THE NEW REFERRAL FEE LANDSCAPE IN TEXAS

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1 THE NEW REFERRAL FEE LANDSCAPE IN TEXAS RICHARD PENA Law Offices of Richard Pena, P.C. Austin, Texas State Bar of Texas 3 RD ANNUAL ADVANCED WORKERS COMPENSATION COURSE August 24-25, 2006 Austin CHAPTER 21

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3 Richard Pena Law Offices of Richard Pena, P.C East Ben White, Suite 220 Austin, TX phone: (512) BACKGROUND, EDUCATION AND PRACTICE Richard Pena is the founder of the firm. He was elected by his peers to serve as the President of the State Bar of Texas from He is also past president of the Travis County Bar Association and former Chair of the Texas Bar Foundation. He was a director to the State Bar of Texas and is a State Delegate to the American Bar Association (ABA). He currently serves as Chair of the Fellows of the American Bar Foundation as well as Chair of the ABA s Commission on Immigration. He has received three Presidential Citations from the State Bar of Texas for his meritorious service to the profession and has been selected a member of the prestigious American Inns of Court. Richard was profiled on the State Bar of Texas Web Site. Richard graduated with Bachelor of Arts and Doctor of Jurisprudence degrees from the University of Texas, where the law school faculty awarded him an honorary membership in the Order of the Coif. Listed in Who s Who in American Law, he is licensed to practice law in Texas and Colorado. Richard has lectured frequently on Workers Compensation and is a Vietnam veteran. He has led Delegations of Texas and U.S. Lawyers to China, South Africa, Cuba, Vietnam, and Cambodia through the People To People Ambassador Program. Richard Pena is rated AV by the Martindale-Hubbell Law Directory, indicating a very high to prominent reputation for legal ability and a very high general recommendation.

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5 TABLE OF CONTENTS I. BACKGROUND LEADING UP TO THE CURRENT REFERRAL FEE RULES A. DIVISION OF FEES BY LAWYERS... 1 B. PROCEDURAL HISTORY OF THE 2005 AMENDMENTS TO RULE 1.04 AND PART VII OF THE TEXAS DISCIPLINARY RULES OF PROFSSIONAL CONDUCT ( TDRCP ) Tex. R. Civ. P. 8A ( Proposed Rule 8A ) Proposed Amendments to Texas Rule 1.04 and Part VII, TDPRC Referendum C. TEXAS RULES REGARDING DIVISION OF FEES Texas Canon of Ethics Texas Code of Professional Responsibility (1970) Texas Disciplinary Rules of Professional Responsibility (1990)... 2 D. AMENDMENTS TO TEXAS RULE 1.04 (2005)... 2 II. SUPREME COURT PROPOSED RULE 8 A, TEXAS RULE OF CIVIL PROCEDURE... 2 III. THE NEW REFERRAL FEE RULE (SEE APPENDIX B)... 3 IV. THE REFERRAL STRUCTURE IN TEXAS... 4 Table 1. Source of Business, Texas Plaintiffs Lawyers By Size of Typical Case... 5 Table 2. Source of Business, Texas Plaintiffs Lawyers By Selected Specializations... 6 Table 3. Take or refer a Bad Baby case, Texas Plaintiffs Lawyers By Selected Specializations... 6 Table 4. Take or refer a Bad Baby case, Texas Plaintiffs Lawyer By Size of Typical Case... 6 Table 5. Refer a Case to Another Plaintiffs Lawyer in 12 months prior to Survey...6 Table 6. If Yes in Table 5, Why Did You Refer, By Size of Typical Case... 7 Table 7. If Yes in Table 5, Why Did You Refer, By Selected Specializations... 7 Table 8. Top Five Type of Cases Referred for a Fee... 7 Table 9. Reasons for Referring Medical Malpractice... 8 Table 10. Reasons for choosing the Lawyer... 8 Observation... 8 Appendix A: Texas Rules of Civil Procedure Proposed Rule 8 a Referral Fees... 9 Appendix B: Texas Disciplinary Rules of Professionals Conduct 1.04(f)(g)2(h) Appendix C: Form Language Authorizing Referral or Association of Counsel Appendix D: Main Components and Frequently Asked Questions of the Referral Fee Rule Appendix E: Referral Fee Task Force Schedule and Members i

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7 THE NEW REFERRAL FEE LANDSCAPE IN TEXAS By Richard Hile I. BACKGROUND LEADING UP TO THE CURRENT REFERRAL FEE RULES. 1 A. DIVISION OF FEES BY LAWYERS Regulation regarding division of fees has been one of the most controversial issues to face the organized bar in Texas and bar associations in other jurisdictions. The controversy surrounding referral fees has only heightened with the advent of TV advertising. As a result of this new phenomenon, several states have begun an extensive review of their rules regarding division of fees. The following is an overview of the process, which led up to the appointment of the State Bar of Texas Referral Fee Task Force and its proposed changes to Rule 1.04 and Part VII of the Texas Disciplinary Rules of Professional Conduct. B. PROCEDURAL HISTORY OF THE 2005 AMENDMENTS TO RULE 1.04 AND PART VII OF THE TEXAS DISCIPLINARY RULES OF PROFSSIONAL CONDUCT ( TDRCP ) 1. Tex. R. Civ. P. 8A ( Proposed Rule 8A ) On October 9, 2003, the Supreme Court issues its Order, in Misc. Docket No , in which it proposed to amend the Texas Rules of Civil Procedure by adding Rule 8a, Referral Fees. 2 The Court deferred implementation of the rule until January 1, 2004 so that the public could comment on the proposed rule. The court ultimately received over 208 writings regarding Rule 8a, the overwhelming majority opposing such rule. Immediately after the proposed rule was published, members of the bar, various sections and special interest groups within the bar, and the State Bar leadership requested that the Court allow the bar to appoint a task force to review the issue of referral fees. The Court, by Order dated December 23, 2003, withdrew the proposed implementation of Rule 8a and authorized the State Bar to appoint a special task force to 1) review the issue of referral fees; 2) hold public hearings throughout the State of Texas; and 3) submit a final report and recommendations concerning changes to the proposed rule at least 30 days prior to the June 2004 State Bar board meeting. 1 By Richard Hile, Dies & Hile, L.L.P, Chair: Referral Fee Task Force, State Bar of Texas. 2 See Appendix A- Propose Rule 8a Proposed Amendments to Texas Rule 1.04 and Part VII, TDPRC The State Bar Board of Directors (the Board ), at its January 2004 meeting, appointed a 19-person Task Force ( Referral Fee Task Force ). The Board authorized the Task Force to conduct 1) public hearings in Austin, Dallas, El Paso, Harlingen, Houston, and San Antonio; and 2) a survey of Texas lawyers to better understand the referral fee practice in Texas. On May 23, 2004, the Task Force issued its Final Report and Recommendations ( Final Report ). At its June 23, 2004 meeting, the Board unanimously voted to 1) adopt the proposed amendments to the rules and comments to the Rules 1.04, 7.02(a), 7.04q and Part VII of the TDRPC; and 2) request that the Supreme Court authorize the State Bar to conduct a referendum so that registered members of the Bar may vote on proposed changes. This resolution was immediately referred to the Supreme Court who published such rules on its website and invited comments from the public and bar to be filed no later that September 15, On September 17, 2004, the Board received reports from the Task Force and the Bar s Referendum Committee. The Task Force recommended one change in Proposed Rule 7.02(a)(2) and the Referendum Committee submitted a proposed form of ballot and timeline for the fall referendum The Board unanimously voted to 1) formally adopt proposed amendments to Rule 1.04 and Part VII, TDRPC; 2) request the Supreme Court to allow electronic transmission ballots for online voting; 3) allow electronic online voting to begin on November 5, 2004 and end at midnight on November 14, 2004; 4) prepare and mail, on November 20, 2004, a written ballot to each eligible member of the Bar who did not vote electronically, with such balloting to close at 5:00 p.m. on December 20, 2004; and 5) approve the from and content of the referendum ballot. Pursuant to the Board Directive, the State Bar, on September 22, 2004, filed a Petition for Order of Referendum with the Supreme Court (Misc. Docket No ) requesting that the Court submit the proposed revised rules and comments to registered members of the State Bar in November The Supreme Court, by order dated October 1, 2004, approved the petition and proposed schedule for the November referendum. 3. Referendum 2004 The State Bar of Texas, in accordance with the Supreme Court s Order, conducted a referendum regarding the proposed changes to Rule 1.04 and Part VII, TDRPC, with on-line voting commencing on November 5, 2004 and ending on November 14, Ballots were made available online to all eligible voters and 11,766 such members voted online. On November 20, 2004, 60,840 ballots were mailed to

8 eligible members of the State Bar who did not vote online, and 16,518 ballots were returned by the deadline, December 20, The result of the vote for Division of Fees was as follows: PROPOSITION MEASURE Division of Fees YES NO TOTAL NO VOTE VOTE VOTE 15,257 12,847 28, A Petition for Order of Promulgation of Changes to the Texas Disciplinary Rules of Professional Conduct was filed with the Supreme Court on January 5, The State Bar requested that the Court enter an order promulgating the amendments to Rule 1.04 and Part VII, TDRPC, as published in the November 2004 issue of the Texas Bar Journal, and further providing that such amendments become effective 90 days from the date of the order promulgating the amendments to Rule 1.04(f) and Part VII of the disciplinary rules and their effective dates are discussed in more detail below. C. TEXAS RULES REGARDING DIVISION OF FEES 1. Texas Canon of Ethics The State Bar and its predecessor, the voluntary Texas Bar Association, as a matter of practice, have generally followed the ABA model rules. In 1938, the Texas Bar Association adopted, in part, the provisions of ABA Canon 34. On year later, the Texas legislature created the Stated Bar of Texas as a mandatory bar, and in 1940, the Court first adopted Canons of Ethics as part of the State Bar rules that were approved in a referendum of Texas lawyers. Texas Canon 31 governed division of fees between non-lawyers. Texas Canon 31 included the ABA canon provision allowing division of fees based upon division of services or responsibility; however, Texas departed from the majority of jurisdictions by expressly permitting a pure forwarding fee. Texas Canon 31, as adopted, states [n]o division of fees for legal services is proper, except with other lawyers, based upon a division of responsibility, or with a forwarding attorney (emphasis added). This rule allowed a forwarding fee to be paid to a lawyer who neither rendered legal services nor assumed joint responsibility for the representation. 2. Texas Code of Professional Responsibility (1970) The State Bar, following in the footsteps of the ABA, proposed the adoption of the Texas Code of Professional Responsibility in Members of the bar approved the proposed Texas Code of Professional Responsibility by referendum in 1971, and the Supreme Court, by order dated December 20, 1971, promulgated these rules. Disciplinary Rule 2-107(A) of 2 the Texas Code continued Texas s departure from the model rule by allowing fee-splitting with a forwarding lawyer. 3. Texas Disciplinary Rules of Professional Responsibility (1990) In 1983, the State Bar appointed a special task force chaired by Orrin Johnson to consider revisions to the Texas disciplinary rules in light of the ABA s adoption of the Model Rules of Professional Responsibility (1983). The task force submitted its final report to the State Bar Board in late The task force expressly rejected the inclusion of the pure forwarding fee in proposed Rule 1.04 and recommended that the ABA model rule regarding division of fees be adopted in toto. This provision engendered a great deal of debate at the board level. Ultimately, the board rejected the task force s recommendation and once again included the pure forwarding fee as part of Texas Rule 1.4(f), and to call a referendum. Members of the bar approved the adoption of the Texas Disciplinary Rules of Professional Conduct, which included Texas Rule 1.04(f), regarding division of fees. These provisions became effective January 1, 1990 and have remained in effect since their promulgation. D. AMENDMENTS TO TEXAS RULE 1.04 (2005) The Task Force, in its Final Report, recommended that the Board adopt modifications and additions to Texas Rules 1.04(f), (g) and (h) and the accompanying comments as set forth in Appendix B. The amendments to the rules and comments include 1)the elimination of the pure forwarding fee; 2) new Comment 12 to Texas Rule 1.04, which describes the minimum, ethical requirement for dividing a fee based on proportion of services, the extent of proportionality required, and the means for testing it; 3) new Comment 13 to Texas Rule 1.04 setting forth minimum, standards to conduct that a lawyer must satisfy to assume joint responsibility; 4) new Comment 14 describes method for determining civil liability between lawyers dividing fee; 5) new Comment 15 which sets fort the requirements for obtaining client consent; 6) new Comment 16 which describes penalties for failure to comply with Rule 1.04(f); and 7) exceptions for qualified lawyer referral groups. II. SUPREME COURT PROPOSED RULE 8 A, TEXAS RULE OF CIVIL PROCEDURE In Misc. Docket No the Supreme Court, on October 9, 2003, proposed to amend the Texas 3 Order Adopting Amendments ot the Texas Rules of Civil Procedure, Misc. Docket No (Oct. 9, 2003).

9 Rules of Civil Procedure by adding Rule 8a, dealing with Referral Fees. The effective date of this Rule was to be January 1, The State Bar of Texas urged the Supreme Court to postpone the effective date of Rule 8a to allow for further study. The Bar further proposed the appointment of a special Task Force and public hearings throughout the state. The Supreme Court argued and suspended the effective date of Rule 8a in order to allow the State Bar s recommended process to go forward. 4 Ultimately the task force presented its report to the State Bar Board of Directors. The Board considered the Final Report and Recommendations of the Referral Fee Task Force and unanimously adopted a resolution requesting that the Texas Supreme Court authorize the State Bar of Texas to conduct a referendum to go to the members. The Supreme Court agreed and such a referendum was conducted. The deadline for receipt of all ballots was 5 p.m., December 20, The Supreme Court, on December 23, 2003, Misc. Docket No , suspended the date of Proposed Rule 8a. The Supreme Court pointed out that the propriety of referral fees was a controversial issue and that fee splitting was one of the most contentious issues in the drafting of the ABA Model Rule in It appeared that no other state was as permissive of referral fees as Texas and, in fact, the only restriction was that the total fee not be unconscionable. Thus, the Order of the Texas Supreme Court (Misc. Docket No ) to add Rule 8a to the Texas Rules of Civil Procedure. Proposed Rule 8a can be found in Appendix A of this paper. Some of the key provisions, which would have gone into effect on January 1, 2004 were: 1. A referred fee would be deemed unconscionable, and therefore not allowed, if amount exceeded $50,000 or 15% of the attorney fees for the party in the case, whichever was less. 2. The attorney in charge for a party was to file with the court a disclosure of every referred fee paid or agreed to be paid with respect to the party. 3. The court must have imposed sanctions, which could be forfeiture all fees in the case, if an attorney intentionally failed to make the proper disclosure. 4 Order Suspending Proposed Rule 8a of the Texas Rules of Civil Procedure, Misc. Docket No (Dec. 23, 2003) at 30 (per curiam). 5 Geoffrey C. Hazard, Jr., Et Al., The Law and Ethics of Lawyering 508 (3 rd ed. 1999) The court must have conducted an evidentiary hearing in any party s motion to determine if there was a violation of this rule. 5. The attorney in charge must have made the disclosure within 30 days of the attorney s first appearance as attorney in charge. III. THE NEW REFERRAL FEE RULE (SEE APPENDIX B) Pursuant to the recommendations of the State Bar of Texas, the Supreme Court concluded that the amendments to the Texas Disciplinary Rules of Professional Conduct as drafted and proposed by the State Bar, through its Referral Fee Task Force and Board of Directors, should be submitted for referendum of the memberships. As stated earlier, the referendum passed and the Supreme Court has issued orders promulgating the charges to the Texas Disciplinary Rules of Professional Conduct having to do with referral fees. The State Bar of Texas Referral Fee Task Force issued its final report and Recommendations on May 24, 2004, which addressed the following issues identified by the Supreme Court in Misc. Order No : 1. Will restriction on referral fees impair what has been viewed as their beneficial purpose of obtaining the best representation fro clients? 2. Do referral fees harm clients? 3. Do referral fees adversely affect the profession? 4. Should referral fees be capped by rule? 5. Should referral fees be disclosed to the client and public? 6. What adverse collateral consequences will a referral rule have? 7. What specific problems does proposed Rule 8a have? The Task Force, very briefly, found that: 1. Restrictions on referral fees impair their beneficial purpose of obtaining the best representation for clients. 2. Referral fees do not harm clients. 3. Referral fees do not adversely affect the profession. 4. Referral fees should not be capped. 5. Referral fees should be disclosed to the client, but not the public. 6. Restrictive referral rules will have adverse collateral consequences. 7. Proposed Rule 8a would have many specific problems.

10 The new referral fee rule (Texas Disciplinary Rule Professional Conduct-Rule 1.04 (f) provides, in part, that: (f) A division of a fee between lawyers who are not in the same firm may be made only if: (1) the division is: in proportion to the professional services performed by each lawyer; or each lawyer assumes joint responsibility for the representation; and (2) the client is advised in writing of the terms of the arrangement prior to the time a proposed division of fees becomes effective, including the share of the fee each lawyer will receive and the client thereafter agrees to the arrangement, and the client s agreement is confirmed in writing; and (g) No agreement between a lawyer or law firm and a person that allows the lawyer or law firm to associate other counsel in the handling of the person s matter is enforceable unless it is confirmed by an arrangement conforming to this rule. An agreement shall be voidable at the option of the person executing it, with out financial liability on the part of that person, except for: (1) reasonable value of legal services provided to that person; or (2) reasonable and necessary expenses actually incurred on behalf of the person. A summary of some relevant items of Rule 1.04 (f)- Division of Fees, which may be helpful to Texas lawyers is as follows: Pure forwarding fees, as in the past, are eliminated. A division of fees may be made only if is in proportion to the professional services performed by each lawyer, OR each lawyer assumes joint responsibility. The client must be advised in writing and agree to the arrangement in writing prior to the division of fees. Some practice aids are as follows: Regarding Proportionality - (a) An agreed allocation will control where there is a substantial and good faith division of services or responsibilities. (b) There should be a reasonable correlation between the amount and value of the services performed and the share of the fee received. Regarding Joint Responsibility - Minimum standards for lawyers establishing joint responsibility must be met such as: (a) Adequate Representation- the referring attorney must identify the client s legal issue and refer the matter to a qualified lawyer. (b) Adequate Communication- the referring lawyer must ensure the client is informed of the status of the matter throughout the representation. Regarding Client Consent - Client consent must be in writing prior to the association or referral proposal. Regarding Penalty - A lawyer who fails to comply with the rule may only recover quantum merit or reasonable and necessary expenses incurred. Observation: Lawyers who regularly refer cases to other lawyers, or who regularly associate lawyers in the handling of cases should pay particular attention to the amendments to Rule In particular, clients should be specifically advised and consent in writing to the arrangement prior to the association or referral proposed. Failure to do so may result it the referring or associating lawyer only being entitled to referral fees based on quantum merit. Attorneys should revise their contingency fee agreements to ensure compliance with the new amendment. (See appendix C for form Language Authorizing Referral or Association of Counsel). For further discussion of the changes to Rule 1.04 I would direct you to article published by Richard Hile, Chair of the Referral Fee Task Force, which is included in the materials of the Advanced Personal Injury Course, 2005, State Bar of Texas, chapter 18. IV. THE REFERRAL STRUCTURE IN TEXAS The data included in Tables 1 through 7 are drawn from a mailed survey of a random sample of Texas plaintiffs lawyers conducted during the fall of 1999 and into the winter of 2000 by American Bar Foundation Senior Research Fellows Stephen Daniels and Joanne Martin as part of their study of the effects 4

11 of tort legislation on access to the civil justice system. The survey produced 554 usable responses. (A useable response is one from a lawyer who, either at the time of the survey or in the five years prior to the survey, devoted at least 25% of his or her practice to plaintiffs work on a contingency fee basis.) The confidence interval associated with this level of response, given the potential respondent pool, is plus or minus four percent at the 95% significance level. (A detailed discussion of the methodology used in this study can be found in the Methodological Appendix to Daniels and Martin, It Was the Best of Times, It Was the Worst of Times: The Precarious Nature of Plaintiffs Practice in Texas, 80 Texas Law Review 1781, 1826 (2002).) This research is currently being replicated to examine the effects of HB4 and Prop.12. The data in Tables 8 through 10 are drawn from the Texas Referral Practices Survey which was conducted by the State Bar of Texas in conjunction with the State Bar of Texas Referral Fee Task Force. This survey was sent to a random sample of 4000 active in-state State Bar of Texas members in the spring of 2004 and generated 1,215 usable responses. The confidence interval associated with this response level is plus or minus three percent at the 95% significance level. Table Summary The referral structure in Texas clearly works to move cases from lawyers less able to handle them into the hands of those who can. Perhaps the clearest example of this can be found through an examination of referral activity in the complex area of medical malpractice. In 2004, medical malpractice cases were the most frequently referred type case for a fee by the State Bar members responding to the Referral Fee Survey. For those who referred at least one medical malpractice case, the two most important reasons for that referral were that the case was outside the lawyer s practice area or that the case was too complex. The most important reason for choosing the lawyer to whom a medical malpractice case was referred was the lawyer s reputation, followed by compatibility with the client. The size of the referral fee was relatively unimportant. The referral structure also very clearly works, not just across the bar writ at large, but within the plaintiffs bar as well. The vast majority of plaintiffs lawyers participating in the ABF study had referred at least one case to another plaintiffs lawyer in the 12 months preceding the study. TABLE 1. SOURCE OF BUSINESS TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Source Group 1 Group 2 Group 3 Group 4 Lawyer Referrals 19.8% 31.9% 42.2% 55.3% Client referrals 37.3% 34.1% 26.2% 18.2% Advertising 20.0% 13.0% 9.2% 6.9% Other Sources 22.9% 21.0% 22.4% 19.6% Groups based on size of lawyer s typical case in year 2000 dollars: Group 1: <$15,001, n=138 lawyers Group 2: >$15,000 & <$37,001, n= 141 lawyers Group 3: >$37,000 & <$200,001, n=134 lawyers Group 4:>$200,000, n= 139 lawyers Table 1. shows that lawyer referrals become more important as the size of a lawyer s typical case increases while client referrals and advertising become less important. This suggests that the pre-2004 referral system helped to move some cases to from lawyers less able to handle to them to lawyers better able to handle them. 5

12 TABLE 2. SOURCE OF BUSINESS TEXAS PLAINTIFFS LAWYERS BY SELECTED SPECIALIZATIONS (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Source Auto Med Mal Lawyer Referrals 25.1% 57.9% Client referrals 37.3% 20.6% Advertising 17.6% 10.8% Other Sources 22.9% 21.0% Specialization based on: Auto >50% of business auto accident cases, n=185 lawyers Med Mal >50% of business medical malpractice cases, n=45 lawyers Table 2. shows that lawyer referrals are more important to med mal specialists than to auto specialists. Again, this suggests that the pre-2004 referral system helped to move some cases from lawyers less able to handle to them to lawyers better able to handle them. TABLE 3. TAKE OR REFER A BAD BABY CASE TEXAS PLAINTIFFS LAWYERS BY SELECTED SPECIALIZATIONS (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Auto Med Mal All Respondents Take the Case 45.4% 97.8% 47.8% Refer the Case 54.6% 2.2% 52.2% Table 3. shows that auto specialists more likely to refer than keep a bad baby case, again suggesting that the pre-2004 referral system helped to move some cases from lawyers less able to handle to them to lawyers better able to handle them. TABLE 4. TAKE OR REFER A BAD BABY CASE TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Group 1 Group 2 Group 3 Group 4 Take the Case 27.5% 46.0% 56.7% 61.3% Refer the Case 72.5% 54.0% 43.3% 38.7% Table 4. shows clearly that lawyers who handle smaller cases will refer such a case will lawyers who handle larger cases will take such a case. TABLE 5. REFER A CASE TO ANOTHER PLAINTIFFS LAWYER IN 12 MONTHS PRIOR TO SURVEY TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Group 1 Group 2 Group 3 Group 4 Yes 79.6% 82.7% 86.4% 82.5% No 20.4% 17.3% 13.6% 17.5% Table 5. shows that most lawyers had referred a case in the 12 months prior to the survey. 6

13 TABLE 6. IF YES IN TABLE 5. WHY DID YOU REFER (ALL THAT APPLY) TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Reason Group 1 Group 2 Group 3 Group 4 Not My Practice Area 60.6% 64.9% 70.2% 67.5% Required Litigation 11.0% 2.6% 3.5% 1.8% $ Value too Low 19.3% 30.7% 50.0% 66.7% $ Value too High 16.5% 6.1% 6.1% 6.1% Case too Complex 48.6% 36.8% 16.7% 13.2% *percentages will not add to 100% since respondents asked to check all that applied Table 6. shows that all groups will refer cases that are out of a lawyer s practice area. Low dollar value as a reason for referring a case goes up as the size of a lawyer s typical case goes up. Case complexity as a reason for referring becomes less important as case value gets larger. Lawyers with larger case values are likely to be lawyers whose practices concentrate on more complex cases. TABLE 7. IF YES IN TABLE 5. WHY DID YOU REFER (ALL THAT APPLY) TEXAS PLAINTIFFS LAWYERS BY SELECTED SPECIALIZATIONS (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Reason Auto Med Mal All Respondents Not My Practice Area 58.8% 47.7% 55.0% Required Litigation 6.8% 0 4.3% $ Value too Low 24.3% % $ Value too High 8.1% 2.6% 7.2% Case too Complex 29.1% 5.3% 23.0% *percentages will not add to 100% since respondents asked to check all that applied Pattern in Table 7. consistent with the pattern in Table 6. Additional data from State Bar of Texas Referral Survey, 2004 Table 8. Top Five Types of Cases Referred for a Fee: All Respondents in Private Practice, N=861 (Texas Referral Fee Survey) Type of Case N of Cases Medical Malpractice 642 Auto Accident 550 Products Liability 484 Criminal 344 Employment 287 Table 8. shows that in 2004, medical malpractice cases were the most referred case for a fee in Texas. 7

14 TABLE 9. Reasons for Referring Medical Malpractice: All Who Referred at Least One (n=195) (Texas Referral Fee Survey) Reason Percent* Out of Practice Area 79.0% Too Complex 44.1% Geographic Distance 38.5% Caseload Full 18.5% Value Too Low 21.0% Value Too High 12.8% Most Cases Referred 0.5% *percentages will not add to 100% since respondents asked to check all that applied. Table 9. shows that for those who referred at least med mal case, the two most important reasons were that the case was outside the lawyer s practice area or that the case was too complex. TABLE 10. Reasons for Choosing the Lawyer: All Who Referred at Least One Malpractice (n=195) (Texas Referral Fee Survey) Reason Important % Neutral % Unimportant % Size of Fee (n=189) 11.6% 21.2% 67.2% Lawyer s Reputation (190) 98.9% 1.1% 0 Reciprocity (n=186) 16.7% 18.3% 65.1% Compatibility with Client (n=184) 56.5% 24.5% 19.0% Table 10. shows that the most important reason for choosing the lawyer to whom a med mal case was referred was the lawyer s reputation, followed by compatibility with the client. The size of the referral fee was relatively unimportant. Observation: There appears to be an informal referral structure among a portion of the bar in Texas which allows clients to get proper representation. The end result is that this referral structure helps provide people in Texas with greater access to justice. 8

15 Appendix A APPENDIX A Texas Rules of Civil Procedure Proposed Rule 8a Referral Fees 9

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17 Texas Rules of Civil Procedure Proposed Rule 8a Referral Fees 8a.1 Referral Fee Defined. A referral fee is a payment of money or anything of value: (a) made by any person in consideration of: (1) the referral of a client or case, or (2) the solicitation of a client or a case by any means that does not include the name of lead counsel or lead counsel s law firm; and (b) made to an attorney who does not, and is not reasonably expected to, provide professional services in the case: (1) that are substantial; and (2) for which the payment would be a reasonable fee apart from the referral. 8a.2 Disclosure. The attorney in charge for a party must file with the court a notice disclosing every referral fee paid or agreed to be paid with respect to the party. The notice must: (a) (b) (c) state the amount and date of each payment made or agreed to be made; state the name, address, telephone number, and state bar identification number of each attorney to whom a payment has been made or is to be made; and state that the client has approved each such payment or agreement. 8a.3 Time for Disclosure. An attorney in charge must make the disclosure required by Rule 8a.2 within 30 days of the attorney s first appearance as attorney in charge. Thereafter, an attorney in charge must disclose any previously undisclosed payment of a referral fee or agreement to pay a referral within 30 days of the date the payment or agreement is made. 8a.4 Sanctions. (a) Grounds for sanctions. The court must impose just sanctions on an attorney if the court finds that: (1) the attorney intentionally failed to make the disclosure required by Rule 8a.2; or (2) the attorney divided or agreed to divide a fee in violation of Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct. (b) (c) Unconscionable referral fee. A referral fee is unconscionable within the meaning of Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct if it exceeds $50,000 or 15% of the attorney fees for the party in the case, whichever is less. A lesser referral fee may also be determined to be unconscionable in the circumstances in which it is paid. Sanctions imposed. If the court finds that grounds for imposing sanctions on an attorney exist, the court: 11

18 (1) must disqualify the attorney from representing the party in the case unless disqualification would unfairly prejudice the party; (2) may permit the party to void the party s agreement to retain the attorney; (3) may order the forfeiture of all fees for the attorney in the case; and (4) may impose other appropriate sanctions in addition. 8a.5 Hearing. The court must, on a party s motion, and may, on its own initiative, conduct an evidentiary hearing to determine whether there has been a violation of this rule. 12

19 Appendix B APPENDIX B TEX. DISCIPLINARY R. PROF. CONDUCT 1.04(f) (g) & (h) 13

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21 Texas Disciplinary Rule Professional Conduct - Rule 1.04(f) (g) (h) Rule 1.04 Fees [No changes in (a)-(e).] (f) A division or agreement arangement for division of a fee between lawyers who are not in the same firm shall not may be made unless only if: (1) the division is: (i) in proportion to the professional services performed by each lawyer; (ii) made with a forwarding lawyer; or (iii) made, by written agreement with the client, with a between lawyers who assumes joint responsibility for the representation; and (2) the client is advised of, and does not object to, the participation of all the lawyers involved consents in writing to the terms of the arrangement prior to the time of the association or referral proposed, including (i) the identity of all lawyers or law firms who will participate in the fee-sharing arrangement, and (ii) whether fees will be divided based on the proportion of services performed or by lawyers agreeing to assume joint responsibility for the representation, and (iii) the share of the fee that each lawyer or law firm will receive or, if the division is based on the proportion of services performed, the basis on which the division will be made; and (3) the aggregate fee does not violate paragraph (a). (g) Every agreement that allows a lawyer or law firm to associate other counsel in the representation of a person, or to refer the person to other counsel for such representation, and that results in such an association with or referral to a different law firm or a lawyer in such a different firm, shall be confirmed by an arrangement conforming to paragraph (f). Consent by a client or a prospective client without knowledge of the information specified in subparagraph (f)(2) does not constitute a confirmation within the meaning of this rule. No attorney shall collect or seek to collect fees or expenses in connection with any such agreement that is not confirmed in that way, except for: (1) the reasonable value of legal services provided to that person; and (2) the reasonable and necessary expenses actually incurred on behalf of that person. (gh) Paragraph (f) of this Rrule does not prohibit apply to payment to a former partner or associate pursuant to a separation or retirement agreement, or to a lawyer referral program certified by the State Bar of 15

22 Texas in accordance with the Texas Lawyer Referral Service Quality Act, Tex. Occ. Code et seq., or any amendments or recodifications thereof. [No changes in comments 1-9.] Division of Fees Comments: 10. A division of fees is a sharing of a single billing to a client between covering the fee of two or more lawyers who are not in the same firm. A division of fees facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring or associating lawyer initially retained by the client and a trial specialist. Because the association of additional counsel normally will result in a further disclosure of client confidences and have a financial impact on a client, advance disclosure of the existence of that proposed association and client consent generally are required. Where those consequences will not arise, however, disclosure is not mandated by this Rule. For example, if a lawyer hires a second lawyer for consultation and advice on a specialized aspect of a matter and that consultation will not necessitate the disclosure of confidential information and the hiring lawyer both absorbs the entire cost of the second lawyer s fees and assumes all responsibility for the advice ultimately given the client, a division of fees within the meaning of this Rule is not involved. See also Comment 3 to Rule 5.04., but it applies in all cases in which two or more lawyers are representing a single client in the same matter, and without regard to whether litigation is involved. Paragraph (f) permits the lawyers to divide a fee either on the basis of the proportion of services they render or if each lawyer assumes joint responsibility for the representation. 11. Contingent fee agreements must be in a writing signed by the client and must otherwise comply with paragraph (d) of this Rule Paragraph (f) permits lawyers to divide a fee on one of three bases. The first is in proportion to the professional services performed by each. The second continues the Texas practice of permitting a division of fees with a forwarding attorney. The third permits fees to be divided with a lawyer who, by written agreement with the client, assumes joint responsibility for the representation. The second and the third methods permit the fees to be divided in any mutually agreeable proportion. If the third method is used, a lawyer may satisfy his or her obligations of joint responsibility for the representation either by being an attorney of record in the matter or by discharging the responsibilities imposed on a supervised lawyer under these rules. See Rule Paragraph (f) does not require disclosure to the client of the share that each lawyer is to receive. A division of a fee based on the proportion of services rendered by two or more lawyers contemplates that each lawyer is performing substantial legal services on behalf of the client with respect to the matter. In particular, it requires that each lawyer who participates in the fee have performed services beyond those involved in initially seeking to acquire and being engaged by the client. There must be a reasonable correlation between the amount or value of services rendered and responsibility assumed, and the share of the fee to be received. However, if each participating lawyer performs substantial legal services on behalf of the client, the agreed division should control even though the division is not directly proportional to actual work performed. If a division of fee is to be based on the proportion of services rendered, the arrangement may provide that the allocation not be made until the end of the representation. When the allocation is deferred until the end of the representation, the terms of the arrangement must include the basis by which the division will be made. 13. Joint responsibility for the representation entails ethical and perhaps financial responsibility for the representation. The ethical responsibility assumed requires that a referring or associating lawyer make 16

23 reasonable efforts to assure adequacy of representation and to provide adequate client communication. Adequacy of representation requires that the referring or associating lawyer conduct a reasonable investigation of the client s legal matter and refer the matter to a lawyer whom the referring or associating lawyer reasonably believes is competent to handle it. See Rule Adequate attorney-client communication requires that a referring or associating lawyer monitor the matter throughout the representation and ensure that the client is informed of those matters that come to that lawyer s attention and that a reasonable lawyer would believe the client should be aware. See Rule Attending all depositions and hearings, or requiring that copies of all pleadings and correspondence be provided a referring or associating lawyer, is not necessary in order to meet the monitoring requirement proposed by this rule. These types of activities may increase the transactional costs, which ultimately the client will bear, and unless some benefit will be derived by the client, they should be avoided. The monitoring requirement is only that the referring lawyer be reasonably informed of the matter, respond to client questions, and assist the handling lawyer when necessary. Any referral or association of other counsel should be made based solely on the client s best interest. 14. In the aggregate, the minimum activities that must be undertaken by referring or associating lawyers pursuant to an arrangement for a division of fees are substantially greater than those assumed by a lawyer who forwarded a matter to other counsel, undertook no ongoing obligations with respect to it, and yet received a portion of the handling lawyer s fee once the matter was concluded, as was permitted under the prior version of this rule. Whether such activities, or any additional activities that a lawyer might agree to undertake, suffice to make one lawyer participating in such an arrangement responsible for the professional misconduct of another lawyer who is participating in it and, if so, to what extent, are intended to be resolved by Texas Civil Practice and Remedies Code, ch. 33, or other applicable law. 15. A client must consent in writing to the terms of the arrangement prior to the time of the association or referral proposed. For this consent to be effective, the client must have been advised of at least the key features of that arrangement. Those essential terms, which are specified in subparagraph (f)(2), are 1) the identity of all lawyers or law firms who will participate in the fee-sharing agreement, 2) whether fees will be divided based on the proportion of services performed or by lawyers agreeing to assume joint responsibility for the representation, and 3) the share of the fee that each lawyer or law firm will receive or the basis on which the division will be made if the division is based on proportion of service performed. Consent by a client or prospective client to the referral to or association of other counsel, made prior to any actual such referral or association but without knowledge of the information specified in subparagraph (f)(2), does not constitute sufficient client confirmation within the meaning of this rule. The referring or associating lawyer or any other lawyer who employs another lawyer to assist in the representation has the primary duty to ensure full disclosure and compliance with this rule. 16. Paragraph (g) facilitates the enforcement of the requirements of paragraph (f). It does so by providing that agreements that authorize an attorney either to refer a person s case to another lawyer, or to associate other counsel in the handling of a client s case, and that actually result in such a referral or association with counsel in a different law firm from the one entering into the agreement, must be confirmed by an arrangement between the person and the lawyers involved that conforms to paragraph (f). As noted there, that arrangement must be presented to and agreed to by the person before the referral or association between the lawyers involved occurs. See subparagraph (f)(2). Because paragraph (g) refers to the party whose matter is involved as a person rather than as a client, it is not possible to evade its requirements by having a referring lawyer not formally enter into an attorney-client relationship with the person involved before referring that person s matter to other counsel. Paragraph (g) does provide, however, for recovery in quantum meruit in instances where its requirements are not met. See subparagraphs (g)(1) and (g)(2). 17

24 17. What should be done with any otherwise agreed-to fee that is forfeited in whole or in part due to a lawyer s failure to comply with paragraph (g) is not resolved by these rules. 18. Subparagraph (f)(3) requires that the aggregate fee charged to clients in connection with a given matter by all of the lawyers involved meet the standards of paragraph (a) that is, not be unconscionable. Fee Disputes and Determinations 129. If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by a bar association, the lawyer should conscientiously consider submitting to it. Law may prescribe a procedure for determining a lawyer s fee, for example, in representation of an executor or administrator, or when a class or a person is entitled to recover a reasonable attorney s fee as part of the measure of damages. All involved lawyers should comply with any prescribed procedures. 18

25 Texas Disciplinary Rule Professional Conduct - Rule 1.04(f) (g) (h) Rule 1.04 Fees (a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable. (b) Factors that may be considered in determining the reasonableness of a fee include, but not to the exclusion of other relevant factors, the following: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent on results obtained or uncertainty of collection before the legal services have been rendered. (c) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation. (d) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (e) or other law. A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined. If there is to be a differentiation in the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, the percentage for each shall be stated. The agreement shall state the litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement describing the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination. (e) A lawyer shall not enter into an arrangement for, charge, or collect a contingent fee for representing a defendant in a criminal case. (f) A division or arrangement for division of a fee between lawyers who are not in the same firm may be made only if: (1) the division is: (i) in proportion to the professional services performed by each lawyer; (ii) made between lawyers who assume joint responsibility for the representation; and (2) the client consents in writing to the terms of the arrangement prior to the time of the association or referral proposed, including (i) the identity of all lawyers or law firms who will participate in the fee-sharing arrangement, and (ii) whether fees will be divided based on the proportion of services performed or by lawyers agreeing to assume joint responsibility for the representation, and (iii) the share of the fee that each lawyer or law firm will receive or, if the division is based on the proportion of services performed, the basis on which the division will be made; and (3) the aggregate fee does not violate paragraph (a). (g) Every agreement that allows a lawyer or law firm to associate other counsel in the representation of a person, or to refer the person to other counsel for such representation, and that results in such an association with or referral to a different law firm or a lawyer in such a different firm, shall be confirmed by an arrangement conforming to paragraph (f). Consent by a client or a prospective client without knowledge of 19

26 the information specified in subparagraph (f)(2) does not constitute a confirmation within the meaning of this rule. No attorney shall collect or seek to collect fees or expenses in connection with any such agreement that is not confirmed in that way, except for: (1) the reasonable value of legal services provided to that person; and (2) the reasonable and necessary expenses actually incurred on behalf of that person. (h) Paragraph (f) of this rule does not apply to payment to a former partner or associate pursuant to a separation or retirement agreement, or to a lawyer referral program certified by the State Bar of Texas in accordance with the Texas Lawyer Referral Service Quality Act, Tex. Occ. Code et seq., or any amendments or recodifications thereof. Comment: 1. A lawyer in good conscience should not charge or collect more than a reasonable fee, although he may charge less or no fee at all. The determination of the reasonableness of a fee, or of the range of reasonableness, can be a difficult question, and a standard of reasonableness is too vague and uncertain to be an appropriate standard in a disciplinary action. For this reason, paragraph (a) adopts, for disciplinary purposes only, a clearer standard: the lawyer is subject to discipline for an illegal fee or an unconscionable fee. Paragraph (a) defines an unconscionable fee in terms of the reasonableness of the fee but in a way to eliminate factual disputes as to the fees reasonableness. The Rules unconscionable standard, however, does not preclude use of the reasonableness standard of paragraph (b) in other settings. Basis or Rate of Fee 2. When the lawyer has regularly represented a client, they ordinarily will have evolved an understanding concerning the basis or rate of the fee. If, however, the basis or rate of fee being charged to a regularly represented client differs from the understanding that has evolved, the lawyer should so advise the client. In a new client-lawyer relationship, an understanding as to the fee should be promptly established. It is not necessary to recite all the factors that underlie the basis of the fee, but only those that are directly involved in its computation. It is sufficient, for example, to state that the basic rate is an hourly charge or a fixed amount or an estimated amount, in order to identify the factors that may be taken into account in finally fixing the fee. When developments occur during the representation that renders an earlier estimate substantially inaccurate, a revised estimate should be provided to the client. A written statement concerning the fee reduces the possibility of misunderstanding, and when the lawyer has not regularly represented the client it is preferable for the basis or rate of the fee to be communicated to the client in writing. Furnishing the client with a simple memorandum or a copy of the lawyers customary fee schedule is sufficient if the basis or rate of the fee is set forth. In the case of a contingent fee, a written agreement is mandatory. Types of Fees 3. Historically lawyers have determined what fees to charge by a variety of methods. Commonly employed are percentage fees and contingent fees (which may vary in accordance with the amount at stake or recovered), hourly rates, and flat fee arrangements, or combinations thereof. 4. The determination of a proper fee requires consideration of the interests of both client and lawyer. The determination of reasonableness requires consideration of all relevant circumstances, including those stated in paragraph (b). Obviously, in a particular situation not all of the factors listed in paragraph (b) may be relevant and factors not listed could be relevant. The fees of a lawyer will vary according to many factors, including the time required, the lawyers experience, ability and reputation, the nature of the employment, the responsibility involved, and the results obtained. 5. When there is a doubt whether a particular fee arrangement is consistent with the client s best interest, the lawyer should discuss with the client alternative bases for the fee and explain their implications. 6. Once a fee arrangement is agreed to, a lawyer should not handle the matter so as to further the lawyers financial interests to the detriment of the client. For example, a lawyer should not abuse a fee arrangement based primarily on hourly charges by using wasteful procedures. Unconscionable Fees 7. Two principal circumstances combine to make it difficult to determine whether a particular fee is unconscionable within the disciplinary test provided by paragraph (a) of this Rule. The first is the subjectivity of a number of the factors relied on to determine the reasonableness of fees under paragraph 20

27 (b). Because those factors do not permit more than an approximation of a range of fees that might be found reasonable in any given case, there is a corresponding degree of uncertainty in determining whether a given fee is unconscionable. Secondly, fee arrangements normally are made at the outset of representation, a time when many uncertainties and contingencies exist, while claims of unconscionability are made in hindsight when the contingencies have been resolved. The unconscionability standard adopts that difference in perspective and requires that a lawyer be given the benefit of any such uncertainties for disciplinary purposes only. Except in very unusual situations, therefore, the circumstances at the time a fee arrangement is made should control in determining a question of unconscionability. 8. Two factors in otherwise borderline cases might indicate a fee may be unconscionable. The first is overreaching by a lawyer, particularly of a client who was unusually susceptible to such overreaching. The second is a failure of the lawyer to give at the outset a clear and accurate explanation of how a fee was to be calculated. For example, a fee arrangement negotiated at arms length with an experienced business client would rarely be subject to question. On the other hand, a fee arrangement with an uneducated or unsophisticated individual having no prior experience in such matters should be more carefully scrutinized for overreaching. While the fact that a client was at a marked disadvantage in bargaining with a lawyer over fees will not make a fee unconscionable, application of the disciplinary test may require some consideration of the personal circumstances of the individuals involved. Fees in Family Law Matters 9. Contingent and percentage fees in family law matters may tend to promote divorce and may be inconsistent with a lawyers obligation to encourage reconciliation. Such fee arrangements also may tend to create a conflict of interest between lawyer and client regarding the appraisal of assets obtained for client. See also Rule 1.08(h). In certain family law matters, such as child custody and adoption, no res is created to fund a fee. Because of the human relationships involved and the unique character of the proceedings, contingent fee arrangements in domestic relations cases are rarely justified. Division of Fees 10. A division of fees is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fees facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring or associating lawyer initially retained by the client and a trial specialist, but it applies in all cases in which two or more lawyers are representing a single client in the same matter, and without regard to whether litigation is involved. Paragraph (f) permits the lawyers to divide a fee either on the basis of the proportion of services they render or if each lawyer assumes joint responsibility for the representation. 11. Contingent fee agreements must be in a writing signed by the client and must otherwise comply with paragraph (d) of this Rule. 12. A division of a fee based on the proportion of services rendered by two or more lawyers contemplates that each lawyer is performing substantial legal services on behalf of the client with respect to the matter. In particular, it requires that each lawyer who participates in the fee have performed services beyond those involved in initially seeking to acquire and being engaged by the client. There must be a reasonable correlation between the amount or value of services rendered and responsibility assumed, and the share of the fee to be received. However, if each participating lawyer performs substantial legal services on behalf of the client, the agreed division should control even though the division is not directly proportional to actual work performed. If a division of fee is to be based on the proportion of services rendered, the arrangement may provide that the allocation not be made until the end of the representation. When the allocation is deferred until the end of the representation, the terms of the arrangement must include the basis by which the division will be made. 13. Joint responsibility for the representation entails ethical and perhaps financial responsibility for the representation. The ethical responsibility assumed requires that a referring or associating lawyer make reasonable efforts to assure adequacy of representation and to provide adequate client communication. Adequacy of representation requires that the referring or associating lawyer conduct a reasonable investigation of the client s legal matter and refer the matter to a lawyer whom the referring or associating lawyer reasonably believes is competent to handle it. See Rule Adequate attorney-client 21

28 communication requires that a referring or associating lawyer monitor the matter throughout the representation and ensure that the client is informed of those matters that come to that lawyer s attention and that a reasonable lawyer would believe the client should be aware. See Rule Attending all depositions and hearings, or requiring that copies of all pleadings and correspondence be provided a referring or associating lawyer, is not necessary in order to meet the monitoring requirement proposed by this rule. These types of activities may increase the transactional costs, which ultimately the client will bear, and unless some benefit will be derived by the client, they should be avoided. The monitoring requirement is only that the referring lawyer be reasonably informed of the matter, respond to client questions, and assist the handling lawyer when necessary. Any referral or association of other counsel should be made based solely on the client s best interest. 14. In the aggregate, the minimum activities that must be undertaken by referring or associating lawyers pursuant to an arrangement for a division of fees are substantially greater than those assumed by a lawyer who forwarded a matter to other counsel, undertook no ongoing obligations with respect to it, and yet received a portion of the handling lawyer s fee once the matter was concluded, as was permitted under the prior version of this rule. Whether such activities, or any additional activities that a lawyer might agree to undertake, suffice to make one lawyer participating in such an arrangement responsible for the professional misconduct of another lawyer who is participating in it and, if so, to what extent, are intended to be resolved by Texas Civil Practice and Remedies Code, ch. 33, or other applicable law. 15. A client must consent in writing to the terms of the arrangement prior to the time of the association or referral proposed. For this consent to be effective, the client must have been advised of at least the key features of that arrangement. Those essential terms, which are specified in subparagraph (f)(2), are 1) the identity of all lawyers or law firms who will participate in the fee-sharing agreement, 2) whether fees will be divided based on the proportion of services performed or by lawyers agreeing to assume joint responsibility for the representation, and 3) the share of the fee that each lawyer or law firm will receive or the basis on which the division will be made if the division is based on proportion of service performed. Consent by a client or prospective client to the referral to or association of other counsel, made prior to any actual such referral or association but without knowledge of the information specified in subparagraph (f)(2), does not constitute sufficient client confirmation within the meaning of this rule. The referring or associating lawyer or any other lawyer who employs another lawyer to assist in the representation has the primary duty to ensure full disclosure and compliance with this rule. 16. Paragraph (g) facilitates the enforcement of the requirements of paragraph (f). It does so by providing that agreements that authorize an attorney either to refer a person s case to another lawyer, or to associate other counsel in the handling of a client s case, and that actually result in such a referral or association with counsel in a different law firm from the one entering into the agreement, must be confirmed by an arrangement between the person and the lawyers involved that conforms to paragraph (f). As noted there, that arrangement must be presented to and agreed to by the person before the referral or association between the lawyers involved occurs. See subparagraph (f)(2). Because paragraph (g) refers to the party whose matter is involved as a person rather than as a client, it is not possible to evade its requirements by having a referring lawyer not formally enter into an attorney-client relationship with the person involved before referring that person s matter to other counsel. Paragraph (g) does provide, however, for recovery in quantum meruit in instances where its requirements are not met. See subparagraphs (g)(1) and (g)(2). 17. What should be done with any otherwise agreed-to fee that is forfeited in whole or in part due to a lawyer s failure to comply with paragraph (g) is not resolved by these rules. 18. Subparagraph (f)(3) requires that the aggregate fee charged to clients in connection with a given matter by all of the lawyers involved meet the standards of paragraph (a) that is, not be unconscionable. Fee Disputes and Determinations 19. If a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by a bar association, the lawyer should conscientiously consider submitting to it. Law may prescribe a procedure for determining a lawyer s fee, for example, in representation of an executor or administrator, or when a class or a person is entitled to recover a 22

29 reasonable attorney s fee as part of the measure of damages. All involved lawyers should comply with any prescribed procedures. 23

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31 Appendix C APPENDIX C FORM LANGUAGE AUTHORIZING REFERRAL OR ASSOCIATION OF COUNSEL 25

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33 Form Language Authorizing Referral or Association of Counsel 1. General Provision which might be inserted in power of attorney or contingent fee contract. If the General Provision is included in the contract, paragraphs 1a, 1b or 1c must also be included either in the contract or in a separate written consent form executed by the client. Paragraphs 1a, 1b, and 1c may be used without the General Provision. Referral or Association of Additional Counsel: Client agrees that Attorneys may refer this matter to another lawyer or associate additional lawyers to assist in representing Client and prosecuting the Client s cause of action. Prior to the referral or association becoming effective, Client shall consent in writing to the terms of the arrangement after being advised of (1) the identity of the lawyer or law firm involved, (2) whether the fees will be divided based on the proportion of services rendered or by lawyers agreeing to assume joint responsibility for the representation, and (3) the share of the fee that each lawyer or law firm will receive or, if the division is based on the proportion of services performed, the basis on which the division will be made. The referral or association of additional attorneys will not increase the total fee owed by the Client. 1a. Referral Fee provision where referring lawyer agrees to assume joint responsibility. Referral: Attorneys are authorized to refer this matter to [insert lawyer s name or name of law firm] to [ represent Client s interests in the matter or prosecute Client s cause of action ]. Attorneys will assume joint responsibility for the [ representation of Client s interest in the matter or prosecution of Client s cause of action ] with [insert lawyer s name or name of law firm]. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney s fee of ( %) 6, ( %) will be paid to Attorneys and ( %) to [insert lawyer s name or name of law firm]. The referral fee to be paid will not increase the total fee owed by the Client. Client s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid. 1b. Association of Counsel Provision where division of fee is based on assumption of joint responsibility. Association of Additional Counsel: Attorneys are authorized to associate [insert lawyer s name or name of law firm] ( Associated Counsel ] to assist Attorneys in [ representing client s interest in the matter or prosecuting Client s cause of action ]. Attorneys will assume joint responsibility for [ representation of Client s interest in the matter or prosecution of Client s cause of action ] with Associated Counsel. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney s fee of ( %) 7, ( %) will be paid to Attorneys and ( %) will be paid to Associated Counsel. The fee to be paid to Associated Counsel will not increase the total fee owed by the Client. Client s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid. 1c. Association of Additional Counsel where division of fee based on proportion of services to be rendered. Association of Additional Counsel: Attorneys are authorized to associate [insert lawyer s or name of law firm] ( Associated Counsel ) to assist Attorneys in representing Client and/or in prosecuting Client s cause of action. Attorney s fees shall be divided based on the proportion of services to be performed by Attorneys and Associated Counsel. Attorneys agree that Associated Counsel will provide the following services: (describe how services will be divided). At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney s fee of ( %) 8, ( %) will be paid to Attorneys and ( %) will be paid to Associated Counsel. The fee to be paid 6 If the power of attorney provides that Attorney s fees will vary depending on whether a case is settled before trial or otherwise (Ex. 33 1/3% if settled before suit filed, 40% after suit is filed and 45% after appeal) the following language can be inserted: At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney s fee conveyed to Attorneys in paragraph of this Agreement, ( %) will be paid to Attorneys and ( %) to [insert lawyer s name or name of law firm]. 7 See footnote 1. 8 See footnote 1. 27

34 Associated Counsel will not increase the total fee owed by the Client. Client s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid. 2. Provision to be inserted in handling lawyer s power of attorney or contingent fee contract when Client is referred and no power of attorney or contingent fee contract was executed with referring lawyer. Referral: Client was referred to Attorneys by [insert lawyer s name or name of law firm] Referring Attorneys to prosecute Client s cause of action. Referring Attorneys will assume joint responsibility for the prosecution of Client s cause of action with Attorneys. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorneys fee of ( %) 9, ( %) will be paid to Attorneys ( %) and ( %) will be paid to Referring Attorneys. The referral fee to be paid will not increase the total fee owed by the Client. Client s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid 3. Separate Consent to Refer Form which must be used if referring lawyer only has general provision authorizing referrals or associations. CONSENT TO REFER [Name of Client] ( Client ) has previously executed a Contingent Fee Agreement / Power of Attorney / Engagement Agreement dated month day, 2005 ( The Agreement ) retaining [insert lawyer s name or name of law firm] ( Referring Attorneys ) to represent Client in regard to certain matters and/or causes of action identified in The Agreement. The Agreement also provides that Referring Attorneys, with Client s written consent, may refer the Client s matter to another attorney to prosecute the Client s cause of action if it is in the best interests of the Client. Referring Attorneys have recommended that the Client s matter be referred to [name of lawyer or law firm] ( Associated Counsel ) to represent Client and to prosecute his/her cause(s) of action. Client agrees that Referring Attorneys may refer his/her matter to Associated Counsel to prosecute Client s cause of action. It is further agreed and understood that: a. the referral fee to be paid will not increase the total attorneys fee owed by Client; b. the Referring Attorneys will assume joint responsibility for the representation of Client with Associated Counsel; and c. if a recovery is made on behalf of the Client, of the total attorney s fee of ( %) 10, ( %) will be paid to Referring Attorneys and ( %) will be paid to Associated Counsel. 9 See footnote If the power of attorney provides that Attorney s fees will vary depending on whether a case is settled before trial or otherwise (Ex. 33 1/3% if settled before suit filed, 40% after suit is filed and 45% after appeal) the following language can be inserted: At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney s fee conveyed to Referring Attorneys in paragraph of The Agreement, ( %) will be paid to Attorneys and ( %) to [insert lawyer s name or name of law firm]. 28

35 Client s signature indicates his/her understanding and consent to the referral of his/her matter and the referral fee to be paid in the event of a successful recovery on his/her part. Signed this day of, Referring Attorney Associated Counsel Client 29

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37 Appendix D APPENDIX D Main Components and Frequently Asked Questions of the Referral Fee Rule As found in Texas Bar Journal, April

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39 MAIN COMPONENTS OF THE REFERRAL FEE RULE Proportion of Services Performed Each lawyer performed substantial legal services on behalf of the client with respect to the matter. Each lawyer who participates in the division of the fee performed services beyond those involved in initially seeking to acquire and being engaged by the client. There must be a reasonable correlation between services performed and the share of the fee between the referring lawyer and handling lawyer. Joint Responsibility Joint responsibility entails ethical and, perhaps, financial responsibility for the representation. The ethical responsibility assumed requires that a referring or associating lawyer make reasonable efforts to assure adequacy of representation and to provide adequate client communication: a. Adequacy of representation. Referring lawyer must make a reasonable investigation into the client matter and refer the matter to a lawyer reasonably believed to be competent to handle it. b. Adequacy of communication. Referring or associating lawyer must monitor the matter throughout the representation by being reasonably informed about the matter, responding to client questions, and assisting the handling layer when necessary and ensure that the client is informed of the progress of the case. Attorneys must obtain client consent to ensure that clients are informed of the terms and conditions of any agreement among lawyers to divide a fee. Requires client consent in writing prior to the time of the association or referral. Requires identification of all lawyers or law firms who will participate in the fee sharing. Specifies whether fees will be divided based on proportion of services performed or by the lawyers agreeing to assume joint responsibility for the representation. Specifies the share that each lawyer will receive. Specifies that the referring or associating lawyer has the primary duty to ensure full disclosure and compliance with this rule. The New Rules: Frequently Asked Questions When do the new referral fee rules go into effect? The Supreme Court ordered that the amendments to Rule 1.04 pertaining to the division of fees become effective on March 1, How do the new rules affect referral fee arrangements entered into before the March 1, 2005, effective date? The pre-march 1, 2005, version of Rule 1.04 applies to fee arrangements between lawyers not in the same firm entered into before March 1, 2005, so long as the client has been advised by that date of all lawyers participating in his or her case. All other fee arrangements entered into with a client that divide fees with lawyers not in the same firm should comply with the new rules after the effective date of the new rules. Does joint responsibility mean that the referring attorney and handling attorney will each have joint control of the representation of the client? No. Joint responsibility does not mean that each attorney will have joint control of the case. A referring lawyer who assumes joint responsibility is not required to attend depositions or hearings nor is he or she required to be copied on all pleadings or correspondence. How does the new referral fee rule apply to contract attorneys employed by a law firm? 33

40 The application of the rule will depend on the specific arrangement between the contract attorney and the firm. If a contract attorney is retained to assist in the prosecution or defense of a claim and receives a portion of the fee recovered by the law firm, the rule would apply to such arrangement. Any arrangement between the contract attorney and the law firm that will result in the fee being divided between the two, whether the division is based on a percentage of the handling lawyers fee or a lump sum amount, must comply with the proposed rule. On the other hand, if the arrangement is such that the contract lawyer and the firm will submit separate statements to the client for work performed, then the rule would not apply. Is there a cap on the amount of referral fees that may be divided between lawyers not in the same firm? No. There is no cap on the amount of fees to be divided among lawyers not in the same firm. However, the division of fees must be in accordance with the provisions specified in Rule Does the new rule apply to cases referred to other attorneys not in the same firm where there is no division of fees? No. The new rule only applies to referrals involving a division of fees between lawyers not in the same firm. It does not apply in situations where there is no division of fees. Are there any exemptions to the requirements of the new rule? Lawyer referral programs certified by the State Bar of Texas that meet the requirements of the Texas Lawyer Referral Service Quality Act, Tex. Occ. Code et seq. are exempt. 34

41 Appendix E APPENDIX E Referral Fee Task Force Schedule and Members 35

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43 REFERRAL FEE TASK FORCE 2004 SCHEDULE January 14 January 28 February 4 February 11 February 18 February 25 March 3 March 24 March 25 Organizational Meeting Austin Public Hearing El Paso Public Hearing San Antonio Committee Meeting Austin (Tentative) Public Hearing Harlingen Public Hearing Dallas Public Hearing Houston Public Hearing Austin Committee Meeting Austin Updated: January 5,

44 REFERRAL FEE TASK FORCE 2004 Chair: Hile, Richard, DIES & HILE, LLP, 1601 Rio Grande St, Ste 330, Austin, TX, 78701, Phone: 512/ , Fax: 512/ , Cannon-Sheridan, JoAl, MOAK & SHERIDAN, LLP, 211 E. Commerce, Jacksonville, TX, 75766, Phone: 903/ , Fax: 903/ , Dawson, Alistair, BECK REDDEN & SECREST, One Houston Center, 1221 McKinney St, Suite 4500, Houston, TX, 77010, Phone: 713/ , Fax: 713/ , Eads, Linda, Southern Methodist University, Dedman School of Law, 3315 Danivel Avenue, Dallas, TX 75205, Phone: 214/ , Fax: 214/ , Evans, David, 48 th Judicial District Court, 201 Main St, Ste 1400, Fort Worth, TX, , Phone: 817/ , Fax: 817/ , Garza, Ygnacio, CPA, LONG CHILTON, LLP, 3125 Central Blvd, Brownsville, TX, 78520, Phone: 956/ , Fax: 956/ , Hagan, John, FLETCHER & SPRINGER, LLP, 8750 N. Central Expressway, 16 th Floor, Dallas, TX, 75231, Phone: 214/ , Fax: 214/ , Hampton, Hartley, 1401 McKinney, #1800, Houston, TX, 77010, Phone: 713/ , Fax: 713/ , Kelly, Hugh Rice, 1936 Rice Boulevard, Houston, TX, 77005, Phone: 713/ , Fax: 713/ , Laird, Steven, Law Office of Steven C. Laird, PC, 2400 Scott Avenue, Fort Worth, TX, 76103, Phone: 817/ , Fax: 817/ , Lewis, Ron, BAKER BOTTS, One Shell Plaza, 910 Louisiana Street, Houston, TX, 77002, Phone: 713/ , Fax: 713/ , McConnico, Steve, SCOTT DOUGLASS & MCCONNICO, 600 Congress Avenue, Suite 1500, Austin, TX, 78701, Phone: 512/ , Fax: 512/ , Maxwell, Stephen, MAXWELL, LITTMAN & KNOWLES, 100 E 15 th St, Suite 120, Fort Worth, TX, 76102, Phone: 817/ , Fax: 817/ , [email protected] Morrison, Lonny, MORRISON & SHELTON, th Street, Suite 400, City National Building, Wichita Falls, TX, 76301, Phone: 940/ , Fax: 940/ , [email protected] Pena, Richard, Law Offices of Richard Pena, 2028 E. Ben White, Suite 220, Austin, TX, 78741, Phone: 512/ , Fax: 512/ , [email protected] Schuwerk, Robert, University of Houston Law Center, 4800 Calhoun, Houston, TX, 77004, Phone: 713/ , Fax: 713/ , [email protected] Updated: January 7,

45 Provide duplicates to: 207 Bonnieview, Austin, 78704, Phone: 512/ , Fax: 512/ , Sias, Mary Evans, PhD, The University of Texas at Dallas, 2601 N. Floyd Road, AD 31, Richardson, TX, 75080, Phone: 972/ , Fax: 972/ , Sullivan, Kent, 80 th District Court, Harris County Civil Courthouse, 1019 Congress, 16 th Floor, Houston, TX, 77002, Phone: 713/ , Fax: 713/ Zavaleta, Hector, 615 E. Schuster Avenue, Building 1, El Paso, TX, , Phone: 915/ , 915/ , Ex-Officio Members Betsy Whitaker, President, State Bar of Texas, Kim Askew, Chair, Board of Directors, State Bar of Texas, Kelly Frels, President-Elect, State Bar of Texas, Guy Harrison, Past President, State Bar of Texas, State Bar Staff: Tony Alvarado, Executive Director, 512/ , Ext. 1400, KaLyn Laney, External Affairs Officer, 512/ , Kristina Hutson, Legislative Analyst, 512/ , Updated: January 7,

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47 Supreme Court Proposal 8A (Referral Fees) Caps: 15% or $50,000, whichever is less Disclosure: Must file Notice with the Court within 30 days of first appearance Sanctions: Disqualification of Attorney Party may void Retainer Agreement Court may order Forfeiture of all fees Court may impose other sanctions Hearing: Evidentiary Hearing on any Party s Motion, or initiative of Court TABLE 1. SOURCE OF BUSINESS TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Source Group 1 Group 2 Group 3 Group 4 Lawyer Referrals 19.8% 31.9% 42.2% 55.3% Client referrals 37.3% 34.1% 26.2% 18.2% Advertising 20.0% 13.0% 9.2% 6.9% Other Sources 22.9% 21.0% 22.4% 19.6% Groups based on size of lawyer s typical case in year 2000 dollars: Group 1: <$15,001, n=138 lawyers Group 2: >$15,000 & <$37,001, n= 141 lawyers Group 3: >$37,000 & <$200,001, n=134 lawyers Group 4:>$200,000, n= 139 lawyers Table 1. shows that lawyer referrals become more important as the size of a lawyer s typical case increases while client referrals and advertising become less important. This suggests that the pre-2004 referral system helped to move some cases to from lawyers less able to handle to them to lawyers better able to handle them. 1

48 TABLE 5. REFER A CASE TO ANOTHER PLAINTIFFS LAWYER IN 12 MONTHS PRIOR TO SURVEY TEXAS PLAINTIFFS LAWYERS BY SIZE OF TYPICAL CASE (American Bar Foundation Survey of Texas Plaintiffs Lawyers) Group 1 Group 2 Group 3 Group 4 Yes 79.6% 82.7% 86.4% 82.5% No 20.4% 17.3% 13.6% 17.5% Table 5. shows that most lawyers had referred a case in the 12 months prior to the survey. TABLE 9. Reasons for Referring Medical Malpractice: All Who Referred at Least One (n=195) (Texas Referral Fee Survey) Reason Percent* Out of Practice Area 79.0% Too Complex 44.1% Geographic Distance 38.5% Caseload Full 18.5% Value Too Low 21.0% Value Too High 12.8% Most Cases Referred 0.5% *percentages will not add to 100% since respondents asked to check all that applied. Table 9. shows that for those who referred at least med mal case, the two most important reasons were that the case was outside the lawyer s practice area or that the case was too complex. 2

49 TABLE 10. Reasons for Choosing the Lawyer: All Who Referred at Least One Malpractice (n=195) (Texas Referral Fee Survey) Reason Important % Neutral % Unimportant % Size of Fee (n=189) 11.6% 21.2% 67.2% Lawyer s Reputation 98.9% 1.1% 0 (190) Reciprocity (n=186) 16.7% 18.3% 65.1% Compatibility with Client (n=184) 56.5% 24.5% 19.0% Table 10. shows that the most important reason for choosing the lawyer to whom a med mal case was referred was the lawyer s reputation, followed by compatibility with the client. The size of the referral fee was relatively unimportant. No Caps New Rule 1.04 (f) (TDRPC) In Effect Today Division of fees must be: 1. In proportion to the professional services performed by each lawyer OR 2. Each lawyer assumes joint responsibility for the representation AND 3. Client consents in writing Sanction Agreement voidable Quantum merit Expenses 3

50 Proportionality Substantial & Good Faith division of services / responsibility Reasonable correlation between services & fee Joint Responsibility Refer case to qualified lawyer Make sure client is informed of status throughout representation Monitor matter Do not need to attend depositions, hearings or get pleadings Assist in case if necessary Form Language Authorizing Referral or Association of Counsel (See Appendix C) Referral or Association of Additional Counsel (When Using Referring Lawyer Contract) 1a. Referral Fee provision where referring lawyer agrees to assume joint responsibility (Using Handling Lawyer Contract) 1b. Association of Counsel Provision where division of fee is based on assumption of joint responsibility 29 4

51 (Proportion of Services) 1c. Association of Additional Counsel where division of fee based on proportion of services to be rendered (When Referring from Lawyer 1 to 2, No Contract was Executed with Lawyer 1) 2. Provision to be inserted in handling lawyer s power of attorney or contingent fee contract when Client is referred and no power of attorney or contingent fee contract was executed with referring lawyer (Handling Attorney is Working the Case, then Refers Out) Consent to Refer 30 5