by Matthew A. Hodel
Referrals of legal business raise several ethical questions for lawyers. Among them: When are you required to seek the services of another attorney to assist your client? Can you be liable for a “negligent” referral? If you have a conflict of interest, are you still able to make a referral to another lawyer? What are the rules for sharing referral fees?
When Must You Make a Referral? Under the California Rules of Professional Conduct, if you lack sufficient learning and skill for a particular legal service you must do one of two things to avoid breaching the duty to act with legal competence. You must associate or consult with another attorney reasonably believed to be competent in that area or acquire the necessary skill and learning yourself. Cal. Rules of Prof’l Conduct R. 3-110(C) (1992). This rule’s Discussion states there is an exception for emergency services, but “assistance should be limited to that reasonably necessary in the circumstances.” Cal. Rules of Prof’l Conduct R. 3-110 (1992).
When you agree to take on a matter, you impliedly agree to use the skill, prudence, and diligence of other attorneys commonly practicing in that subject matter area. Kirsch v. Duryea, 21 Cal. 3d 303, 308 (1978). If you lack or cannot acquire that skill yourself, you have a mandatory duty to make the referral. The failure to do so is legal malpractice. Horne v. Peckham, 97 Cal. App. 3d 404, 414 (1979) (failure to consult with tax law specialist); see also, “Duty to Refer to a [Medical] Specialist, Use Note” Cal. Jury Instr.—Civ. 6.04 (“BAJI”) (2015) (“This instruction may be adapted to a legal malpractice case”). As an extension of this obligation, you may also have a duty to refer a client to a non-legal specialist. Enriquez v. Smyth, 173 Cal. App. 3d 691, 697 (1985) (finding a duty to refer a client to an appraiser, if that is what competent bankruptcy attorneys normally do).
Can You Be Sued for a “Negligent” Referral? The easiest answer to this question is “Yes,” if you are talking about the improper failure to seek the services of another lawyer as discussed above. But what if you refer someone to another lawyer who then commits legal malpractice or some other wrong against the client? Does California recognize a cause of action against you for negligent referral to another lawyer? The answer seems to be, “Probably,” if the circumstances so warrant.
The Rutter Group states that there is no California case on point, but adds that it “seems clear” that such a claim would be recognized. California Practice Guide: Professional Responsibility, Section 5:502 (Rutter Group 2015). Several commentators have written in support of such a claim. See discussion and citations at 6 Bus. & Com. Litig. Fed. Cts. § 75:19 (3d ed.) (Thompson Reuters 2014) (“Claims for negligence and malpractice may also include a professional’s negligent referral of another professional as a cause of action”).
If accused of such a wrong, the referring lawyer might argue that making the recommendation was not the “practice of law.” Setting aside whether this contention is wise from an insurance coverage perspective, there is no perfectly bright line as to what constitutes the “practice of law.” Business and Professions Code Section 6125, which prohibits the unauthorized practice of law, does not define what it means to “practice.” Our Supreme Court has said that defining this term “may be a formidable endeavor.” Baron v. City of Los Angeles, 2 Cal. 3d 535, 543 (1970).
Whether the referral is an act of “practicing law” would seem to depend upon the reasonable expectations of the person seeking the referral. Are they already an existing client? Did they call upon the lawyer, explain the legal problem, hear the lawyer cannot handle the case, but then ask for the referral based upon the lawyer’s knowledge and expertise as a member of the legal community? There are many cases holding that even the briefest conversation can result in legal duties, including a fiduciary relationship, flowing from the lawyer to a prospective client, even though the lawyer is never retained. See, e.g., Miller v. Metzinger, 91 Cal. App. 3d 31, 40 (1979).
Even if not “practicing law” it would still seem that a reckless referral could be actionable under ordinary principles of negligence: duty, breach of duty, and proximately caused damages. Let’s suppose you tell someone who asked for a referral, “Go hire this lawyer, they are good and well-qualified for this type of problem.” Does this statement go beyond a non-actionable expression of opinion and into negligent misrepresentation? See Restatement (Second) Torts § 552 (1977) (“Information Negligently Supplied for the Guidance of Others”). A leading case on negligent legal referrals analyzes this problem under both legal malpractice and common law negligence principles. See Tormo v. Yormark, 398 F. Supp. 1159, 1169-72 (D.N.J. 1975) (New York attorney referred his clients to criminally indicted attorney who then embezzled their funds).
There are other ways for the referral to be negligent. For example, the referring lawyer may have a duty to warn the inquirer of an impending statute of limitations problem. See Miller, 91 Cal. App. 3d at 42. But see Flatt v. Superior Court, 9 Cal. 4th 275, 290-91 (1994) (there is no duty to warn or to recommend prompt hiring of another attorney where to do so would conflict with the interests of another existing client).
How, then, to try to insulate against negligent referral claims? Some referred-out persons do not need cautionary words from you. They are sophisticated enough to know the referral is a subjective opinion and, in the end, the choice is theirs alone to make.
Others may need more. Consider providing more than one name, which reinforces the independence of the referred person’s choice. Surround the referral with cautionary wording, and put them in writing, such as: “I suggest you consider this person to potentially represent you” and “If you choose to consider them, then you should personally interview them so that you can listen to their qualifications and experience. Then, decide for yourself if they are someone you would be comfortable with in handling your matter.” Of course, don’t make a referral if you don’t have any basis for the recommendation; or, if you are relying upon hearsay, then flag your lack of personal, direct knowledge as part of the recommendation.
Consider making no referral at all, especially where you do not trust the person requesting counsel or something about them makes you uneasy. If you decline, for whatever reason, to make a referral, then think about putting them in contact with the Orange County Bar Association’s attorney referral service, found at http://www.lrisoc.org.
Can You Make a Referral When You Have a Conflict of Interest? Assume you are approached by a potential client who seeks representation against one of your present clients. After you decline to take the person on as a client because of Rule of Professional Conduct 3-310 (“Avoiding the Representation of Adverse Interests”), may you nonetheless refer them on to another lawyer? Or, must you refrain from so doing because, under some construct, you are acting “adverse” to a client?
My research for this article found no California reported decision directly on point. Rule 3-310 does not literally address the problem because, in this hypothetical, you have not undertaken the “representation” of the adverse party—all you have done is refer them to another lawyer. One argument, however, is that the Supreme Court’s decision in Oasis West Realty would prohibit the referral based on the reasoning that the lawyer may not do anything which would injuriously affect the client in any matter where the lawyer has represented or is representing the client, nor may the lawyer use confidential information obtained from that relationship against the client. See Oasis West Realty, LLC v. Goldman, 51 Cal. 4th 811, 823 (2011).
Nor is there any California State Bar ethics committee opinion addressing the problem; however, one opinion has noted there is a broad definition of what it means to be “adverse” to a client—basically anything that is potentially injurious. COPRAC Opinion No. 2011-182 thus opines that an attorney must decline to take on representation that would require service of the third-party subpoena on an existing client. The opinion also advises that, absent exigent circumstances, attorneys should check for conflicts before accepting representation of a client in any matter. Id. at 2-3, 5.
But the opinion seems to have anticipated and then avoided the very question we are now discussing: “This opinion does not address whether Attorney may ethically do anything other than decline the representation should Witness Client refuse to consent to the representation of Prospective Client.” Id. at 1 n.2.
Despite the above, there is significant authority from other state bar association committees opining that a referral may ethically be made in these circumstances. In 2004, the District of Columbia Bar Association opined that the referral does not constitute any damage or prejudice to the existing client. Fundamentally, the District of Columbia Bar Association believed there is a sound public policy rationale for allowing the referral:
We cannot assume that it is disadvantageous to the referring lawyer’s existing client for its adversary to be represented by competent counsel. Competent opposing counsel is likely in many cases to contribute to reaching a reasonable resolution of the dispute. More basically, inherent in our adversary system is the principle that persons ought to be represented by competent lawyers and that disputes ought to be resolved on their merits. Assisting a person to obtain competent representation is entirely consistent with that principle.
In 2014, the New York State Bar Association addressed the slightly different question of whether a law firm forced to withdraw from a representation because of a conflict of interest may still make a referral to other attorneys. It cited with approval the D.C. bar opinion and reached a similar result, taking note that the withdrawing attorney had a duty to take steps upon withdrawal to avoid foreseeable prejudice to the rights of the client. N.Y. Bar Assoc. Committee on Professional Ethics Opinion No. 1018 (Aug. 2014).
Basic Rules on Referral Fees The best advice anyone can ever give you on referral fees is this—don’t go near them unless you first read and fully understand Rules of Professional Conduct 1-320 (“Financial Arrangements With Non-Lawyers”) and 2-200 (“Financial Arrangements Among Lawyers”).
Under Rule 1-320, fee sharing with non-lawyers is generally prohibited. This rule disallows an attorney from even sharing fees with a non-lawyer even with the client’s consent. The only exceptions are explicitly stated in the rule: payment to the estate of an attorney of your firm, participation in profit-sharing or retirement plans, or fees paid to lawyer referral services that comply with the State Bar of California’s Minimum Standards for Lawyer Referral Service 1-320(A)(1)-(4). This rule also prohibits compensating for or promising anything of value to another person or entity for the purpose of recommending or securing employment; however, offering or giving a gift or gratuity is not prohibited so long as it is not a quid pro quo. Cal. Rules of Prof’l Conduct R. 1-320(B).
A fee splitting agreement that violates Rule 1-320 is against public policy. But it may be enforced by the non-lawyer if they are not in pari delicto. Cain v. Burns, 131 Cal. App. 2d 439, 442-43 (1955).
Under Rule 2-200(A), fee sharing among lawyers who are not with the same law firm is barred unless the client consents in writing after full disclosure and the total fee is not increased by reason of the division so as to result in unconscionability. Like 1-320, this rule disallows compensation for referring business, but gifts are allowed so long as they are not given or offered in consideration of any agreement or understanding. Cal. Rules of Prof’l Conduct R. 2-200(B).
This rule applies to both referral fees and fee splitting agreements. Chambers v. Kay, 29 Cal. 4th 142, 150 (2002). The client’s consent is not required prior to entering the agreement with the other lawyer, but must be obtained before the fees are divided. Nor must the agreement between the lawyers be in writing. However, it is “preferable” that client’s written consent be obtained “early in the process.” Mink v. Maccabee, 121 Cal. App. 4th 835, 838 (2004). But think twice about whether it is appropriate to defer getting the client’s written consent. See Cal. Rules of Prof’l Conduct R. 3-500 (duty to keep client reasonably informed of significant developments related to the employment).
Agreements that violate Rule 2-200 are contrary to public policy because they create an inherent conflict of interest and are void. However, quantum meruit recovery may be allowed between the lawyers to the agreement, unless some other ethical rule is violated. Huskinson & Brown, LLP v. Wolf, 32 Cal. 4th 453, 463 (2004); see also Campagna v. City of Sanger, 42 Cal. App. 4th 533, 542 (1996) (attorney violating Political Reform Act cannot claim referral fee); see also Barnes, Crosby, Fitzgerald & Zeman, LLP v. Ringler, 212 Cal. App. 4th 172, 174 (2012), as modified on denial of reh’g (Jan. 16, 2013) (attorney may be equitably estopped from claiming that a fee-sharing contract is unenforceable due to noncompliance with rules where that attorney is responsible for the noncompliance and has unfairly prevented another lawyer from complying with the rules’ mandates).
Finally, fees may, in effect, be “shared” in connection with the sale of “substantially” all of the law practice of a member, provided that various conditions are satisfied. Cal. Rules of Prof’l Conduct R. 2-300.
Matthew A. Hodel is a partner with Hodel Wilks LLP in Irvine, California. He is member of the OCBA’s Professionalism and Ethics Committee. He may be reached at mhodel@hodelwilks.com.