Stand out from the crowd concept femaleAvvo Legal Services has been meeting with North Carolina bar regulators, resulting in a draft proposal that would amend several legal ethics rules and make it easier for Avvo to operate in the Tar Heel State, according to Prof. Alberto Bernabe, a Chicago law professor who has seen some of the relevant documents, and blogged about them last week.

Ethical problems?

Several state legal ethics opinions have recently found client-referral services using an Avvo-like model to be ethically problematic, including opinions from regulators in Pennsylvania, South Carolina, and my home state, Ohio.  Rule revisions in Florida now pending for approval by the state supreme court there likewise call aspects of the model into some question.

Some of the identified ethical issues raised by Avvo-like referral services, as identified by various ethics opinions are:

  • the company — and non-lawyers — control significant aspects of the attorney-client relationship, including functions that can constitute the practice of law (see Model Rule 5.5(a));
  • the structure can interfere with the lawyer’s exercise of independent legal judgment on behalf of the client (see Model Rule 5.4(c));
  • the way the fees are managed could constitute or invite commingling of clients’ funds and lawyers’ funds (see Model Rule 1.15(a));
  • the fee structure makes it difficult to comply with the duty to refund unearned fees at the end of the representation (see Model Rule 1.16(d));
  • a model where the lawyer is paid only after the representation is concluded makes the fees contingent on the outcome, which can violate the prohibition on contingent fees for certain kinds of cases (see Model Rule 1.5(d));
  • receiving and holding client funds paid in advance may violate the lawyer’s duty to hold those funds in a trust account (see Model Rule 1.15(c));
  • although part of the fee paid by the client and kept by the company may be designated as a “marketing fee,” the fact that such fees are calculated as a percentage of the full fee makes the arrangement likely to be impermissible fee-splitting with a non-lawyer (see Model Rule 5.4(a));
  • the business model can threaten the confidentiality of the lawyer-client relationship (see Model Rule 1.6).

North Carolina considers amendments

In light of these issues, Avvo has tried to allay concerns, including by saying that its model actually comports with ethics rules, and that it is providing advertising that is protected by the First Amendment.  (A recent Georgetown Law Journal article by Prof. Bernabe details Avvo’s arguments.)

According to Prof. Bernabe, North Carolina may now be considering a different regulatory approach:  amending its lawyer conduct rules to “make it acceptable for lawyers to participate in services like Avvo.”

Documents he has seen include a proposal to amend the fee-splitting rule to permit payment of a portion of the lawyer’s fee to an on-line platform if the amount is a reasonable charge for administrative or marketing services and there is no interference with the lawyer’s independent professional judgment.

Another proposed comment amendment would allow lawyers to participate in Avvo-like rating services without fear of being held in violation of the prohibition against giving something of value in exchange for a recommendation of employment.  (See Model Rule 7.2(b).)

Yet another amendment would allow the company to keep the client’s payment until the end of the representation, imposing on the lawyer the obligation of ensuring that such “intermediaries” “adequately protect client funds” — instead of placing such advance payments in the lawyer’s trust account.

Brave New World

Although nothing is certain yet, and the documents that Prof. Bernabe describes are certainly preliminary and might be incomplete, the path that North Carolina appears to be contemplating significantly departs from the road that bar regulators in other jurisdictions have so far taken.  Whether acquiescing to market trends — even ones that seem to be irresistible — is in the true best interest of legal consumers and the legal profession remains to be seen.

Money SliceFollowing an $8 million settlement in a personal injury suit, the New York Court of Appeals held that a fee-sharing agreement between two lawyers was enforceable, even though it violated ethics requirements.  The court said that counsel’s failure to inform her client and obtain consent to the fee split was a “serious ethical violation,” but it did not allow her to sidestep the otherwise-enforceable contract.  The unanimous February 9 opinion in Marin v. Constitution Realty, LLC seems to go against a developing trend toward voiding unethical fee-sharing agreements.

Failure to disclose to client

The case involved serious injuries to a construction worker who fell from a Manhattan building.  Counsel of record hired co-counsel and agreed to pay him 20 percent  of the attorneys’ fees if the case settled before trial.  However, no one informed the client of the agreement or obtained his consent, although there was evidence that counsel of record had led her co-counsel to believe that the client had been informed.  Just six months later, counsel fired the co-counsel and advised him that his portion of any fee would be based on quantum meruit.  Three years later, the case settled for $8 million.  Co-counsel moved to enforce the fee-sharing agreement.

Fee-splitting requires client disclosure

Every jurisdiction in the country has some form of Model Rule 1.5(e), which permits fee sharing between lawyers who are not in the same firm,  but requires that the client agree to the arrangement in writing, including the share that each lawyer will receive.

Affirming the trial court and the intermediate court of appeals, the New York high court held that the failure to disclose to the client and get his consent did not void the fee-sharing agreement, as counsel of record had argued.

Quoting from its 2009 opinion under the former Code, the court said “it ill becomes defendant … to seek to avoid on ‘ethical’ grounds the obligations of an agreement to which [she] freely assented and from which [she] reaped the benefits.”  The court said that having benefitted, counsel could not “use the ethical rules as a sword” to invalidate the fee-sharing agreement.

Not the majority view?

Although the Marin court did not consider the Restatement (Third) of the Law Governing Lawyers, the opinion likely accords with the view set out in § 47, which says that “a lawyer who has violated a regulatory rule or statute by entering into an improper fee-splitting arrangement should not obtain a tribunal’s aid to enforce that arrangement, unless the other lawyer is the one responsible for the impropriety.”  Here, as the court noted, co-counsel, who was trying to enforce the agreement, thought that counsel of record had informed the client, which under the Restatement analysis might suggest that the “other lawyer” was responsible for the ethics breach.

But more broadly, there seems to be an emerging majority view that fee-sharing arrangements that don’t comply with Rule 1.5(e) are simply invalid.  See Benjamin C. Cooper, Taking Rules Seriously, 35 Cardozo L. Rev. 267 (Oct. 2013) (a “significant majority of the courts [that] have looked at the issue conclude that such agreements are unenforceable,” citing cases).  The justification for that position is that it would be against public policy if a lawyer could enforce an unethical fee agreement through court action, even though the lawyer would be subject to discipline for entering into the agreement.  However, as Marin illustrates, there are opinions that come out the other way.

Take care before you share

It seems self-evident that the best way to stay out of trouble is to comply with the client-disclosure-and-consent requirement of your jurisdiction’s version of Rule 1.5(e).  But if you are involved either in trying to enforce or to invalidate a fee agreement that does not comply with the rule, you will need to weigh the relevant case authorities carefully, in light of the divergent approaches that courts have taken.