Opinion 87-11
(July 1987)

By letter dated April 22, 1987, you have asked for an opinion from the Professional Guidance Committee as to whether a law firm which refers medical malpractice cases to other counsel because the cases are actually or potentially adverse to the interests of hospitals which are represented by the health care group of that law firm may receive compensation for the work done in developing the medical malpractice cases. As noted in your letter, the firm does not represent the hospitals in the defense of medical malpractice actions, and the practice of the attorneys who develop the malpractice cases is unrelated to the health care practice. The malpractice actions are normally undertaken under a contingent fee arrangement.

The Committee has determined that the referring firm may receive compensation for the work done in developing the medical malpractice case on the basis of quantum meruit. Such compensation would be the reasonable value of the firm's services until the time of the firm's withdrawal. In order to receive compensation in this form, the firm must satisfy the requirements in Disciplinary Rule 2-107, which provides:

(a) A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of his law firm or law office, unless:

(1) The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made

(2) The total fee of the lawyers does not clearly exceed reasonable compensation for all legal services they rendered the client.

The Committee also recommends that the following two requirements be satisfied. The firm must first conduct a good faith conflict check when the malpractice plaintiff initially approaches the firm and make as thorough a check as possible for possible or probable conflicts. Secondly, the firm must secure the consent of both the malpractice plaintiff and the hospital client whose interests are potentially or adversely affected by the medical malpractice case. If DR 2-107 and the Committee's two requirements are satisfied, the referring firm may receive quantum meruit compensation for the work performed on the malpractice case.

Of course, as a result of the conflict with the firm's hospital clients, the referring firm is prohibited from performing any work on the malpractice case or performing any service to the malpractice plaintiff relating to that case. Such a prohibition is provided in Disciplinary Rule 5-105(B), which provides:

A lawyer shall not continue multiple employment if the exercise of his independent professional judgment on behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involve him in representing differing interests, except to the extent permitted in DR 5-105(C).

The Committee has determined, however, that the referring firm may not receive compensation for the work done in the malpractice case in the form of a "referral fee," i.e., a percentage of the ultimate award in the malpractice case. It is the opinion of the Committee that such an arrangement would continue to give the referring firm an interest in the outcome of the malpractice action as the firm's compensation would arise only if the malpractice plaintiff ultimately prevailed in this lawsuit. The Committee believes that such an interest would or could have a chilling effect on the relationship and communications between the firm and the hospital clients. Such a result is less likely to occur where the firm receives quantum meruit compensation as the firm is only entitled to the reasonable amount of work already done.

The Committee also believes that the ongoing interest in the ultimate outcome of litigation, occasioned by the referral fee, while continuing to represent the hospital in the health care field may have the appearance of impropriety. Such a result is prohibited by Canon 9 which provides "A lawyer should avoid even the appearance of professional impropriety."

Opinions of other bodies support the Committee's opinion that percentage referral fees are impermissible in the scenario described in your letter. For example, the ABA/BNA Lawyer's Manual on Professional Conduct provides:

Fees may not be divided with a lawyer who is under a legal or ethical impediment to representing a client, regardless of the services that lawyer performed or the responsibilities assumed.

Opinions supporting this position have been rendered by the ABA, the New Jersey Bar, the Massachusetts Bar and the New York State Bar. See, e.g., ABA informal Opinion 1088(1968); New Jersey Bar Opinion 548 (1984); Massachusetts Bar Opinion 90-10 (1980); and New York State Bar Association Opinion 338 (4/25/74).

Accordingly, the presence of a conflict, a continuing interest in the outcome of the case and the appearance of impropriety make it improper to receive a referral fee for a case referred to other counsel due to a conflict. However, the Committee feels that quantum meruit compensation is permissible if the requirements prescribed earlier in this Opinion are followed.

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.