The Referral Fee and the Missing Conflict Check
Attorney Reyes represents a plaintiff in a commercial lease dispute. Opposing counsel, Okafor, is a solo practitioner who shares office space, a receptionist, and a case-management system with Reyes but maintains separate letterhead and trust accounts. Okafor's client is a landlord who, unknown to Okafor, previously consulted Reyes about the same lease eighteen months ago; Reyes took no fee and sent a declination letter. Reyes never ran a conflict check when the new matter came in because the intake was handled by the shared receptionist. Okafor also agreed to pay Reyes $5,000 from the settlement proceeds as a "referral" for sending a separate landlord client to Okafor. The settlement is now $240,000, and the client asks whether the referral fee is proper and whether Okafor must withdraw.
1. Assess the conflict-of-interest problem created by the prior consultation. Must Reyes or Okafor withdraw, and what screening or consent options exist?
Read the worked answer
Two rules interact: the duty of confidentiality to former prospective clients and the imputation of conflicts among lawyers in a firm.
First, a person who consults a lawyer about forming a relationship is a prospective client. Even without a fee, the lawyer owes confidentiality and may not use or reveal information learned in the consultation, and may not represent a materially adverse party in the same or a substantially related matter if the lawyer received information that could be significantly harmful. Reyes's declination letter does not erase the duty. The lease dispute is the same matter, so the substantial-relationship test is met; the question is whether Reyes received significantly harmful information. Reyes must assess that from the consultation file.
Second, imputation. Are Reyes and Okafor a "firm"? Sharing rent, a receptionist, and a case-management system, without separate client-facing identity, may create a de facto firm or at least a close association triggering imputation. If imputed, Okafor's representation is tainted even though Okafor personally did nothing wrong. Options: (a) Reyes and Okafor timely screen Reyes from the matter and confirm no information was shared - screening is permitted for prospective-client conflicts in many jurisdictions where the personally-disqualified lawyer is screened and the client's information is protected; (b) obtain informed consent from both affected clients if the conflict is consentable; (c) Okafor withdraws if consent is refused and no screening rule applies. Because the shared case-management system creates leakage risk, the screen must be documented, access restricted, and the receptionist instructed in writing. Reyes should also run a proper conflict check immediately and preserve the consultation record.
2. Is the $5,000 referral fee from settlement proceeds permissible? What alternatives are lawful?
Read the worked answer
Generally no. A lawyer may not give anything of value to a person for recommending the lawyer's services, and may not pay a referral fee to another lawyer who does not share the fee and responsibility. A flat $5,000 "referral" paid out of a client's settlement proceeds has three defects: it is a payment for a recommendation, it is not tied to services or shared responsibility, and it is taken from client funds without a basis in the fee agreement with that client.
Exceptions and lawful alternatives:
- Division of fees between lawyers is permitted in many jurisdictions if the client consents in writing after disclosure, the total fee is not increased, and the division is proportionate to services or each lawyer assumes joint responsibility. A bare referral with no responsibility fails this test.
- Payment for actual services - Okafor may pay Reyes for work Reyes actually performed at a reasonable rate, documented and disclosed.
- Nominal gifts or advertising that do not constitute payment for referral.
- Referral without compensation - the safest course.
Also flag the trust-account issue: settlement proceeds are client funds; any disbursement to Reyes must be authorized in writing by the client and reflected in the settlement statement. Recommended action: cancel the $5,000 arrangement, return any funds not yet disbursed, disclose the prior consultation to both clients, and document the conflict screen. If Okafor's client refuses consent and no screening rule applies, Okafor should withdraw before incurring further fees.