Inside: Considerations before engaging in fee-splitting agreements

Oftentimes, you are stepping into a liability landmine field without a proper safety sweep

A golden rule of business is to develop strong positive relationships. Arguably, one of the best types of business relationships is a mutually beneficial one. In the best of circumstances, all parties receive the benefit of a profit — akin to a symbiotic business relationship.

An example of such an arrangement is when two businesses refer each other their clients and share a portion of the fees generated from services rendered from the referral back to the referrer. For illustration, if an accounting firm refers a client to a law firm focusing in the practice of tax, and the law firm in turn shares a percentage of their fees generated from this referred client’s work with the accounting firm. This type of arrangement is generally called fee-splitting and potentially can be very profitable for the parties engaged in the practice. However, businesses should be wary of such a relationship because fee-splitting is not an unequivocally acceptable practice — in fact, the illustration just provided is actually prohibited!

There are professions and businesses where this type of practice is prohibited or could potentially be considered a breach of fiduciary duty or breach of contract with their clients or consumers. Consequently, it is extremely important to analyze whether a fee-splitting arrangement is an acceptable practice whenever presented with such an opportunity; if not, you are stepping into a liability landmine field without a proper safety sweep.

First, with only an extremely narrow exception, lawyers are prohibited from fee-splitting with non-attorneys. Model Rule 5.4(a), which is nearly adopted by all 50 states, has prohibited “non-attorneys from entering into agreements where a non-lawyer has a financial interest in a law firm.” Consequently, it would be prudent to avoid entering such an agreement with a law firm unless you have received advice from an impartial attorney to the contrary. There are several reasons for the promulgation of this rule by the American Bar Association. It is generally acknowledged that attorneys are a unique class of professionals in the United States. They have self-imposed duties that protect their clients’ best interest.

One such duty is personal accountability for neutral-decision making on behalf of the interest of their clients. It is well-reasoned that if an attorney has a non-attorney as a business partner, the attorney may be undermining his ability to exercise their independent judgment to render candid advice to the client, essentially creating a conflict of interest for themselves by acquiring a business partner that is not obligated to the same standard of ethics. However, attorneys are not the only professionals who are prohibited from splitting-fees. Doctors are often prohibited from splitting their fees by state law and/or their medical board ethical rules. But more importantly, at the federal level this practice may even be considered a violation of law — specifically the Anti-Kickback Statute and the Stark law, which heavily regulate physician referrals.

Next, there are many other types of businesses where the business owes a fiduciary duty to its clients. For example: real estate brokers, financial advisors, sports agents, and trust administrators all owe their clients a fiduciary duty. A fiduciary duty may potentially be breached if they enter into a fee-splitting agreement without their clients’ knowledge. Therefore, it is important to analyze whether you in fact owe your clients’ a duty or if the other business does before entering into a fee-splitting arrangement. If a party owes a duty, it is imperative that you disclose to your clients the “fee-splitting” agreement and obtain their consent before engaging in the practice. If you do not disclose, it is likely that the party with a fiduciary duty will be in breach.

Furthermore, on a practical note, after you carefully analyze whether entering into this type of arrangement is acceptable, and decide to do so, it is prudent to formally memorialize the fee-splitting arrangement in writing to form a written contract. The importance of this point cannot be stressed enough. There have been countless disputes that have arisen as a result of an oral fee-splitting agreement not being honored by one of the entering parties.

Now, you may be asking yourself what this has to do with your business. You may be thinking, I’m not a medical professional or an attorney, nor do I owe anyone a fiduciary duty.  My business is not prohibited from entering into these relationships. It is the other company or individual who is going to be held accountable if our arrangement is discovered.

This is usually true. However, you, as another party to this practice, may be dragged into the mess that will inevitably unfold once the fee-splitting arrangement is discovered. Is it really worth being dragged into litigation on a potential counterclaim or as a co-defendant for a small piece of business? Moreover, is it worth potentially tarnishing your business’s reputation to be linked with this type of practice? I certainly hope these (nearly) rhetorical questions you just answered to yourself were a resounding no. Consult an attorney before entering into this type of arrangement. And, at the very least, provide your clients a disclosure of this arrangement and obtain their written consent.

Contributing Author

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Jefferey Ogden Katz

Jefferey Ogden Katz is a partner at The Patterson Law Firm, LLC. He is a leading litigation attorney and has handled numerous professional liability cases...

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