Opinion 2005-17
(January 2006)

This opinion is based on facts provided in the inquirer’s original inquiry as well as additional information provided by the inquirer in response to follow up questions from the Committee after its December 2005 meeting.

The inquirer is the third attorney representing Plaintiffs in a case that recently concluded in the Philadelphia County Court of Common Pleas. The original action was commenced by Attorney #1, in Federal Court in Philadelphia, on behalf of two plaintiffs (the specific cause of action was not disclosed to the Committee). There were 22 corporate defendants named in the original action.

Defense Law Firm A entered its appearance on behalf of the 11th named corporate defendant (hereinafter “Defendant 11”). Sometime thereafter, Attorney #1 voluntarily discontinued the federal lawsuit and filed a similar case in Philadelphia Court of Common Pleas listing 44 plaintiffs and 29 corporate defendants, one of whom was Defendant 11. Defense Law Firm A again entered its appearance on behalf of Defendant 11.

Preliminary Objections were filed and, once they were resolved, Attorney #1 filed a motion to disqualify Defense Law Firm A, claiming that the law firm had a conflict of interest arising from the fact that one of the 42 plaintiffs who retained him after the initial federal filing, was married to an attorney who worked for (and was a shareholder in) Defense Law Firm A. The disqualification motion and supporting memo focused on the likelihood that the plaintiff and her lawyer/husband would communicate about presumptively confidential information having to do with the lawsuit. In response, Defense Law Firm A stated, inter alia, that the lawyer/husband was not involved in representing Defendant 11 and was sufficiently isolated from the case as to prevent any improper flow of information. In addition, Defense Law Firm A requested the severance of the 44 cases and the disqualification of Attorney #1. This counter-disqualification request was apparently based on Defense Law Firm A’s belief that Attorney #1 may have constructed the conflict by knowingly undertaking the representation of plaintiff/wife for the purpose of disqualifying lawyer/husband’s firm from representing Defendant 11. While these competing motions were pending, Attorney #1 filed yet another claim in Common Pleas Court, on behalf of 120 plaintiffs (the previous 44 plus 76 new plaintiffs), asserting the same claims as in the previous complaint.

On the disqualification motions, the Court sided with Defense Law Firm A, severing all of the claims and disqualifying Attorney #1. Appeals from that Order were unsuccessful.

As a result of the disqualification, Attorney #1 sent the file to another law firm (“Attorney #2”), but only 38 of the 120 plaintiffs who had retained Attorney #1 stayed with Attorney #2, to file individual complaints. Attorney #2 subsequently referred the matter to the inquirer due to the inquirer’s experience in handling multi-plaintiff litigation. Attorney #2 asked the inquirer to honor whatever “interest” Attorney #1 had in the case and, once the case was concluded, to discuss with Attorney #2 what compensation arrangements might be appropriate.

The case was litigated to what the inquirer calls a “successful conclusion”. Shortly after the case concluded, Attorney #1 contacted the inquirer and stated that he (Attorney #1) was entitled to a referral fee equal to 1/3 of the 33% contingent fee the plaintiffs agreed to pay. This inquiry followed. Because of the inquirer’s concern over the question about the referral fee, he has sought permission to escrow a portion of the proceeds in order to provide for distribution among counsel, once the fee issue is resolved.

After the above facts were discussed at length at the Committee’s December 2005 meeting, the Committee contacted the inquirer for clarification as to two significant points. The first point was the specific terms of the disqualification and whether there was any indication, in the Court’s Order, that the disqualification was based on the Court’s conclusion that Attorney #1 deliberately created the conflict, as Defense Law Firm A had contended. The inquirer provided the full text of the Court’s Opinion and the following excerpt is informative:

  • “Plaintiffs’ attorney is disqualified from representing any plaintiff in this lawsuit because he agreed to represent [plaintiff/wife] after knowing that [Defense Law Firm A] was already representing [Defendant 11] in an earlier lawsuit filed by Jane Doe 1 and Jane Doe 2 in the United States District Court for the Eastern District of Pennsylvania [the original lawsuit].”
The second question the Committee asked was whether there was a written fee agreement between Attorney #1 and any subsequent counsel (Attorney #2 and/or inquirer). The inquirer responded that, in Attorney #2’s files, there is a letter of October 21, 2002 from Attorney #2 to Attorney #1 which has a detailed discussion of the circumstances under which Attorney #1 might be entitled to a referral fee on certain portions of the recovery for a certain segment of the plaintiff group. Without recounting the text of those provisions verbatim, the significant points are as follows:

Attorney #1 was to assign all rights under the contingent fee agreements with his clients to Attorney #2 and obtain written consents to those assignments.
Attorney #2 recognized the “considerable time and effort” Attorney #1 put into the case and states an obligation to compensate Attorney #1, in some way, for that work.
The letter provides for a stepped-down referral fee arrangement on settlements that occur at various points in the post-referral duration of the litigation.

The inquirer asks the Committee for advice as to “whether an attorney who has been disqualified from representing clients in a lawsuit because of a conflict of interest is eligible for a referral fee”. The inquirer also asks specifically, “…what if any, interest in a referral does Attorney # 1 have?” In other words, whether, and to what degree, there is a referral fee relationship between Attorney #1 and Attorney #2. The inquirer does not ask about any aspect of the referral fee relationship between himself and Attorney #2.

The Committee first notes that fee questions such as this frequently have not only ethical implications, but common law contract implications. It is also not uncommon for an analysis under each of these areas to reach what appear to be contradictory conclusions. The inquirer should keep in mind that this Committee does not offer advice on substantive law, and the inquirer will have to address the contract issues to whatever extent he thinks is appropriate.

Referral fees are governed by Pennsylvania Rule of Professional Conduct (the “Rules”) 1.5(e). In summary, that rule permits referral fees to be paid to an attorney who has not actually performed substantive work on the case, so long as the aggregate fee paid by the client is not clearly excessive or otherwise unlawful, and so long as the client is informed of the referral fee and does not object to its payment. While the inquiry does not provide the gross amount of the contingent fee, we will assume for purposes of this opinion that it is within customary bounds. Similarly, while the inquiry states that the October 21, 2002 correspondence between Attorney #1 and Attorney #2 required Attorney #1 to obtain certain consents from the clients, it is not clear that such consents included a consent to (or notice of) a referral fee. Again, we will assume that there has been compliance with this aspect of Rule 1.5(e), but if either of these assumptions is incorrect, the conclusions reached in this opinion may not be accurate.

The inquiry is framed as an issue of “conflict of interest”, although the subsequent information provided by the inquirer, including the text of the Court’s disqualification Order, lead the Committee to conclude that this is not a situation that poses a traditional conflict of interest, as that term is employed and defined under Rules 1.7, 1.8 and 1.9. Based on the facts presented, the Committee does not see a situation where Attorney #1 is representing a present or former client against another present or former client, or has his duties of loyalty compromised in any other way as a result of the representation of these plaintiffs. Close consideration of the Court’s disqualification order language bears out the conclusion that this disqualification does not arise from a “conflict of interest”, as that term is defined under the operative rules.

It appears that the basis for the disqualification Order was, more likely, a desire by the Court to sanction Attorney #1 for undertaking the representation of plaintiff/wife, at a time when he knew or reasonably should have known that Defendant 11 was represented by the firm that employs her husband, and then attempting to use that relationship as a means to disqualify Defense Firm A. The Committee looked at the order very closely and cannot see a basis, under the Rules of Professional Conduct, for the disqualification, nor for prohibiting a referral fee. On several occasions in the past (all of which have been fact-specific), this Committee and others have opined that an attorney with a clear conflict of interest, as defined under Rules 1.7 and 1.9, is ethically barred from accepting a referral fee in a matter in which such conflict is present. The facts presented in this inquiry differ significantly from those cases, and those opinions do not lead to the conclusion that a referral fee is barred in this case. The Committee sees no positional or client-specific conflict under Rule 1.7 and does not believe that there is evidence, as yet, that the representation of plaintiff/wife actually will lead to the disclosure of any information, otherwise protected by Rule 1.6, that would have impaired Attorney #1’s conduct of the litigation. Thus, even if there were a hard and fast “Rule” prohibiting referral fees in clear-cut conflict situations, the Committee believes this case would not fit that model. Therefore, the Committee believes that there is no ethical prohibition to the payment of a referral fee to Attorney #1 under the circumstances presented in this inquiry.

CAVEAT: The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. It carries only such weight as an appropriate reviewing authority may choose to give it.