Tuesday, March 25, 2014

Illinois Appellate Court issues opinion on splitting fee agreements

Just over a week ago, the Illinois Appellate Court, First District, issued an opinion addressing two important issues related to fee splitting (or sharing) agreements:  (1) whether attorneys can enforce fee-splitting agreements if they have not strictly complied with Rule of Professional Conduct 1.5(e), even if they can claim they "substantially complied" with the rule and (2) whether a lawyer accused of reneging on such an agreement can raise the non compliance with Rule 1.5(e) as a contractual defense where it was his own conduct that allegedly caused or contributed to a violation of the rule.  The court says NO to the first question but YES to the second one.  The case is called Fohrman & Assocs., Ltd. v. Marc D. Alberts, P.C., and it is available here.

As to the first issue, the court holds that lawyers' fee-splitting or referral agreements are unenforceable if the contracting attorneys do not strictly comply with the ethics rule that requires each lawyer to ensure that the clients are informed in writing about the basis for the arrangement—including the exact split in fees and the division of the lawyers' responsibilities.

I understand saying that the conduct is contrary to the rules if it does not follow the rule.  In other words, I understand saying that a lawyer can be disciplined for not following the rule.  That should be obvious and makes sense.

But the issue here is not about misconduct or discipline, it is about the validity of a contract.  For this reason, I am not so sure I like the result of the case, particularly the answer to the second question.

In deciding that an attorney could raise the non compliance of the rule as a defense even when that attorney had arguably caused the non compliance, the court stated that "we ... reject an argument that the referral agreement should be enforced because of defendants' alleged "nefarious" conduct. ... In doing so, we do not condone any alleged misconduct or encourage unfairness in relationships between attorneys. We uphold the Rules' interest in protecting clients above the interests of attorneys in recovering fees."

Taking this position, the court may not be condoning the misconduct, but it is allowing the attorney who allegedly engaged in it to get away with it.  And, more importantly, the reason it states to do so does not make sense.  The court says it is deciding the case this way because it is best to protect the interests of the clients "above" the interests of the attorneys in recovering fees.  Here is the problem with this:  enforcing the agreement would not affect the interests of the clients at all; the only interest affected is the interest of one of the attorneys.

Take the typical splitting fee agreement for example:  Lawyer A refers a case to Lawyer B.  Lawyer B agrees to take the case on a contingency of 1/3 of the recovery and agrees with Lawyer A to share that fee.  According to the agreement, Lawyer A would get 1/3 of the 1/3 Lawyer B gets out the eventual recovery.  Now assume that Lawyer B dupes Lawyer A into believing that Lawyer A has done everything he needed to do for the agreement to be valid.  [I am not saying this is what happened in the real case; this is a hypothetical].  Continue to assume that even though Lawyer B told Lawyer A the agreement is in order, the agreement does not strictly comply with the Rule 1.5(e). Months later, the case settles for $9,000.  Lawyer B gets the check and gives the client $6,000, and keeps the $3,000 that corresponds to his fee.  Lawyer A then calls Lawyer B asking him to share the fee as promised.  Lawyer B refuses and they end up in court arguing over it.

Here is the important part:  the client has been satisfied and is out of the picture.  He does not care what happens next.  His rights have been well taken care of.  The fight that ensues is between the attorneys and if they want to fight over it for years to come, that's their business.  The client is not involved and couldn't care less.  He has his money and has moved on.

The question for the court relates to the right of Lawyer A to be able to recover the fee he negotiated with Lawyer B.  Would it be fair to allow Lawyer B to deny Lawyer A his share of the fee because Lawyer A did not comply with the rule if it is true that the reason that happened was because of Lawyer's B's assurances to Lawyer A?  I don't think so.

As a contractual matter, it seems to me there were two more equitable solutions to the problem presented by the case in Illinois.  First, it could be held that even though the conduct was in violation of the rules, the contract should be enforced between the parties (the lawyers) and then refer the matter of the misconduct to the authorities.  In the alternative, the court could have adopted a view used in other jurisdictions that have decided that when lawyers from different firms agree to jointly represent a client, they enter into a “joint venture” or an “ad hoc partnership” in which the lawyers implicitly agreed to share profits or losses equally regardless of whether one attorney provides more labor or skill than the other.  As a contract interpretation matter, wouldn't either one of these be a more equitable solution to the problem?