Lawyer Stuff

Don’t Share Fees with Non-Lawyers!

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New Ethics Advisory Opinion warns against web-based referral service

South Carolina Ethics Advisory Opinion 16-06 fields questions about an attorney directory website fixed-fee legal referral service. The service works like this:

  • Attorney signs up for the service by agreeing to offer certain flat fee services.
  • The fee for the service is set by the internet advertising directory website (service).
  • The service makes the referral to the attorney, who then contacts the client to arrange a meeting and begin the representation.
  • The service handles payment processing from the client and holds the funds until the legal work is completed.
  • Upon completion of the work, the service transfers the full amount of the fee to attorney’s account.
  • Upon completion of the work, the service charges the attorney a “per service marketing fee” which seems to be based upon the legal work provided and is only incurred when the lawyer provides the legal work. For example, the legal fee for an uncontested divorce may be $995, and the marketing fee is $200, while the legal fee to start a single member LLC is $595, and the marketing fee is $125.

Rule 5.4 of the Rules of Professional Conduct prohibits a lawyer from sharing legal fees with a non-lawyer. There are some exceptions set out in the rule, but those exceptions generally fall into two categories, payments to a deceased lawyer’s estate and payments to non-lawyer employees in a profit sharing compensation or retirement plan. The exceptions, of course, don’t apply to this attorney directory situation.

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The Ethics Advisory Committee stated that the situation described above where the service collects the legal fee and transmits it to the attorney and in a separate transaction, the service receives a fee for its efforts, is an indirect method to share attorney’s fees. Attempting to disguise the fee-sharing arrangement in two transactions doesn’t cure the problem.  Calling the fee received by the service a “per service marketing fee” also doesn’t cure the problem.

Rule 7.2 (c) prohibits a lawyer from giving anything of value for recommending the lawyer’s services, with three exceptions. One of the exceptions allows a lawyer to pay for the “reasonable costs of advertisements”. The Ethics Advisory Committee pointed to Comment 7 to the rule which lists reasonable advertising costs such as newspaper, radio and television advertisements and on-line directory listings.  The Committee stated that the permitted advertising is typically for a fixed cost per add or per run of air time, and that reasonableness of the costs can be assessed by the market rate.

The Opinion says that the internet service purports to charge the lawyer fees based on the type of legal service rather than the cost of advertising. Since it doesn’t cost the service any more to advertise online for a family law matter than for preparing corporate documents, the fees are not rational and do not fall under the exception for “reasonable costs of advertisements”.

Dirt lawyers, be careful when assessing any type of referral arrangement, and, when in doubt, ask questions of the Ethics Advisory Committee.

When Do I Have to Turn My Fellow Lawyer In?

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We have a hot-off-the-presses South Carolina Ethics Advisory Opinion (16-04, July 18, 2016) in which a lawyer asks when opposing counsel must be reported to the Office of Disciplinary Counsel (ODC). The opinion only relates to dirt in that it revolves around a foreclosure matter, but all of us as attorneys may need guidance in these extremely difficult situations from time to time.

The facts are as clear as mud, but my colleague and former foreclosure lawyer, Jennifer Rubin, has attempted to decipher them for us. It appears that Lawyer A (the lawyer who is raising the question) represents a lender in the context of an ongoing mortgage foreclosure sales action. We’re guessing here, but it sounds as if the lender needs to unwind the foreclosure sale, probably because of some agreement or dispute with the borrower. Lawyer B represents the purchaser at the sale. Lawyer B’s client does not want the sale to be unwound, and Lawyer B argues that his or her client enjoys a bona fide purchaser status. Lawyer A argues that Lawyer B purportedly knew of a potential defect prior to paying the balance of the purchase price and acquiring title but failed to reveal that information to the court. In other words, Lawyer B knew his client was not a bona fide purchaser.

whistle blowerLawyer A believes Lawyer B’s conduct has damaged the lender financially and also rises to the level of misconduct that must be reported to the ODC. The question becomes whether Lawyer A must report Lawyer B’s conduct to the ODC immediately or whether the report can be made at the conclusion of the litigation or appeal.

The Ethics Advisory Committee first reviews Rule of Professional Conduct 8.3 which requires a Lawyer to report a fellow lawyer of a violation of the Rules which raises a substantial question of the lawyer’s honestly, trustworthiness or fitness to practice law. Rule 8.3 requires actual knowledge, which implies more than a suspicion of misconduct. But judgment is required of the reporting lawyer. Comment 3 gives guidance by limiting the reporting obligation to “those offenses that a self-regulating profession must vigorously endeavor to prevent.”

Why do we have to report each other? The Committee points to the preamble of Rule 8.3 which states that the legal profession is largely self-governing and that “the legal profession’s relative autonomy carries with it a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of  parochial or self-interested concerns of the bar.”

So, assuming this lawyer’s conduct rises to the level that must be reported, when must the report be made? A partial answer is that the rule is silent as to timing, but the Committee points to prevailing opinions around the country that reporting should be made “promptly”. The Louisiana Supreme Court has said *, “The need for prompt reporting flows from the need to safeguard the public and the profession against future wrongdoing by the offending lawyer.”

The Committee said it believes it is appropriate for the lawyer to consider any potential adverse impact to the client in determining the timing of the report against another lawyer. And because the Rule is silent as to timing, the Committee opined that Lawyer A may wait until the conclusion of the matter if Lawyer A determines that immediate reporting may hurt the client, but the misconduct should be reported promptly at the conclusion of the litigation or appeal.

*In re Rielmann, 802 So.2d. 1239 (Louisiana, 2005)