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Are You at Risk of Losing Referral Fees?

Are you getting informed written client consent of your referral fee agreements?  If not, you are at risk of losing referral fees.

In Reeve v. Meleyco, 2020 WL 1429362 (no official citation yet), the California Court of Appeal reversed a judgment in favor of an attorney seeking to enforce a referral fee agreement.  The court concluded a client’s written acknowledgement (that he received and understood a letter explaining the referral fee would not come from the client’s percentage of any settlement) did not constitute written consent to the referral fee agreement under former California Rules of Professional Conduct, rule 2-200.

Attorney Robert K. Reeve referred a personal injury case to attorney Kenneth N. Meleyco.  Reeve and Meleyco met with the client, James Luoma, and discussed a referral fee Meleyco would pay Reeve.  Luoma and Meleyco entered a contingency fee agreement in which the client agreed Meleyco would earn a 35 percent (35%) contingency fee of any settlement or judgment in favor of Luoma or his injured daughter.  The fee agreement did not mention a referral fee for Reeve.

Reeve performed some tasks on Luoma’s matter until Meleyco sent a letter to Reeve confirming their agreement that Reeve’s referral fee would be 25 percent (25%) of Meleyco’s fee.  The letter did not indicate a copy was sent to Luoma.  Luoma subsequently sent Meleyco a letter stating:  “[A]s you know any referral agreement made by you and Robert Reeve in this case was made without my knowledge.”

Meleyco sent Luoma a letter in response: “[T]his letter is to assure you that the twenty-five percent (25%) referral fee that I am paying to Bob Reeve will come out of my fee and will not increase the fees to either you or your daughter.”  The bottom of Meleyco’s letter to Luoma included language indicating receipt and understanding of the letter, and Luoma testified at trial that his signature indicated his agreement to the 25 percent (25%) referral fee to Reeve and that he had conversations with Meleyco about the referral fee.

Meleyco settled Luoma’s personal injury case.  Meleyco prepared, and Luoma signed, a disbursement sheet which included $180,000 in attorneys’ fees to Meleyco.  There was no mention of a referral fee to Reeve.  Meleyco disbursed the settlement money according to the disbursement sheet and did not pay Reeve a referral fee.

In December 2014, Reeve sued Meleyco for breach of contract based on the referral fee agreement and later added causes of action for quantum meruit and promissory estoppel.  The jury found in Reeve’s favor for $78,750, based on both the breach of contract and quantum meruit causes of action.  The trial court granted Reeve’s motion for prejudgment interest and awarded him approximately $50,000.  Meleyco appealed.

The Reeve court concluded Reeve could not recover for breach of contract because Luoma did not provide written consent for the referral fee agreement.  Under former rule 2‑200(A), in effect during the relevant time period, “A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless:  [¶] . . . [t]he client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division . . . .”  Case precedent renders unenforceable as against public policy any attorney fee sharing agreement if the client did not give informed, written consent consistent with former rule 2-200.

Although there was a writing disclosing the division of fees that would be made and certain terms of the division (the sufficiency of which the appellate court expressly did not decide), the Reeve court concluded Luoma’s signature at the bottom of the letter was merely confirmation Luoma received the letters and understood its contents, not Luoma’s written consent to the referral fee agreement.  Luoma’s subsequent testimony that his acknowledgement expressed his agreement that the referral fee could be paid to Reeve did not remedy the deficiency.  Because there was insufficient evidence to conclude Luoma consented to the referral fee agreement as required by former rule 2-200, the appellate court held the referral fee was unenforceable as against public policy, and Reeve could not recover for breach of contract.

The Reeve court also concluded that Reeve’s quantum meruit claim was barred by the applicable two-year statute of limitations.  Reeve did not dispute he filed his complaint more than two years after he last performed services relating to the 2011 settlement; instead, he argued the four-year statute of limitations under Code of Civil Procedure section 339(a) applied because there was a writing (i.e., the unenforceable referral fee agreement).  The Reeve court explained that because quantum meruit recovery is not an action based on a contract or writing, the presence of an unenforceable contract does not extend the limitations period to four years.  Accordingly, Reeve’s recovery under quantum meruit was barred because he did not file his complaint within the two-year limitations period. Finally, the Reeve court concluded there was no support for the trial court’s award of prejudgment interest since there was no support for the judgment in favor of Reeve on either of the causes of action.

Referral fees are often a significant source of income for attorneys.  California attorneys should familiarize themselves with California Rules of Professional Conduct, rule 1.5.1 and ensure their fee agreements and referral fee agreements comply with it.  Rule 1.5.1 requires fee split agreements between lawyers to be in writing and the client must consent to the division after full disclosure at or near the time the lawyers enter the fee split agreement.  Failing to comply with these rules can be very costly.

Thank you Amy Nguyen for authoring this with me.

Mark Wilson, a trial attorney, has won nearly every case he has tried or arbitrated. He lost only one jury trial and obtained a complete reversal on appeal. Mr. Wilson represents clients in business litigation and legal malpractice cases and was named in the 2017 – 2020 SuperLawyers® Top 50 Orange County lists. Mr. Wilson is a California State Bar certified specialist in Legal Malpractice Law and can be reached at (949) 631-3300; [email protected]; https://www.kleinandwilson.com