Attorneys who affiliate with nonlawyer companies and out-of-state law firms in order to receive referrals take heed.
The Indiana Supreme Court Disciplinary Commission recently warned its state’s lawyers that such affiliations may violate several ethics rules. ABA Section of Litigation leaders agree with the commission’s cautionary opinion under the current ethics rules, but expect to see those rules updated in the future in order to address the changing legal market.
Commission Responds to a Growing Trend
According to Ethics Opinion No. 2-18, Indiana attorneys are being approached “by non-lawyer companies or out-of-state law firms looking to establish an ongoing affiliation for providing legal services in Indiana” without having to register with the Indiana bar. For example, an out-of-state firm may enter into a nominal “Of Counsel” or other contractual arrangement with the Indiana attorney, which requires little to no work from that Indiana attorney on services being provided within Indiana.
Similarly, a nonlawyer-owned company may refer a discrete project to an Indiana lawyer, determine and collect the client’s fee for that project, and then charge the Indiana attorney a fixed percentage of the client’s fee as a “marketing fee.” According to the commission, the common feature of these “license rental” business models “is that the non-lawyer company or out-of-state law firm wants to offer legal services in Indiana on an ongoing basis without being licensed to practice law in Indiana. They then direct the cases to an Indiana lawyer for a portion of the fees charged, often while requiring relatively minimal work or involvement by the Indiana lawyer.”
License Rental Agreements Raise Ethical Issues
The commission warns that “license rental” affiliations with a nonlawyer company or an out-of-state law firm may put an Indiana attorney at risk of violating multiple ethical rules, including:
- Improper fee splitting in violation of Rule 5.4(a)
- Abdication of professional independence in violation of Rule 5.4(c)
- Limited representation in violation of Rule 1.2(c)
- Unreasonable “advertising” costs in violation of Rules 7.2 and 7.3
- Misrepresentation of lawyer services in violation of Rule 7.1
Who controls the legal services is a key issue for the commission, which emphasized that a “lawyer risks violation of these rules when the non-lawyer company or out-of-state law firm dictates nearly all aspects of the representation, particularly the objectives and legal strategy.” Splitting of fees was another significant area of concern, as the commission emphasized that Rule 5.4 prohibits splitting fees with nonlawyers and Rule 1.5 requires that the client approve fee-splitting arrangements between lawyers not in the same firm.
Other states, including New Jersey, Ohio, South Carolina, and Virginia, have issued similar warnings about license rental agreements. A 2016 opinion from the Supreme Court of Ohio’s Board of Professional Conduct, for example, concluded that a “lawyer’s participation in an online, nonlawyer-owned legal referral service, where the lawyer is required to pay a ‘marketing fee’ to a nonlawyer for each service completed
for a client, is unethical.” On the other hand, the North Carolina State Bar’s Ethics Committee has proposed several changes to its ethics rules in order to permit such license rental agreements. A 2017 proposed change to Rule 5.4 would allow for a fee splitting with a company such as Avvo as long as “the business relationship will not interfere with the lawyer’s professional judgment on behalf of a client.” That proposal has been returned to the committee for reconsideration, however, after it received significant opposition.
Fee-Sharing Requires Existing Rules to be Modified
“Other countries have relaxed their rules relating to nonlawyer-owned companies, but our current ethics rules generally still prohibit them,” says Merri A. Baldwin, San Francisco, CA, former chair of the Section of Litigation’s Committee on Professional Services Liability Litigation, and coeditor of The Law of Lawyers’ Liability (ABA 2012). Nevertheless, this is a “very hot topic right now, as there is a justice gap and these disruptive technologies are attempting to connect clients to attorneys in cost-effective ways,” adds Baldwin. “These nonlawyer services are not going away, and the ABA and states will need to respond to them,” says John M. Barkett, Miami, FL, cochair of the Section’s Ethics & Professionalism Committee.
Baldwin noted that California recently commissioned a Legal Services Landscape report, which notes that “private investors are increasingly pushing the boundaries of [existing ethics] rules by funding new technologies and service delivery models designed to solve many of the legal market’s most vexing problems.” The report recommends modifications to California’s ethics rules to facilitate greater collaboration across law and other disciplines.
A Guide for Associating with Out-of-State Firms
“When out-of-state attorneys are admitted to court pro hac vice, there are controls in place to address ethical issues,” Barkett observes. “Those controls are absent in the license rental agreements, and attorneys cannot just accept out-of-state work without any review or adherence to the ethical rules,” cautions Barkett. By outlining its concerns and the applicable rules though, Barkett believes the commission gave Indiana attorneys a “road map” for drafting an engagement letter with an out-of-state law firm that would allow the attorney to meet the applicable ethics obligations.
Peter J. Murphy is a contributing editor for Litigation News.
Hashtags: #ethics, #professionalism, #legal industry
- Lauren M. Gregory, "Online Client Referral Programs Condemned as Unethical," Litigation News (Oct. 10, 2017).
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