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State bar ethics opinions address lawyers marketing legal services on group-coupon websites

By Peter H. Geraghty
Director, ETHICSearch

You work in a small law firm with a practice that concentrates in estate planning. You have been approached by an Internet-based company that proposes to offer coupons that would entitle the buyer to an initial consultation and development of an estate plan with your firm at a discounted rate. The company would market the coupons and would receive the funds from the purchasers. It would then remit to you a percentage of the funds received once the services have been completed.

Can you participate in such a plan?

Analysis

The primary ethics issues implicated in this scenario include the lawyer’s obligations to check for conflicts of interest under Rules 1.7 Conflicts of Interest: Current Clients and 1.9 Duties to Former Clients, to provide competent representation under Rule 1.1 Competence, fee sharing with non-lawyers under Rule 5.4 Professional Independence of a Lawyer, advertising and solicitation issues under Rules 7.1 Communication Concerning a Lawyer's Services and 7.2 Advertising and safekeeping of client funds and property under Rule 1.15 Safekeeping Property.

In my experience having researched many thousands of ethics questions that have been presented to the ETHICSearch research service over the years, ABA, state and local bar ethics opinions are an extremely valuable resource for helping to resolve them. Links to most state and local bar ethics opinion websites are available on the ABA Center for Professional Responsibility’s web page. Another very useful resource is the ABA/BNA Lawyers’ Manual on Professional Conduct, which in addition to a treatise on legal ethics has digests of thousands of state and local bar association ethics opinions. The Manual is available on the BNA website (BNA offers a seven-day free trial) and on the Westlaw and Lexis websites.

There have been four state bar association ethics opinions that have been issued on this topic over the past six months. These include Indiana State Bar Association Legal Ethics Committee No. 1 of 2012 (2012), New York State Bar Opinion 897 (2011), South Carolina Opinion 11-05 (2011) and North Carolina Opinion 10 (2011). Some sources indicate that the Missouri Bar has either approved the use of group-coupon companies or has issued an opinion on the topic, but this is not the case. (See statement by Sara Rittman, Ethics Counsel, Missouri Bar Association dated February 28, 2011) These opinions come to varying conclusions on the propriety of a lawyer’s participation in such programs. The New York, North Carolina and South Carolina opinions have approved the practice with caveats, while the Indiana opinion states that it is very likely not appropriate.

Indiana State Bar Opinion No. 1 of 2012.

The Indiana State Bar opinion is the most recent to address these issues, and it did so based on the following description of a group coupon company arrangement with a service provider:

…The Company’s various marketing campaigns work by aggregating customers for its cooperating businesses by daily or other regular notification of the opportunity to purchase coupons at a set price for a specific product valued at a discount to the normal price charged to those who are not using the Company’s coupon. The aggregated customers are charged for the coupon by the Company only after a predetermined number of members, as negotiated with the provider of the service, are assembled in response to the online advertisement. The daily notice is either emailed to the computer or texted to the smartphone of the group subscriber who is a potential purchaser of the services.

The Company and the business usually establish a price for the good or service sold and share in the purchase price of the sale, which results in a further discounted payment to the business but in a savings to the customer. Some customers purchase coupons and do not redeem them in the time periods stated in the offer.

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Conflicts of interest; Competence

The Indiana committee took a dim view of these arrangements, pointing out a number of issues that could get the participating lawyer into trouble. The first of these concerns relates to the lawyer’s obligation to check for conflicts of interest and to make a determination based on the facts of the individual matter as to whether he is competent to handle it before agreeing to take on the representation. The committee stated that it is primarily the lawyer’s responsibility to determine whether it is appropriate to enter into a lawyer-client relationship with a prospective client and that the lawyer may not delegate that responsibility to either the company or to the client. In the group coupon context, it is the client or the company who may initiate the establishment of the relationship when either the client purchases the coupon or the company accepts payment before the client has an opportunity to meet with the lawyer, and before the lawyer has a chance to conduct a conflicts check. After meeting with the client, if the lawyer were to determine that there was a conflict, or that he could not provide competent representation, he would have an obligation to withdraw from the representation and to return any funds or property the client had provided pursuant to Rules 1.1, 1.5, 1.15 and 1.16(d) Declining or Terminating Representation.

The committee noted that similar concerns are present when a lawyer makes his services available for purchase in a charitable auction. Several state bar opinions on this topic and have concluded that the lawyer would have an obligation to check for conflicts of interest and to assess whether he could provide competent representation before agreeing to take on the representation of the successful bidder. The Indiana committee cited to its Opinion 4 of 2008 Attorney’s Legal Services Donations to Charities (2008). For further information on this topic, See the October 2007 Eye on Ethics column entitled, “ Going. Going. Gone! Or may a lawyer provide legal services as an item in a charitable auction?”

Client funds and property

The Indiana committee also noted that the practices of the coupon company with regard to the funds it receives for the coupons could also potentially violate the lawyer’s obligations to safeguard client property under Rule 1.15, since under some such arrangements, the committee found that the coupon company keeps the funds and releases them to the lawyer in increments over time. This may interfere with the lawyer’s obligations under Rule 1.15 to keep client funds separate and to maintain complete records of each client’s property. The committee noted that if for any reason the lawyer decided that he could not undertake the representation, the client would be entitled to a full refund of any amounts the client has paid. Since the company may be holding these funds, the committee noted that it could be problematic for the lawyer to promptly refund them.

Fee sharing, solicitation

The Indiana committee was also concerned that such arrangements can involve improper fee sharing under Rule 5.4 with nonlawyers, and that they could also amount to an improper channeling of clients or giving something of value for recommending a lawyer’s services under Rule 7.2(b), particularly under circumstances where the coupon companies take up to 50 percent of the fees paid for the coupons.

The committee concluded by stating that if a lawyer in Indiana is contemplating entering into a relationship with a coupon company, he should conduct careful research and consider consulting with a lawyer who has experience in legal ethics matters to craft an arrangement or an alternative course of action that complies with the Indiana rules.

New York , North Carolina and South Carolina

Other state bar opinions issued by the North Carolina, South Carolina and New York bar associations take differing views.

The New York opinion stated that a lawyer may participate in a deal of the day or group-coupon program so long as the company materials promoting the coupon makes it clear that there is no lawyer-client relationship formed until the lawyer has checked for conflicts and has also verified that he is competent to undertake the representation. The committee suggested the following as guidelines for disclaimers to include on the coupon-company website:

…To avoid the premature and improper formation of a lawyer-client relationship, the lawyer’s advertisement on a “deal of the day” website must make clear that the offer made on the website is subject to a number of conditions.  These would include that before such a relationship is formed, the lawyer will check for conflicts and determine that the lawyer is competent to provide legal services that are appropriate to the consumer.  If the lawyer determines that the lawyer-client relationship is untenable for these reasons, the lawyer must give the coupon buyer a full refund.  This arrangement should be disclosed as part of the coupon offer on the website, along with any other information needed to avoid making the offer misleading in any way.

The New York committee also stated that the fact that the company retains a portion of the fees received for the coupons does not necessarily raise fee-sharing concerns and should instead be viewed as a reasonable cost for advertising under Rule 7.2(b). The committee did, however, indicate that its analysis could change if the amount retained by the company was excessive. If this were the case, then the lawyer might be viewed as paying for referrals, in violation Rule 7.2.

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Similar to the Indiana opinion, the New York committee stated that if for any reason including conflicts of interest or competence the lawyer was unable to provide the services requested, the client would be entitled to a full refund. On the other hand, the committee stated that the lawyer would be entitled to keep the full amount as an earned retainer for having made himself available to provide the service in the time specified in the coupon if the client let the coupon expire.

South Carolina Opinion 11-05 stated that lawyer involvement in a “daily deal” website that offers products and services at a discounted rate was permissible and did not necessarily involve fee-splitting with nonlawyers under Rule 5.4. Similar to the New York opinion, the South Carolina committee stated that the percentage retained could be viewed as the payment of advertising costs under Rule 7.2. The South Carolina committee was also of the view that the underlying policy concern for the rule prohibiting fee-sharing with nonlawyers was not present in this context since the company was not in a position to control the services to be provided by the lawyer, and that they would therefore not adversely affect the lawyers independent professional judgment. North Carolina Opinion 10 of 2010 came to a similar conclusion.

The South Carolina committee also cautioned that the lawyer should have a plan in place to address the “logistical” challenges raised by such a program, namely the obligation to meet with the client to explain the scope of the representation and fee agreement under Rule 1.5 and the obligation to check for conflicts of interest under Rules 1.7 and 1.9.

North Carolina Opinion 10 (2011) similarly found that the percentage retained by the company could be viewed as the payment of advertising costs so long as the amount retained is reasonable. Similar to the New York opinion, the committee stated that the lawyer should ensure that there are appropriate disclaimers in the coupon advertisements indicating that the lawyer must perform conflicts checks and may also decline to represent the client if it is determined that the services offered are not appropriate for the particular client before a lawyer-client relationship can be established.

To the extent that the services offered are represented to be at a discounted rate, then that should be the fact. The lawyer should have an established rate for the particular type of service that is being offered at a discount. For further information on the ethical issues involved when a lawyer advertises his services at a discounted rate, See the April 2008 Eye on Ethics column entitled, “ Lawyer advertising (or incentivising): Offering discounts or coupons to prospective clients.”

Different from the New York committee, the North Carolina opinion stated that in the event the purchaser of the coupon did not redeem it within the applicable time period, the lawyer may not keep the deposit but rather must refund any unearned amounts to the client. If the client were to wait until the coupon expired, the lawyer would still be obligated to provide the service at his standard rate so long as he credits the client with the amounts paid for the coupon.

As demonstrated by these state bar opinions’ varying approaches to the ethical issues implicated with lawyer involvement with group-coupon websites, this is a developing area in the law of professional responsibility. For further information, check your local rules and consult with your state or local bar association.

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