A referring attorney must have an attorney-client relationship with the individual being referred in order for a fee-splitting agreement to be valid, the Michigan Supreme Court has unanimously decided.

This required professional relationship “can be limited to the act of advising the individual to seek the services of the other attorney if the referring attorney and client expressly or impliedly demonstrate their intent to enter into a professional relationship for that purpose,” the Supreme Court held in Law Offices of Jeffrey Sherbow, PC v Fieger & Fieger, PC (Docket No. 159450).

The high court further said the defendant in the case had the burden of proving noncompliance with Michigan Rule of Professional Conduct (MRPC) 1.5(e) regarding the validity of the referral agreement. The defendant had the burden of proof, the justices said, because the violation of the rule was raised “as a defense against enforcement of the referral agreement.”

MRPC 1.5(e) permits attorneys who are not in the same law firm to split fees in certain circumstances. The rule says: “(e) A division of a fee between lawyers who are not in the same firm may be made only if: (1) the client is advised of and does not object to the participation of all the lawyers involved; and (2) the total fee is reasonable.”

Justice David F. Viviano wrote the 42-page opinion.

Background

The plaintiff, attorney Jeffrey Sherbow, had a working relationship with Charles Rice, who operated a business in Detroit. Rice died in an automobile accident in Ohio. The passengers in the vehicle - Mervie Rice, Dorothy Dixon and Philip Hill - were all seriously injured. Dixon was placed in a medically-induced coma. When Dion Rice, the son of Charles and Dixon, was told about the accident, he called Charles’s business associate and asked for Sherbow’s contact information. Subsequently, Sherbow and Dion had several phone conversations and eventually agreed to meet and talk further. Meanwhile, Sherbow also had several conversations with Jeffrey Danzig, an attorney and partner at the defendant’s law firm. Sherbow began the process of referring the personal injury and no-fault cases of Dixon, Mervie, Hill and Charles’s estate to the defendant. Danzig agreed that, for Sherbow’s referral, he would be paid one-third of any contingent fee the defendant earned from the cases.

The defendant was ultimately successful in representing the parties and obtained an award of $10.225 million. A contingent fee of $3,408,333.34 was paid to the defendant. When the defendant refused to pay Sherbow 20 percent of that fee ($681,666.67), the plaintiff filed this action for breach of contract in Oakland County Circuit Court. The case went to trial. The issues were whether Danzig had the actual or apparent authority to bind the defendant to the referral fee contract and, if so, whether the contract violated MRPC 1.5(e) and was therefore unenforceable as a matter of public policy.

After several days of testimony, the trial court, over the plaintiff’s objections, instructed the jury that the plaintiff had to prove by a preponderance of the evidence that MRPC 1.5(e) had not been violated and that, to be entitled to judgment, the plaintiff must have had attorney-client relationships with Dion on behalf of Charles’s estate, Mervie, Dixon and Hill at the time of the referral. The verdict form asked the jury to answer two questions with respect to each client: “Were any of the following clients of Jeffrey Sherbow,” and “[i]f yes to any part of 1, did Plaintiff refer one, some, or all of the following personal injury cases to Defendant?” The verdict form also included a third, general question: “If yes to any parts of 1 and 2, did Jeffrey Danzig have actual or apparent authority to bind Fieger Firm?” The jury answered that Sherbow had an attorney-client relationship with Dion on behalf of Charles’s estate and referred that case to the defendant. The jury found the opposite for the other three clients. Regarding the third question, the jury determined that Danzig did have the actual or apparent authority to bind the defendant to a contract.

Accordingly, the trial court entered judgment for the plaintiff and awarded the plaintiff $93,333.33. The trial court entered no cause of actions as to the other three claims. The plaintiff moved for judgment notwithstanding the verdict (JNOV) regarding the fees arising from Dixon’s case, arguing that Dion acted on behalf of both Charles’s estate and Dixon while she was incapacitated. The trial court denied the motion.

On appeal, the Michigan Court Appeals held that summary disposition was properly denied because there was a genuine issue of material fact as to whether the clients had knowledge of the fee-splitting agreement and did not object to it. Regarding the jury instructions, the Court of Appeals said that, pursuant to the Michigan Court Rules and established caselaw, the defendant had the burden of proof with respect to its affirmative defenses. Regarding the assertion that there must have been an attorney-client relationship before the referral was made to the defendant in order to satisfy MRPC 1.5(e), the Court of Appeals said: “Defendant contends, and the trial court agreed at trial, that the use of the word ‘client’ meant that Dixon, Mervie, and Hill had to be [the plaintiff’s] clients in order to conform to the rule. Plaintiff argued to the contrary, citing that MRPC 1.5(e) only uses the term ‘client’ to mean that the person would eventually become the client of the firm or lawyer receiving the referral. We agree with plaintiff. … Requiring a party to establish an attorney-client relationship with the referring attorney before a referral takes place adds a new element to the rule and is not part of MRPC 1.5(e) as it is written.” Therefore, MRPC 1.5(e) “does not contain a requirement that Sherbow have an attorney-client relationship with Mervie, Dixon, and Hill, and the trial court erred in instructing the jury to the contrary and including the question on the verdict form,” the Court of Appeals held.

Accordingly, the Court of Appeals affirmed the trial court’s orders denying summary disposition and JNOV, vacated the jury’s verdict with respect to the first two questions regarding Mervie, Hill and Dixon, and remanded the case for further proceedings.

Both parties appealed to the Michigan Supreme Court.

Relationship Required

In its analysis, the Michigan Supreme Court focused on the language of MRPC 1.5(e), which permits attorneys who are not in the same law firm to split fees in certain circumstances.

According to the high court, MRPC 1.5(e) requires an attorney-client relationship between a referring attorney and the individual whom the attorney refers. The justices noted that, historically, the Michigan Supreme Court has required that referring attorneys have a professional relationship with the referred client. “In 1988, MRPC 1.5(e) eliminated the services-and-responsibility requirement, thereby opening the door for pure referral fees,” the high court observed. “The interplay of MRPC 7.2 (banning lawyers from giving anything of value to a person for recommending the lawyer’s services) and MRPC 5.4 (prohibiting attorneys from sharing legal fees with nonlawyers except under certain circumstances) with MRPC 1.5(e) indicates that the latter is an exception to these general rules.”

It would be “strange,” the Supreme Court said, if this exception permitted attorneys to receive paid referrals and split fees simply based on an individual’s status as a lawyer. “[A]s supported by the comments to MRPC 1.5(e) and the surrounding court rules, the referring attorney must participate in the matter as a lawyer by establishing a professional relationship with the client in order to share in fees. This is an agency relationship that develops from the parties’ agreement, which can be express or implied through their conduct; therefore, an attorney-client relationship cannot exist unless the client seeks to obtain legal advice or services from an attorney either directly or indirectly through an intermediary. If the attorney and client expressly or impliedly intend to enter into a professional relationship, the referral can form the basis for that relationship, which need not extend beyond that referral.”

Based on the foregoing analysis of MRPC 1.5(e), the Supreme Court said the trial court properly instructed the jury that a professional relationship was necessary for the fee-splitting agreement to be valid.

Burden Of Proof

Next, the Supreme Court explained why the party seeking to void a referral agreement on the basis that it runs afoul of MRPC 1.5(e) has the burden of demonstrating the violation.

“A plaintiff has the burden of proof in persuading the jury of the elements of his or her case,” the Supreme Court explained. “In turn, a defendant bears the burden of production related to any affirmative defense raised. An affirmative defense does not challenge the merits of a plaintiff’s claim but, instead, seeks to foreclose the plaintiff from continuing his or her case for reasons unrelated to the plaintiff’s prima facie case. After the defendant presents evidence for an affirmative defense, the burden shifts to the plaintiff to produce sufficient evidence to overcome the defendants’ evidence.”

Referral agreements are contracts and they are “not illegal or improper,” the justices pointed out. Moreover, pursuant to MCR 2.111(F)(3)(a) and (b), a defendant’s claim that an otherwise valid contract is void because it violates the public policy underlying MRPC 1.5(e) is an affirmative defense, the high court observed. This public policy argument “does not attack the prima facie case related to breach of contract but, instead, offers an independent reason why the referral agreement is void and the contract claim should be defeated.”

Here, the defendant’s argument that the referral agreement was void as being against public policy was an affirmative defense for which the defendant had the burden of proof, the Supreme Court said. Therefore, the trial court erroneously instructed the jury that the plaintiff had the burden of proving the agreement was not against public policy. Under the circumstances, this error did not prejudice the plaintiff as to Mervie and Hill because there was no evidence from which a jury could have inferred the plaintiff had an attorney-client relationship with them or that the plaintiff referred them to the defendant’s firm, the justices said.

However, the Supreme Court held, the plaintiff was prejudiced by the incorrect jury instruction as it related to Dixon. “Although [the plaintiff] did not speak with Dixon, there was evidence that her son Dion had acted on behalf of Dixon, just as he had acted on behalf of Rice’s estate. Given this evidence and the fact that the jury found that [the plaintiff’s] interactions with Dion were enough to create an attorney-client relationship with Rice’s estate, the Court could not say that a jury properly instructed on the burden of proof would have found that those same interactions with Dion were insufficient to establish an attorney-client relationship with Dixon. Remand for a new trial was warranted on [the plaintiff’s] claim regarding a referral fee for Dixon.”

Accordingly, “[w]e hold that a fee division under MRPC 1.5(e) requires that the participating lawyers establish a professional relationship with the client. Where, as here, one lawyer claims part of the fee on the sole basis of having referred the client to the other lawyer, the referring attorney must actually consult with the client, directly or through an intermediary, in giving the referral. The consultation itself is sufficient to create an attorney-client relationship, if the parties so intend. The burden of proving that MRPC 1.5(e) has been violated and that therefore a referral-fee agreement is unenforceable falls upon the party challenging the agreement, which here is the Fieger Firm. … Therefore, the Court of Appeals’ judgment is reversed in part and affirmed in part, the jury’s verdict is vacated with respect to Dixon, and the case is remanded to the trial court for a new trial with regard to the portion of the fee Sherbow seeks for referring Dixon.”