Lawyers Using Referral Marketing as a Revenue Stream? Not so Fast!

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Recently I read a post which suggested that attorneys should use referral marketing as a revenue stream – that attorneys should refer cases they cannot or will not take to other attorneys for fees.

Not so fast!

It’s not as easy as I give you a new client you pay me a referral fee because all fees are governed by ethics rules in every single state.  And more often than not, you are not allowed to monetize a referral you provide to another law firm unless certain rules are followed. 

What is Referral Marketing?

Referral marketing is when you get clients, friends, and colleagues to tell others about you.  It’s a form of word-of-mouth advertising and it can be incredible.  Essentially what you are doing is asking people who were happy with your work to refer others to you should they require the type of legal work you perform. You can even ask for referrals from people who may not have worked with you in the past, but who know, like and trust you to refer business to you when they know of someone who needs your services. 

In addition, testimonials, reviews, and recommendations are a type of referral. And you should be asking happy clients to provide these on a regular basis.

But there is the key – you have to position yourself for and ask for referrals.  And many attorneys are hesitant to ask because of fear.  Fear of looking needy, fear of being rejected, and fear of looking like a sleazy salesperson.  However, if you create your referral marketing program correctly (which will be the subject of a different post), then all of these fears will be washed away.

Paying for Referrals from Clients

In some industries, unlike the legal industry, you can incentivize your clients to provide referrals to you.  For example, DropBox is credited for having one of the most famous referral marketing programs ever.  They grew 3900% in 15 months by offering registered users the ability to increase their storage capacity just by referring friends who signed up.   

There are other companies that will give you free stuff for referring customers to them or even provide you with discounts for doing so.

However, lawyers are not like other industries.  You cannot pay to incentivize your clients to provide you with referrals, testimonials, or recommendations.  Almost every state has a version of the American Bar Association’s Model Rules of Professional Conduct rule 7.2(b) which states:

(b) A lawyer shall not compensate, give or promise anything of value to a person for recommending the lawyer’s services except that a lawyer may:

(1) pay the reasonable costs of advertisements or communications permitted by this Rule;

(2) pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service;

(3) pay for a law practice in accordance with Rule 1.17;

(4) refer clients to another lawyer or a nonlawyer professional pursuant to an agreement not otherwise prohibited under these Rules that provides for the other person to refer clients or customers to the lawyer, if:

(i) the reciprocal referral agreement is not exclusive; and

(ii) the client is informed of the existence and nature of the agreement; and

(5) give nominal gifts as an expression of appreciation that are neither intended nor reasonably expected to be a form of compensation for recommending a lawyer’s services.

A real example would be offering to provide the client with a monetary incentive for receiving a referral from their client or even offering a discount on their fees for so doing. 

This even includes asking happy clients for recommendations and testimonials.  In one example, an attorney told a group of other attorneys that they receive testimonials and reviews from every client they ask.  When someone inquired how they are able to do this, the reply was that they offer the client a gift card for their reviews.  This is a violation of the rule and could cause the attorney some problems. 

Now, had the attorney just asked the clients for reviews and then sent a gift card in appreciation without the client being aware that they were going to receive one, then they would be in compliance with Rule 7.2(b)(5).   But it is the offer of quid-pro-quo that brings that into the realm of an ethics violation.

Paying for Referrals from Other Lawyers:

What many attorneys think of when they think of referral fees is when they provide another lawyer/law firm with a referral to a client that they cannot or will not be able to help.  And there are a number of ethics rules which govern these types of situations beginning with ABA Model Rule of Professional Conduct 1.5(e) which states:

(e) A division of a fee between lawyers who are not in the same firm may be made only if:

(1) the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;

(2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

(3) the total fee is reasonable.

While the last two clauses are self-explanatory, many lawyers have an issue about the meaning of the first clause. 

Some think that all fee divisions must be proportional, meaning that the attorney who provided the referral to the other attorney must be given a fee equal to the amount of work that the referring attorney has done.  However, this is not the only option.

You are allowed to give referral fees to other attorneys in non-proportional amounts if “each lawyer assumes joint responsibilities” – that is if each attorney assumes that both the referring and receiving lawyers would be held liable for any claim of malpractice. 

Some states take the stance that just stating they will take responsibility in the referral agreement will suffice whether the referring attorney does any work or none at all.  Other states say that the referring attorney must actually do something – other than just making the referral—in the actual representation. Regular brief contacts with the client or an occasional review of relevant documents could suffice.

Also, understand that there are some states which prohibit referral fees outright.  Please check with your state ethics rules. 

However, if your state does allow referral fees between attorneys, then this arrangement is also subject to conflict of interest rules.

If you are conflicted out of being able to represent a client for any reason under the conflict of interest rules, then you are not entitled to receive a referral fee at all. 

If you couldn’t represent them yourself because of a concurrent conflict of interest (Model Rule of Professional Conduct 1.7), a conflict of interest with a former client (Model Rule of Professional Conduct 1.9), or even a prospective client (Model Rule of Professional Conduct 1.18), you are not allowed to receive monies from the client’s other attorneys regardless of whether you have the client’s express written consent.

Should You Pay For Referrals at All?

Even if you didn’t have all of the proscriptions against referral fees stated above, the question remains whether you should pay a referral fee at all? 

Referrals can be a great way to build your book of business.  Whether you are giving or receiving, referral generation is an important aspect of marketing, but when you pay for referrals you change the relationship from social to financial and that changes the dynamic in ways that won’t last long-term.

When you provide a financial incentive those who would like the money are going to send you junky referrals. And many may insist because they referred you, they should be paid whether you take the case or not. 

The proper motivation for a referral is that you are showing your trust in someone else or being trusted by someone who is referring to you. 

That’s not to say that you shouldn’t use creative incentives to keep your name top of mind with your referral sources, it’s just that if you provide something of value, you are in essence bribing them to refer you.  And you shouldn’t have to bribe your referral sources. 

Become a “resource hub” by developing a broad and deep network of trusted professionals to whom you can give referrals and from whom you can receive referrals.

And the best policy, whether or not you pay a fee, as long as it is ethical, is to thank your referral source. It will leave a good impression and make them more likely to refer you again.

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