Authored By: Matthew Smith and Jennifer Grieco
Referral and fee-sharing agreements between attorneys are nothing new. When presented with a matter outside of an attorney’s practice, public policy supports referring the client to an attorney with specialized knowledge in that area of law. In such instances, Michigan Rule of Professional Conduct 1.5(e) allows the specialist and referring attorney to share in the fee earned, provided that “(1) the client is advised of and does not object to the participation of all the lawyers involved; and (2) the total fee is reasonable.” But this rule, on its face, does not set forth what relationship the referring attorney must have or maintain with the referred client to receive a fee. And when a dispute arises between attorneys concerning the validity of the fee-sharing agreement, who bears the burden of proof – the attorney challenging the fee division, or the attorney attempting to enforce it?
On June 9, 2021, the Michigan Supreme Court answered these questions in Law Offices of Jeffrey Sherbow, PC v Fieger & Fieger, PC, 2021 Mich. LEXIS 1043, 2021 WL 2371254 (June 9, 2021). That case involved a dispute over the enforceability of a written fee-sharing arrangement between attorney Jeffrey Sherbow, the referring attorney, and the Fieger & Fieger, PC law firm (the “Fieger Firm”). Initially, Sherbow had been indirectly contacted by Dion Rice (“Dion”), whose father had died in a car accident and his mother and two others severely injured. After being contacted concerning the accident, Sherbow contacted Jeffrey Danzig, a partner at the Fieger Firm. Sherbow then communicated with Dion directly, and Dion indicated to Sherbow that he had already contacted and intended to retain the Fieger Firm on behalf of his father’s estate (“Rice Estate”) and his mother, Dorothy Dixon (“Dixon”), who remained in a coma at that time. At a meeting with both Sherbow and Danzig, Dion retained the Fieger Firm to represent both the Rice Estate and Dixon. Both Sherbow and Danzig recalled informing Dion that Sherbow would receive a referral fee. Dion did not recall being told of the referral relationship. It was undisputed that Sherbow performed no work on the case.
The Fieger Firm eventually received an award of $10,225,000, entitling it to a fee of approximately $3.4 Million. When Sherbow inquired about payment of his referral fee, the Fieger Firm refused claiming that Dion had contacted the firm on his own, and that the referral agreement was void as against public policy because it violated MRPC 1.5(e). Sherbow then sued to enforce his referral fee and the matter proceeded to trial. At trial, the jury was instructed that the burden of proof was on Sherbow to prove by a preponderance of the evidence that the referral arrangement complied with MRPC 1.5(e), including that the referred clients were each Sherbow’s client in order to recover a referral fee. The jury found that only Dion, on behalf of the Rice Estate, was a client of Sherbow, and awarded him $93,333.33. Sherbow appealed, asserting the instructions were in error and that the trial court erred in imposing the burden of showing compliance with MRPC 1.5(e) on him.
On appeal, the Michigan Supreme Court held that MRPC 1.5(e) requires “the establishment of a professional relationship with the client.” The rule’s use of “[t]he word ‘participation’ contemplates something more than the referring attorney’s bare participation as a party to the fee agreement,” and “indicates that the minimum required ‘participation’ is the establishment of an attorney-client relationship.” This is, in part, because “[t]he rule speaks of the ‘division of a fee between lawyers …,” and effectively “require[s] the referring lawyer to participate as a lawyer.” The Court also found the use of the word “client” in MRPC 1.5(e) significant. At the time the rule was adopted, Black’s Law Dictionary defined “client” as “[a] person who employs or retains an attorney, or counsellor, to appear for him in courts, advise, assist, and defend him in legal proceedings, and to act for him in any legal business.” Thus, to be a “client” of an attorney, one must have a professional relationship with the attorney. Furthermore, the Court noted that if no professional relationship were required, a referring attorney could improperly evade both the conflict-of-interest and confidentiality mandates of MRPC 1.7 and MRPC 1.6(a), while still collecting a fee.
But the Michigan Supreme Court was clear to note that the “professional relationship” requirement “does not mean that the referring attorney must provide legal services for the client beyond the referral or assume responsibility for the client’s case.” Rather, the relationship “can be accomplished by a direct or indirect (i.e., through the client’s agent) consultation,” and there is “no rule that the relationship thus formed must extend for any particular duration or seek any particular objectives….” Therefore, “[i]f the parties intend to enter a professional relationship, the referral can form the basis for that relationship, which does not need to extend any further than the referral.”
As to the burden of proof concerning compliance with the requirements of MRPC 1.5(e), the Michigan Supreme Court found the trial court’s placement of the burden of proof on Sherbow was in error. It reasoned that the burden of proving “that the contract has ‘a proper subject matter,’” rested on Sherbow. But the Court held that “[r]eferral agreements are a proper subject matter for contracts—that much is shown by the existence of MRPC 1.5(e), which authorizes contracts on this subject.” Beyond that, “the Fieger Firm’s argument challenging the referral agreement as void as against public policy constitutes an affirmative defense for which the Fieger Firm, as defendant, bears the burden of proof.” This was because, “[i]t does not attack Sherbow’s prima facie case but, instead, offers an independent reason why the referral agreement is void and the contract claim should be defeated.” Because the burden of proof had been improperly placed on Sherbow, the Court remanded for retrial on the issue of whether Sherbow, through Dion, had established a professional relationship with Dixon.
This decision provides two important points of guidance for Michigan attorneys entering into referral fee-sharing agreements. First, a referring attorney must establish a professional relationship with the client to share in any resulting fee, but “consultation itself is sufficient to create an attorney-client relationship, if the parties so intend.” Second, if the non-referring attorney hopes to escape paying a referral fee, it should be prepared to meet its burden of proving a violation of MRPC 1.5(e).