Forwarding Fees in Texas Are Here to Stay

Sitting down to write two seven-figure checks to lawyers who had forwarded cases to my firm, it was hard not to wonder why attorneys in Texas operate under a different set of rules from other statewide professionals or their legal counterparts in other states. Unlike most states, the Texas Disciplinary Rules of Professional Conduct specifically permit “forwarding fees” among attorneys. Some exceptions exist, such as in criminal matters, but referral fees are quite common in personal-injury law and in other areas to a lesser extent. Some large defense firms have policies disallowing them, primarily due to the potential for perceived conflicts of interest with firm clients or insurers who may wind up as defendants in the referred cases, but the practice is generally widespread, with many attorneys earning a significant portion of their income either referring or receiving cases.

In contrast to the rules governing attorneys, Texas Occupations Code �102.001 criminalizes paid referral agreements among all licensed health care providers. According to surgeon Scott Kacy, M.D., of Beaumont, medical referral fees historically have been considered immoral and unethical.

“If a patient needs to see a specialist,” he explains, “the idea is to find the one best qualified for the job, not the one who will take you out to dinner or pay you the most money. It should be based on what is best for the patient.”

Likewise, Texas accountants are prohibited by Chapter 501.71 of their Rules of Professional Conduct from paying or receiving a referral fee for any matter that requires independence, such as audits or reviews. According to James Penn, a CPA in Hurst, even in situations where referral fees technically may be permitted, accountants typically do not use them to avoid damaging their own reputations for “professionalism and independence.”

Some other Texas professions are less stringent in prohibiting forwarding fees. In the past, the rules of the Texas Board of Architectural Examiners prohibited all types of referral fees; however, as of March 2001, the rules have been amended to prohibit referral fees only when used to secure publicly funded architectural work. Architect David R.C. Tennant of Rimkus Consulting Group confirms that so-called “bird-dog fees” are not uncommon in the architectural design profession; however, the fees typically total no more than 5 percent of the gross fee on a project.

But for Texas attorneys, referral fees are expressly permitted and typically total 25 percent to 33 percent of the attorney fee in a contingent-fee case. Solos and large firms, new attorneys and well-established practitioners are all part of the forwarding fee frenzy, advertising for referrals and often paying lucrative percentages.

Rule 1.04(f) of the Texas Disciplinary Rules of Professional Conduct specifically permits forwarding fees and places no limit on the percentage. In most cases, Texas law merely requires that the forwarding agreement be disclosed to the client and that it not lead to the collection of an unconscionable fee. Moreover, a referring Texas attorney probably cannot be held vicariously liable based merely on a receiving attorney’s malpractice. A referring attorney may, however, be sued for his own negligence in making a referral.

IN THE MINORITY

Texas is in the minority of jurisdictions in allowing pure referral fees. Most other states prohibit the practice, with notable exceptions being Alabama, Connecticut, Kansas, Michigan, Pennsylvania, Washington and West Virginia. Indeed, according to the American Bar Association Model Rules of Professional Conduct, the division of fees between two lawyers only can occur if the lawyers assume joint responsibility for the case. Likewise, the Restatement (Third) of the Law Governing Lawyers states that attorneys only may divide fees if the division “is in proportion to the services performed by each lawyer” or if the lawyers assume joint responsibility. The rationale for a no-referral-fee approach is the thought that lawyers should not have a financial incentive to make a referral and should do so simply because it is in the client’s best interest.

In Texas, the public policy rationale permitting such fees is consumer protection. The thought is that by allowing referral fees, lawyers will refer cases to the best attorneys in the field, rather than hold on to them, if they know they will be compensated from potentially lucrative cases. The system gives big incentives to those with knowledge of the best attorneys to ensure that potential clients receive the best, most competent representation possible. At the same time, the system lessens the incentive for unqualified attorneys to attempt to handle matters beyond their expertise, as they still may profit � probably even more so � by referring clients to more capable colleagues.

Some Texas legislators have publicly derided contingency and referral fees, touting their party line of “tort reform,” while nevertheless getting rich simply by giving constituents drawn to their offices the names of lawyers with whom they have referral-fee agreements. Profiting from referrals while publicly attacking the system for political gain appears hypocritical, but clients have little reason to complain, as their own recoveries are unaffected, and they receive superior representation.

Given the proliferation of the practice and the fact that few attorneys and clients involved have reason to complain, it would appear that forwarding fees in Texas are alive and well and here to stay.