Monday, 27 June 2011 20:00

No. Carolina Gov. Should Veto UPL Bill

Yesterday, we sent Governor Bev Purdue of North Carolina a letter urging her to veto a bill that includes a provision that would allow lawyers to sue and collect attorneys' fees from nonlawyers whom they deemed to be practicing law at their expense. The provision was tucked inside a a bill regulating optometrists.

You can read our letter to the governor here.

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A member of the North Carolina Senate has introduced a bill that would promote the delivery of innovative legal services. Senate Bill 254 would allow non-lawyers to own a minority stake in law firms. As we mentioned in our previous post, outside investment in law firms could provide them the capital they need to innovate and find ways to serve consumers better. Some lawyers have claimed that non-lawyer ownership could compromise their ethical duties to their clients or to the courts. However, the bill would protect consumers by warning non-lawyer owners that duties between shareholders do not trump duties to clients. If passed, the bill would be a first step toward helping the legal profession join the rest of the economy in providing integrated and innovative services. We urge the North Carolina legislature to pass SB 254 and encourage other states to introduce similar legislation.

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Groupon and Living Social are two companies which represent one of the most popular business models of the internet age. These companies offer discount certificates through online daily deal (“daily deal”) emails usable for products or services at local or national companies. These deals have restrictions on when you can use them, what locations will honor them, and what exactly the deal entitles the owner to. The deal company gives approximately 50% of the proceeds to the participating business and retains the other half. For example, a common deal is to pay $10 for $25 worth of food at a local restaurant or $10 for two movie tickets. The restaurant or movie theatre would get half of the amount paid and the company advertising the daily deal would receive the other half.

While restaurants have played a lead role in taking advantage of daily deal advertising, other industries have quickly followed suit, including personal care, home services, health services, and most recently the legal industry. However, while some legal practitioners are pushing for this consumer savings innovation, some bar associations are reluctant to allow it.

Currently New YorkNorth Carolina, and South Carolina have passed ethics rules allowing lawyers to offer online daily deals to potential clients. However, Alabama and Indiana have rejected such forms of advertising at the expense of legal consumers. 

Lawyers’ rules of ethics are the central issues involved in these states’ decisions to allow or disallow daily deals. These issues include excessive advertising costs, sharing legal fees with a non-lawyerclient trust accounts for unearned fees, an inability to perform conflict checks, and an inability of a lawyer to competently and diligently represent a client in their specific legal matter. However, while legal ethics rules about these subjects generally help protect consumers of legal services, the strict application of these rules to online daily deals harms consumers rather than protects them. 

The legal ethics concerns of states such as Indiana and Alabama are not valid in this situation. While it is important to lawyers to observe the highest standards of ethics, prohibitive regulations should not be put in place at the expense of consumers when far less restrictive measures are just as effective, and can allow greater access to affordable legal services.

The question of whether or not the cost of daily deals equal excessive advertising has become a contentious point. As stated previously, daily deal companies usually retain approximately 50% of the profits, and some critics consider that a violation of the cost allowed to advertise for legal services. However, lawyers should be free to choose this form of advertisement if they think it will be advantageous, and excessive advertising does not hurt a consumer.

States’ opinions are also split on whether daily deals violate the prohibition on sharing legal fees with a non-lawyer. These limitations are intended to protect the lawyer’s professional independence of judgment. Courts and bar associations are concerned that if someone other than the lawyer receives the lawyer’s fee or salary, the lawyer might place the interests of that third party over the client’s. In the case of daily deals, the third party merely disseminates the advertisement information the lawyer asked to be disseminated. The lawyers making use of these types of advertising owes no more allegiance to them than other lawyers who advertise in phone books or billboard owe to those companies. 

Responsive Law believes that since daily deal companies do not have the ability to exercise any control over the services that will eventually be rendered to the consumer, their use should not be considered prohibited fee sharing. South Carolina’s Ethics Advisory Committee agreed with this stance in a recent Advisory Opinion.

Another object that bar associations have to daily deals concerns the obligation of lawyers to have client trust accounts for unearned fees. Client trust accounts are set up by lawyers to keep clients’ funds segregated from the lawyer’s general funds. The purpose behind requiring client trust accounts for unearned fees is to protect the funds from the lawyers’ own finances. ABA Model Rule 1.15 (c) provides that “a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.” This assures the client that they will receive any remaining amount that the lawyer does not use or earn. According to ABA Model Rule 1.16(d), when the representation terminates, unearned fees and costs must be refunded to the client.

If a lawyer chooses to engage in daily deal advertising, they should take on the responsibility that if there is an issue with representation, the lawyer will refund the consumer the entire amount the consumer paid to the daily deal company, including any amount that the company kept for profit. Therefore, if the lawyer chooses to offer $400 of legal services on a daily deal website for $200 will only receive $120 due to advertising costs, the lawyer should be required to not only put that $120 in a client trust account but also match it with $80 in order to protect the consumer if no services are provided.

A lawyer’s inability to perform conflict checks prior to the consumer purchasing the deal raises additional ethical concerns. Lawyers perform conflict checks regarding a client’s legal matter prior to creating an attorney-client relationship with the potential client to make sure that they do not currently have cases whose legal interests are adverse to the new client’s interest. While this rule does protect consumers’ interests, online daily deals can still operate within this framework. Disclaimers and restrictions are common in these deals. Lawyers who wish to offer these deals to potential new clients can add disclaimers to the offered deal which explains what conflict checks are, and explain that if a conflict of interest is discovered, the consumer will be refunded any amount paid for the services. As mentioned earlier, this will have to be a cost that the lawyer takes on if they choose to advertise in this way.  

States have also discussed the potential inability of a lawyer who receives clients through this method to competently and diligently represent those clients. Lawyers are ethically required to competently and diligently represent a client and to immediately inform the client if they are unable to do so. Normally, clients seek lawyers who claim to have knowledge in a specific legal area which concerns the client.  After an initial discussion, the lawyer informs the client whether or not they possess the knowledge and the time to accept the offer to represent. However, with daily deals it is possible that a lawyer who advertises in this fashion may receive clients whom they are unable to represent due to lack of competence or time. However, there are ways in which to prevent any issues regarding competence and diligence with daily deals. Lawyers can specifically list the services which will be included as well as limit the amount of daily deals that they offer or state in the daily deal that it is only valid for certain types of work.

New York, North Carolina, and South Carolina are all heading in the right direction by allowing the legal profession to take advantage of new innovations that benefit consumers without harming the profession. While the issues raised by states that have rejected these innovations represent valid client protection principles when applied to traditional practice, the strict application of traditional rules to new innovations is not always appropriate. Appropriate regulations can be placed on online daily deals that achieve both the goals of increasing affordable legal services to consumers as well as protecting them from misuse of client funds and other lawyer misconduct.


Jen Roy, a law student at the University of the District of Columbia, is a Responsive Law intern.

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