Call the former lawyer and, with the client's consent, work out a referral arrangement.

Unbeknownst to me, my client consulted with another firm on his personal injury case. I received a letter from the client that I am discharged and the new lawyer is taking over. How do I resolve the fee situation for the fees and costs the client owes me for my time?

Samuel C. Stretton.

In this world of business as opposed to a profession and lack of civility, lawyers have no qualms about stealing another lawyer's client. In the old days, a lawyer would call the original lawyer and try to reconcile the lawyer and the client unless the lawyer knew that the original lawyer wasn't doing their job or wasn't competent. Nowadays, that doesn't happen. There is usually never a call from the other lawyer and just notice to deliver the file. The new lawyer makes no effort to attempt to inquire as to costs owed, fees or time.

This lack of courtesy just doesn't occur in personal injury cases. This writer has had several lawyers he was representing go elsewhere without any prior notice or any request from their new counsel to try to resolve the issues.

The lack of courtesy between lawyers is widespread and apparently will continue that way. After all, this is one of the few professions where in pleadings, lawyers attack each other instead of just the merits of their case. There is a certain glee in hurting, attacking or embarrassing the opposing counsel. That, unfortunately, is the way modern law is practiced and it's shocking that the courts allow it to continue, but they do.

In any event, if the client discharges a lawyer, the client has an absolute right to do so. Whether the lawyer has done good or the lawyer has done bad, the client has an absolute right to change lawyers. That's why this is a profession. Rule 1.16 of the Rules of Professional Conduct allows that.

But if the client changes lawyers, they don't have the right to not pay the lawyer for their outstanding costs and also work out the reasonable fee payment. Personal injury cases can always get somewhat tricky. The costs are usually memorialized because lawyers keep records.  But the contingent fee in a personal injury case is unknown because it depends on the amount of the settlement or verdict. But if the first lawyer did a credible job, collected all the records, interviewed the witnesses, obtained all the photos and the case is ready for trial or settlement, then it would appear that that the original lawyer should receive a substantial portion of any contingent fee.

In Pennsylvania, there is some case law that says quantum meruit is hours times hourly rate. But if a lawyer brings real value to the case, by his efforts, that's usually considered as part of the quantum meruit fee.

When a client goes to another lawyer this is not like a referral arrangement. There is no agreement where there can be an agreement as to the fee as there is in a referral arrangement under Rule 1.5 of the Rules of Professional Conduct.

When a client leaves to go to another lawyer, it is the client, not the new lawyer, who is responsible for the fee to be paid to the former lawyer. What some lawyers do is notify the insurance carrier or the third party that they have an attorney's lien on the fee and any distribution or settlement has to include the first lawyer's name. That's not a bad way of helping to get one's fee because the insurance company or third party is going to be very reluctant to pay the monies to the new lawyer knowing that the first lawyer may have a claim against them if monies aren't paid over. The problem is this letter to the insurance company sometimes interferes with settling the case. Obviously, no lawyer wants to hurt or delay a client's chances of recovery, but on the other hand, the client or the new lawyer should work something out, but that doesn't happen like it used to.

Under Rule 1.15 of the Rules of Professional Conduct, a lawyer can't distribute monies held in escrow if there is a claim for those monies. If the first lawyer has a claim for fees, even if the amount is not fully resolved, the fees have to be held in escrow or at least enough money held to cover the outer limit of the claim for fees. These funds cannot be distributed. For a lawyer to distribute that could be considered conversion. At least in referral fees, if the lawyer doesn't hold the referral fee in escrow, Pennsylvania case law treats that as conversion and it could result in severe disciplinary consequences.

An example of problems in these matters is when the new lawyer doesn't tell the old lawyer the case is settled and the old lawyer later finds out. There is injunctive relief filed and a claim for quantum meruit and breach of contract. A good judge often can resolve the issues. But this can take time and cost more money. Further, if the monies have not been maintained in escrow, the new lawyer could face some disciplinary consequences.

The American Bar Association's legal ethics committee issued a Formal Opinion titled 487 on June 18. This opinion attempts to deal with how to resolve fees when the new lawyer replaces the old, but everyone is uncertain as to the actual amount of the fees that will be available because of the contingent nature of the fee. The committee indicated under no circumstances should Rule 1.5(e), the Referral Fee Rule, be applicable because the referral fee situation implies that two lawyers are working on the case where one is replacing another. The committee notes that the new lawyer cannot disburse a portion of the overall fees to the old counsel without the client's consent unless there is an order. But the committee also notes if there is a dispute, then the monies have to remain in the escrow account until the case is resolved.

Also, the committee notes that if the new lawyer is negotiating with the old lawyer, then there is a duty to advise the client of a potential for conflict of interest since the new lawyer under Rule 1.7 has his own interest in mind to get as much fee as he can and, therefore, he cannot look clearly at just what is in the best interest of the client. See Rule 1.7 of the Rules of Professional Conduct.

The opinion is useful, but it creates several hurdles that create some problems for lawyers. The committee notes that there must be a written fee agreement. The committee notes that when a client changes lawyers, the new lawyer should be aware that the client may not understand that they still owe monies to the old lawyer. The committee notes that the new lawyer must advise his client of the existence of the old lawyer's claim for fees and costs as part of the terms and conditions of the employment by the new lawyer. In other words, if someone is greedy and wants to sign someone up, they still have to advise the client, presumably in writing, that you still owe monies to the old lawyer and it could be a substantial amount. That might put a damper on the client's decision to seek new counsel. The committee recommends this be done in writing.

The committee also notes that the new lawyer must tell the client the risk of having to pay two fees. The committee notes that in such a situation there is really only one contingent fee, which would have to be divided. It should be noted that the committee takes a strong position that the referral arrangement rule does not apply.

The committee is fairly strong in the opinion that when the new counsel is negotiating with the old counsel over fees, there should be a fee agreement between new counsel and the client that should set forth the scope of the representation in terms of any dispute with the old lawyer and the fees that are due. The committee highlights that the fees must be reasonable in that situation. The committee notes there has to be informed consent in writing waiving any conflict of interest by the lawyers in that situation.

The committee also notes that if there are still disagreements on the fees, either between the two counsel or the client, then the new counsel must comply with Rule 1.15 in notifying the former counsel when the funds have been received and placing the disputed funds in escrow until the dispute is resolved.

Although this opinion is based on the Model Rules of Professional Conduct and not Pennsylvania's, this Formal Opinion 487 still provides a good road map on how to resolve the disputes. It's concept of conflict of interest and the client's role. But all lawyers should be aware of this because it could be a factor in whether or not they wish to take on the new case.

Perhaps the best way is when one takes over from a former lawyer to just call the former lawyer and, with the client's consent, work out an old-fashioned referral arrangement. That's usually the best way of resolving these matters if all sides are agreeable.

Except for a few exceptions, one can't have a fee-sharing arrangement with his nonlawyer employee.

I have an excellent secretary/paralegal who works wonders with my clients and really gets me business. Is there any way I can share some of the legal fees with her?

The famous movie, “Erin Brockovich,” dealt with a lawyer giving her a $2 million referral fee for work she did as a paralegal on an environmental contamination case that the lawyer won and got a great settlement and large fee. That, of course, would be totally illegal in Pennsylvania.

The rule at issue is Rule 5.4 of the Rules of Professional Conduct. That rule, under Rule 5.4(a), is very clear: “A lawyer or law firm should not share legal fees with a nonlawyer …” But there are exceptions. The first exception is paying reasonable fees to a deceased lawyer's estate after the lawyer's death. Second is paying the estate reasonable compensation for the legal services the deceased lawyer provided. The third exception is placing monies in a nonlawyer employee's compensation or retirement plan. This is allowed even if the plan is based on a profit-sharing arrangement. The fourth exception is purchasing the practice of a lawyer or law firm. One can share the fees with the estate or eligible person if the lawyer whose law practice is being sold is no longer alive. Finally, a lawyer can share court-awarded legal fees with a nonprofit organization that recommended the employment of a lawyer.

Rule 5.4 has a very good purpose. It is important that a lawyer always exercise his independent judgment on behalf of a client. If nonlawyers or other people have a claim to fees for compensation out of a particular case that could affect the lawyer's judgment on behalf of the client. It could create a classic conflict of interest. The lawyer's obligation is to his client only and, therefore, Rule 5.4 wants to make sure that there is no competing interest by some third party who is not a lawyer and doesn't have the overhead or pressures that the lawyer does.

Having said that, there is nothing wrong with giving a reasonable bonus to an excellent employee. If a lawyer has a good year and some employee has contributed to that and if a lawyer wants to give them $1,000 or $5,000 or $10,000 bonus, that would not be unreasonable. The problem where it might become unreasonable if the lawyer had a massive settlement and then paid $100,000 or $200,000 to the nonlawyer employee because of their assistance of bringing the case in or working on the case. That would be considered fee sharing as opposed to just a normal business practice of giving a good bonus. There is case law in Pennsylvania that these fee-sharing arrangements with nonlawyers would not be enforceable in any event.

Rule 5.4(b), (c), and (d) also prohibit nonlawyers' involvement in the law practice. For instance, a nonlawyer can't be part of the partnership in Pennsylvania in a law firm. A lawyer can't pay a nonlawyer for referring business. A lawyer can't give any equity interest to a nonlawyer in Pennsylvania. Some of this may change as gradually nonlawyers are getting more involved in firms such as in England. But, hopefully, that never reaches that stage in Pennsylvania.

In conclusion, therefore, except for those limited exceptions, one can't have a fee-sharing arrangement with their excellent non-lawyer employee. Although, at times, that might seem unfair or harsh, it is a very good rule to maintain professionalism of a law firm. Further, the involvement of nonlawyers in a firm is troubling in terms of undermining the independence and professionalism in the future.

Chester County lawyer Samuel C. Stretton has practiced in the area of legal and judicial ethics for more than 35 years. He welcomes questions and comments from readers. If you have a question, call Stretton directly at 610-696-4243 or write to him at 301 S. High St. P.O. Box 3231, West Chester, Pennsylvania, 19381.