The Road Less Traveled — North Carolina Splits from Other Jurisdictions on Fee-Splitting Issue

I am sure many of you are aware of Avvo’s online legal directory. However, you may not know that Avvo, as well as a handful of other platforms, is now offering fixed fee limited scope legal services online.

How do these online legal service platforms work? In the case of Avvo Legal Services, Avvo determines the fee that will be charged for each discrete service and charges participating lawyers a percentage of the fee. The percentage charged to the lawyer, which varies depending on the particular legal service, is called a “marketing fee.” Avvo initially collects the entire legal fee from the consumer and deposits the funds in an Avvo bank account. On a monthly basis, Avvo pays the participating lawyer all legal fees generated by the lawyer in the preceding month. In a separate transaction, Avvo collects its marketing fees for these legal services by debiting the lawyer’s operating account.

So basically, the business model for these online legal platforms involves the service collecting the legal fee from the client/consumer and then—wait for it—splitting the fee with the participating lawyer. Say what???

Now I know, and you know, that fee sharing is a no-no under the Rules of Professional Conduct. Rule 5.4(a) clearly states that a lawyer “shall not share legal fees with a nonlawyer, except” blah blah blah not relevant here. So what gives? Well, four jurisdictions give the thumbs down to this business model.

The four jurisdictions that have issued ethics opinions on the business model are Ohio, South Carolina, Pennsylvania, and New Jersey. Each of these jurisdictions concludes that lawyers cannot participate in the business model because, among other issues, the model involves fee-sharing prohibited by Rule 5.4(a). Ohio Board of Prof ’l Conduct, Op. 2016-3 (2016), SC Bar Ethics Advisory Comm., Op. 16-06 (2016), PA Bar Ass’n. Comm. on Legal Ethics and Prof ’l Responsibility, Op. 2016-200 (2016), NJ Joint Opinion of NJ Advisory Comm. on Prof ’l Ethics, NJ Comm. on Attorney Advertising, and NJ Comm. on the Unauthorized Practice of Law (ACPE Op. 732, CAA Op. 44, UPL Op. 54) (2017).[i]

In their evaluations of the fee-sharing issue, the four ethics committees conclude that the manner in which the amount of the “marketing fee” is established (a percentage of the legal fee) supports a finding of improper fee sharing. The committees reject any contention that there is no sharing of legal fees because the entire legal fee is paid to the lawyer in one transaction, and the service is paid its fee in another separate transaction.

They also reject the argument that there is no sharing of legal fees because the payment to the service is referred to as a “marketing fee.” Makes sense. But wait. The structure, terminology, and amount of the fee paid to the service are all factors that relate to a determination of whether a lawyer is sharing a legal fee with a nonlawyer, rather than a determination of whether the purpose for the fee-sharing prohibition is implicated. Comment [1] to Rule 5.4 states that the purpose of “traditional limitations” on sharing fees is “to protect the lawyer’s professional independence of judgment.”

What do these four ethics opinions conclude as to the effect of the payments to Avvo or other businesses on the participating lawyers’ independence of professional judgment? The primary purpose underlying the fee-sharing prohibition set out in Rule 5.4(a)—protection of a lawyer’s independent professional judgment—is either not addressed in the opinions at all, not addressed in connection with the fee-splitting issue, or not deemed to be dispositive. Please see “Things That Make You Go Hmm...” by C+C Music Factory (Columbia Records 1991).

Not wanting to be left behind, North Carolina has decided to issue its own opinion on Avvo’s business model. At its meeting on July 27, 2017, the Ethics Committee voted to publish for comment Proposed 2017 Formal Ethics Opinion 6 (Participation in Online Platform for Finding and Employing a Lawyer). The full proposed opinion can be found on page 38 of the Journal (Fall 2017 issue).

The proposed opinion addresses many ethical issues implicated by the Avvo business model. In fact, 13 rules of professional conduct are cited in the proposed opinion, including Rule 5.4(a). (Sidebar Quiz: How many of you can name 13 Rules of Professional Conduct???)

In its discussion of fee-sharing, North Carolina falls in line with the other four opinions in concluding that the structure of the payments in the business model is irrelevant to the fee sharing issue, and also agrees that “the fact the marketing fee is a percentage of the legal fee implicates the fee-sharing prohibition.” Now here is where we go rogue. Our proposed opinion focuses on the purpose for the fee-splitting prohibition — “to protect the lawyer’s professional independence of judgment.” The opinion references two current North Carolina ethics opinions approving payment arrangements similar to that of the Avvo business model. The payment arrangements in 2010 FEO 4, involving a barter exchange program, and 2011 FEO 10, involving an online group coupon, were approved because the nonlawyer receiving the payment exercised no influence over the professional judgment of the lawyer, and the fee was a reasonable charge for marketing or advertising services. Similarly, Proposed 2017 Formal Ethics Opinion 6 concludes that, “if there is no interference by Avvo in the independent professional judgment of a participating lawyer, and the percentage marketing fees paid by the lawyer to Avvo are reasonable costs of advertising...the lawyer is not prohibited from participating in [Avvo Legal Service] on the basis of the fee-sharing prohibition.” Mic drop.

To clarify the committee’s position, the Ethics Committee is considering an amendment to Rule 5.4(a). The amendment addresses the payment structure utilized in the Avvo business model. The proposed amendment is an additional exception to the prohibition on sharing legal fees set out in Rule 5.4(a) and allows a lawyer to pay a portion of a legal fee to a credit card processor, group advertising provider, or online platform for identifying and hiring a lawyer if the amount paid is for payment processing or for administrative or marketing services, and there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship. The full proposed rule amendment can be found on page 38 of the Journal (Fall 2017 issue).

The proposed amendment to Rule 5.4(a) makes sense, but I’m not sure it solves the conundrum presented by Rule 5.4(a) and perhaps responsible for the inconsistent holdings in the ethics opinions. A literal application of Rule 5.4(a) would prohibit all payments by a lawyer to a nonlawyer employee or vendor if the source of the funds is legal fees previously earned by the lawyer. As already noted, comment [1] to Rule 5.4 states that the provisions of the rule “express traditional  limitations  on  sharing fees.” These “traditional limitations” may be unnecessary and even unworkable in today’s legal marketplace. The stated purpose for the prohibition against fee-sharing is met by other rules of professional conduct. For example, Rule 2.1 specifically provides that, in representing a client, “a lawyer shall exercise independent, professional judgment and render candid advice.” Rule 5.4(c) prohibits a lawyer from allowing a person who recommends a lawyer to direct or regulate the lawyer’s professional judgment. Similarly, Rule 1.8(f) provides that a lawyer may not allow a third party payor to interfere with the lawyer’s independence of professional judgment or with the client-lawyer relationship. These three rules of professional conduct, among others, protect a lawyer’s professional independence of judgment without establishing an unworkable restriction on the lawyer’s use of his own legal fees. Rule 5.4(a) states that a lawyer “shall not share legal fees with a nonlawyer.” Do lawyers who participate in Avvo Legal Services share legal fees with Avvo? Yes. Does it matter? I don’t think so.

If you have gotten this far I would like to emphasize two very important things about Proposed 2017 Formal Ethics Opinion 6: (1) it is a proposed opinion, and (2) it is being published for comment. If this proposed opinion makes you want to pack up and move to South Carolina, Ohio, Pennsylvania, or New Jersey, please unpack and send us your comments and concerns instead.

(This article originally appeared in the Fall 2017 edition of the North Carolina State Bar Journal.)