(This article appeared in Journal 29,3, Fall 2024)
It is natural for lawyers to develop preferences for working with particular third party service providers. Likewise, vendors often have favorite legal professionals they enjoy working with more than others. While developing good working relationships with vendors may provide advantages to a lawyer and his clients, the Rules of Professional Conduct put limitations on these professional relationships. Importantly, the ethics rules prohibit a lawyer from entering into a quid pro quo referral agreement with any service provider.
For real estate lawyers, third party service providers regularly include lenders and title insurance agencies. RPC 57 discusses the ethical parameters of relationships between real estate lawyers and these service providers. In RPC 57, a lender plans to require borrowers to use one of three “approved” lawyers to do all the title work on closings on his loans. The opinion provides that a lawyer may ethically request lenders and title insurance companies to place him on an “approved” attorney list. However, the opinion explicitly cautions that the lawyer may not “give any special remuneration” to the lender in return for placing his name on the list of approved attorneys.
2006 FEO 7 considers referral requirements that are often a condition of membership in a for-profit networking organization. 2006 FEO 7 provides that a lawyer may be a member of a for-profit networking organization provided the lawyer does not make referrals to other members of the organization on a quid pro quo basis. The opinion emphasizes a lawyer’s ethical duty to maintain impartiality, prioritize client interest, and give competent advice in referral decisions. The opinion states that any lawyer who participates in this type of organization “is expected to act in good faith” and must discontinue participation if reciprocal referrals are, in fact, “an explicit or implicit condition of membership in the organization.”
In 2011 FEO 4, the ethics committee again scrutinizes the relationship between a real estate lawyer and a service provider and concludes that the lawyer may not enter into an exclusive reciprocal referral agreement with a title insurance company. Pursuant to the opinion, a reciprocal referral arrangement impairs the lawyer’s ability to provide independent professional judgment and creates a nonconsentable conflict of interest between the lawyer and the client. In addition, the arrangement amounts to improper compensation for referrals in violation of Rule 7.2(b). The opinion notes that, when referring a client to one or more title insurance companies, the lawyer is charged with acting in the best interest of the client. One of the factors the lawyer can consider when making a referral is the lawyer’s working relationship with specific title insurers, particularly where the relationship may prove beneficial to the client. As stated in the opinion, a lawyer “may, and should, strive to cultivate the types of business relationships and provide the quality of legal services that will encourage clients and other professionals to recommend the lawyer’s services. What a lawyer cannot do, however, is permit a person who recommends the lawyer’s services to direct or regulate the lawyer’s professional judgment in rendering the legal services.”
2022 FEO 3 examines a potential referral arrangement between a lawyer and a doctor who is creating a list of potential legal service providers to be given to interested patients. The opinion concludes that the lawyer may agree to be included on the list “provided that there is no quid pro quo exchange” for recommending the lawyer’s services and the doctor does not engage in improper solicitation. The opinion reemphasizes the prior ethics opinion’s holdings that a lawyer “offering to refer a client to an allied professional in exchange for a referral from the professional to the lawyer’s practice, rather than based on the professional’s independent analysis of the lawyer’s qualifications, constitutes an improper quid pro quo.”
A prohibited referral agreement does not need to be formal or written. For example, 2006 FEO 7 prohibits a lawyer from participation in a networking organization if quid pro quo referral arrangements are “an explicit or implicit condition” of membership in a networking organization. In the context of real estate closings, the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. (“RESPA”) sets out that a prohibited agreement or understanding can be oral, or it can be implied by the party’s course of conduct. 12 U.S.C. § 2607(a) prohibits any person from giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a) (emphasis added). The Code of Federal Regulations further provides: “An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern, or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.” 12 CFR 1024.14(e). In sum, the informal “wink-wink” exclusive referral agreement is just as prohibited by the Rules of Professional Conduct as the formal/explicit exclusive referral agreement.
Referrals should be made based on the best interests of the client, rather than financial gain or reciprocal arrangements. However, the reality is that some lawyers may still engage in questionable referral arrangements with service providers. Ensuring that referrals are genuinely made in the best interests of clients, without being influenced by financial gain or reciprocal arrangements, is fundamental to maintaining ethical standards in the legal profession. If a lawyer knows that another lawyer is participating in an improper referral arrangement, the lawyer should communicate his concerns to the other lawyer and recommend that the lawyer contact the State Bar for ethics advice as to his participation in the referral arrangement. After this communication, if the concerned lawyer knows that the other lawyer has continued his participation in the improper referral arrangement, the lawyer should review Rule 8.3 and determine if reporting the participating lawyer to the State Bar is required.
As noted above, lawyers are permitted—and encouraged—to develop business relationships with other professionals who can assist with the representation of clients, provided the Rules of Professional Conduct are followed. Developing business referrals within the ethical boundaries of the Rules of Professional Conduct requires a lawyer to provide quality legal services rather than rely on financial incentives. The bottom line: Just say NO to quid pro quo.