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Referral Fees – To Pay or Not to Pay?

As the attorneys out there know, we have particular rules about sharing fees with people who aren’t attorneys. It’s one HUGE area that has surprised me in my young legal career.

Here’s my take: referrals fees are allowed in Virginia; I receive them, and I’m happy to pay them.

That single sentence may cause a lot of tension, but I’ll back it up.

Virginia allows referral fees

Virginia used to prohibit referral fees. If lawyers shared fees, they had to be taking on responsibility for the matter. You could have a co-counsel relationship and split the fee, but you couldn’t simply pay a fee for sending a case over.

Former DR 2-105(D) of the Code of Professional Responsibility required that “Both attorneys expressly assume responsibility to the client” if fees were being divided.

Rule 1.5 of the Rules of Professional Conduct changes that. Subsection (e) says:

A division of a fee between lawyers who are not in the same firm may be made only if:
(1) the client is advised of and consents to the participation of all the lawyers involved;
(2) the terms of the division of the fee are disclosed to the client and the client consents thereto;
(3) the total fee is reasonable; and
(4) the division of fees and the client’s consent is obtained in advance of the rendering of legal services, preferably in writing.

See? No requirement of assuming responsibility. Don’t believe me? Check out the commentary:

Paragraph (e) eliminates the requirement in the Virginia Code that each lawyer involved in a fee-splitting arrangement assume full responsibility to the client, regardless of the degree of the lawyer’s continuing participation. The requirement in the Virginia Code was deleted to encourage referrals under appropriate circumstances by not requiring the lawyer making the referral to automatically assume ethical responsibility for all of the activities of the other lawyers involved in the arrangement. However, such an arrangement is acceptable only if the client consents after full disclosure, which must include a delineation of each lawyer’s responsibilities to the client.

And if that’s not enough, Legal Ethics Opinion 1739 analyzed this exact point. Yes, Virginia lawyers can pay referral fees.

But just because it’s ethical doesn’t mean that it makes sense to do it. Or does it?

Referral fees make business sense

I market a lot. I get a lot of phone calls and inquiries into my firm. But I certainly can’t handle them all.

Just this year we’ve already referred out 270 potential clients to colleagues throughout Virginia. And it’s only May!

It takes resources to generate those inquiries. And it certainly requires time on our end to answer the phone, chat with the caller, and figure out if it’s something we can handle or not.

I’m running a business here. Shouldn’t I get paid for that? You betcha!

Now I certainly don’t select the attorney to refer a case to based on the referral fee. I first make sure it’s a good attorney who I trust. Then I check to make sure the case is the right fit for them (as best I can anyway). And THEN we make the referral.

On the flip side of this coin, why should an attorney pay a fee for a case?

Referral fees are the safest advertising expense out there.

Think about it. Would you have that case if your colleague hadn’t sent it to you? Probably not.

How do you get your other cases? If you have a consumer-oriented practice, you’re probably marketing somehow. And that’s probably costing you money (or at least time, which is money, right?)

But all those other marketing and networking efforts are speculative and risky. Who knows if they’ll ever pay off? Even so, you still invest in them.

With referral fees, you get the call from a client today. You make a note that John sent him. IF the client hires you, THEN you send John the fee. You only pay when you get paid. What’s not to love about that?

What do you think about referral fees?

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One Response to “Referral Fees – To Pay or Not to Pay?”

  1. Girasol
    May 27th, 2011

    I always offer a referral fee to my web clients. What I find interesting is that most of them say “that’s cool!” and then don’t do anything about it… but a few really get hold of it and start promoting me to everyone they know. I have other friends in various trades who offer referral fees and it really works for them also. The thing is, they are not going to refer their friends to someone who turns out to be a lemon, so in my case I actually think this system is quite well protected against “false recommendations just to get the referral fee”.
    I always make sure to notify the person I am offering a referral fee to, that they only get the fee when the first transaction is complete and the buyer has actually made the payment. Another form of referral fee you can offer is some free service, a free short consultation or something. People are often motivated by getting something for free, and it costs the seller only a little time.

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