On second thought, “this” is the least discussed ethics rule.

Many moons ago (look at me and my topical thinly-veiled 8/21/17 Eclipse reference), I wrote a post about Model Rule 2.1 being perhaps the least discussed ethics rule and why maybe it shouldn’t be.  But, a recent news item about a relatively humdrum topic, a relatively large multi-state law firm (Husch Blackwell) announcing that it has named a new CEO who is not lawyer, got me thinking about another ethics rule that much more likely is, hands-down, the least discussed ethics rule.  That rule is Model Rule 5.4(b)(2).  Unlike Rule 2.1 though, Rule 5.4(b)(2) is deservedly never made the subject of discussion because if it were paid attention to, then one of two things would be true.  Either it is an essentially meaningless rule or it’s a rule that tens (if not hundreds) of thousands of lawyers throughout the U.S. violated by showing up to work today.

You probably might have some trouble thinking what the rule in question says so I’ll help you out.  It’s this one:

(d)  A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:

(2) a nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation.

We have this same language in Tennessee in our RPC 5.4(d)(2) and, odds are, you do too in whatever state where you happen to be reading this.  Now, if your law firm is organized as a corporation, then no worries under any circumstances because the “other than a corporation” language at the end there makes it clear that a corporation can have a nonlawyer in an officer position.

If you practice law in a firm that is organized as a professional limited liability company, or a limited liability partnership (for the record, Husch Blackwell happens to be an LLP) or some such similar entity, and you have someone – not a lawyer – in a position like a Chief Marketing Officer, or a Chief Financial Officer, or a Chief Operating Officer, or a CEO, then … well the existence of this rule is unfortunate, unless it can be said that none of those entities qualifies as a “form of association.”

If they don’t qualify, then what exactly is the purpose of this rule?  Why should only lawyers practicing in an “association of attorneys,” but not organized in one of these other formal business entity forms be prohibited from having a nonlawyer be an officer?

If such limited liability entities do qualify as associations under the rule, then what exactly is the reason for still having this rule on the books anywhere?  Particularly given that 5.4(d)(3) already effectively prohibits the actual harm by prohibiting practicing even in a firm that is a corporation if “a nonlawyer has the right to direct or control the professional judgment of a lawyer.”

There are a significant number of firms these days that have someone who isn’t a lawyer serving in one of those roles managerial roles as an officer, and I’m certainly not aware of any instances of any bar regulator seeking discipline against lawyers practicing with those firms on that basis.  (For what it is worth the ABA’s Annotated Model Rules of Professional Conduct that I have handy [Sixth Edition] declares that “Rule 5.4(d) prohibits a lawyer from practicing in any for-profit entity in which a nonlawyer has an ownership interest, a position of responsibility, or a right to direct the lawyer’s professional judgment.”)

So, like I said, probably for the best that this is the least discussed rule.

New Jersey weighs in as well, reminding us the difference between “is” and “ought.”

My last two posts have focused on the pretty wide-ranging and very thought-provoking work (and work product) of the Oregon State Bar Futures Task Force.  I do plan to return to the topics because there is more in that report worth discussion, but we are taking a break from that with this post.

Let’s move from the West Coast to the East Coast and talk today about a joint opinion issued in New Jersey last week because it offers something of a juxtaposition for discussion of the future of legal ethics.

On June 21, 2017, three committees of the Supreme Court of New Jersey – the Advisory Committee on Professional Ethics, the Committee on Attorney Advertising, and the Committee on the Unauthorized Practice of Law — issued a Joint Opinion announcing that lawyers in New Jersey can’t get involved with Avvo Legal Services, Rocket Lawyer, or LegalZoom.  In fact, you don’t actually have to read much further than the title of the Joint Opinion to get the gist of it as it is entitled:

Lawyers Participating in Impermissible Lawyer Referral Services and Providing Legal Services for Unregistered Legal Service Plans — Avvo, LegalZoom, Rocket Lawyer, and Similar Companies

As indicated, the opinion explains that there are two problems: one that plagues Avvo Legal Services under their analysis, and another that plagues LegalZoom and Rocket Lawyer.  The message New Jersey is sending reads as one that as starkly different from Oregon’s message.

But, and here’s what makes all of this both complicated, fascinating to discuss, and extremely important:  the analysis New Jersey offers is not wrong.

As to lawyer participation in services like LegalZoom and Rocket Lawyer, which offer something that New Jersey refers to as a legal services plan — and the choice to see them that way and call them that is an important one — the problem for New Jersey lawyers is described in a way that appears much less pervasive than as to other companies operating in the space – that these companies simply are not properly registered in New Jersey.  I’ve written in the past about the barrier that Tennessee’s special RPC 7.6 can create for attorney participation in programs if they can be considered an intermediary organization.  New Jersey has a particular registration requirement for companies that provide “legal service plans.”  That rule is RPC 7.3(e)(4).

The opinion walks through each of the requirements ending with the registration requirement that appears in RPC 7.3(e)(4)(vii).  The opinion indicates that, regardless of anything else, neither of those companies have registered their plans and, thus, lawyers cannot participate.  The implication is that the only obstacle standing between New Jersey lawyers and signing up for plans offered by Rocket Lawyer or LegalZoom is proper registration.  The opinion doesn’t pull back the curtain to make plain for the reader whether there is any institutional barrier that makes it impossible for Rocket Lawyer or LegalZoom to choose to register.  But, the joint opinion certainly appears to strongly imply that lack of registration is the only problem.

As to participation with Avvo Legal Services, the New Jersey joint opinion has serious problems to point out – problems that would require a change in business model altogether to be solved.  The problems voiced by the New Jersey joint opinion are ones that have been expressed before in a number of other states and, in fact, the New Jersey opinion unsurprisingly explicitly cites to those other ethics opinions from Ohio, South Carolina, and Pennsylvania.  Avvo’s marketing fee requires a lawyer to improperly share fees with a nonlawyer in violation of New Jersey Rule 5.4.  The opinion, in a way that when truly contemplated seems like piling on, also goes after the same payment as being the payment of impermissible referral fees in violation of New Jersey’s Rules 7.2(c) and 7.3(d).

Back in February 2016, I wrote a lengthy post that was a barely-veiled critique of the arguments Avvo kept making in terms of their efforts to defend their business model over how they were trying to blur the distinction between what is, and what ought to be, when it comes to whether participating lawyers were complying with the ethics rules.

The difference between the message being sent in New Jersey and developments in Oregon may be just as simply summed up though.

Perhaps, the gap between the two approaches is only as big as the difference between what is and what ought to be.

More of me weighing in on Oregon weighing in on the future

For those that missed my post earlier this week on the release of the Oregon State Bar Futures Task Force report, you can read that post here and get caught up.

Today, I want to offer some thoughts on one of the three Recommendations made by the Regulatory Committee of the Futures Task Force.  It is likely the most important of the Recommendations but certain to be the most controversial as well.

Recommendation 2: Revise Rules of Professional Conduct to Remove Barriers to Innovation.

This recommendation is comprised of four parts.  I’ll list them in the order they are presented, even though that is not the order in which I want to discuss them.

2.1  Amend current advertising rules to allow in-person or real-time electronic solicitation, with limited exceptions.

2.2  Amend current fee-sharing rules to allow fee sharing between lawyers and lawyer referral services, with appropriate disclosure to clients.

2.3  Amend current fee-sharing and partnership rules to allow participation by licensed paraprofessionals.

2.4  Clarify that providing access to web-based intelligent software that allows consumers to create custom legal documents is not the practice of law.

Now, that third sub-part creates a spoiler for another of the three Regulatory Committee recommendations – Implement Legal Paraprofessional Licensure.  Given the way those programs have played out to date in a number of other jurisdictions, I don’t think that is going to do much to turn any tides, so for now I’m going to pass on discussing it.  (If you want to delve into it, you can read all of thoughts of the Futures Task Force on that subject and the entirety of the 90+ page report behind the Executive Summary here.)

The fourth one – making clear that certain software programs that let someone through self-help generate customized legal documents — is a perfectly fine idea and, in this day and age, seems very difficult to argue against.  With each passing day, the notion that there are certain legal problems that states cannot allow be served through software programs that do for certain legal problems what tax return software programs do for income taxes seems harder and harder to justify.  But, I’m not sure that such a clarification is what is standing between better access to legal services for consumers and where things are today.  I tend to think that, in part, because those services already exist and are in pretty wide use because companies already make them available and consumers already use them.

The first one about changes to the advertising rules is most certainly a provision I would support (and have supported in past posts).  Virginia has just done something similar with its recent rule revisions.  But again, I don’t know that this change would be something that, as a response or solution to trying to improve public access to legal services, will make any real difference.  Why do I say that?  It is currently not at all very difficult to create an online platform in which it is the consumers that make the first communication effort so that lawyers can respond to it rather than initiate it.  As long as that is true, then lawyer advertising rules prohibiting solicitation do not present any barrier at all to getting consumers in need of legal services and lawyers with the time and ability to provide the services together.

That leaves the second subpart.  And that is the one where I suggest, respectfully, all the marbles are located for lawyers.

The notion of changing the ethics rules to allow lawyers to share fees in a particular matter with nonlawyers, as long as there is full, appropriate disclosure to the consumer of what is taking place.

The specific proposal Oregon’s Task Force has offered is for its current RPC 5.4(a)(5) that only references bar-sponsored or not-for-profit referral services to be revised to read instead as follows:

(a)  A lawyer or law firm shall not share legal fees with a nonlawyer, except that

***

(5) a lawyer may pay the usual charges of a lawyer-referral service, including sharing legal fees with the service, only if:

(i) the lawyer communicates to the client in writing at the outset of the representation the amount of the charge and the manner of its calculation, and

(ii) the total fee for legal services rendered to the client combined with the amount of the charge would not be a clearly excessive fee pursuant to Rule 1.5 if it were solely a fee for legal services, including fees calculated as a percentage of legal fees received by the lawyer from a referral.

That is an action that would, overnight, make pretty much every technological innovation already available (or even conceivable) viable for lawyers to participate in as a way of delivering legal services to consumers and businesses.  It would also allow many existing operators in the legal space to spend less time on trying to come up with workarounds about not being engaged in making referrals in their business model to try to assuage concerns that lawyers who use their platforms will be the subject of disciplinary complaints.

In short, that recommendation appears to me to the one that must be discussed and debated and decided on before any evaluation can be made about what any of the other ones might mean or accomplish.

If Oregon follows through, it seems difficult to speculate that one or more other states won’t follow.  And, if the experience of those states shows that full disclosure of the sharing arrangement, plus compliance with the other ethics rules requiring exercise of independent professional judgment and not allowing interference with that judgment, then it will seem very difficult for any jurisdiction to argue against doing the same.

It is inherently a controversial topic because the prohibition against fee sharing with nonlawyers is viewed by many as a bedrock principle of our profession.  But — if the underlying premise of that bedrock principle is restated as preserving the independent professional judgment of lawyers from undue influence by others — then the Oregon proposal that would allow fee sharing, require fulsome disclosure to the consumer involved about that arrangement could still readily be expected to serve that bedrock principle and protect consumers while benefiting consumers because – though not highlighted in the Report, RPC 5.4(c) would still be in force as well.

(c) A lawyer shall not permit a person who
recommends, employs, or pays the lawyer to render
legal services for another to direct or regulate the
lawyer’s professional judgment in rendering such legal
services.

Existing models of the online approach to pairing lawyers and consumers in need of legal services could almost all be placed into this bucket and, thus, lawyers using these services would still have maintain their independent professional judgment and refuse and resist efforts to compromise it.

Coming to praise rather than bury – Colorado Formal Op. 129

It is almost three months old now, but I wanted to right a word or two about a really well-constructed ethics opinion issued in Colorado, not just because it is an opinion that deserves to be read, but also because it raises a not-quite-academic question about the phenomenon of captive law firms.

The opinion put out by the Colorado Bar Association Ethics Committee, Colorado Bar Formal Op. 129, is titled “Ethical Duties of Lawyer Paid by One Other Than the Client.”

Because questions of insurance defense representation raising similar issues were previously addressed by the Committee in Formal Opinion 91, this new opinion focuses on “ethical questions that can arise in third-party payer situations that do not involve insurance as a source of payment.”  (My not-quite-academic question is importantly a variation on that theme and the different approach often allowed for the tripartite relationship….)

The opinion helpfully catalogs quite a few such scenarios, like

  • friend or family paying for someone’s defense against criminal charges
  • parents paying for representation of children
  • corporations paying for attorney fees of an employee or officer
  • contractual indemnitor paying legal fees of an indemnitee

Those last two are ones, I suspect, that lawyers don’t think about as often in terms of making sure they know what is necessary for compliance with all of the pertinent ethics rules in their jurisdictions, which if the jurisdiction tracks the approaches under the ABA Model Rules as Colorado mostly does are RPCs 1.0(e), RPC 1.6, 1.7, 1.8(f), and 5.4(c).

The opinion does a good job at addressing in detail the various ethical questions, particularly on the dynamics that can arise where, for example, the person that will be paying the freight for the representation also happens to be a client of the attorney in some other matter and how compliance with just RPC 1.8(f) and 5.4(c) alone may not be enough because of the conflict issues raised by RPC 1.7.

The opinion merits a full read, but, if you only have 1 or 2 minutes to spare, then the best part is — II.  Practical Considerations – Discussions with the Third-Party Payer — which provides insightful, detailed, and potentially uncomfortable guidance about what really ought to happen in terms of communicating to the person who will be holding the checkbook who the client actually is and to whom the lawyer’s professional duties are owed, the limitations on the rights of the person making the payments, and the consequences of non-payment.

All of this then leads to my promised question, if these same principles are the ones that would have to be adhered to by a lawyer who represents insurance policyholders for an insurance company through a model in which the lawyer’s firm is a “captive” firm of that company, would there be any realistic way to comply?  Wouldn’t the process of obtaining the informed consent of that client always require having to make crystal-clear the significant financial interest that the lawyer has in keeping his/her only source of business happy?

I say that my question along these lines is not-quite-academic, because it is actually answered in Colorado by that earlier opinion, Formal Opinion 91 which was issued in 1993 but was updated with an addendum in 2013.  For readers in Colorado, I’m pretty sure the answer is that a lot of disclosure would have to be made, but that acquiring informed consent is feasible.

But, for readers not in Colorado, there may or may not be guidance quite as clear on the question.

Friday follow-up – more proof that it’s risky for lawyers to work with Avvo Legal Services

I’ve written about this topic several times (some might say probably too many times) now, but here is the first example of people who — unlike me — actually matter reaching a very familiar sounding set of conclusions about something that quite obviously is the Avvo Legal Services program.

South Carolina put out an advisory ethics opinion back in the middle of July.  I don’t exactly know how I missed it before yesterday, but thanks to an ABA Journal online story about it, I’ve now learned about it.  It hits exactly the two issues that, outside of jurisdiction like Tennessee that have a separate barrier like RPC 7.6, I tried not-too-subtly to emphasize in one of my earlier posts present a real problem for any lawyer thinking about signing up with Avvo Legal Services.  The two issues that, amount to something of a Schylla and Charybdis scenario, are the rule against fee sharing with non lawyers – RPC 5.4(a) — and the rule against paying people for giving people something of value in exchange for recommending your services – RPC 7.2(c).

The South Carolina opinion, quite succinctly, walks through why the arrangement about which it was asked manages to sound like both a fee sharing problem and alternatively a payment for referral problem.  As to fee sharing:

[T]he service collects the entire fee and transmits it to the attorney at the conclusion of the case.  In a separate transaction, the service receives a fee for its efforts, which is apparently directly related to the amount of the fee earned in the case.  The fact that there is a separate transaction in which the service is paid does not mean that the arrangement is not fee splitting as described in the Rules of Professional Conduct.

A lawyer cannot do indirectly what would be prohibited if done directly.  Allowing the service to indirectly take a portion of the attorney’s fee by disguising it in two separate transactions does not negate the fact that the service is claiming a certain portion of the fee earned by the lawyer as its “per service marketing fee.”

As to the lawyer giving Avvo Legal Services money in exchange for a recommendation or referral of the lawyer’s services and whether the “marketing fee” can be considered the “reasonable costs of an advertisement”:

The service, however, purports to charge the lawyer a fee based on the type of service the lawyer has performed rather than a fixed fee for the advertisement, or a fee per inquiry or “click.”  In essence, the service’s charges amount to a contingency advertising fee arrangement rather than a cost that can be assessed for reasonableness by looking a market rate or comparable services.

Presumably, it does not cost the service any more to advertise online for a family law matter than for the preparation of corporate documents.  There does not seem to be any rational basis for charging the attorney more for the advertising of one type of case versus another.  For example, a newspaper or radio ad would cost the same whether a lawyer was advertising his services as a criminal defense lawyer or a family law attorney.  The cost of the ad may vary from publication to publication, but the ad cost would not be dependent on the type of legal service offered.

As the ABA Journal story indicates, Avvo continues to argue against this kind of result on the basis of things that maybe “ought” to be true but just aren’t “actually” true at the moment with respect to pretty much any state’s ethics rules.   Avvo also has in a variety of online spots advanced the argument that it is not even making referrals but just offering a marketplace.  All of this is extremely intellectually interesting from a distance of course because there are models for providing a “marketplace” that actually do work within the existing ethics rules, even ones where the company charges the attorneys for the privilege of getting to be in the marketplace.  But the approach in that regard doesn’t involve charging a fee that is only tied to successful outcomes – i.e., transactions where legal services are provided and fees paid.  (Although even that kind of approach can be made to work if the consumer is the one that pays the freight to the entity hosting the marketplace.)  A much less controversial approach along those lines would be like the eBay model of providing a marketplace, where the participants are paying a fee associated with being involved and they pay it whether they end up getting to a successful transaction or not.

Importantly, Avvo’s response to developments like this SC opinion also makes clear that it plans to carry on full speed ahead, as you’d expect it would given its size, its capital, and its investment in its approach.  That kind of reaction to regulatory barriers is very similar to other market disruptors in other industries who sort of take a “we’re so big and we’re so influential, we dare you to try to stop us” approach.  Uber would be a fine example, but as to Uber there is very little risk to the users or the drivers in being affiliated with the entity when regulators come calling.

As to Avvo Legal Services there are real, and potentially really serious consequences for participating lawyers.  Individual lawyers will make their own decisions, but South Carolina lawyers will have to be extremely reticent about doing business with Avvo Legal Services in light of this opinion.  And I don’t think the SC opinion will be the last to come out and to reach similar conclusions.  My guess is that this will be the first of several jurisdictions that will put out similar opinions.

Thus, if you are a lawyer that is thinking about participating in this kind of arrangement, or continuing to participate if you are already doing so, you know, of course, that no matter what Avvo won’t be the one getting reprimanded and they can’t serve your suspension for you, but it would be a pretty reasonable conversation to pursue to see if Avvo is willing to pay for the costs of your defense if you end up facing disciplinary proceedings over your participation.

 

Traps for the Unwary – Avvo Legal Services Comes to Tennessee

I’ve written previously about the maelstrom of issues presented by Avvo’s expansion from its original core business as a lawyer rating service into new things such as Avvo Legal Services — an arrangement where it makes clients, who will have already paid Avvo for the legal services they want, available directly to lawyers to perform certain limited duration, flat rate services.  This is not lead generation, which finds blessing in a Comment to ABA Model Rule 7.2.  Avvo’s own marketing materials make this perfectly clear:

Get paying clients, not leads.

With more than 8 million visits to Avvo each month, we can connect you with clients who have already paid for limited-scope legal services.  There’s no chasing leads.

Earlier this week, Avvo Legal Services launched in 4 more states, including Tennessee.  Right around the beginning of 2016, I wrote a post about why I don’t think anyone can do business with Avvo Legal Services in my state unless they can show compliance with RPC 7.6.  From the best I can tell, Avvo Legal Services hasn’t registered appropriately — they are not listed here — and that’s no surprise because back when its General Counsel was kind enough to interact on my site with a comment, he stated that it wouldn’t be registering as an intermediary organization.

Fundamentally, as I hinted at in the second post I wrote about the ALS rollout, the problem for any lawyer trying to decide whether to take on the risk of working with Avvo Legal Services is that ALS continues to largely ignore the gap between what perhaps “ought” to be and what actually “is” when it comes to various attorney ethics rules.

It is hard to blame Avvo for that approach, of course, as it, and the folks behind it, are in the business of making money and aren’t going to be the people who are going to get in trouble if their business model is ruled not to comply with the attorney ethics rules.  The people at risk of getting into trouble in those circumstances are the lawyers that decide to do business with Avvo Legal Services.

I can’t find anything that would involve any changes to the Avvo Legal Services business model that would change my initial conclusion that Avvo is likely to be treated as an intermediary organization under RPC 7.6 in Tennessee.

Of course, even if I’m wrong about that, the second layer of risk for Tennessee lawyers is that the most likely routes that might exist for trying to categorize what is going on as something not regulated by RPC 7.6 will only strengthen concern that the “marketing fee” that the lawyer pays Avvo is really fee-sharing with a nonlawyer.

And, Avvo Legal Services certainly does its case against the idea that it is sharing fees no favors when its General Counsel tackles the issue with a statement (appearing in the Frequently Asked Questions part of this link) such as:

Fee splits are not inherently unethical.  They only become a problem if the split creates a situation that may compromise a lawyer’s professional independence of judgment.

 

Now, I have no personal beef with Josh King.  He has been kind enough to post comments at my blog before and. like me, he’s an active member of the Association of Professional Responsibility Lawyers, and he’s advocating for his client’s position.  But the assertion that fee splitting is not inherently unethical and that a fee split is only a problem if might compromise professional independence of judgment is simply not a correct statement of the law.  It perhaps ought to be how the ethics rules are set up and perhaps ought to be how lawyers are regulated, but it isn’t how things currently are.

In Tennessee and many other states, the sharing of legal fees with a nonlawyer is inherently not okay and only ethical if it can be shown to fit one of the exceptions in RPC 5.4(a).  Maybe those rules should be changed, but any lawyer agreeing to participate in an arrangement that runs afoul of them until any such change occurs is running a real risk.

Is it a risk worth taking for any particular individual lawyer?  Not my call to make, of course, but you’d have to be extremely desperate to take on that kind of risk for say the $109 you would get, after Avvo takes its $40 marketing fee, for doing a document review.

If it ever will come to pass, the states will have to serve as the laboratories.

Two weeks ago, I offered some thoughts on the latest flare-up in the long-running off-and-on ABA exploration of the third-rail of the practice of law: potential non-lawyer ownership/investment in law firms.  This time around, before I could even manage to finish reading all of the comments and try to write some thoughts about the comments, the effort has already died.  The ultimate end is not really surprising, though the alacrity this time around is a bit surprising.

The overwhelming majority of the comments submitted were negative and antagonistic.  Many of the comments in opposition to considering the idea were long on rhetoric and short on efforts at making persuasive arguments.  Many others expressed outrage — these were particularly from state bar associations and entities within the ABA — at the fact that the issue had even been floated again so soon on the heels of past unsuccessful efforts.  A few of the comments in opposition were extremely thoughtful in the way they tackled the questions.

The two comments that I had found myself most wanting to explore in a written piece, however, all share one important aspect in common, an expressed familiarity with what consequences there have or have not been in D.C.  One of them were written by a lawyer with asserted substantial experience working with and advising law firms and other business entities in Washington, D.C., the one U.S. jurisdiction that permits some nonlawyer ownership in law firms.  One of them — on the opposing side — was written by someone [it is labeled at the Comment site as having been submitted anonymously] claiming to be very familiar with a problematic underbelly of D.C.’s approach.

If nothing else is clear from this latest unsuccessful trial balloon from the ABA Commission on the Future of Legal Services, it should be that if any change is going to occur on this front, it will be because one or more states take it upon themselves to expand the list of jurisdictions from just D.C. to some larger but still small number.  And, then either there will be very deleterious consequences for the profession, or there won’t be.  But, unless that happens, then probably about 5 years from now another ABA entity will float the idea and . . . lather, rinse, and repeat.

Any state that might be inclined to consider amending their RPC 5.4 to permit the kind of things that D.C. permits — whether out of a spirit of innovation or perhaps even a highly selfish economic interest to see if perhaps they could drive investment and business expansion into their jurisdiction — ought to give a thorough reading to this comment that was filed by a lawyer with the Zuckerman Spaeder firm about the lack of issues as a result of RPC 5.4 efforts in D.C.  But also ought to give a thorough read to this anonymous comment raising issues about what is claimed to be the problems stemming from D.C.’s provision, including a cottage injury of unsavory, shell-company like practices claimed to be going on in D.C. as well.

In the meantime, other things will continue to happen that aren’t much different in some respects from outside ownership as workarounds.  Things like this story about developments in litigation funding.  Though it is a bit misleading to call this a “new” focus, it may be a new focus for Burford Capital but there have been other companies out there that have engaged in contingent funding of lawyers and law firms, rather than individual cases, for nearly a decade on the plaintiffs’ side of the aisle.

And, people who continue to explore this topic ought to give some thought to trying to answer the following question:  is the legal profession trying to claim there is something unique about us or about the rules that govern us?  If it is the latter, then the follow up question I’d offer that is worth thinking about is why couldn’t the application of those same strictures to folks without a law degree as long as they have an ownership stake in a law firm serve to protect the public just as well?

Independence of professional judgment, and other thoughts spurred by the ABA Commission on the Future of Legal Services

April 2016 has brought another iteration of a seemingly, endless, (yet kind of potentially pointless unless you think the politics of the situation will somehow play out differently from the past) debate: whether some entity within the ABA is attempting to usher into reality a world in which people other than lawyers will be allowed to have ownership interests in law firms?

The raising of the mere possibility of outside investment in law firms by people who are not lawyers incites debate and inflames passion among lawyers immediately.  Not all lawyers of course.  Some just go to work, represent their clients, get stuff done, go home, lather, rinse & repeat.  But lawyers who are active in state bar associations certainly get pretty revved up, as do many ethics nerds like me.

The ABA Commission on the Future of Legal Services put out an issues paper on April 8, 2016 for comment that has stirred this topic up again.  You can read it here.  The deadline for comments (if you are so inclined) is tomorrow.  About a week before putting out the paper discussing Alternative Business Structures, the same Commission put out an issues paper focused on the world of “unregulated” entities operating as legal service providers.  That issues paper also makes for interesting reading and you can get it here.

It should be no surprise that these two topics are being addressed in close proximity by the ABA Commission because they are relatively intertwined in the minds of many people.  (And, for clarity, I have put “unregulated” in quotes because what the ABA Commission means when it uses that term is not regulated by courts in the way that lawyers practicing law are regulated.  Entities that provide legal services but that are owned and operated by people other than lawyers are, of course, regulated to some extent by agencies such as the Federal Trade Commission.)

Unlike the comment deadline on the Alternative Business Structures paper, the comment deadline on the paper regarding what to do about unregulated LSPs has passed.  I’ve spent a bit of time reading some but not all of the comments, and you can find links to all of the comments here.

For those who don’t want to go read all of the original source material, I think a fair description/takeaway/summary of the two ABA issues papers is:

  1.  The ABA Commission is likely thinking pretty strongly about trying to propose that courts, through entity regulation and using the Model Regulatory Objectives approved by the ABA House of Delegates in Resolution 105, attempt to exert some control over entities such as Legal Zoom and Avvo and others that provide services that would certainly be treated as the practice of law if performed by a lawyer.
  2. The ABA Commission is certainly trying to spur another conversation about whether business models presently prohibited because of RPC 5.4 throughout the U.S. (other than Washington, D.C.) might be a worthwhile endeavor.  And, the Commission’s issues paper has managed to lay out the potential benefits and risks of doing so in a pretty fair, even-handed manner.

For those that cannot remember off the top of their head, ABA Model Rule 5.4 is the ethics rule which (a) generally prevents lawyers from sharing fees with those who are not lawyers; (b) prohibits lawyers from being in partnerships with nonlawyers if any of the partnership’s activities involve the practice of law; (c) mandates that a lawyer who is letting someone other than their client pay them cannot let that other person “direct or regulate the lawyer’s professional judgment in rendering such legal services,” and (d) prevents lawyers from practicing law in certain business entity forms if a nonlawyer has an ownership interest or serves in certain roles.   [N.B. – sorry, I tried.  Once I started talking about this specific rule, “nonlawyer” as a term became unavoidable.]

I’m not sure that my thoughts on these issues are fully-baked as of yet, but I think that each of the following six positions are reasonable ones to have:

  1.  Maintaining independence of professional judgment is a core principle of the legal profession, but that doesn’t mean that the conditions in which lawyers work have to be sanitized so as to try to free lawyers from temptations.  We already allow quite a few things under the ethics rules that can create temptations for lawyers to allow others to control or interfere with their professional judgment or that, at minimum, place severe negative economic pressure on the exercise of independent professional judgment.  We let lawyers be hired by, and paid by, insurance companies for the purpose of representing policyholders.  Those insurance companies establish guidelines for how those lawyers are supposed to go about handling the litigation; they scrutinize and reject bills if the right billing codes are not used by the lawyers; and they ultimately place the pressure on lawyers who think the guidelines and restrictions go too far to exercise their independent professional judgment to do what is necessary to represent the client’s interests even if it sometimes means they end up not getting paid for time and effort that needed to be done.  Our ethics rules have no problem with lawyers being employed as in-house counsel even though they are constantly at risk of having their employer (and only client) potentially pressure them to set aside their professional judgment and do things that help drive profits.  Our ethics rules have long allowed lawyers to handle cases on a contingent fee basis.  Our ethics rules do not prohibit law firms from imposing requirements on how many billable hours must be logged to stay employed. Sometimes the strongest principles are those that survive despite temptations.
  2. Allowing people other than lawyers to invest in law firms or otherwise be owners or stakeholders in law firms is not going to increase access to justice among those who cannot afford legal services.  It’s just not, and people should just stop already with the effort to claim that the reason it should be considered is because of how it will help as an access to justice initiative.
  3. Expanding on the Washington, D.C. approach to allow people other than lawyers to be partners in law firms or to have a minority ownership interest in the firm as long as they agree to abide by the lawyer ethics rules will neither create Armageddon, nor create any more economic pressure on lawyers than already exists from items discussed in point #1.
  4. If you aren’t a lawyer, there is a fairly compelling logic to the notion that the limit of regulation that should be imposed by courts or by lawyers as officers of courts on “unregulated” LSPs should be that such entities and the people involved with them cannot hold themselves out as if they were a lawyer.
  5. On the other hand, if you are a lawyer, it is reasonable to believe that the restriction identified in #4 alone is not sufficient.  There has to be some line over which LSPs cannot cross.  This is true if for no other reason than that the regulations lawyers have to endure are significantly more restrictive than the regulations imposed by agencies like the FTC and similar state regulatory agencies, and those more restrictive regulations render competition in certain legal services entirely unfair.
  6. It is silly for RPC 5.4(d)(2) to only allow someone who is not a lawyer to be an officer or have a position of similar responsibility (i.e. Chief Marketing Officer, or CFO, or COO) in a law firm if the law firm is organized as a corporation.  I cannot think of any legitimate reason that a law firm organized as a PLLC or an LLP can’t have an accountant serving as CFO but a law firm organized as a Professional Corporation should.  (And, for this last thought I owe Lynda Shely thanks for reminding me while we were in Austin that the rule actually says this.)

What do you think?  Are any of these six positions above not reasonable ones to have?  I almost never solicit input in the comments, but have at me if I’ve lost the plot.

 

 

Lawyer ethics rules are public policy statements. Of course they are.

There is a lot of activity that can take place at the intersection of the lawyer ethics rules and public policy.  There can be issues that aren’t addressed by lawyer ethics rules (or at least not fully addressed) but that are addressed as a matter of state public policy.  What there really can’t be though are issues that are addressed by a state’s lawyer ethics rules but that are not addressed by state public policy.  At least, there can’t be in a state where the attorney ethics rules have been adopted as part of a court rule.

This is because, generally speaking, court rules are elevated in dignity to the equivalent of statutes.  Thus, using Tennessee as an example, the Tennessee Rules of Professional Conduct, enshrined as they are in Rule 8 of the Tennessee Supreme Court Rules, establish the public policy of our state on the issues they address.  Our Tennessee Supreme Court made this point plain in 2002.  Crews v. Buckman Labs, 78 S.W.3d 852 (Tenn. 2002) was an important decision on both questions of lawyer ethics and employment law where the Court explained that a lawyer claiming to have been fired for exercising her ethical duty to report another lawyer’s misconduct could challenge the employment action as an unlawful termination in violation of state public policy.

This point — that attorney ethics rules are state public policy — was a bit lost on one of the litigants in a piece of litigation in federal court in Virginia arising from a dispute among former law partners governed by the D.C. Rules of Professional Conduct.  The point was not lost on the district judge presiding over the litigation, however.

The Moskowitz v. Jacobson Holman, PLLC litigation came about after a lawyer departed his law firm for greener pastures.  The firm, exercising its authority under its operating agreement, denied the lawyer 50% of his equity interest on departure because he took some clients with him when he left.  In response to a counterclaim from the firm, the departed lawyer argued that the provision in the operating agreement allowing such forfeiture violated RPC 5.6 and was void.  On a motion for judgment on the pleadings, the district court ruled that if it is shown that RPC 5.6 was violated, then no additional showing would be required to find that aspect of the contract to be unenforceable.  (Though the suit was filed in Virginia federal court, the D.C. ethics rules applied to the firm’s agreement.)

There are, of course, other contexts where this kind of argument about public policy made by the law firm could be viable.  For example, courts are split about whether an agreement to share fees with a nonlawyer in violation of the attorney ethics rules can still be enforced by the nonlawyer.  Since the party seeking to enforce the terms of the contract is not a lawyer in those instances and the ethics rules do not apply to their conduct, it is not surprising to learn that some courts allow enforcement of such a contract even though the lawyer involved violated his or her ethical obligations under the relevant version of RPC 5.4(a).  In the context of an RPC 5.6 violation though, everyone involved is a lawyer and governed by the ethics rules.

To me, the closer question is the one that the court had to assume was true for purposes of resolving the judgment on the pleadings issue:  whether the kind of forfeiture provision in the law firm’s operating agreement actually violates RPC 5.6(a).

In Tennessee, our version of the rule is identical to the ABA Model Rule and provides that lawyers cannot “participate in offering or making a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.”

Nothing in our Comment to the Rule, nor the ABA’s, elaborates on what terms short of actual restriction on practice qualify as prohibited by the rule.  At least in my state, a robust argument could be had over whether a “financial penalty” alone is something that “restricts the right of a lawyer to practice after termination of the relationship.”  The fact that the “except” language in the dependent clause addresses a financial issue is certainly potentially persuasive evidence that this type of arrangement could be found to violate RPC 5.6(a).

Under the D.C. version of the rule, an additional paragraph exists in the Comment [numbered as Cmt. [2] in D.C.] that states:  “Restrictions, other than those concerning retirement benefits, that impose a substantial financial penalty on a lawyer who competes after leaving the firm may violate paragraph (a).” Yet, D.C.’s word choice leaves an opening.  D.C. went with “may violate” so the potential exists that you could have a provision that imposes a substantial financial penalty on a lawyer who competes after leaving the firm that would not violate RPC 5.6(a).

Kickstarter worked for the potato salad guy, but it is more like a nonstarter for fledgling lawyers.

It was about two years ago when a man from Ohio put up a Kickstarter to raise $10 to make potato salad and ended up receiving tens of thousands of dollars in donations.  I’m sure there were many people who were familiar with this concept before then, but for me that was the first I’d heard of the online phenomenon of crowdfunding.  Most recently, it seems like a good bit of the news on crowdfunding has been of the weird variety where people use it to raise money for police officers who shoot unarmed people.

I never thought I’d see lawyers interested in using crowdfunding to actually permit them to set up a law practice.  I didn’t think I’d see it for two reasons: (1) the ethics rules prohibiting nonlawyer investment in law firms would never allow something like that; and (2) if you are going to hope a collection of strangers with too much money on their hands will throw some your way, why wouldn’t you leverage it to do something much less stressful than practice law?

Yet, yesterday I read the stories about the new law school graduates drowning in student loan debt who were kicking around the idea and the resulting New York State Bar Association ethics opinion.   It is not entirely clear why this opinion, written and issued back on June 29, 2015, is just now surfacing in the news, but in tooling around and reading a few stories about the opinion I came across a second unexpected development —  much of the reporting on this opinion appears to be giving it a positive headline as if the newsworthy aspect of the opinion indicates that maybe a lawyer could pursue this.

Yet, thoughtful reading of the opinion demonstrates that is the wrong sort of headline.  The NYSBA opinion explains that from what it can decipher there are 5 types of crowdfunding endeavors.  One is sort of just syndicating a loan with many, many small loans from individuals for a project that might not get a large amount of funding from a bank or other institutional investor.  The committee spends no time talking about the ethical implications of that option because that still would just be more debt for these new law grads and the law grads making the request indicated that they were interested in crowdfunding to avoid being saddled with additional debt.

Two of the other five approaches, the investment model and a royalties model, are ones the committee explained are nonstarters from an ethics perspective because they involve either (the investment model) nonlawyer ownership in the firm in violation of RPC 5.4(d) or they amount to an arrangement in which there would be fee sharing between lawyer and nonlawyer in violation of RPC 5.4(a).  These obvious answers to the ethical issue are one of those two reasons stated above that I didn’t think I’d see lawyers exploring this model.

Finally, the two other types are the straight, no-strings-attached donation approach and the “reward” model, where you are overpaying for some small item in return approach.  As to the donation approach, the committee did not see any ethical problem with it.  (Also they were kind enough to not explicitly state that the only chance this would work is if you threw in an offer of some potato salad.  And, if you didn’t actually follow the potato salad story back when it happened, the guy did end up throwing a big party with the proceeds and giving some funds to charity so that at least had something of a happy ending.)

As to the reward model, the inquiring lawyers said that perhaps they would offer an informational pamphlet or agree to provide pro bono services to some charitable organizations.  The committee says that could be ethically viable but that there were some land mines, like making sure the informational pamphlet didn’t offer legal advice and complied with advertising restrictions and making sure that, if offers were made to do pro bono work for a charitable organization, that the lawyer could remain available to do so ethically.  In addressing this approach, the committee offered a call-back to a 2011 opinion it issued about “deal of the day” websites like Groupon.

What is really disappointing is, having gone to all of the trouble of putting out an opinion on this topic and even referencing its prior Groupon analysis, it might have actually been more helpful to address a variation on the reward approach which might be economically viable.  Could lawyers put up a crowdfunding offer where anyone who contributes say $50 today receives $200 in free legal services from this firm at any time in 2016?  Such an approach might just provide the level of seed money needed to start up the infrastructure of a law practice and might, assuming the lawyer can develop some regular clients (who weren’t also investors), allow the lawyer to eventually turn a profit.  Such an approach also would, in theory, be no more perilous from an ethics perspective than the Groupon situation.

But, really, the most valuable thing this ethics opinion does — in a fairly easy to observe way — is to lay bare how the absolute restriction on nonlawyer investment in a law firm goes way beyond what would be necessary to protect the espoused public interest being served — which it says in the Comment to the Rule is “to protect the lawyer’s independence of professional judgment.”  The regulatory concern is that if lawyers practice in a law firm that is controlled by non-lawyers then the lawyers will not adhere to their ethical obligations and will instead allow themselves to be directed to do whatever is necessary for the firm — and therefore the investors — to turn a profit.  Yet, if a law firm raised $50,000 in start up capital $25 at a time from 2,000 investors, would you really be worried that any of those 2,000 individuals would be in a position to control or direct the independent professional judgment of the lawyers in the law firm?  No, of course not.