Reader Phil Grossman, in comments to yesterday’s post about the hawking of injury case leads to lawyers, advances some interesting contentions, including some I’m not knowledgeable enough to evaluate, about lawyer referrals and fee-splitting:

…Lawyers are the only professional group that considers it ethical to pay referral fees. The bar associations allow and approve referral fees as long as they are paid only to other lawyers.

In the sort of mass tort lawsuits that this company is dealing in, it is extremely common for ‘clients’ to be bought and sold, sometimes multiple times, with a typical referral fee being around a third of the contingency fee. The general public doesn’t realize that the lawyer advertising on TV or out on the Internet for mass tort clients is usually just a marketer, selling all the clients he collects to other lawyers. It is actually more lucrative to advertise for clients and then sell them to other lawyers than to do the actual work of representing clients.

If, for example, someone is injured in an auto accident, it is common for a relative or friend who happens to be a lawyer to offer to refer the victim to a “good personal injury lawyer”. But the victims aren’t aware that their relative or friend is probably making money off of their accident by collecting around a third or so of the contingency fee from the lawyer they have been referred to. Although bar association rules usually say the referral fee and its amount should be disclosed to the client, in practice it is always kept secret from the client, who thinks his or her lawyer relative or friend is just being altruistic.

But it appears that this company might be trying to collect money up front from its targeted lawyers, rather than taking the normal percentage payment of their referral fees from the contingency fees after the fact. If so, the targeted lawyers need to be very cautious indeed.

And:

Ron Coleman has asked if anyone has metrics on “marketer” lawyer referral fee income. I think hard figures would be difficult to obtain since lawyers don’t want their clients to be aware that they are being bought and sold and, despite bar association regulations, rarely let clients know that referral fees are being exchanged, never mind the amount of those referral fees. Lawyer referral fees are a well kept secret.

However there is lots of indirect evidence of how lucrative collecting referral fees is. For example, by far the most expensive Google adwords are those used by marketer lawyers, with many of them costing those lawyers over $50 per click compared to just cents per click for typical Google adwords. And just spending a bit of time watching daytime TV will show you that [law-related?] advertising on daytime TV is dominated by marketer lawyer advertising (with companies providing cash in exchange for assignments of lawsuit structured settlements also prominent there).

But beyond the bulk advertisements of the mass marketers of lawsuits, many individual lawyers, who are not practicing trial lawyers, but make their income in other ways, such as employees of corporations, supplement their incomes, often substantially, by referring relatives, friends, and coworkers to personal injury lawyers in exchange for referral fees (which they keep secret from those being referred as you can understand).

In fact politicians, such as state and federal legislators, who are also lawyers, can supplement their incomes very substantially by referring constituents who are involved in accidents to personal injury lawyers in exchange for secretive referral fees. And the fact that these referral fees from tort cases are so profitable to lawyer legislators is one of the reasons why tort law reform is so difficult to achieve.

It is interesting that the going rate for referral fees is around a third or so of the contingency fee. On first hearing of referral fees, one would assume that referral fees would be much lower, perhaps around 5% or 10% or so of the contingency fee. But referral fees are so high because contingency fees themselves are so incredibly lucrative that the lawyer handling a case can easily afford to give away a third or so of his or her contingency fee and still have lavish amounts of money left over for himself or herself.

Now you would think that since referral fees typically amount to about a third of the contingency fee, a savvy consumer could approach directly a tort lawyer who he or she wants to handle his or her case and negotiate a contingency fee which is up to a third less than the standard contingency fee, saving a lot of money, with the lawyer still making the same income or more as if he or she had to pay a referral fee. But the bar associations, in a rather perverse application of logic, forbid this discounting since “it wouldn’t be fair to the client coming in through a referral to pay more than a client coming in without a referral.” The US Justice Department has convinced other trade associations to change other similar restraint of trade rules and one would hope that the Justice Department might similarly convince the bar associations to change this rule. But with an incoming Democratic administration, heavily financially supported by trial lawyers, that isn’t likely to happen.

I suspect some of the lawyers among our readership will want to take issue with some of these assertions. When they do, I hope they will also share their opinions on the key charge that Grossman levels here: is it in fact common for lawyers to conceal from clients the existence and magnitude of referral fees, or to bury the information in a form or location where they hope the client doesn’t notice it? If this is in violation of bar regulations, are there ever stirrings in the bar to crack down and enforce the rules? And what, if any, antitrust scrutiny has the federal government applied to bar rules in this area, including the sort Grossman describes, forbidding the discounting of fees for non-referred clients? I once looked into some of these questions, but that was quite a long time ago, and I don’t mean to prejudge the current answers.

P.S. In comments, Ted Frank and Phil Grossman note earlier coverage of “chicken catchers” vs. “chicken pluckers” here and here. And for a different ethically troublesome scenario arising out of referral fees, check out this 2004 story from Illinois.

Filed under: antitrust, attorneys' fees, bar associations, chasing clients