Summary: A lawyer may not accept a payment for referring a client to a non-lawyer service provider unless the lawyer obtains the client’s informed consent in writing. The Committee believes that in some cases the lawyer will not be able to satisfy this requirement and must refuse to accept the payment.1
Facts: The inquirer is a business lawyer who provides general counsel services to small- and medium-sized businesses. A software company that provides cloud-based management tools has offered to pay the lawyer a fee for referring clients to the company. The tools are offered on a “Software as a Service” basis, with the customer paying a subscription fee for accessing the software tool over the internet. The company has offered to compensate the lawyer as follows:
1. If a client referred by the lawyer subscribes to one of the company’s products, the company will pay the lawyer 10% of the fee that the client pays for the first year of service.
2. If the client subscribes to additional services, the company will pay the lawyer 10% of the first year’s fee for the new service
Discussion: “The relation of attorney and client is highly fiduciary in its nature.” Hendrickson v. Sears, 365 Mass. 83, 90, (1974). This inquiry implicates the fiduciary duties that lawyers owe their clients in several respects.
1. The Lawyer’s Fiduciary Duties. We begin with the duty of confidentiality. Rule 1.8(b) of the Massachusetts Rules of Professional Conduct provides in relevant part:
A lawyer shall not use confidential information relating to representation of a client to the disadvantage of the client or for the lawyer’s advantage or the advantage of a third person, unless the client gives informed consent, . . . (emphasis supplied).
The Massachusetts rule is broader than the comparable Model Rule in effect in many states, which simply prohibits use of confidential information to the disadvantage of a client.
Confidential information is defined in Mass.R.Prof.C. 1.6(a):
"Confidential information" consists of information gained during or relating to the representation of a client, whatever its source, that is (i) protected by the attorney-client privilege, (ii) likely to be embarrassing or detrimental to the client if disclosed, or (iii) information that the lawyer has agreed to keep confidential.
When the inquiring lawyer decides which clients to refer to the software company, the lawyer will often be relying in whole or in in part on confidential information gained during or related to the representation of the client. The lawyer cannot use that information for the lawyer’s personal benefit or the benefit of the software company without the informed consent of the client. We discuss the requirement of informed consent in part 2, below.
Lawyers also have a duty to avoid conflicts of interest in the representation of clients. Rule 1.7(a)(2) of the Massachusetts Rules provides that a lawyer has a conflict of interest if there is a significant risk that the representation of a client will be materially limited by the lawyer’s personal interest. By accepting a referral fee from a third party, the lawyer creates a conflict between the lawyer’s personal interests and the client’s. As Comment 10 to Rule 1.7 admonishes, “. . .[A] lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest.”
Notwithstanding a conflict of interest, a lawyer may represent a client if the conditions set forth in Rule 1.7(b) are satisfied. Two of those conditions are relevant here: the lawyer must have an objectively reasonable belief that the lawyer will be able to provide competent and diligent representation, as required by Rule 1.7(b)(1), and the lawyer must obtain the client’s informed consent, confirmed in writing, as required by Rule 1.7(b)(4). See the discussion in Part 2, below.
Finally, attorneys, like other agents, are prohibited from using their position to obtain a material benefit from third parties without the informed consent of their clients.
Restatement (3rd) Agency, §§ 8.02, 8.06(1). Rule 1.8(a) of the Massachusetts Rules is a practical application of this fiduciary principle. Under Rule 1.8(a), a lawyer who enters a business transaction with a client must satisfy three conditions:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
Ethics opinions in other states have concluded that a payment from a third party to a lawyer for referring a client involves a business transaction with a client and is therefore subject to Rule 1.8(a). Ill. State Bar Ass’n Op. 97-04 (1998); Ky. Ethics Op. E-390 (1996); Mich. Op. RI-317; Ohio Advisory Op. 2009-10 (2000); Utah Ethics Advisory Op. 99-07 (1999);
See also Calif. Formal Op. 1995-140 (1995) (applying California rule on business with clients); Va. Legal Ethics Op. 1564 (rev. 1995) (applying DR 5-104). In essence, these opinions treat the payment of a referral fee as a three-party business transaction with funds flowing from the client to the third party and then to the lawyer. We find this view persuasive.
The Ethics Committee of the District of Columbia Bar has concluded that Rule 1.8(a) does not apply unless the lawyer has an ownership interest or management role in the third party paying the referral fee, which is not the case in this inquiry. D.C. Bar Ethics Op. 361 (2011);
see also J. Dzienkowski and R. Peroni,
Conflicts of Interest In Lawyer Referral Arrangements With Nonlawyer Professionals, 21 Geo. J. Legal Ethics 197, 220 (2008) (expressing doubt that the drafters of Rule 1.8(a) had referral fees in mind). Even if we accept this view, lawyers are still subject to the general rule that agents cannot use their position to obtain material benefit from a third party without the informed consent of their clients.
2.
Informed Consent and the Objectively Reasonable Test. Each of the fiduciary duties we have discussed requires the lawyer to obtain the client’s informed consent before proceeding. “Informed consent” is defined in Rule 1.0(g):
“Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.
To obtain the informed consent of a client in this case, the lawyer must at a minimum fully disclose all the payments that the software company might make to the lawyer, including the fee for the initial transaction and any future fees the lawyer may earn if the client subscribes to additional services. Rule 1.8(a)(1) requires that the disclosures about payments to the lawyer must be in writing. The lawyer must also discuss alternatives available to the client, such as obtaining management software from another vendor who will not be paying the lawyer a referral fee. Finally, to satisfy Rule 1.7, the lawyer must draw the client’s attention to circumstances in which the lawyer’s financial interest in earning the fee might affect the lawyer’s ability to provide the client with disinterested advice and vigorous advocacy, such as contract negotiations with the software vendor or a dispute about whether the vendor has performed the terms of the agreement. Rule 1.8(a)(3) requires that the client consent “in a writing signed by the client.” To ensure that the client’s consent is freely given, the lawyer must obtain the client’s consent before the lawyer refers the client to the software company.
In addition, Rule 1.7(b)(1) requires that a lawyer must have an objectively reasonable belief that the conflict will not interfere with the lawyer’s ability to provide competent and diligent representation to the client. Applying this test, the Committee finds two features of the referral arrangement troublesome. First, the referral fee is a percentage of the subscription fee the client pays for the first year of service and is likely to be significant. Second, the lawyer stands to receive additional payments if the client signs up for more services, creating a continuing conflict between the lawyer’s personal interest and the lawyer’s duty to the client. In the face of such incentives, it is objectively unreasonable for the lawyer to suppose that he or she will be able to exercise independent professional judgment on behalf of the client in any matter where the software vendor is an adverse party.
See Rule 1.7, Comment 8. Accordingly, before accepting the referral fee, the lawyer must tell the client that the lawyer will not be able to represent the client in negotiations, disputes, and other legal matters involving the software vendor.
3.
Conclusion. Ethics opinions in several other states have decided that an attorney may accept a fee for referring a party to a third person, provided that the attorney complies strictly with Rules 1.7 and 1.8(a). (As noted above, the ethics rules in most states do not restrict the use of confidential information for the lawyer’s advantage).
See, e.g., Arizona Ethics Op. 05-01; Michigan Ethics Op. RI-317. Other states have concluded that the practice places such strains on the lawyer’s loyalty that it should be treated as
per se unethical in all cases.
See, e.g., Maine Ethics Op. 184; Ohio Advisory Op. 2009-10.
Given this split of authority and the lack of controlling Massachusetts judicial precedent, we are not prepared to declare that acceptance of a referral fee is impermissible in every case. Nevertheless, even if the practice is permissible, the applicable ethics rules are “exacting,” D.C. Bar Ethics Op. 361, and in some cases the requirement of informed consent will be impossible to satisfy. Illinois State Bar Ethics Op. 98-03. We also agree with the observation of Assistant Bar Counsel Robert Daniszewski that, “[E]ven where there’s no ambiguity as to when the lawyer is putting on or taking off the ‘lawyer hat,’ ancillary business relationships can still be destabilizing to the attorney-client relationship by making it more difficult for the client to perceive the lawyer as a completely loyal and disinterested protector of the client’s interests.”
The Cost of Doing Business (With a Client), https://bbopublic.massbbo.org/web/f/cost_of_doing_business.pdf (visited on 10/18/24).
This advice is from a committee without governmental authority.
-------------------------------------
1. This Opinion does not address referral fees among lawyers, which are covered by Mass.R.Prof.C. 1.5(e).