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Referral Practices Among Lawyers: A Theoretical and Empirical Analysis

Published online by Cambridge University Press:  27 December 2018

Stephen J. Spurr
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Abstract

This article analvzes referral practices among lawyers. The hypothesis is that the market for legal services is “efficient,” that is, market forces enable plaintiffs in personal injury cases to maximize their recoveries, given the quality of lawyers representing defendants. If this market is indeed efficient, one would expect that legal claims which would benefit most from high-quality legal services would be assigned to high-quality lawyers. The evidence shows that referrals enable claims to be matched with lawyers in just that way. That is, through the mechanism of referrals, claims of greater intrinsic value are assigned to lawyers of higher quality.

The paper also provides a model of the decision a generalist must make: to litigate a case himself or refer it to a trial specialist. The implications of the model support the hypothesis that this market is efficient in the sense defined above.

Type
Articles
Information
Law & Social Inquiry , Volume 13 , Issue 1 , Winter 1988 , pp. 87 - 109
Copyright
Copyright © American Bar Foundation, 1988 

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References

1 Mark Pauly, the Ethics and Economics of Kickbacks and Fee Splitting, 10 Bell J. Econ. 344 (1970).Google Scholar

2 Isaac Ehrlich & Lawrence Fisher. The Derived Demand for Advertising: A Theoretical and Empirical Investigation. 72 Am. Econ. Rev. 366 (1982).Google Scholar

3 22 N.Y. Admin. Code § 603.7(a). In fact retainer statements have been required to be filed by plaintiffs' attorneys in the First Judicial Department since 1929 and in the Second Department since 1940. N.Y. Special Rules Appellate Division, First Dept., IV-A (adopted Feb. 26, 1929); N.Y. Special Rules Appellate Division, Second Dept. III (adopted Jan. 1, 1940).Google Scholar

4 22 N.Y. Admin. Code §§ 603.7(b)(1) & (2). The requirement to disclose a failure to recover any amount became effective in the First Department on July I, 1960. Marc A. Franklin, Robert H. Chanin, & Irving Mark, Accidents, Money and the Law: A Study of the Economics of Personal Injury Litigation, 61 Colum. L. Rev. I, 8 nn.40 & 42 (1961).Google Scholar

5 The statements enable the Appellate Division to monitor compliance with regulation of contingent fees. Since 1957 the First Judicial Department (Manhattan and the Bronx) has had a maximum fee schedule for lawyers hired on a contingent fee basis. This schedule gave an attorney a choice between two (maximum) fee arrangements: (1) one-third of the amount recovered for the client, or (2) a downward sliding scale, allowing 50% of the first $1000 of recovery, 40% of the next $2000, 35% of the next $22,000, and 25% of any amount over $25,000. (The one-third option became better for the attorney when the recovery exceeded $33,000.) If the attorney believes that the sliding scale option will not give him “adequate compensation” because of “extraordinary circumstances,” he may apply to the court for greater compensation. 22 N.Y. Admin. Code § 603.7(e)(4). Evidently this section is rarely invoked. Franklin, Chanin, & Mark, 61 Colum. L. Rev., at 23 n.108.Google Scholar

6 These statements are confidential, and were obtained through a court order. On Jan. 23, 1984, the American Bar Foundation, through its then executive director, John P. Heinz, applied for permission to inspect these records for the purposes of research. On Feb. 10, 1984, the Hon. Francis Murphy, as presiding justice of the Appellate Division, First Judicial Department. entered an order granting the Foundation access to all retainer and closing statements filed in the First Department from July 1, 1960, to date. The Foundation gave the author access to the statements for the purposes of this study.Google Scholar

7 William J. Curran, How Lawyers Handle Medical Malpractice Cases: An Analysis of an Important Medicolegal Study 11 (Nat'I Center for Health Serv. Research, U.S. Dep't Health, Educ., & Welfare), DHEW Pub. No. (HRA) 76–3152 (1976).Google Scholar

8 Similarly, the term referral is not restricted to cases where the client's sole objective in visiting the first lawyer is to obtain information as to who is best suited to handle the case. A referral has occurred where the client hires the first lawyer to represent him, with the implicit understanding that this lawyer may delegate the case to a personal injury specialist if it becomes expedient to do so, i.e., if such delegation would yield a larger expected net recovery for the client.Google Scholar

9 About 5% of the United States population annually become accident statistics. Franklin, Chanin, & Mark, 61 Colum L. Rev. at 1 (cited in note 4).Google Scholar

10 Chasers are ordinarily laymen who, for a fee, locate potential clients for a lawyer. They may have contacts with police officers, hospital attendants, doctors. ambulance drivers, garage attendants, or others likely to encounter injured persons immediately after their injury. Historical accounts indicate that chasers often operated independently, soliciting claims in hospital wards, which they auctioned off to attorneys who made the highest hid. In New York, this type of activity violates not only bar association disciplinary rules but also the criminal law. Glenn Greenwood & Robert F. Frederickson, Specialization in the Medical and Legal Professions 95 (Mundelein, III.: Callaghan & Co., 1964) (“Greenwood & Frederickson”); Comment, 41 Cornell L.Q. 683, 697 n.114 (1956); 15 Judiciary Law sec. 479 (soliciting business on behalf of an attorney), sec. 481 (aiding, assisting, or abetting the solicitation of persons), and sec. 482 (employment by attorney of person to aid, assist, or abet in the solicitation of business).Google Scholar

11 The article stated: “This report covers some of the leading lawyers for plaintiffs in the New York metropolitan area…. The information obtained from lawyers and judges for both reports is not intended to be exhaustive. There are many other excellent lawyers in the field who are not mentioned.”Google Scholar

12 The 18 high-quality lawyers were chosen randomly from the names in the New York Law Journal article. All the lawyers named in that article were excluded from the random sample of 100 lawyers.Google Scholar

13 It often happens chat closing statements are not filed for an individual lawyer, but rather for a law firm of which the lawyer is a member. When I could not determine from the closing statements filed by the firm which cases were handled by the individual lawyer, 1 collected all closing statements filed for the law firm during 1983.Google Scholar

14 Cases in which there was no recovery are not included in this table.Google Scholar

15 The Martindale-Hubbell Law Directory also provides evaluations of lawyers, based on information solicited from lawyers and judges on an anonymous basis. The accuracy of its ratings has been questioned. See Douglas E. Rosenthal, Lawyer and Client: Who's in Charge? 135–136 (New York: Russell Sage Foundation, 1974). To determine the validity of the selection made by the New York Law Journal. we would need some independent measure of quality-which we do not have.Google Scholar

16 It should be noted that because of ambiguities in the data, we could not determine the proportion of the average lawyer's business that is acquired by referral from lawyers; we could determine only that the upper bound of that proportion is 27%. The data show that 27% of the recoveries by the “average” lawyer involve referrals between lawyers but do not indicate whether the lawyer is on the sending or receiving end of the referral.Google Scholar

17 To be precise, table 3 shows the number of retainer statements recorded on microfilm during the year and the fraction of those statements that involve a referral between lawyers. The table would be slightly different if it showed the number of retainer statements which were entered into during the year and the fraction of those statements that involve a referral between lawyers.Google Scholar

18 For example, if a retainer statement was copied to microfilm during 1980, a search was made of closing statements filed from 1980 through I983 to find the marching closing statement. Although the computer tape includes a full set of retainer statements for 1983, results for 1983 are nor included in table 3 since they would be based solely on retainer statements for which the corresponding closing statement was filed in the same year.Google Scholar

19 I have chosen a production function whose exponents sum to 1.Google Scholar

20 We have not shown that the relative advantage of referral, compared to the alternative of handling the case by oneself, increases with c. To do this, one would have to evaluate the derivative with respect to c of the relative advantage of referral:Google Scholar

The derivative of this expression reduces toGoogle Scholar

To determine the sign of this expression, one would have to specify a functional form for FG and FS.Google Scholar

21 In some cases the formula determining the compensation of the recipient lawyer was not expressed as a fraction of the total contingent fee. In may instances the retainer statement filed by the recipient lawyer provided that the contingent fee was to be divided between the lawyers on the basis of quantum meruit. i.e., in accordance with the amount of work done by each lawyer. In these cases, I obtained the referral share from the closing statement if that Statement indicated how the fee was divided. If the closing statement did not provide this information, it was not possible to determine the referral share.Google Scholar

In some statements the recipient lawyer's compensation was expressed as a fraction of the gross, rather than the net recovery (the maximum contingent fee is based on the net recovery); these statements are in the “not specified” category of table 4 and were not included in the regression analysis that follows. Statements which indicated that the fee would be shared by three or more lawyers were also eliminated, on the ground that they were not comparable to the cases involving two lawyers.Google Scholar

22 One occasionally finds assertions made without reference to data.Google Scholar

For many years it was customary within the legal profession to pay a “finder's fee” or “forwarding fee.” Pursuant to this practice, if a lawyer referred a case to another lawyer, or, with the consent of the client, forwarded the case to a lawyer in another jurisdiction, the forwarding lawyer was entitled to a “finder's fee” of one third of the fee earned. The fee was payable whether or not the forwarding lawyer performed any service or assumed any responsibility.Google Scholar

This practice was condemned by Canon 34, which was adopted in 1937. However, many lawyers fear that, as specialization increases, the resulting increase in the number of referrals from one lawyer to another will cause general practitioners to feel that they must accept forwarding fees inorder to sustain themselves. Those who disagree with this reasoning assert that fee-splitting depends on the ethics of the individual lawyer and not upon the amount of specialization; and unethical division of fees can best be prohibited by insuring that the quality of the bar is high and by rigid enforcement of Canon 34.Google Scholar

Greenwood & Frederickson at 137, citing Drinker, Legal Ethics 186 (1953) (cited in note 10).Google Scholar

See also Robert H. Aronson, Attorney-client Fee Arrangements: Regulation and Review 59 (Washington, D.C.: Federal Judicial Center, 1980): “A 1951 poll indicated that, in the rwenty-five states from which responses were received, a forwarding fee of 33/13 percent was not considered unprofessional in sixteen states and was common practice in nineteen states.”Citing Mc-Cracken, Report on Observance by the Bar of Stated Professional Standards, 37 Va. L. Rev. 399, 415 (1951).Google Scholar

23 Evidently this maximum fee schedule is a binding constraint, so that the contingent fees actually paid closely approximate the maximum. See Franklin, Chanin, & Mark, 61 Colum. L. Rev. at 23–24 (cited in note 4).Google Scholar

24 There is informal evidence, at least for aircraft accident litigation, that there is substantial competition among recipient lawyers: “This situation is complicated even further when the local contingency fee attorney refers his case to an aviation or other tort specialist, who typically contracts to receive a large part of the contingency fee of the original attorney. (The original attorney may shop around for the best deal, so there is at this level a good bit of competition among the specialists.) Since so-called referral fees are frowned upon, the referring attorney may justify his fee by playing a role in the handling of the case, but the referring attorney's role may well not be commensurate with his share of the fee.” Randal R. Craft, Jr., Factors Influencing Settlement of Personal Injury and Death Claims in Aircraft Accident Litigation, 46 J. Air Law & Comm. 895, 920–21 (1981).Google Scholar

25 There are 13 admiralty and 35 medical malpractice cases in the sample. I found some claims based on aviation accidents, which could have been another specialty, except that there were not enough claims in this category to allow a regressor variable to be added.Google Scholar

26 Pauly. 10 Bell J. Econ. (cited in note 1).Google Scholar

27 See Douglas C. Montgomery & Elizabeth Peck, Introduction to Linear Regression Analysis 88 (New York: John Wiley & Sons, 1982).Google Scholar

28 See, e.g., Patricia M. Danzon, The Frequency and Severity of Medical Malpractice Claims, 27 J. Law & Econ. 115 (1984): “The early seventies witnessed a rapid increase in the frequency and severity of medical malpractice claims. In California, for example, both frequency and severity increased at an average rate of almost 20 percent per annum, cumulating to yield an increase in total claim costs per physician of roughly 40 percent per annum.”“Severity” means the average amount paid per successful claim, including court awards and payments made in out-of-court settlements.Google Scholar

29 “Urbanization is the single most powerful predictor of both frequency and severity, even after controlling for higher physician and lawyer density in urban states, more pro-plaintiff common law and the frequency and severity of claims in other liability lines. Higher awards by urban courts are probably one factor inducing the higher claim frequency.” Id. at 143.Google Scholar

30 Lucian Y. Ray, Application of Basic Principles of Admiralty Law to the Practice of Admiralty Law in the Great Lakes, 33 Wis. B. Bull. 37, 45 (1960), quoted in Greenwood & Frederickson at 87–88 (cited in note 10).Google Scholar

31 Examination of the microfilm records disclosed that in many cases the first retainer statement (filed by the referring lawyer) and the second retainer statement (filed by the recipient lawyer) are filed simultaneously, so that the second statement has the code number that immediately follows the number assigned to the first retainer statement. Often in such cases the referring lawyer was not aware of the New York Supreme Court rules requiring the filing of retainer and closing statements, and therefore probably has little experience in litigation of personal injury cases. It seems likely that a referring lawyer in such circumstances will make a minimal contribution to the case and perhaps will obtain a smaller referral share than a referring lawyer who has knowledge of the rules.Google Scholar

32 There may well be a time trend in the referral share even though the coefficient for REFERDATE is not significant. Recent research carried out with this data set indicates that there was a very substantial decline in the proportion of cases referred between lawyers for the period 1972–84. Given this evidence, it would not be surprising to find a corresponding change in the referral share over the same period. This change would not necessarily be captured in these regressions, since the retainer statements which make up the sample are drawn from a small time interval: in fact, in 69% of the cases the recipient lawyer was hired during 1977.Google Scholar