Stay on track, get back on track

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The importance of using precise ethical terms

The importance of using precise ethical terms

          I had never lived with felines until we adopted a teenage cat -- Lucy -- in 1999. As a result of my lack of experience, I had an exchange something like this with our veterinarian shortly after Lucy moved in:

Me: I found this….thing…on the window sill. I couldn’t tell what it was. I don’t think it was poop but it was shaped like poop.

Vet: Was it oblong? Hairy? In a pool of liquid?

Me: [Nodding]

Vet: Hairball.

Me: [Quizzical look] Hairball?  But it wasn’t shaped like a ball.

Vet: Hairball.

          I hear “hairball” and think of something like this:

          While “hairball” may be appropriate shorthand in feline society – even though clearly cats don’t emit spheres – we lawyers need to be more precise with the ethical terms we use. Many lawyers, either because they learned improperly or rely on inaccurate shorthand, in particular misuse two ethics-oriented terms: retainer and referral fee.


          “Retainer” is, in my opinion, the most misused word in the legal profession.

          The “true” or “classic” retainer is a fee paid in advance “merely to insure the lawyer’s availability to represent the client and to preclude the lawyer from taking adverse representation.” ER 1.5, comment 7. A retainer is earned when it is paid, because the client is essentially buying the lawyer’s availability. In re Hirschfeld, 192 Ariz. 40, 960 P.2d 640 (1998) (“a retainer, in its classic sense, is a fee paid to secure a lawyer’s availability”); Ariz. Ethics Op. 99-02 (April 1999) (a “general retainer” is an option on a lawyer’s time). If the client then engages the lawyer to perform legal work for which the client “retained” the lawyer, the lawyer does not bill against the paid retainer.

          I’ve long used this example of how a retainer works:

You make a reservation at a restaurant for dinner. The restaurant, as some high-demand establishments in metropolitan areas do, charges you a fee simply to make the reservation. (This apparently is to deter people from not showing up.) When you arrive to dine, you exercise your paid-for reservation and you pay for the food you eat.

The same happens with a true retainer. The client pays the lawyer to “reserve” the lawyer. When the client uses that reservation, the client then pays for the lawyer’s legal services.

          What is often called a retainer is really an advance fee, which is a security deposit the client gives to ensure the payment of fees when they are subsequently earned, either on a flat-fee or hourly-fee basis. ER 1.5, comment [7].

          Calling the fee by the accurate name is important if for no other reason than doing so will help you properly handle your trust account. A retainer belongs to you when it is paid, and therefore shouldn’t be deposited into your client trust account. An advance fee needs to be held in your client trust account until you earn it.

Referral fee

          If you use this phrase inaccurately, you're not alone. Many regulators do as well.

          Several years ago, I surveyed other jurisdictions to ask whether they allowed lawyers to pay and receive referral fees. Many reported that they did. Once I dug down into their rules, however, I realized they used “referral fee” to mean “fee sharing.” These two terms are entirely different animals.

          Very few jurisdictions actually allow one lawyer to pay another lawyer simply for referring work. Most jurisdictions, including Arizona, follow this rule: If you refer another lawyer a potential client, that lawyer can’t give you any kind of a kickback or thank-you payment. A lawyer may not give anyone, including another lawyer, “anything of value…for recommending” the lawyer's services. ER 7.2(b). The rule makes exceptions only for paying for advertisements, for charges imposed by legal services plans or allowable referral services, and for a law practice.

          So you cannot pay a “referral fee.” You may share or divide a fee with a lawyer in another law firm. Fee-sharing falls under ER 1.5(e), which states that a fee may be divided only if:

(1)  the division is in proportion to the services performed by each lawyer or each lawyer receiving any portion of the fee assumes joint responsibility for the representation;

(2)  the client agrees, in a writing signed by the client, to the participation of all the lawyers involved and the division of fees and responsibilities between lawyers; and

(3)  the total fee is reasonable.

          Until this year, Arizona allowed lawyers in different firms to divide fees only if each lawyer took joint responsibiity for the representation. “Joint responsibility” was deemed to be at least vicarious malpractice responsibility for the other lawyer’s conduct. Ariz. Ethics Op. 04-02 (March 2004).

          It’s understandable if you erroneously refer to paying “referral fees” when technically you mean dividing or sharing a fee. That 2004 ethics opinion uses the phrase “referral fee” (“A referral fee that does not satisfy ER 1.5(e) violates ER 7.2(b), which generally prohibits lawyers from paying others for channeling professional work”). Comment [8] to ER 1.5 repeatedly refers to “referring lawyer.” That comment also concludes by stating that “Except as permitted by this Rule, referral fees are prohibited by ER 7.2(b),” which implies that ER 1.5 permits some referral fees.

           In reality, if you refer a client to another lawyer, and you have to share malpractice liability with that lawyer or you perform work on the case, then that lawyer's payment to you is not simply a referral fee. You two are sharing fees based on your contributions, not just for sending the other lawyer a client.

          Retainers, referral fees, hairballs. The world won't end if you use the inaccurate term or shorthand phrase. At the very least it will cause confusion; at the worst, however, you could take a misstep under the rules. (If you own felines, you no doubt know all about hairballs and missteps.)

got 1.5(d)(3)?

got 1.5(d)(3)?

But I was following orders!

But I was following orders!