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MRPC 1.5(e) Does Not Require Referring Attorneys to Have an Attorney–Client Relationship to Earn Referral Fees, According to the Michigan Court of Appeals

Posted on Tuesday, May 21, 2019

When law firms enter into referral agreements, the client must be advised of and not object to the division of fees, but the client need not have an attorney–client relationship with the referring firm.

In Sherbow v. Fieger (Docket No. 338997), a complicated legal representation situation arose following an unfortunate car accident in Ohio in July 2012. Charles Rice did not survive the accident, and three of the passengers—Mervie Rice, Dorothy Dixon, and Philip Hill—were seriously injured. An Ohio hospital placed Dorothy in a medically-induced coma.

Dion Rice, the son of Charles and Dorothy, sought out Jeffrey Sherbow—sole practitioner of the plaintiff law firm—for legal advice regarding the accident. Sherbow met with Dion at Charles’s home. Sherbow also spoke with Jeffrey Danzig, a partner at the defendant law firm, Fieger & Fieger. Sherbow testified that in the meeting at Charles’s home, he told Dion he did not feel equipped to take on the personal injury and no-fault cases, but he also said he knew someone who could take the cases. Sherbow testified that Dion helped him reach out to the other clients. Then, Sherbow referred all of the matters to Danzig, who then agreed that Sherbow would receive 1/3 of any contingent fees stemming from the referral.

Mervie, Philip, and Dion retained the defendant firm. Dion also retained the firm to represent Dorothy and Charles’s Estate. Dorothy eventually met with Danzig when she was no longer in the coma. The retainer agreements did not reflect the referral agreement, but Danzig testified he informed all of the clients of the referral agreement, and they did not object. However, the clients all testified that they did not know of the referral agreement and would have objected.                 

In August 2012, Danzig sent letters to Sherbow, acknowledging the one-third referral fee. However, an Ohio firm assisted the defendant firm and sought 20% of the contingent fee, so Sherbow agreed to lower his referral fee to 20%. An agreement between Danzig and Sherbow in January 2014 reflected this new arrangement.

The defendant succeeded in its representation, obtaining a contingent fee of roughly $3.4 million. However, the defendant refused to pay plaintiff the 20% referral fee, approximately $680,000, leading the plaintiff to bring this litigation in 2017 for breach of contract.

The defendant moved for summary disposition, arguing the contract violated the Michigan Rules of Professional Conduct (MRPC) 1.5(e), which only allows a reasonable fee division between lawyers of different firms if “the client is advised of and does not object to the participation of all the lawyers involved[.]” Both parties presented conflicting evidence as to whether the clients were advised of the referral agreement. Further, the parties also offered conflicting evidence as to whether Danzig had the apparent authority to bind the defendant law firm to a contract. Thus, the Trial Court denied the defendant’s motions for summary disposition.

At trial, the Trial Court instructed the jury that the plaintiff, the referring law firm, needed to prove it did not violate MRPC 1.5(e) with the referral contract. The Trial Court also instructed the jury that this rule required Sherbow to have an attorney–client relationship with the clients at the time of the referral. Finally, the Trial Court instructed the jury that for the plaintiff to succeed, the jury would need to find that Danzig had apparent authority to bind the defendant to the referral agreement.

Based on these instructions, the jury only awarded the plaintiff around $93,000, finding that Danzig did have binding authority as an agent of the defendant firm, but finding that Sherbow only had an attorney–client relationship with Dion on behalf of Charles’s Estate. Both parties appealed. The Court of Appeals decided many issues in this case, but two major decisions revolved around agency law and MRPC 1.5(e) and the meaning of “client.”

Agency Law

The defendant law firm argued in a motion for summary disposition that Danzig did not have the authority to bind the defendant to a referral agreement. In fact, the defendant firm had a policy prohibiting employees or partners from “agreeing to pay referral fees without the express approval of Geoffrey Fieger.” However, the plaintiff firm provided evidence that in practice, “Danzig had such authority, exercised it often, and almost never got approval from Fieger.”

The Court of Appeals affirmed the denial of the motion for summary disposition, finding genuine issues of material fact regarding Danzig’s apparent authority. The Court explained that an “agent’s apparent authority to bind a principal arises where the acts and appearances lead a third person reasonably to believe that an agency relationship exists; however, apparent authority must be traceable to the principal and cannot be established only by the acts and conduct of the agent.” If agency is in dispute, any testimony tending to establish agency makes it a question of fact.

Here, the record reflected that, despite the defendant firm’s policy, several factors pointed to Danzig’s apparent authority to act on behalf of the defendant. He was a partner in the firm, his name was in the firm’s title and in the letterhead for all correspondence, and he was head of the intake department. Thus, the defendant firm’s actual policy had no bearing on Danzig’s apparent authority, so summary disposition would have been improper.

MRPC 1.5(e) and the Meaning of “Client”

Applying the rules of statutory construction in a de novo review, the Court of Appeals ruled that 1.5(e)’s use of the word “client” does not mean that the referring party and the client need an attorney–client relationship as the defendant firm would interpret it. The rule simply means that “the person would eventually become the client of the firm of lawyer receiving the referral.” (emphasis added). The Trial Court instructed the jury that if no attorney–client relationship existed between Sherbow and Mervie, Philip, and Dorothy, Sherbow would have no claim to share in the contingent fees.

The Court of Appeals found this interpretation problematic because lawyers might take on cases, they are unqualified to handle for a period of time simply so they could receive referral fees. Thus, the Court of Appeals found that the Trial Court erred in its interpretation of this rule and related jury instruction. The Court of Appeals reasoned that if the Michigan Supreme Court want to require attorney–client relationships with a referring attorney, it would have explicitly included that requirement in MRPC 1.5; the purpose of current rule is to protect clients, and modifying it in this way would undermine that purpose. On remand, however, the Trial Court still must decide whether the injured parties were actually informed of the referral agreement and did not object at the time.

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