Referral fees and conflicts of interest

The recent indictment of NY State Assembly Speaker Sheldon Silver on corruption charges has – at least for  the moment – focused some  attention on the age-old practice of “referral fees,” under which a lawyer or other professional receives compensation for referring an individual or entity to some other service provider.  In the Silver case, the (now ex-) Speaker received such fees from two different law firms.  As described in this piece in the NY Times , one of these firms –  “a  large personal injury law firm where he has worked for more than a decade” – paid him more than three million dollars based on  client referrals from a doctor whose research center had been given $500,000 in state grants orchestrated by Silver.  Another part of the prosecution’s case involves his receipt of referral fees from a real estate law firm to which he had steered clients and his performing official action to benefit those clients.

In both of these alleged schemes the principal victims were the taxpayers of NY, whose interests were subordinated to Silver’s personal interest. The element of harm to the two firms’ respective clients was less a part of the picture (although some harm could be presumed with the personal injury referral fees). But in a traditional referral fee situation the harm is principally and often entirely to the client.

Of course, it is not only lawyers who pay/receive referral fees – and who face ethical questions involving these practices.  For instance, architects must, as a matter of professional standards, disclose referral fees.  As noted in this Advisory Opinion from the American Institute of Architects: “It makes no difference under the disclosure rules whether the architect is certain that the contractor he recommends is the best one for the job or that he would make the same recommendation even if no referral fee were paid. Though the architect may be confident there is no actual conflict of interest, any referral fee is an interest substantial enough to create an appearance of partiality and is a factor about which the client is entitled to know.”

Legal and ethical issues regarding referral fees are disturbingly common in the medical profession.  For a discussion of the conflicts of interest inherent in such arrangements see this post  from Chris MacDonald’s excellent Business Ethics Blog: “If the person you’re relying on for advice is financially beholden to the person he or she is recommending, you have every reason to doubt that advice.”

Such practices are also common in the financial advisory services realm.  See this discussion of  relevant ethical standards,  and note that – as with doctors – these cases sometimes cross legal, as well as ethical, lines.

Finally, the regulation of referral fees in the legal profession has existed for many years. However, the area is increasingly complicated by the phenomenon of referrals being made by non-attorneys to law firms, as described in this paper by John Dzienkowski of the University of Texas School of Law.

Indeed, in my own practice I have been offered referral fees by vendors selling C&E products and services.  I always say No.  I’d like to think that my steadfastness is the result of being virtuous, but in reality, it is just a matter of common sense. That is, for clients or prospective clients to have to worry about whether my advice was tainted would be devastating to my business.  And no referral fee could ever compensate for that.