E-Ethics Vol. II, No. I (June 2002)
(c) 2002 by David Hricik
How Much Loyalty Does a Firm Get from its Associates?
I. The Fact Pattern.
An associate at your firm gets a call from a friend regarding a potential huge contingent fee case, asking if the firm would be interested in handling it. "No," he says, "but I know a good buddy of mine who does that kind of work." He then refers the case to a friend, who... doesn't take the case. Instead, he refers the case to a high-profile plaintiffs' attorney, who settles it for many millions of dollars. The associate's friend gets a substantial referral fee. The associate then leaves your firm and becomes partners with that friend.
Does the firm have a claim for breach of fiduciary duty against the associate?
II. The Law.
Johnson v. Brewer & Pritchard, P.C., , 2000 WL 33716714, __ S.W.3d __ (Tex. March 21, 2002) is the final chapter (perhaps?) in the story of an associate, Chang, who purportedly referred a case to a friend, Johnson, and then left his firm to form a partnership with that friend. Essentially, the associate heard of a helicopter crash involving friends, and used his firm's fax machine and other resources to solicit the victims as possible clients, but he then got his friend Johnson to represent the clients. Johnson then referred the case to Jamail & Kolius for a referral fee.
The associate's firm did not handle PI or wrongful death cases. Rather than revealing what actually happened, however, the associate told his firm that he had "lost out" to the Jamail firm, and had never been hired.
The case eventually settled, netting Johnson a $3m referral fee. After the associate left the firm, and eventually became partners with Johnson, the firm sued the associate for its portion of the referral fee. Interestingly, there was no evidence that the associate profited from his diversion of the business to Johnson, which created a thorny issue for the court.
The Texas Supreme Court, though finding associates owe a fiduciary duty to their firms, repeatedly stated that the scope of the fiduciary duty was narrow. At one point it explained why:
[W]e think it unwise to impose an absolute fiduciary duty upon associates of a law firm to abstain from directing those with legal needs to a firm other than the associate's employer. If one of the parties injured in the helictoper crash had been Chang's mother, should Brewer & Pritchard have a cause of action for breach of fiduciary duty if Chang referred her to an experienced personal injury lawyer without securing a referral fee for Brewer & Pritchard? The answer to that question should be no.The Court went on to note that Brewer & Pritchard had a firm policy that precluded the referral of cases to others without payment to Brewer & Pritchard, but that it had not sued Chang and Johnson for breach of contract. The court emphasized, by the way, that the firm had repeatedly tried to investigate suspicious financial transfers from Johnson to entities affiliated with Chang, but it had never been able to show Chang had profited; hence, there was no breach of fiduciary duty.There could be many reasons why it would be in a potential client's best interest for an associate to suggest that they seek representation from a firm other than the firm for whom the associate works. For example, suppose that an existing client of a firm asks an associate if that firm handles corporate and tax matters. The associate says yes, and tells her employer that she will try to secure representation of the client in these matters. The client meets with the tax and business lawyers of the firm, but afterwards asks the associate for a frank evaluation of whether lawyers at another firm who handle such matters on a more regular basis and to the exclusion of other practice areas migh tbe better suited. The associate should not be faced with breaching a fiduciary duty to the firm that employs her by giving an answer that leads the client to another firm.
There is evidence... that Brewer & Pritchard had little or no experience with personal injury claims and had never taken to trial a claim involving catastrophic personal injuries. A firm's legitimate interest in demanding loyalty from its associates should not outweigh competing considerations of the public's interest in securing the most appropriate representation for the particular type of case and market competition.
... We hold only that an associate may participate in referring a client or potential client to a lawyer or firm other than his or her employer without violating a fiduciary duty to that employer as long as the associate receives no benefit, compensation, or other gain as a result of the referral. However, an associate owes a fiduciary duty not to accept or agree to accept profit, gain, or any benefit from referring or participating in the referral of a client or potential client to a lawyer or firm other than the associate's employer.
III. The Solutions?.
Johnson leads to the obvious need for firms to consider what to do in light of the competing policies identified by the court. A minimal step would be to require associates to at least notify the firm if the associate refers a case to other counsel. Taking steps beyond that implicates some of the same policies identified by the court. For example, contractually requiring associates to refer cases to the firm would implicate the policy of "securing the most appropriate representation for the particular type of case."
However, particularly in states where a firm can receive a "referral fee" without remaining involved in the referred case (such as Texas), the firm may be able to require the associate to identify the case to the firm, and let it refer the case to appropriate counsel, and gain the referral fee, rather than allowing the associate to refer use firm resources to make it so that a third party obtains the referral fee. That sort of policy would not appear to implicate the public policies discussed in Johnson
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