The Risk Manager, Summer 1998

A not well understood Kentucky Rule of Professional Conduct is Rule 1.5e Fees which governs sharing fees between lawyers not in the same firm. States with this same rule are reporting cases involving lawyer disputes over fee sharing and lawyer-client fee disputes because 1.5e was not followed. What’s at stake for lawyers who do not follow the rule are ethical violations and malpractice exposure.

What The Rule Requires
Rule 1.5e allows a division of a fee between lawyers who are not in the same firm only in two circumstances:

  1. Sharing Fees Proportionate To Services Rendered Requirements
    • The division is in proportion to the services performed by each lawyer;
    • The client is advised of and does not object to the participation of all the lawyers involved; and
    • The total fee is reasonable.
      A typical proportionate fee sharing situation is when a lawyer is asked to serve as local counsel or handle a specific aspect of a matter such as an environmental law issue. The referring lawyer is lead counsel for the matter.
  2. Sharing Fees Not Proportionate To Services Rendered Requirements
    • By written agreement with the client, each lawyer assumes joint responsibility for the representation;
    • The client is advised of and does not object to the participation of all the lawyers involved; and
    • The total fee is reasonable.
      A typical disproportionate fee sharing situation is when a lawyer refers a case to a trial specialist who will be lead counsel. The referring lawyer usually will do little, if any, of the work on the matter.

The comment to Rule 1.5e offers this guidance:
A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee on either the basis of the proportion of services they render or by agreement between the participating lawyers if all assume responsibility for the representation as a whole and the client is advised and does not object. It does not require disclosure to the client of the share that each lawyer is to receive. Joint responsibility for the representation entails the obligations stated in Rule 5.1 [Responsibilities of a Partner or Supervisory Lawyer] for purposes of the matter involved.

Rule Analysis and Recent Developments
Rule 1.5e does away with the pure referral fee where a lawyer passes a case to another lawyer, does no work on the case, has no responsibility for the case, but unknown to the client will be paid a fee by the other lawyer. If the referring lawyer will receive fees, Rule 1.5e must be followed and the referring lawyer will retain in some degree both professional responsibility and malpractice exposure for the matter. A lawyer unaware of the requirements for sharing fees may be surprised by a malpractice claim or bar complaint over a matter referred and ignored.

The reasons for Rule 1.5e center on the idea that referral fees are under the table arrangements which are inherently unfair to clients. They work to increase the overall fee charged, interfere with a client’s right to choose his own lawyer, encourage neglect and unprofessional conduct by the referring lawyer, and are unfair to the lawyer who does all the work.

Violations of the rule are coming to light most frequently in contingency fee cases when a referring lawyer sues the associated lawyer for unpaid fees. Some jurisdictions hold that as a matter of public policy understandings between lawyers to share fees that do not comply with 1.5e will not be enforced. Other jurisdictions take the approach that violations of the rule are a matter for bar disciplinary authorities. The enforceability of the fee sharing agreement is a matter of law for the courts. These jurisdictions usually are concerned with one lawyer receiving a windfall because of a rule violation for which both lawyers have responsibility.

Risk Management
Compliance with 1.5e is not complicated. Written notification is required in disproportionate fee sharing matters, while oral notification will suffice in proportionate fee sharing cases. The rule does not require the client to agree in writing. Better risk management, however, is to give the client in all shared fee representations a short letter advising that another lawyer is being associated with the case who will share the client’s fee. Even though the client’s written acknowledgement is not required, it is recommended that you include a signature line for the client to show receipt of the letter.

Good risk management for associated lawyers in proportionate fee sharing matters include:

  1. documenting carefully with the referring lawyer the scope of engagement to include the fee sharing understanding;
  2. making sure that the client is fully informed of the scope of engagement in writing; and
  3. during the representation, documenting telephone calls and meetings with the referring lawyer, and all other aspects of the representation of the client.
    If properly risk managed, associated lawyers should not be held jointly responsible with the referring lawyer for the overall representation.

In disproportionate fee sharing situations the referring lawyer is jointly responsible for the representation with the associated lawyer even though the associated lawyer is doing most, if not all, of the work. The comment to Rule 1.5e makes it clear that the both lawyers have the duties of a partner for the representation. It is essential that the referring lawyer put the fee sharing agreement in writing and track the matter as diligently as any other case she practices. Frequently, referring lawyers rely completely on the associated lawyer and learn of problems only after the statue of limitations has passed or default judgment entered. It’s too late then and it is surprising how often the associated lawyer has no insurance or assets to help with the malpractice claim.