UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.
Ethics Advisory Opinion 03-09
FACTUAL SUMMARY
Law Firm represents clients in collection matters. When the clients’ claims fall above a certain monetary threshold, suit is filed for the client if demand letters fail to produce results. Where the clients’ claim amounts fall under that dollar threshold, the claims accounts are sent back to the client after demand letters fail to generate results. A collection agency is seeking to obtain the business of collecting on the lower dollar accounts that otherwise would be returned to the client after collection efforts fail. The client wishes for Law Firm to refer small claims the Law Firm is unable to collect to the collection agency. The collection agency has presented the Law Firm with a “Brokerage Agreement” calling for the law firm (denominated the “Billing Service” company) to refer accounts from client “Business/Medical Practices” in exchange for payment of two percent of the gross monies collected on referred accounts. The two percent payments are called “brokerage fees.” The proposed “Brokerage Agreement” states that “this agreement adds no monetary cost to the clients’ contingency fees.” Client is aware of the Brokerage Agreement and consents to Law Firm entering into the agreement. The collection agency intends to charge a standard contingent fee and give up a share of it, equaling two percent of gross receipts to Law Firm.
QUESTION PRESENTED
Do the “brokerage” fees to be received by Law Firm involve unethical fee sharing or pose any other problems under the Rules of Professional Conduct?
SUMMARY
The receipt of the “brokerage fees” under proposed plan does not constitute unethical fee sharing per se but nonetheless raises disclosure issues and reasonable fee issues that need to be addressed.
OPINION
Certain types of fee sharing arrangements are prohibited under Rule 7.2(c), but that rule is not applicable here because the sharing is being done by a lay agency out of its fee income, not by a lawyer as a means of attracting business. The same concerns that underlie Rule 7.2(c), such as contamination of the decision-making process and inflation of clients’ bills, can apply to cases where lawyers receive compensation for referring client work, however.
The decision of what to do with the client’s uncollected small accounts rests with the client, and the lawyer is duty-bound to give the best advice possible, uncontaminated by any prospect of compensation from a collection agency. If, as here, it is the client’s wish that matters be referred to the collection agency with the lawyer receiving compensation on a small percentage basis, it is not unethical for the lawyer to accept that fee.
The client needs to be fully informed of the Law Firm’s financial interest in the transaction, and any compensation received by the Law Firm needs to be reasonable. Support for this position rests on the lawyer’s obligation to give appropriate advice to the client under Rule 1.4, the lawyer’s duty to avoid collecting excessive compensation under Rule 1.5, and the lawyer’s obligation to avoid improper conflicts of interest under Rule 1.7