Opinion 2203

I. QUESTIONS PRESENTED:

1) Whether:
a) It is permissible for an attorney to receive referrals from a member of (or directly from) the Washington State Licensed Mortgage Brokers Association;
b) Whether, in addition to the referral, the attorney later pays the referring Broker a fee for the Broker’s services relating to the referred client?

2) Whether it is permissible for the attorney to hire a third party to market the attorney where the attorney only pays for clients actually received and engaged/accepted by the attorney?

II. BRIEF ANSWER:

1) (a) Yes, it is permissible for attorneys to receive referrals from a member of, or directly from, the Washington State Licensed Mortgage Broker’s Association
(b) No (under the facts described below), an attorney cannot offer compensation to a referring Broker to subsequently carry out future services relating to the referred client.

It was also the Committee’s position that this practice raises concerns regarding conflicts of interest.

2) No, an attorney cannot pay a referral source only for clients actually received, engaged, or accepted by the attorney.

III. RULES OF PROFESSIONAL CONDUCT

1.6, 1.7, 1.9, 1.18, 5.4, 7.2, and 7.3

IV. STATEMENT OF FACTS:

An Attorney engaged in real estate law has developed a relationship with the Washington State Licensed Mortgage Brokers Association (and members thereof), through which the Attorney wishes to engage one or more brokers to advertise the lawyer’s services, or more particularly, to recommend the Lawyer’s services to homeowners/borrowers attempting to refinance or modify their mortgages. It appears that the Lawyer would be paid directly by the homeowner/borrower and not the Broker. After the referral has been made, the Lawyer would like to pay the Broker a fee for providing certain services for the Lawyer (and homeowner/borrower) relating to the refinance or modification.

As a separate and unrelated matter, the inquiring Lawyer would like to hire third parties to market the Lawyer’s services, and in return, the Lawyer would like to pay for only those clients actually referred and accepted by the Lawyer.

V. DISCUSSION:

Question 1:

The first inquiry raises concerns with respect to several RPCs relating to both advertising and conflicts of interest.

Advertising Constraints

RPC 7.2(b) (Advertising) provides, in relevant part:

A lawyer shall not give anything of value to a person for recommending the lawyer’s services, except that a lawyer may

(1) pay the reasonable costs of advertisements or communications permitted by this Rule;
(2) pay the usual charges of a legal service plan or a not-for-profit referral service;
….

As Comment 5 to Rule 7.2 makes clear, while a lawyer’s advertising to the public is permissible, lawyers are not permitted to pay others to channel professional work directly to them.

Thus (when the exchange of something of value for marketing and referrals is involved) a distinction is drawn between person-to-person referrals and general advertisements. This is due, in at least part, because general advertisements do not contain an individualized (one-to-one) component nor do they add in a relationship of trust (both of which may interfere with the client’s independent choice of professionals).

An exception under the rule is made for direct referrals between lawyers, but in that case, two requirements must be met for the referral to permissible, namely: that the referral agreement is not exclusive; and the client is informed of the arrangement between the lawyers. And, the lawyer cannot offer compensation for the referral.

If this arrangement with the broker constitutes a quid pro quo it would likely violate RPC 7.2(b). A non-exclusive reciprocal understanding would not violate RPC 7.2(b), provided the lawyer complied with the duty mandated under RPC 1.4(b) to explain the arrangement “to the extent reasonably necessary to permit the client to make informed decisions.” In this case, the referral fee may be deemed to have been exchanged in the form of the payment by the Lawyer to the broker for services rendered after the Lawyer receives the referral (we assume for the analysis that the broker is aware that he/she would not be paid unless and until the client hires the Lawyer).

The reciprocal referral arrangement proposed by the inquirer results in the Lawyer giving something of value to a non-lawyer broker in exchange for recommending the Lawyer’s services in violation of RPC 7.2(b).

Conflicts of Interest

There was also concern expressed by the Committee that the scenario described by the inquiring Lawyer raised conflicts of interest. The inquiring Lawyer should ensure that no concurrent conflict of interest exists in his representation of homeowners/borrowers pursuing modifications or refinance of loans that may have been originated by the referring broker. If a conflict of interest exists, the inquiring Lawyer is cautioned to ensure that it is a waivable conflict, and if so, he must adhere to RPC 1.7, which requires both the disclosure of the nature of the conflict and informed consent.

RPC 1.7 provides in relevant part:

(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if:
….
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer`s responsibilities to . . . a third person or by a personal interest of the lawyer.

There are several Comments that are instructive to the inquiry, including Comment 1, which provides:

“Loyalty and independent judgment are essential elements in the lawyer’s relationship to a client. Concurrent conflicts of interest can arise from the lawyer’s responsibilities to . . . a third person or from the lawyer’s own interests.”

Comment 10 to RPC 1.7 specifically addresses personal interest conflicts that could arise in this scenario:

“The lawyer’s own interests should not be permitted to have an adverse effect on representation of a client . . . . In addition, a lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest.”

If the inquiring attorney is interested in pursuing representation in such matters where a concurrent conflict has arisen, he must disclose his own personal business interests and obtain the informed consent of the client as set forth in RPC 1.7(b) before proceeding with representation.

Additional Concerns

In addition, there was a concern expressed by the Committee that part (b) (of Question 1) may run afoul of either RPC 5.4’s prohibition on sharing legal fees with a non-lawyer, or the requirement of independence of judgment.

Finally, the lawyer should be careful to ensure compliance with RPCs 1.6 and 1.18, to ensure that confidential information of clients and prospective clients is not shared with the broker unless the client has consented.

Question 2:

An attorney cannot pay a referral source only for clients actually received, engaged, or accepted by the attorney. RPC 7.3 provides the relevant guidance with respect to this portion of the inquiry:

(a) A lawyer shall not, directly or through a third person, by in-person, live telephone or real-time electronic contact solicit professional employment from a prospective client when a significant motive for the lawyer’s doing so is the lawyer’s pecuniary gain, unless the person contacted:
(1) is a lawyer;
(2) has a family, close personal or prior professional relationship with the lawyer; or
(3) has consented to the contact by requesting a referral from a not-for profit lawyer referral service.

An exception is made under 7.3(d), permitting in-person or telephone solicitations when the lawyer has engaged a prepaid or legal services plan and the organization makes the solicitations, so long as lawyers ensure that the prepaid legal or legal services organization is otherwise in compliance with the Rules.

A lawyer may pay the reasonable costs of advertising (RPC 7.2), but may not give anything of value to a person for recommending the lawyer’s services, except as set forth in 7.2(b) (and as expressed above). Just as the lawyer is prevented from in-person solicitations, so too is a third party prohibited from making these solicitations in return for compensation on behalf of lawyer.

Under the facts set forth in the inquiring Lawyer’s second question, it would appear that the conduct expressed would not be permissible under the Rules: i.e., the payment for particular client referrals from third parties when actually accepted by the Lawyer.

VI. CONCLUSION:

Lawyers may pay for the reasonable cost of advertising and may accept professional referrals, but may not pay persons or organizations (or otherwise exchange value) for specific referrals unless the organization is pre-paid legal, a legal services plan or a not-for-profit referral service. The scenario posed in questions 1(b) and 2 above, as presented by the inquirer, appears to run afoul of the Rules of Professional Conduct because the inquiring Lawyer proposes an exchange of value for the referral, either by direct payment or by way of a referral for work. There was also concern expressed by the Committee that a conflict of interest arises in the first scenario, and therefore, to the extent that scenario is permissible under other RPCs, the inquiring Lawyer must ensure compliance with RPC 1.7 et. seq.