Fee-Sharing Agreements Can’t Be Enforced Absent ‘Strict Compliance’ With Ethics Rule

By Samson Habte  

March 18 --Lawyers' fee-splitting or referral agreements are unenforceable if the contracting attorneys “do not strictly comply” with the ethics rule that requires each lawyer to ensure that the clients are informed in writing about the basis for the arrangement--including the “exact split in fees” and “the division of the lawyers' responsibilities,” the Illinois Appellate Court, First District, declared March 14.

The ruling addresses two fundamental questions that have divided courts in Illinois and in other jurisdictions:

First, may attorneys enforce fee-splitting or referral agreements if they have “substantially complied” with Rule of Professional Conduct 1.5(e), which governs such arrangements? Second, is a lawyer accused of reneging on such an agreement estopped from raising Rule 1.5(e) as a contractual defense where it was his own conduct that allegedly caused or contributed to a violation of the rule?

Writing for the court, Justice Mary K. Rochford said the answer to both questions is “no.”

What Do Other States Say?

The holding in this case is in line with what the majority of courts in other jurisdictions that have ruled on this subject have held.

But there is authority upholding fee-sharing agreements even when they do not comply with the ethics rules on division of fees between lawyers who are not in the same firm.

For a discussion of case law on both sides of the question, see the Special Report in this issue at 30 Law. Man. Prof. Conduct 218.

“It is our understanding that the fee-sharing provisions of the Rules are not guide posts, but mandatory,” Rochford wrote. Substantial compliance is no longer sufficient, she said. Lawyers must strictly comply with the client disclosure and consent requirements in Illinois Rule 1.5(e), she said, before they will be able to enforce a fee-sharing or referral contract in litigation against other attorneys accused of breaching such agreements.

The court also rejected the estoppel argument. Unlike an older fee-splitting standard from the Model Code, “Rule 1.5(e) does not place the responsibility of disclosure solely on the receiving attorney,” Rochford noted. Accordingly, she said, the doctrine cannot be invoked by an attorney who accused another lawyer with whom he had a referral fee arrangement of acting “nefariously” by failing to follow through on supposed assurances to make the necessary disclosures to clients.

Allegedly Unpaid Referral Fees

Workers' compensation attorney Donald W. Fohrman and his law firm (collectively “Fohrman”) sued attorney Marc D. Alberts and his former and current law firms (collectively “Alberts”) for breaching a series of arrangements to divide attorneys' fees from personal injury cases that Fohrman referred to Alberts.

According to the complaint, Fohrman was promised 50 percent of those fees and was not obligated to do any work on a case after referring it to Alberts. The complaint further stated that Alberts promised Fohrman that “the co-counsel arrangement would be properly disclosed to the [referred] clients in conformity with all applicable Supreme Court Rules governing attorney discipline.”

Accordingly, Fohrman said Alberts was responsible for ensuring that any “corresponding attorney-client representation agreements” executed in connection with a referred matter complied with Rule 1.5(e).

That standard provides in relevant part that unaffiliated lawyers may divide fees only if:

(1) the division is in proportion to the services performed by each lawyer, or if the primary service performed by one lawyer is the referral of the client to another lawyer and each lawyer assumes joint financial responsibility for the representation;  

(2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; …  

Fohrman claims that Alberts initially held up his side of the purported bargain by making sure that referred clients signed forms including the necessary disclosures. But Alberts subsequently “stopped using the fee-sharing disclosure form,” the complaint alleged.

Fohrman further contended that one year into the arrangement, Alberts modified the retainers he executed with referred clients to reduce Fohrman's fee share to 33 percent. Fohrman said he was paid over $733,000 for 87 referrals made from 2004 to 2010. However, he contends that he was deprived of more than $100,000 due to Alberts's changes to the terms of their arrangement.

Claims, Defenses and Counterclaims

Fohrman sought an accounting and asserted claims for breach of contract and fraud against Alberts. He further contended that the referral arrangement gave rise to a fiduciary duty that Alberts breached by failing to live up to his responsibility to ensure that clients were informed of the purportedly contemplated fee-divisions.

Fohrman also filed notices of attorneys' liens in numerous cases he had referred to Alberts.

Alberts argued that those liens were unenforceable. He also moved to dismiss the complaint on grounds that Fohrman's referral fee claims were unenforceable because corresponding retainers executed with referred clients did not comply with Rule 1.5(e).

Alberts also disclaimed the existence of a referral arrangement and denied that he assured Fohrman that any retainers would include the necessary disclosures.

Raising affirmative defenses--including in pari delicto, unclean hands, breach of fiduciary duty and ratification--Alberts also argued that Fohrman was aware of the contents of the retainers and thus failed to meet his own professional obligation to make the client disclosures mandated by Rule 1.5(e).

Fohrman countered that the retainer agreements “substantially complied” with the provisions in Rule 1.5(e).

“Fohrman alleged that based on the listing of Fohrman and Alberts [in the retainers], it was 'presumptive' that the contingency fee would be split on a '50/50 basis,' and both firms 'were equally responsible to the client for the progress of the case, and subject to liability should either law firm commit any malpractice,'” the court stated.

Additionally, Fohrman argued that Alberts should be estopped from raising Rule 1.5(e) as a contractual defense because it was his “nefarious” conduct that caused any violation of the rule.

Strict Compliance Demanded

A trial court dismissed Fohrman's claims and declared his liens invalid.

In doing so, the trial court rejected the argument that “substantial compliance” with Rule 1.5(e) is sufficient to establish the enforceability of a fee-splitting agreement in a contractual dispute between lawyers.

The appellate panel agreed. “Rule 1.5 'embod[ies] this state's public policy of placing the rights of clients above and beyond any lawyers' remedies in seeking to enforce fee-sharing arrangements,'” Rochford wrote, citing Romanek v. Connelly, 753 N.E.2d 1062, 17 Law. Man. Prof. Conduct 445 (Ill. App. Ct. 2001).

Strict compliance with the rule's disclosure and consent requirements is essential and noncompliant agreements are void as contrary to public policy, she said. Rochford acknowledged that past Illinois cases have suggested that “a standard of substantial compliance [with DR 2-107 in the predecessor Code] is preferable because it comports with practical realities.”

However, she added, “The 'practical realities' concept is contrary to … the public policy of protecting the clients which is behind the Rules.”

Rochford also pointed to several more recent cases in which courts have declined to enforce noncompliant fee-splitting agreements. See Paul B. Episcope Ltd. v. Law Offices of Campbell & Di Vincenzo, 869 N.E.2d 784, 23 Law. Man. Prof. Conduct 109 (Ill. App. Ct. 2007); Thompson v. Hiter, 826 N.E.2d 503, 21 Law. Man. Prof. Conduct 171 (Ill. App. Ct. 2005).

Accordingly, the panel rejected Fohrman's claim that the trial court “ignor[ed] the continuing vitality of the substantial compliance doctrine.”

No Estoppel

According to the court, Fohrman argued that Holstein v. Grossman, 616 N.E.2d 1224 (Ill. App. Ct. 1993) “advocates for the use of a substantial compliance standard” when one party to a referral arrangement promises to make the necessary client disclosures but fails to do so.

Fohrman said Holstein also supported his argument that Alberts's own “nefarious” conduct estops him from invoking Rule 1.5(e) as a shield to the breach of fiduciary duty claim.

The court was not convinced. It noted that Holstein interpreted DR 2-107, a predecessor to Rule 1.5(e). That is important because “the language of Rule 2-107 … stated [that] the 'receiving' lawyer must fully disclose” a referral arrangement to a client, Rochford said.

“That language is not present in Rule 1.5(e),” which “does not place the responsibility of disclosure solely on the receiving attorney,” Rochford stated.

Therefore, she said, “It is arguable that the holding in Holstein, as to joint venture claims, no longer has vitality in that it was grounded on the plain language of Rule 2-107 not present in Rule 1.5(e).”

The court added that it “would not apply the Holstein 'exception'” even if such an exception does exist. The evidence shows that Fohrman, unlike the plaintiff in Holstein, “had notice of the noncompliant attorney-client agreements and allowed them to be used in contravention of Rule 1.5(e) and its common law fiduciary duty,” it said.

“Because there was not complete compliance with Rule 1.5(e), and Fohrman failed to meet its own fiduciary duty of disclosing the referral agreement, we find the circuit court properly dismissed the amended complaint with prejudice and granted summary judgment in favor of Alberts as to the unenforceability of the attorney liens,” the court concluded.

Fohrman was represented by Mark L. Karno, Chicago. The Fohrman firm was represented by Goldstein & McClintock LLLC, Chicago. Alberts was represented by Dahl & Bonadies LLC, Chicago.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

Full text at http://www.bloomberglaw.com/public/document/Donald_W_Fohrman__Assocs_v_Mark_D_Alberts_PC_2013_IL_App_1st_1233.

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