On The Legality of Referral Fees: The NJ Civil Rights Attorney’s Fee Fight
“Referral fee” can mean a lot of different things in the law. The plainly unethical version involves lawyers paying non-lawyers (like doctors or tow truck drivers or union bosses) to send them potential cases, but, when plaintiff’s lawyers use the term “referral fee,” they usually mean: the part of a damages award or settlement that one lawyer takes from the overall contingent attorney’s fees for sending a potential client to another lawyer. Perhaps the most common is the “third of a third,” in which the client is represented on a one-third contingent fee (i.e., the lawyer takes one-third of any settlement or verdict), and then that fee is split between the lawyers so that the referring lawyer takes one-third of the fee while the lawyer who litigated the case takes two-thirds of the fee. If the underlying fee agreement with the client seeks 40%, then often the referral fee will be 40% of that fee.
Referral fees are the lifeblood of the injury, malpractice, and product liability world. Sure, the litigating attorneys frequently grumble about paying such a sizable fee given that the referring attorney “did no work” and “didn’t pay any costs.” But those same attorneys, when they’re the referring attorney, don’t hesitate to point out that the litigating attorney wouldn’t have the case at all without the referral fee, and that the referring attorney could have just as easily run with the case as co-counsel. (Indeed, referral attorneys often do stay around as “co-counsel” on the case, even if they do only nominal work, a point we’ll return to in a moment.)
The existence of referral fees creates a marketplace among lawyers for injury claims, and thus a marketplace for good lawyers. Take a look at the top plaintiff’s law firms in a given city and I can guarantee you that not one of them was built on television commercials, or Yellow Pages (yes, they still exist), or Avvo reviews, or search engine optimization — they were built on reputation and referral fees. Those lawyers proved themselves in court, and, as their good reputation grew, more and more cases were referred to them, providing stronger and larger cases and allowing them to be more selective, and the virtuous cycle continued.
Tort reformers press for an alternative to this system, one in which referral fees are banned. If they get their way, the prohibition on referral fees would remove the incentive that drives “large net” advertising, which can be annoying but serves the purpose of connecting injuries people with appropriate legal counsel. Without referral fees, the lawyers with the inclination and the budgets to advertise won’t send clients to the lawyers who are best able to handle the client’s claim. That, in turn, would encourage lawyers who are not the best suited for a particular claim to “give it a shot” and to try to litigate the case themselves — to the detriment of the client.
Which brings us to the Law Offices of Catalano & Plache v. Brustin case reported by the New York Law Journal. I’m not familiar with Catalano & Plache, which, according to the NYLJ, “had an ongoing relationships with the Ramapough Tribe, which has a presence in Bergen County, N.J., and Rockland County, N.Y., and had represented the tribe’s interests for more than 17 years.” But I am familiar with the defendants, Neufeld Scheck & Brustin and Emery Celli Brinckerhoff & Abady, two of the most prominent civil rights law firms in New York City. You might be, too: the “Neufeld” and “Scheck” are the co-founders of the Innocence Project.
According to the Catalano & Plache lawsuit, the firm was asked to represent the estate of Emil Mann, a member of the Ramapough Mountain Indians (the tribe Catalano & Plache had represented for 17 years), in a civil rights lawsuit against the New Jersey Park Police Officer over Mann’s fatal shooting in Mahwah, N.J. They then brought in Neufeld Scheck & Brustin, which brought in Emery Celli Brinckerhoff & Abady. So far, so good: that is how the marketplace for catastrophic injury and wrongful death claims is supposed to work: the client went to a lawyer they trusted, and that lawyer recognized that the issue was outside their expertise, so they brought in the best civil rights lawyers they could find.
The referral fee included an ambiguity in it that, depending on the interpretation, could make the referral fee either unusually low or unusually high. As the NYLJ said:
Specifically, the retainer agreement, on Emery Celli’s letterhead, provides that Catalano & Plache would receive 16.65 percent of the 33.3 percent attorney fees on the first $500,000 recovered; 15 percent of 30 percent of fees on the next $500,000; 12.5 percent of the 25 percent of fees on the next $500,000; and 10 percent of 20 percent of fees recovered in the next $500,000. Should the claim result in a more than $2 million recovery, the Catalano firm’s “share of the fees on such excess amount shall be determined pursuant to the same formula (i.e., Catalano & Plache’s percentage share shall be half of the percentage that the attorneys’ fees are with respect to the recovery.)”
That strange gradation on every half-million comes from N.J. Rule 1:21-7, which caps fees on those same gradations.
Did you catch the numbers problem there? Start with the first $500,000. What’s “16.65 percent of the 33.3 percent attorney fees?” Does that mean 16.65% of the overall recovery (which is a whopping half of the attorney’s fees), or does that mean 16.65% of the attorney’s fee (a mere 5.5% of the overall recovery, or half of the industry-standard referral split)?
My hunch is that it’s the former, and that the firms intended to agree to a 50% referral fee. That’s higher than the norm for the market, but the Mann shooting was exceptionally high-profile, so much so the shooting caused Gov. Jon S. Corzine to form a special committee on Native American community affairs. It was also a strong case on liability, given that the police officer’s conduct was so outrageous that he was indicted for his conduct, a rarity even in the most egregious of civil rights violations. 50% is thus higher than the normal referral fee, but it’s not unheard-of for high-profile, strong-liability, large damages cases. It makes far more sense that the case was referred for an above-market referral fee than for a below-market one.
The Neufeld and Emery firms then took the cases and ran with them. As expected by a top firm, they fought hard, spent at least $185,359 of their own money on attorney disbursements, and secured a $2.42 million jury verdict. They then settled with the government for a $2.37 million award to the plaintiff, $1.18 million in attorney’s fees, and reimbursement of the $185,359 in expenses.
Then everything fell apart, probably — and I’m speculating here — when they ran into that “16.65% of 33.3%” problem. The Neufeld and Emery firms, when filing for court approval of the settlement (which was necessary because it was a wrongful death claim and because it involved a request for an award of attorney’s fees), didn’t list Catalano & Plache, and, once the settlement was approved, said they weren’t going to pay the referral fee.
A war of letters ensued (the NYLJ has copies), the judge was contacted, and the judge — rightly, in my opinion — said he had already ruled on the parties’ rights, and so this dispute was better left to a subsequent breach of contract lawsuit. Hence the lawsuit.
Despite the complicated history, the parties’ positions are simple. Catalano & Plache relies on New Jersey Rule of Professional Conduct 1.5(e):
(e) Except as otherwise provided by the Court Rules, a division of fee between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer, or, by written agreement with the client, each lawyer assumes joint responsibility for the representation; and
(2) the client is notified of the fee division; and
(3) the client consents to the participation of all the lawyers involved; and
(4) the total fee is reasonable.
Catalano & Plache argues that there’s no requirement “the division [be] in proportion to the services performed by each lawyer,” because there was a written agreement assuming joint representation, the client was notified of and consented to the fee split, and the total fee for the representation is reasonable. Frankly, I bet if you surveyed most lawyers in New Jersey, they would probably agree with that interpretation — and it appears that the Neufeld and Emery firms did, too, because their August 10, 2012 letter to the judge says “At the onset of this case, we were mistakenly under the impression that referral fees were permissible under the New Jersey Rules.”
The Neufeld and Emery firms argues that NJ RPC 1.5(e), as applied here, requires that “the division is in proportion to the services performed by each lawyer,” and so limits Catalano & Plache to the work they actually performed. They claim the written fee agreement failed to include “joint responsibility,” because Catalano & Plache isn’t licensed to practice in New Jersey and never sought pro hac vice status. They then argue that NJ RPC 7.2(c) and 7.3(d), which both say (in different words, but same idea) that “A lawyer shall not compensate or give anything of value to a person or organization to recommend or secure the lawyer’s employment by a client, or as a reward for having made a recommendation resulting in the lawyer’s employment by a client.”
Frankly, I think the Neufeld and Emery firms are stretching the rules a bit too far. NJ RPC 7.2(c) and 7.3(d) both plainly relate to lawyers paying bounties to non-lawyers, the unethical practice I described at the top, and there’s no reason to believe either trumps NJ RPC 1.5(e), which directly addresses this issue. The case they cited to the court, Bruno v. Gale, didn’t really address any of these questions, and it also involved “a standard retainer agreement providing for a contingent fee,” rather than a fee agreement explaining the division of the fee. Bruno v. Gale, Wentworth & Dillon Realty, 371 N.J. Super. 69, 73, 852 A.2d 198, 200 (App. Div. 2004).
Neufeld and Emery’s unauthorized practice of law argument — i.e., that Catalano & Plache couldn’t have “assumed joint responsibility” because they weren’t licensed to practice in New Jersey and never sought pro hac vice status — has some superficial appeal, but it’s more quibbling than it is substantive analysis. The claimed problem there could quite easily have been rectified by doing nothing more than adding the referring lawyers to the complaint and seeking pro hac vice status. Applying this argument would allow lawyers licensed in New Jersey to benefit from their own misunderstanding of New Jersey law, a misunderstanding they either negligently or intentionally conveyed to the referring lawyers and to the client, to the detriment of lawyers out of state. The core two purposes of NJ RPC 1.5(e) — disclosing fee splitting to clients in writing, and avoiding endless litigation over assertions of oral fee agreements — was met by the written agreement in this case.
I would be very surprised if the Neufeld and Emery firms really feel that referral fees are illegal in New Jersey, and that referring lawyers have to enter an appearance and hang around on the case. I would assume, given the size, scope, and duration of their civil rights practice, that they’ve paid fees in identical situations in the past; recall, as I noted above, that they admitted to the judge they only recently came to believe referral fees were illegal in New Jersey. Frankly, I doubt they would even want to force every referral lawyer to enter as pro hac on every last case, and to have them hanging around on every last issue to create the appearance of “proportionate” work. It wouldn’t benefit the client, it’s just a waste of time.
I’m speculating, but what I think we’re really witnessing here is the standard progression of a law firm fee fight: there’s an ambiguity in an agreement and, when it can’t be resolved, the lawyers respond by throwing every last argument they can at one another. My favorite example of that is the Kanter v. Epstein case here in Pennsylvania (which I discussed in this post), another referral fee fight, in which the appellants raised 104 issues in their notice of appeal, about a hundred more issues than most appeal lawyers recommend (though, it should be noted, I disagree with that advice, I still wouldn’t put more than a dozen issues into an appeal).
All of which is another reminder to us all — referring lawyers and litigating lawyers — to ensure our agreements are as clear and unambiguous as possible. Next time you see something like “16.65 percent of the 33.3 percent attorney fees,” clarify if that means 16.65% of the overall recovery or 16.65% of the attorney’s fee.