Making big news this summer was the shut-down of Avvo Legal Services just a few months after it was acquired by Internet Brands.  (A couple of the many reports are here and here.)  Some speculated that the new corporate owner had no stomach to continue to fight for that portion of Avvo’s business model in the face of numerous state ethics opinions that found a wide variety of ethics problems with it.

The flat-fee service that Avvo offered through a network of lawyers required the lawyer to rebate a “marketing” fee to Avvo out of the fee that the lawyer received.  As we’ve pointed out, that raised issues of fee-splitting with non-lawyers; but other aspects of the model also troubled ethics boards.

Does “processing fee” = fee-splitting?

On another front now drawing notice, another on-line legal services provider is contesting charges in California district court that its own business plan violates false advertising and unfair competition statutes, including recently-filed allegations that it supports its business with spurious attorney ratings.

The suit is significant for highlighting that despite the demise of Avvo Legal Services, the ethics issues remain in light of the other players that continue to occupy the same space in the marketplace, and that litigation, not just regulatory action, sometimes results.

The plaintiff in the California federal case is LegalForce RAPC Worldwide, an IP firm.  In an amended complaint filed earlier this month, LegalForce alleges that it competes with defendant UpCounsel Inc. to “provide individuals and small businesses with affordable access to attorneys,” by using technology to match clients with lawyers specialized in corporate, patent and trademark law.

The allegations, which withstood an earlier motion to dismiss, include that UpCounsel’s model features a “processing fee” markup that constitutes impermissible fee-sharing with non-lawyers.

The amended complaint says that UpCounsel tries to attract consumers by promising to provide lawyers in the “Top 5%” of specialized IP and corporate practice niches in cities across the U.S, and that the representation constitutes false advertising, as there is no ranking system that could provide a basis for the claim.

“Reviews” outnumber lawyers, says complaint

In addition, according to the allegations of the amended complaint, UpCounsel falsely advertised superior consumer ratings for the lawyers in its network.  As an example, the plaintiff pointed to the rating given to IP lawyers in Cotati, California:

“Cotati Intellectual Property Lawyers, 5.0 ***** Based on 5450 reviews.”  “It is impossible for Cotati Intellectual Property Lawyers to have 5,450 reviews on UpCounsel,” says the amended complaint, because “Cotati is a small town … with a population of 7,455. There are only 21 attorneys in the city of Cotati licensed to practice law in California, and none of these 21 attorneys are listed on UpCounsel.”

LegalForce alleges that this same pattern of “perfect or near-perfect review scores” based on thousands of purported reviews is duplicated as to lawyers advertised by UpCounsel in other cities, such as Tallahassee and Savannah.

More to come…

The ethics issues regarding on-line legal service providers have not gone away just because Avvo has withdrawn from that market.  As Prof. Alberto Bernabe, a legal ethics professor at John Marshall Law School in Chicago, has pointed out, “Where Avvo left off, someone else will pick up…,” including, most recently, “Text a Lawyer,” an on-line platform where prospective clients can ask lawyers questions via text.

Regulators and litigation parties will surely continue to confront the ethical issues inherent in these platforms, although the ABA’s recently-passed revamp of some of the legal marketing rules in the Model Rules of Professional Conduct fails to address on-line referral providers.

The New York City Bar Association recently found that common forms of third-party litigation funding for law firms violate New York’s Rule 5.4(a), which like the analogous Model Rule, bars fee-splitting with non-lawyers.

In its Opinion 2018-5, the NYCBA’s Professional Ethics Committee advised that “a lawyer may not enter into a financing agreement with a litigation funder, a non-lawyer, under which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters.”  (Left untouched by the opinion are agreements between funders and clients, which do not implicate the fee-splitting issue.)

While ethics opinions are advisory, they can be cited by courts as persuasive authority; and an opinion from the influential NYCBA could help shape the conversation in an area that has been marked by controversy.  As we described earlier this year, two jurisdictions now require some disclosure when third-party funding is part of a case (Wisconsin by statute and the Northern District of California by rule), and the U.S. Chamber of Commerce has favored a change to the Rules of Civil Procedure to require such disclosure.  And as we have also described, some courts still view third-party funding as impermissible under the old doctrines of champerty and maintenance.  Yet, litigation funding is big business, with the U.S. market estimated at $5 billion annually, and growing.

Fee-splitting problem

Against this backdrop, the Committee considered two arrangements, both of which it found forbidden by the fee-splitting rule:  (1) where the funding to the firm is not secured other than by the lawyer’s fee, “so that it is implicit that the lawyer will pay the funder only if the lawyer receives legal fees in the matter;” and (2) where instead of a fixed amount or interest rate, the amount of the lawyer’s payment to the funder will depend on the amount of the lawyer’s fee.

Rule 5.4(a) (“Professional Independence of a Lawyer”) provides that “a lawyer or law firm shall not share legal fees with a non-lawyer.”  The purpose of the rule, as described in comment 1, is to protect independent legal judgment.  See also Roy Simon & Nicole Hyland, Simon’s New York Rules of Professional Conduct Annotated at 1420 (noting that the rule’s intention is to protect independent legal judgment by removing the incentive for non-lawyers to interfere or pressure lawyers to use improper measures to win cases).

The Committee noted the long-standing nature of the fee-splitting prohibition, and that it has been broadly interpreted to bar many different types of business arrangements in which lawyers agree to make payments to non-lawyers based on the lawyer’s receipt of legal fees, or on the amount of those fees.  A financing arrangement contingent on the receipt of fees or their amount is no different, and is impermissible, said the Committee, “regardless of how the arrangement is worded.”

“Rightly or wrongly,” the Committee said, Rule 5.4(a) “presupposes that when non-lawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer.”

Lessons from the case law… and a call to the legislature?

The Committee acknowledged that New York courts have enforced litigation funding contracts against attempts to invalidate the agreements based on public policy grounds, but said that would be expected:  “[L]awyers who violate the Rules cannot ordinarily invoke their own transgressions to avoid contractual obligations.”

And as for the argument that the prohibition on fee-sharing is overbroad?  The Committee recognized that there is room for question there, including whether there might be adequate contractual or other means of preventing litigation funding arrangements from interfering with independent legal judgment.  But “that is a matter to be decided by the state judiciary,” said the Committee.

Funder reaction:  not warm

As described in Law360 (subscription required), the chief investment officer at one major funder, Burford Capital, called the NYCBA’s opinion “flatly wrong.”  The chief investment officer of another funder, Bentham IMF, said it was “going the wrong way.”

Perhaps these reactions are predictable; but the NYCBA’s opinion is only the most recent of a string of advisory opinions from other jurisdictions, such as Maine, Virginia, Nevada and Utah, that point in the same direction.

Stay tuned.  This is a topic with possible ramifications on how new firms are financed, as well as an ongoing debate over the role of the fee-splitting rule in actually protecting clients.

A Washington lawyer was disbarred last month by the state supreme court in a disciplinary case with an interesting array of issues:  the heavy penalties for using trust account money to “rob Peter to pay Paul;” the danger of treating the representation of a relative too casually; “compassion fatigue” as a potential mitigating factor in lawyer discipline; and the application of the Constitutional protection against double jeopardy in the disciplinary setting.

Rob Peter, pay Paul

The lawyer was a sole practitioner with a personal injury practice.  Alerted to overdrafts in his client trust account, disciplinary counsel investigated and found numerous irregularities:

  • The lawyer transferred trust account money to his operating and personal accounts when they were overdrawn or short of funds, in the process converting more than $10,000 to his own use.
  • He also failed to pay several clients the full amounts of settlements they were entitled to, and made misrepresentations to them in the process.
  • The lawyer shuffled money in and out of the trust account, using funds properly belonging to one client to pay settlement amounts owed to others.

Misusing and misappropriating client funds in these kinds of ways is the most serious ethics breach in the rule-book, and the court found violations of Washington’s versions of Model Rule 1.15 (Safekeeping Property) and Rule 8.4(c) (dishonesty, fraud, deceit and misrepresentation).  In Washington, as in many jurisdictions, the presumptive penalty is disbarment.

All in the family

Additional counts of the disciplinary complaint involved the lawyer’s representation of his nephew in a car accident case.  There was no fee agreement, but the lawyer eventually settled the case for $90,000 and took a $20,000 fee.  Later, however, after a change in Washington law, the tortfeasor’s insurer sent the lawyer more than $17,000 as an additional settlement payment.  The lawyer failed to notify the nephew, signed his nephew’s name on the check and eventually disbursed it to his office account, using it to pay bills.

The lawyer testified that his sister — the client’s mother — authorized him to negotiate the check, and that the nephew’s drug problem made it inappropriate to give the additional settlement money to him.  The sister had power of attorney over her son at one point, but it had expired long before the lawyer distributed the additional settlement funds to himself without the client’s knowledge or permission.

The court found that in addition to violating the trust account rules and converting the funds dishonestly, the lawyer violated the state’s version of Model Rule 1.4 (Communication).

“Compassion fatigue”?

The lawyer argued that the disciplinary board, which unanimously recommended disbarment, should have considered his emotional problems as a mitigating factor.  In the same year that he committed the charged misconduct, he had lost three personal injury trials in a row.  A psychiatrist testified at the disciplinary hearing that these losses and the lawyer’s over-identification with his clients led to “compassion fatigue,” a syndrome in which people in the helping professions become ill themselves as a result of working with traumatized populations.

The lawyer’s expert witness said that symptoms of “compassion fatigue” can include becoming “jaded,” and mentally disassociating from daily life, and that it had caused the lawyer to become careless and to avoid the stress of dealing with his bookkeeping.

The court accepted the concept of “compassion fatigue” as a potential mitigating factor.  Under Washington law, the mitigating factor of emotional problems requires merely some connection between the asserted problem and the misconduct; the court found that the psychiatrist’s expert testimony established that connection at least as to  some of the lawyer’s misconduct.

Nonetheless, the court said, under the totality of the circumstances, the lawyer’s emotional problems carried “little weight.”  “Compassion fatigue” did not actually cause the lawyer to forge his nephew’s signature, or convert client funds, the court said; and he testified that he was still aware of his ethical obligations.

In order to justify mitigation where the presumptive sanction is disbarment, the court noted, the circumstances must be “extraordinary.”  Here, they were not, and the failure to preserve the integrity of his clients’ funds led the court to rule that the lawyer’s emotional troubles could not reduce the sanction.

Double jeopardy and lawyer discipline

Last, the lawyer argued that being charged with multiple rule violations stemming from single instances of misconduct meant that he was being punished more than once for the same conduct, in violation of the Constitutional protection against double jeopardy.

This was an issue of first impression in Washington.  However, numerous jurisdictions have considered whether the double jeopardy clause is implicated in lawyer disciplinary proceedings, and answered “No,” and the Washington Supreme Court was persuaded by these holdings.  The weight of authority is that the sanctions for professional misconduct — reproval (or admonishment or reprimand), suspension or disbarment — are not criminal sanctions (which consist of fines or incarceration).  Thus, disciplinary sanctions are not “punishment” for purpose of the double jeopardy clause, the court held.

As the legal market continues to change, attorneys face more challenges when it comes to client relations. While the trend has been for clients to slash attorney’s fees by hiring third party auditors to review bills, or to aggressively seek discounts on fees, ethical considerations, and now the United States Court of Appeals for the 10th Circuit, make it clear that overbilling clients cannot be a solution for legal revenue woes.

In a recent opinion, the Tenth Circuit left a law firm with a legal bill of its own when the Court ruled that the firm’s malpractice insurer was entitled to recover its expenses from defending an overbilling malpractice claim not covered under the firm’s policy.

What happened?

In 2012, the Colorado Attorney General’s Office began investigating attorney Michael P. Medved for allegedly overbilling clients, and later filed suit against him.  Additionally, Medved was facing a class action suit from former clients relating to the same allegations. Medved reached out to his firm’s malpractice insurance provider, Evanston Insurance Company, for representation in both matters.  At the time, Medved’s firm had a malpractice policy that covered “wrongful acts by reason of professional services.” Evanston agreed to defend Medved subject to a reservation of rights. Both cases resulted in relatively quick settlements.

Evanston later sued Medved seeking reimbursement for legal fees and costs incurred, arguing that the malpractice policy did not cover claims related to overbilling because overbilling was not a “wrongful act by reason of professional services.”

The 10th Circuit Court of Appeals agreed, reasoning that:  “The alleged wrongful act (overbilling) lacked the required connection to professional services rather than the claim itself, and the ‘by reason of’ phrase does not create a connection between the wrongful act and the professional services . . .”

Medved argued that Evanston’s failure to properly reserve its right to challenge the representation should estop Evanston’s claims, but the Court of Appeals quickly dismissed this argument, finding that Medved had failed to show prejudice.

Ethical considerations

Model Rule 1.5 prohibits a lawyer from collecting unreasonable fees or an unreasonable amount of expenses from a client. While this rule seems pretty simple on its face, there is no bright-line test to determine what is, or is not, reasonable. Given there is no bright-line rule, the ABA Model Rules provide eight factors you should consider when determining the reasonableness of a fee.

All jurisdictions have adopted some version of Rule 1.5.  Clients and courts have been paying more attention to attorneys’ billing practices; the Tenth Circuit’s ruling here points to the risk of not being able to rely on malpractice insurance to cover the cost of defending against overbilling claims.

The Tenth Circuit ruling also shines a light on the importance of heading off billing problems with clients before they start.  Communicating with clients about fees is more important than ever, and it’s also part of your duty under your jurisdiction’s version of Model Rule 1.4 (Communication). Thoughtful communication with the client throughout the course of a matter is the best practice.  However, the more transparently you communicate with clients about your fees and billing practices on the front end, the less likely it is that you’ll have to defend against an action based on overbilling on the back end.

*Imokhai Okolo is a rising second-year law student at the University of Akron School of Law where he serves as an Assistant Editor on the Akron Law Review, member of the Akron Law Trial team, Vice President of the Akron Black Law Students Association, and Student Director of the Driver License Restoration Clinic.

So, you’ve just met with a potential client and the opportunity to take a fascinating case or close a major deal is at your front door. The catch? The client wants to pay for your services in Bitcoin.  Do you accept? Can you accept?

The do’s and the can’s

If you’re licensed in Nebraska the answer is yes! With some caveats, of course. Late last year, Nebraska’s Lawyer Advisory Committee became the first authority to opine on the legal ethics implications of digital currencies. Ethics Advisory Opinion 17-03 allows attorneys to receive and accept digital currency as payment for legal services. However, in order to ensure attorneys aren’t charging unreasonable fees, the Committee advised that the currency must immediately be converted to U.S. dollars upon receipt. Digital currency can also be accepted from third-party payers so long as there is no interference with the attorney’s independent relationship with the client. And, attorneys can hold digital currency in trust or escrow for clients and third parties as long as it is held separately from the attorney’s property, with reasonable safeguards.

Why Bitcoin?

An advantage to accepting Bitcoin (or other digital currency) as payment is that there are no transfer fees. Unlike payment by credit card, wire, or check, and foreign currency conversion for international transactions, Bitcoin is transferred from client to attorney directly, with no fee attached. Other advantages are instant transactions, no bank acting as middleman in the transaction, and the shared digital ledger book that tracks all Bitcoin transfers, which prevents counterfeiting.

How does Bitcoin work?

Bitcoin is an open-source program existing on a decentralized peer-to-peer network on the internet. Anyone can access Bitcoin, and it is stored in a digital wallet. There is a public key, consisting of numbers and letters constituting the “address” to which the Bitcoin is sent, and a private key that the sender uses to authorize the transfer of Bitcoin from one digital wallet to another. These transfers are managed and tracked in the leger book.

The value of Bitcoin fluctuates (wildly).  As of July 3, one was worth $6,624, but it has been worth almost $20,000.  Bitcoin can be transferred in pieces; the smallest, a Satoshi, is one hundred millionth of a Bitcoin.

Some ethical considerations

Given Bitcoin’s ever-changing value, there is a chance that a Bitcoin that was worth the fair value of the legal services you provided last week may today be worth three times as much.  To the Nebraska Committee, that raises the prohibition against unreasonable fees, under its version of Model Rule 1.5(a). The Committee tried to address this concern by mandating that Bitcoin be converted to U.S. dollars upon receipt.

Not everyone agrees. The late ethics guru Ronald Rotunda, for instance, thought that there is no legal ethics issue in not immediately converting digital currency into dollars. He argued that all forms of currency can rise and fall in value against the U.S. dollar, and that deciding in light of that risk to accept a legal fee in Euros, for instance, is a business decision for the lawyer to make, not an ethics issue.

Another potential issue is that since Bitcoin is not legal tender, the IRS classifies it as property. One commentator has noted that this makes accepting a Bitcoin payment similar to bartering for legal services, “like the country lawyer accepting a bushel of apples for drafting a will.” You should check  ethics opinions in your jurisdiction to determine any restrictions on bartering for legal services before agreeing to accept Bitcoin as payment. (We’ve written about bartering for your legal services here.)

A further issue is how to hold digital currency in a client trust account. The Nebraska Committee advised that if the payment is intended to be a retainer to be drawn on as fees are earned in the future, it must be converted to U.S. dollars immediately.  That certainly avoids the risk that the client’s retainer will go down in value; but it also precludes any upside gain that could benefit the client.  These circumstances might call for some client decision-making — and that makes them a subject that you have a duty to communicate about with your client, under Rule 1.4(b).

The Takeaway

Payment in Bitcoin and other digital currencies can be a very cool and convenient alternative fee method that you can offer clients. Just be sure to consider all of the ethical implications before accepting this form of payment.

* Jasmine C. Taylor is a rising third-year law student at Cleveland-Marshall College of Law in Cleveland, Ohio. She is currently a Sergeant in the Ohio Army National Guard, 1-137th Aviation Regiment.

Early last year, the federal Northern District of California became the first court to require — by rule — that a party receiving outside litigation funding must disclose the arrangement.  As we described, the rule is limited to class actions; it had been favored by the U.S. Chamber of Commerce, which views it as promoting needed transparency.

Now comes the first statute on the subject, Act 235, which passed in a narrow vote by the Wisconsin state legislature, and was signed into law on April 3.

“Forward” for the Badger State?

The U.S. Chamber’s Institute for Legal Reform had lobbied in support of the Wisconsin bill, and said on its website that its passage lived up to the state’s motto — “Forward” — by “bring[ing] litigation funding out of the shadows.”

The statute requires a party to disclose “any agreement under which any person … has a right to receive compensation that is contingent on and sourced from any proceeds of the civil action, by settlement, judgment or otherwise.”  It exempts lawyer-client contingency fee agreements, and only applies to actions filed in Wisconsin state courts.

Burford Capital, one of the largest of the U.S. commercial litigation funders, downplayed the significance of the Wisconsin law.  As reported by the ABA Journal, Burford’s chief marketing officer said that the statute overreached in applying to commercial litigation finance as well as consumer finance, and predicted a backlash from businesses.  Proponents of funding also point to a possible Pandora’s box of discovery disputes that will be opened with increasing regulation.

But you can’t invest in your cake and eat it, too…

Whether the new Wisconsin statute will be the first of many remains to be seen.  Another unknown, as we’ve discussed before, is how courts will deal with the doctrines of champerty and maintenance that have historically placed limits on the ability of third parties to fund suits.

But in another litigation-funding development, the New York State Bar Association last month decided that neither a lawyer nor the lawyer’s firm can represent a client in an action funded by a litigation finance company in which the lawyer is an investor.

In Opinion 1145, the NYSBA’s ethics committee said that doing so raised an unwaivable conflict of interest that couldn’t be remedied by the client’s informed consent.  New York’s version of Model Rule 1.8(e) bars a lawyer from providing “financial assistance to a client in connection with pending or contemplated litigation,” subject to limited exceptions for advances covering court costs and expenses, and indigent clients.  The committee said that even though the lawyer wouldn’t be the only investor in the funding company, the “reality [is] that money from the [lawyer] would be paid as financial assistance to the … client.”

And representing a client funded through the company the lawyer invests in would also violate New York’s version of Model Rule 1.8(i), which prohibits acquiring a “proprietary interest” in a client’s claim, the committee ruled.  By providing money to the client in exchange for a percentage of the prospective recovery, the funding company would acquire such an interest, and the lawyer would also do so, as a part owner of the company.

There is no provision for waiving these prohibitions, said the committee, and they are imputed to the investing lawyer’s whole firm.

Still trending

Third-party funding remains a hot topic, and we predict that there will be further developments, on all fronts — legislative, case-law, and regulatory.  (The U.S. Chamber is one of more than two dozen organizations that last summer asked the federal courts’ Rules Committee to consider amending the Rules of Civil Procedure to require disclosure of third-party funding arrangements.)   We’ll continue to keep you posted, so check back often.

Just last month, we wrote about a North Carolina draft proposal that would ease the way via its ethics rules for Avvo and other on-line legal services to operate there.  Now, after a joint opinion from three New Jersey Supreme Court committees, the Garden State has turned thumbs down on such law platforms, citing issues including improper fee-sharing and referral fees.

Nix on Avvo, LegalZoom, Rocket Lawyer

The joint opinion bans participation in Avvo’s programs because of the “marketing fees” it collect from lawyers in exchange for participating in two of its offerings:  “Avvo Advisor,” in which clients talk to lawyers for 15 minutes for $40, with Avvo keeping $10; and “Avvo Legal Services,” where clients pay a flat fee to Avvo for access to affiliated lawyers, and then Avvo pays the lawyer net of its own fee.

The committees found that this arrangement violates New Jersey’s version of Model Rule 5.4(a), barring fee-splitting with non-lawyers, and it mattered not that Avvo called its cut a “marketing fee”:  irrespective of its label, said the committees, “lawyers pay a portion of the legal fee earned to a nonlawyer; this is impermissible fee sharing.”  In addition, said the committees, these payments signal a “lawyer referral service,” and payment of an “impermissible referral fee” under New Jersey’s Rules 7.2(c) and 7.3(d).

Icing the cake, the committees also raised a trust account issue, saying that Avvo’s practice of holding the lawyer’s fee until the conclusion of the matter violates the attorney’s duty to maintain a registered trust account and to hold client funds in it until the work is completed.

Avvo wasn’t the only on-line platform tagged — Rocket Lawyer and LegalZoom also were placed off-limits to New Jersey lawyers, but for a different reason.  While they do not require payment from lawyers to participate, and do not share the clients’ monthly subscription fees with lawyers, Rocket Lawyer and LegalZoom are “legal service plans” that have not been registered with or approved by the New Jersey Supreme Court, said the committees.  That places them outside the pale, even while not violating the fee-sharing prohibition.

A notice to the bar from the supreme court’s administrative office accompanied the joint opinion, listing the 46 state-approved legal service plans, including those offered through unions and government agencies.

What next?

As we’ve noted, the ABA’s Futures Commission sees the continuing onslaught of on-line platforms as something that is here to stay.  Nonetheless, this New Jersey ethics opinion joins other cautionary or negative ones issued by regulators in Ohio, Pennsylvania and South Carolina.  Against that backdrop, North Carolina’s recent consideration of rule changes may appear to be the outlier (although an Oregon state bar association task force also recently recommended ethics rule amendments that would be friendly to on-line service legal platforms).

Avvo responded to the New Jersey opinion, telling the New Jersey Law Journal that it is “attempting to address the pressing need for greater consumer access to justice, and we will continue to do so despite this advisory opinion.”

Will market pressure become a tsunami that will eventually sweep legal ethics considerations away?  It may take awhile to tell, but until then, look for more ethics opinions to come out with differing views, potentially creating a patchwork of inconsistent state approaches.  We’ll be watching with great interest.

One dollar billsLitigation funding is in the news again, with the U.S. Chamber of Commerce spearheading a request to amend the Federal Rules of Civil Procedure to require initial disclosure of all third-party agreements for compensation that are “contingent on, and sourced from, any proceeds of the civil action, by settlement, judgment or otherwise.”

The Chamber joined with 28 other organizations in a letter sent earlier this month to the federal courts’ Rules Committee, saying that its aim is to bring third-party litigation funding out of “the shadows” and to identify “a real party in interest that may be steering a plaintiff’s litigation strategy and settlement decisions.”

The new push follows up on a 2014 proposal that the Chamber and a few other organizations made to the same rulemaking committee, which was rejected.  Things have changed since then, the Chamber’s June 1 letter said, citing expansion of third-party funding in the U.S., with several significant players reporting significant and steady growth, and on-line marketplaces opening the way for investors to shop for individual cases to contribute to.

Shift in momentum?

As we reported in February, the U.S. District Court for the Northern District of California became the first court to mandate disclosure of litigation funding that parties in class actions receive from outside sources, under a revision to the court’s standing order.  That was followed up in March, when the U.S. House of Representatives passed the Fairness in Class Action Litigation Act of 2017, which likewise would require disclosure of third-party funders in class actions.  The bill is now before the Senate Judiciary Committee.

Problems with alternative litigation funding

The process for amending the federal civil rules is a lengthy one.  But with at least some momentum on its side, the U.S. Chamber cited several justifications for the rule change it seeks, including:

  • The champerty problem.  This old legal doctrine, which seeks to prevent buying and selling lawsuits, still continues to be in play, with at least three state courts of appeals citing it or suggesting it as a viable defense in 2016-17, and a U.S. bankruptcy court in January finding an agreement to be champertous.
  • Fee-sharing issue.  Model Rule 5.4(a) bars almost all forms of sharing legal fees with non-lawyers, with the goal of preserving the lawyer’s independent professional judgment. But some models of third-party litigation funding apparently involve plaintiffs’ counsel repaying the funder’s investment out of the lawyer’s attorney fees, if any.
  • Confidentiality and conflicts.  To the extent that funding arrangements require disclosure of client information to the financier they could raise confidentiality concerns under the ethics rules, as well as privilege issues.  And lawyers who have “contracted directly with a funding company may have … duties to it that are … perhaps inconsistent with” the duties of loyalty to the client, including conflicts arising from steering clients to favored funders.

Watch and wait

In a press release, one large litigation funder, Bentham IMF, said that the Chamber’s proposal was misguided, including because the law firms using such financing were assisting under-served and under-funded clients — small-to-mid-size businesses and individuals — who could not otherwise afford to litigate their claims.  Bentham also said that the rule amendment proposal was unfairly one-sided, and that defendants should have to abide by similar disclosure rules.

Litigation funding will continue to be a hotly debated issue, and if your clients are involved in civil litigation, these are developments that bear watching.  Stay tuned.

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.