Opinion ID: 710246
Heading Depth: 2
Heading Rank: 2

Heading: The Fee-Sharing Agreement

Text: 32 We now turn to the merits of the case before us. The parties bring a claim governed by Illinois law and by the Illinois Rules of Professional Conduct. When determining issues under Illinois law, we apply the law that would be applied in this context by the Illinois Supreme Court. Green v. J.C. Penney Auto, Ins. Co., 806 F.2d 759, 761 (7th Cir.1986). We are obliged to consider the holdings of state appellate courts, but are not bound to do so if we have good reasons for diverging from those decisions. See Eljer Mfg., Inc. v. Liberty Mut. Ins. Co., 972 F.2d 805, 814 (7th Cir.1992), cert. denied, 507 U.S. 1005, 113 S.Ct. 1646, 123 L.Ed.2d 267 (1993). The magistrate judge before whom this case first was heard determined that, under Illinois law, the original fee-sharing agreement could be rescinded orally. The district court did not reach that issue because it found no clear evidence of rescission. Because the disposition of this appeal requires that we determine issues of Illinois law, we must decide these issues de novo. Salve Regina College v. Russell, 499 U.S. 225, 231, 111 S.Ct. 1217, 1220-21, 113 L.Ed.2d 190 (1991). 33  The Illinois Rules of Professional Conduct regulate fee-sharing agreements. The Illinois Supreme Court has made clear that its standards of professional behavior, currently embodied in the Illinois Rules of Professional Conduct, 9 bind the courts as a matter of law. In re Vrdolyak, 137 Ill.2d 407, 148 Ill.Dec. 243, 248, 560 N.E.2d 840, 845 (1990) (As an exercise of this court's inherent power over the bar and as rules of court, the Code operates with the force of law.). To determine the proper application of a rule, we examine its language, structure, and the purposes that it serves. 34 Rule 1.5(f)-(h) sets forth the standards concerning all fee-sharing arrangements between attorneys who are not members of the same firm. Specifically, it states: 35 (f) Except as provided in Rule 1.5(j), a lawyer shall not divide a fee for legal services with another lawyer who is not in the same firm, unless the client consents to employment of the other lawyer by signing a writing which discloses: 36 (1) that a division of fees will be made; 37 (2) the basis upon which the division will be made, including the economic benefit to be received by the other lawyer as a result of the division; and 38 (3) the responsibility to be assumed by the other lawyer for performance of the legal services in question. 39 (g) A division of fees shall be made in proportion to the services performed and responsibility assumed by each lawyer, except where the primary service performed by one lawyer is the referral of the client to another lawyer and 40 (1) the receiving lawyer discloses that the referring lawyer has received or will receive economic benefit from the referral and the extent and basis of such economic benefit, and 41 (2) the referring lawyer agrees to assume the same legal responsibility for the performance of the services in question as would a partner of the receiving lawyer. 42 (h) The total fee of the lawyers shall be reasonable. 43 Illinois Rules of Professional Conduct Rule 1.5(f)-(h). Rule 1.5(f) initially states a general prohibition of fee-sharing between attorneys who are not members of the same firm. This prohibition is followed by a description of the limited circumstances in which such arrangements are allowed: only when the client consents in writing to the arrangement. Rule 1.5 also establishes the general rule concerning the terms of any such division. Rule 1.5(g). Agreements to divide fees shall be made in proportion to the services performed and responsibility assumed by each lawyer. It is clear that all agreements to divide fees, including those in which attorneys agree to receive compensation in proportion to their efforts, must comply with the writing requirement of Rule 1.5(f). That requirement mandates that the client sign a written consent to the arrangement which discloses three matters: (1) that a division of fees will be made; (2) the basis upon which the division of fees will be made; and (3) the responsibility assumed by each attorney. Moreover, one additional requirement governs all fee agreements: Rule 1.5(h) mandates that the total fee of the lawyers shall be reasonable.2 44 Within the realm of all possible fee-sharing arrangements, Rule 1.5(g) singles out those based upon referrals. 10 Referral-based fee-sharing agreements are excepted from the general rule that any division of fees shall be made in proportion to the services performed and responsibility assumed by each lawyer. Because of the recognition that in some cases this arrangement may be beneficial to a client, the referring attorney is permitted, under the exception of Rule 1.5(g), to recover an amount disproportionate to the services performed. It is clear that a referral agreement is still a division of fees and still subject to the writing requirement; it is simply one in which an attorney may recover more than his proportionate amount. In the case of referral-based fee-sharing, Rule 1.5(g) imposes two requirements. First, the extent and basis of the economic benefit received by the referring lawyer must be disclosed. And second, the referring lawyer must agree to assume the same responsibility for the client's representation as would a partner of the receiving lawyer. 3 45 Turning to the facts of this case, it is clear that the original agreement between Mr. Strauss and Mr. Antoniono was subject to the special requirements of Rule 1.5(g). Mr. Antoniono referred Ms. Baer to Mr. Strauss with the understanding that Mr. Strauss was to do most of the work: [He] was chosen because of his familiarity with Title VII litigation and because of Mr. Antoniono's lack of experience in the area. Mr. Antoniono's role, as he understood it, was quite limited; he stated that his job was holding the client's hand. Tr. at 53. This arrangement was exactly what Rule 1.5 was intended to permit. Ms. Baer received the benefit of a local attorney experienced in litigating her claim and Mr. Antoniono was to be compensated for his care in searching out counsel on her behalf. Following the Rule's purpose of informing and protecting clients, Ms. Baer was made fully aware of the arrangement between her two attorneys and gave her informed consent to their fee-sharing arrangement. Indeed, the fee arrangement was part of the retainer agreement and Ms. Baer evidenced her consent by signing the agreement. Because the service rendered by Mr. Antoniono was primarily a referral, Rule 1.5(g) permitted the attorneys to depart from the general rule of proportionality and to agree to share fees in a manner disproportionate to the amount of work expended by each. 46 Mr. Strauss submits that the alleged oral agreement between himself and Mr. Antoniono, made in November 1992, rescinded the original fee-sharing agreement and substituted in its place an agreement not to share fees. Instead, each attorney would be entitled to his hourly rate. In Mr. Strauss' view, the attorneys no longer had a fee-sharing agreement. Therefore, Rule 1.5 did not mandate that the new agreement be in writing. 47 We do not believe that Mr. Strauss' interpretation can be squared with the plain wording of Rule 1.5. Rule 1.5(f)-(g) clearly indicates that all fee-sharing agreements between attorneys who are not in the same firm must be committed to writing and approved by the client. The rule contemplates that most such agreements will involve attorneys who divide fees on the basis of their efforts; the only fee-sharing agreements which are not governed by this general rule and which fall within the ambit of the special rule set forth in Rule 1.5(g) are those based upon referral. Although the alleged change altered the attorneys' agreement to one in which each lawyer received compensation based on effort, the agreement remains within the ambit of Rule 1.5 because, even after the alleged alteration, the substituted contract was no less a division of fees within the meaning of Rule 1.5. The substituted agreement, by its own terms, is an agreement between lawyers to split the fee in the case. The fee will still be divided; it simply will be divided under a different formula. 48 Any other interpretation would frustrate the purpose of Rule 1.5. The writing requirement set forth in Rule 1.5(f) is for the protection and benefit of the client. Hofreiter v. Leigh, 124 Ill.App.3d 1052, 80 Ill.Dec. 319, 322, 465 N.E.2d 110, 113 (1984) (The purpose of Rule 2-107(a)(1) [present Rule 1.5(f) ] is to serve the best interest of the client.). It is only after notice is given to the client and the client gives informed consent that such agreements will be enforced. When attorneys fail to inform their clients of fee-sharing arrangements and do not commit such arrangements to writing, the arrangements have not been enforced by Illinois courts. See Holstein v. Grossman, 246 Ill.App.3d 719, 186 Ill.Dec. 592, 616 N.E.2d 1224 (1993); Anderson v. Anchor Org. for Health Maintenance, 274 Ill.App.3d 1001, 211 Ill.Dec. 213, 654 N.E.2d 675 (1995). This court has also recognized the requirement of Rule 1.5(f) that all fee-sharing agreements be committed to writing and approved by the client. Kaplan v. Pavalon & Gifford, 12 F.3d 87 (7th Cir.1993) (In Illinois, a fee-sharing agreement between attorneys for referrals, which is neither in writing nor signed by the client, is unenforceable as a matter of public policy.). As Anderson makes clear, this precedent cannot be read as limited to only a particular subset of referral agreements--those in which fees are shared disproportionately; they too are subject to the writing and disclosure requirements of Rule 1.5. 49 In this case, the attorneys had informed Ms. Baer of their referral agreement and had received her written consent to the arrangement. Indeed, she had signed the agreement which was incorporated in the original retainer agreement. Their subsequent alleged oral agreement was without her written consent. Indeed, as far as this record reflects, it was without her consent at all. It was, moreover, not simply a rescission of the earlier written agreement; it was the substitution of another fee-sharing agreement and therefore, quite independently of its relationship to the earlier agreement, it was necessary, under the explicit provisions of Rule 1.5(g), that it be in writing. Rule 1.5(f)-(g) exists to inform and protect the client; fee-sharing, whether in a referral context or otherwise, is permitted only after the client consents. Rule 1.5's policy and language require that, before an agreement establishing a division of fees is valid, the client must consent, in writing, to the change. No such written consent was ever given by Ms. Baer to the revised fee-sharing agreement allegedly entered into by her attorneys. 11 50 Accordingly, we must conclude that, even if Mr. Antoniono agreed to a revised fee-sharing arrangement with Mr. Strauss, the agreement could not be enforced because Ms. Baer never gave her written consent to it. In the absence of a writing memorializing the revised agreement, the only agreement to be enforced is the original fee-sharing arrangement. Under its terms, Mr. Antoniono is entitled to the fees currently held in escrow.