s] paramount.” As such, I do not think this rule should be implemented and moreover, Bar ethics committees should not permit fee sharing amongst nonlawyers, nor should they permit nonlawyer ownership of law firms. If they did, the title of “esquire” certainly would not mean as much and the industry, and most importantly, the clients, could seriously suffer as a result.