From comments: lawyer referral fees

by Walter Olson on December 4, 2008

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.

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More on lawyer referrals and fee discounts
12.13.08 at 5:47 pm

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1 Jason Barney 12.04.08 at 2:00 am

Where’s the “Schumer Box” for retainer agreements?

I recently learned of a successful wrongful death settlement, the client for which was referred to the attorney by his paralegal. Rumor has it she was to share in the contingency fee as a reward for the referral.

I thought out loud that was not correct—I thought only attorneys could collect fees in this manner. Someone else remarked about the movie Erin Brockovich where it was depicted that her reward was a larger than expected percentage of the contingency fee although she was a legal investigator, not the attorney on the case.

Any thoughts?

2 Ron Miller 12.04.08 at 5:09 am

First, I don’t think there is a state in the country where you can share a contingency fee with a non-lawyer.

To answer your question, I also think every state requires the clients’ consent to the nature of the fee split.(If not every, the vast majority.) I can’t tell you how many lawyers don’t put in writing how the attorneys’ fees are being distributed but they certainly should if they want to follow the ethical rules.

This blog post (www.marylandinjurylawyerblog.com/2008/02/contingency_fees.html) references a Point of Law blog post that discussed a study with a theory that better cases get pushed along to better lawyers. There is an efficacy to the system of referrals – lawyers have an incentive to pass the case along to a lawyer who better knows how to handle the case. Local jack of all trades lawyer gets a large malpractice or truck accident victim client. It might not be an awful system that gives that lawyer some incentive to pass the case along to a lawyer who has experience in handling those cases because there is a societal benefit. I would hate for that hypothetical local legislator to try to handle that case himself because if he/she does not know how to handle the case, the change of it getting screwed is pretty high. And the incentive for taking a shot at it is compelling because every lawyer and their mother very wrongly thinks they can pretty much figure out how to handle a tort case.

3 Doug 12.04.08 at 8:35 am

Many years ago, as a newly minted lawyer, I worked as a contract attorney for a modest sized PI firm who accept referrals from a PI firm that advertised statewide. When I was sent out to interview potential clients, I was instructed to carefully go over the fee agreement with the potential client. Importantly, if this was a referral (which the client was told of when the appointment was made) I explained to them the referral agreement (1/3 of 1/3) with the other firm. It seems to me that the better practice would be full disclosure. Trust begins at the inception of the relationship. Besides, Client should not object, his cut is not going to be any different.

4 Ted 12.04.08 at 8:49 am

Cf. also Mark Lanier’s comments about “chicken catchers” and “chicken pluckers.”

5 Eric Turkewitz 12.04.08 at 10:47 am

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”.

Walter: A personal recommendation is usually the best way to go, because there is usually some type of actual experience behind it. Few people would recommend a “good personal injury attorney” to a relative or friend without knowing that the lawyer actually did this kind of thing.

As to forwarding fees, it is required to in New York that every dollar that is collected in a personal injury case be accounted for by a statement to the court, with a copy to the client.

One of the first posts I put up, in fact, as I was testing the waters on this whole blogging gig and how to go about it, dealt with the subject of how to find a good PI lawyer. You can find it here, and I think the points I made are those that you and I would agree on:

http://www.newyorkpersonalinjuryattorneyblog.com/2006/11/faq-new-york-personal-inury-law-part-1.html

6 PhilG 12.04.08 at 11:41 am

Ted brought up Mark Lanier’s comments about “chicken catchers” & “chicken pluckers”. Here’s a link to an article on Mark Lanier’s comments:

http://medicinewatch.blogspot.com/2007/06/personal-injury-lawyers-positioning-for.html

And here’s a link to a PointofLaw article on a Texas self-proclaimed “chicken catcher”:

http://www.pointoflaw.com/archives/2005/02/poultry-in-moti.php

7 Ron Miller 12.04.08 at 4:36 pm

Rare disagreement with Eric: I think people say I’ve got a great lawyer all the time. “I’ve got a guy.” But whether the lawyer (1) handles large personal injury case regularly, or (2) actually in fact did a good job for the client is a far leap from “I got a guy.”

There are a lot of bad personal injury lawyers out there making a living off of prior referrals.

8 PhilG 12.05.08 at 8:56 am

Here’s an example of a non-practicing lawyer, employed as an insurance adjuster, who referred his neighbors to a personal injury law firm, intending to secretly receive a third of the contingency fee, with his share being more than $175,000. But this particular instance of a secret referral fee came to light only because of a dispute between him and the law firm, forcing him to sue for his share:
http://www.law.com/jsp/article.jsp?id=1185527216844

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