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Bare Referral Fee Scrutinized in Class Action Law Suits

After one U.S. District Judge forced a law firm to reveal its referral fee arrangement in a recent prominent case, many legal experts are suggesting the industry may be at a tipping point where class action firms could be required to more fully disclose the distribution of their fees.

Law Firm Referral Fee ProgramsIn the market for lead plaintiffs in class action law suits, firms pay politically connected attorneys multi-million-dollar fees to provide firms with nothing more than an introduction to potential clients including pension funds and other institutions. These referring attorneys do not assist the firm in any way during the case and provide no legal counsel. Most worrisome to many legal ethics experts is the fact that the involvement of these attorneys is often hidden from the client, the class, and even the court.

These referral fee arrangements are particularly useful to class action law firms as a method of avoiding competition amongst other firms that desire the role of lead counsel. In such instances, there is a significant and unresolved question as to whether fees need to be disclosed to the entire class or only to the immediate client.

The New York class action law firm Labaton Sucharow recently disclosed that it paid a Houston lawyer over $4 million for a referral fee in the $300 million State Street Bank & Trust case. The lawyer did not contribute to the case in anyway other than acting as a middleman between the law firm and the client.

Upon this discovery, a U.S. District Judge ordered the law firm to reveal the number of referral fee arrangements that it signed with referring attorneys. The law firm disclosed that it paid such fees for nearly a third of its 150 open cases – which were regulated by eighteen different referral agreements.

Massachusetts allows “bare referral” arrangements where lawyers pay for only the name of a client, though such agreements are banned nearly everywhere else. Because New York’s ethics rules are tougher, the law firm updated its eighteen referral agreements to comply with the New York rules.

Labaton expressed that it “deeply regrets” paying a “bare referral” fee in the case and has agreed to disclose the name of all referring attorneys in future cases. Further, the firm agreed to return to class members $700,000 for the fee paid to the lawyer and an additional $1.4 million for double counting. Plus, the firm will return to other lawyers an additional $2.75 million for incorrect lodestar calculations. It also hired a former U.S. District Court Judge to monitor its fee practices over the course of the next year.

On the matter of lodestar calculations, Labaton agreed to stop allowing other firms to pay for attorneys working in its office and to claim time on lodestar petitions. This practice of sharing lodestar hours is used by class action lawyers to split the cost of litigation, but it is also criticized by legal experts as a method of covering up anti-competitive practices.

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Disclaimer

This article is provided for educational purposes only. The information provided is believed to be accurate but is not guaranteed. It is not to be interpreted as legal advice or an opinion in regard to any topic discussed. The article should not be used as a substitute for legal advice from a licensed attorney in your state. Every situation is different and circumstances vary widely depending on the governing state law and related considerations.

 

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