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.

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.

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.