Puerto Rico considers implementing IOLTA type rules; comments requested

As you probably know, IOLTA (short for "interest on lawyer trust accounts") programs are a mechanism for funding legal services for the poor. They require attorneys to place certain funds in interest generating accounts and banks to provide the interest to an agency that uses it to provide funds for legal services. All states and the District of Columbia have IOLTA programs. (About a decade ago, the program in DC became mandatory; see here).

Now comes news that the Supreme Court of Puerto Rico is considering adopting a similar program.  The text of it (in Spanish) is available here.  Comments should be sent to SecretariadoConferenciaJudicialyNotarial@ramajudicial.pr

If you want to learn more about the basics of IOLTA programs, you can listen to this short podcast.  Also, here is a short post on common mistakes lawyers make when handling an IOLTA account. If you want to read about the typical debate as to whether IOLTA programs are unconstitutional, you can take a look at this article, although that is only one of many, many others on the subject.

Avvo expands its Legal Services program to 18 states; Should attorneys be concerned? (part 2)

A few days ago, I posted a long comment expressing my concern over the new Avvo Legal Services, which it describes as an online legal services marketplace now offering fixed-fee, limited-scope legal services through a network of attorneys.  Many others have raised similar concerns.  See, among many others, Solo Practice University; Simple Justice and the comments to stories in the ABA Journal.com here, here and here.

Coincidentally, yesterday Avvo announced it has now expanded the service to 18 states, covering about 70 percent of the US population.  I first read the story in Law Sites, which describes the news and the service and quotes Avvo's general counsel and CEO.  I left a comment expressing my opinion about one of their claims and asking for an explanation, and the General Counsel for Avvo was kind enough to reply.  You can read our exchange in the comments below the story here and judge for yourself as to whether Avvo's explanation makes sense to you.

I find it interesting that when challenged on whether lawyers paying for the service could be found to be in violation of the rule against sharing fees with non-lawyers, Avvo's GC claimed the rule is unconstitutional as applied under the First Amendment.  (Is Avvo arguing that because it calls the fee a "marketing fee," paying the fee makes it advertising?  I don't know.)  This means that in the last couple of days I have read of Avvo claiming that the transaction is not fee sharing because it is a separate transaction, that the transaction is not fee sharing because it is paying for advertising, that if the transaction is fee sharing, it is allowed by the rules, and that if it is not allowed by the rule, the rule in unconstitutional.

Also, I don't understand why Avvo doesn't instead argue that it is covered by comment [5] to Rule 7.2 which says that "a lawyer may pay others for generating client leads, such as Internet-based client leads, as long as the lead generator does not recommend the lawyer, any payment to the lead generator is consistent with Rules 1.5(e) (division of fees) and 5.4 (professional independence of the lawyer), and the lead generator’s communications are consistent with Rule 7.1 (communications concerning a lawyer’s services)."

This is an interesting relatively new comment that I have not seen interpreted in any cases.  (If you know of one, please send it my way - I'd like to see it.)  My sense is that this comment was adopted precisely to be more lenient with respect to the ban to pay others for referring clients, by opening the door to online services that connect clients with lawyers -- which is precisely what Avvo does.  The problem is that there are a few things in the comment that have not been tested (at least to my knowledge).  What is a "client lead"?  Does that refer to information or to an actual client?  If the intent is to allow payment for information but not for an actual client, then the comment won't help Avvo.  Again, I have not done the research to know how "leads" has been interpreted (or is meant to be interpreted).

Also, and more importantly, what does it mean when it says that the payment won't violate Rule 7.2 as long as it is "consistent with" Rules 1.5 and 5.4.  Is "consistent with" the same as "complies with" or is there a difference?  If it means that in order for the payment not to violate 7.2 the lawyer also has to comply with 1.5(e) and 5.4, that means that payment to a non-lawyer will be in violation of 7.2 because sharing a fee with a non lawyer is by definition a violation of 5.4 and irrelevant to 1.5(e) which is about sharing fees with other lawyers.  Since internet "lead generators" are not likely to be lawyers, I think that "consistent with" means something other than "complies with."

Viewed that way, the question becomes whether allowing payment to a non-lawyer for finding and sending a client to the lawyer threatens the policies and concerns for which we decided to adopt the requirements in 1.5(e) and the ban in 5.4.   And I think Avvo can make a case that allowing this type of payment does not.  I don't know how convincing the argument will be before the authorities, but you can make the argument.   Which is why I don't understand why not go for this argument rather than the strange argument based on the First Amendment (which appears to be based on a forced interpretation of what the speech in question is and an incorrect reading of the constitutional standard that applies (note that Avvo's GC argues the state has to show harm, an argument the Supreme Court dismissed in Ohralik).  

Having said all that, it seems Avvo is here to stay and that at least for now states are tolerating it.  However, it will be interesting to see what happens in the near future.  It will be interesting to see if attorneys ask their local Ethics Commissions to issue opinions on whether sharing fees with Avvo is ethical.  Hopefully some will and we will begin to see the responses in different states. 

It will also be interesting to see if states will then create regulations to apply to the non lawyers in the legal marketplace.  The ABA just adopted a resolution urging jurisdictions to regulate the non lawyers in the legal services marketplace according to the policies and values of the legal profession.  Ironically, this may lead to a finding that it is not a good idea to abandon the ban related to sharing fees with a non-lawyer. 

Avvo joins the legal market; now offers legal services through network of attorneys; should attorneys be concerned?

Avvo, the somewhat controversial (here and here) online rating company, has evolved into what it calls an online legal services marketplace now offering fixed-fee, limited-scope legal services through a network of attorneys.  This is not surprising since the company's CEO has participated in a number of events calling for the opening of the legal market to outsiders and the elimination of regulation on the unauthorized practice of law to open the way for Avvo itself to join the market.  (You can see a video of one of these events here.)

Finding new ways to provide access to legal representation, including by relaxing some regulations, is not necessarily a bad thing.  But one must be careful not to make mistakes since the regulations have not been relaxed yet.

As I have argued before, the new buzzword in Legal Ethics these days is the notion of "innovation" and states and the ABA are trying to find ways to encourage innovation.  Yet we shouldn't rush to try to be innovative at the risk of creating other problems.  I have no problem with innovation, or change or new initiatives, and I most certainly don't have a problem in trying to find ways to provide access to legal services for people who can't afford them, but whatever is done should be done with a full understanding of the professional responsibility principles involved and of the possible consequences for possible mistakes.

Not too long ago, I made that observation when commenting on the ABA initiative with a company called Rocket Lawyer (another one of those so called online legal services marketplaces).  You can read my comment here.

I am repeating it now in light of the announcement that Avvo is now offering "legal services through a network of attorneys."

Avvo first got into the business of offering legal advice last year when it launched Avvo Advisor, a service that provides on-demand legal advice by phone for a fixed fee of $39 for 15 minutes.  Just a couple of weeks ago, however, the ABA Journal.com reported that Avvo has begun testing a service that offers fixed-fee, limited-scope legal services through a network of attorneys, and plans to roll out the service more broadly over the next few months.  (You should also read the comments posted at  the end of the ABA Journal story.)

That's a whole different ballgame and one that deserves a closer look.

As described elsewhere, attorneys can sign up with Avvo to offer services by agreeing to pay a "marketing fee" the value of which will depend on the services rendered.  Clients would choose an attorney from those registered with Avvo and form an attorney-client relationship with the attorney (not with Avvo).  Avvo essentially serves as a means for the client to find an attorney.

Viewed this way, Avvo is essentially helping people find a lawyer who can serve their needs. Yet, Avvo claims it is not a referral service.  Why?  Maybe because lawyers have to pay Avvo a fee to get Avvo to connect them with clients, and the rules in most, if not all, jurisdictions say it is unethical to pay a third party for recommendations or referrals except under certain circumstances.  Thus, ABA Model Rule 7.2(b), which has been adopted in the vast majority of jurisdictions, states that “[a] lawyer shall not give anything of value to a person for recommending the lawyer’s services except that a lawyer may . . . pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service. A qualified lawyer referral service is a lawyer referral service that has been approved by an appropriate regulatory authority. . . .”  Avvo is a for profit business.  Whether it is "a qualified referral service" depends on the law of each jurisdiction.

But, as long as you are willing to take Avvo's word for it, the is question moot anyway because Avvo clearly states in its website that it is not a referral service.  So, there.

This brings us to the issues that arise when we start to look at how money is exchanged and what the money pays for. 

Here is what Avvo itself says about this in the FAQ section of its website:

"Should I be concerned about fee-splitting?  No. Avvo always sends you 100% of the client’s payment. As a completely separate transaction, you will pay a per-service marketing fee. We know this issue is extremely important to participating attorneys. Here’s what ethics expert and Avvo General Counsel Josh King says on the matter, "Fee splits are not inherently unethical. They only become a problem if the split creates a situation that may compromise a lawyer’s professional independence of judgment. We believe that Avvo Legal Services fees, like credit card fees, would involve the sort of technical fee split that would not create such a potential for compromise. Nonetheless, we have tried to keep things simple and clear by making the per-service marketing fee a separate charge."

. . . . Does this count as fee splitting?  No. As mentioned in the ethics section of this FAQ, Avvo always sends you the entire legal fee paid by the client. The per-service marketing fee is a completely separate transaction. We know this is extremely important to participating attorneys. Here’s what ethics expert and Avvo General Counsel Josh King says on the matter, "Fee splits are not inherently unethical. They only become a problem if the split creates a situation that may compromise a lawyer’s professional independence of judgment. We believe that Avvo Legal Services fees, like credit card fees, would involve the sort of technical fee split that would not create such a potential for compromise. Nonetheless, we have tried to keep things simple and clear by making the per-service marketing fee a separate charge.”

Of course, I am sure that Avvo believes its service does not violate the rules of professional conduct, but the fact they believe it, by itself, does not make it so.  Do your own research before you commit to something that might become a problem.

Start by taking a look at what Avvo says about fee splitting:  "Fee splits are not inherently unethical. They only become a problem if the split creates a situation that may compromise a lawyer’s professional independence of judgment."

That statement is, at best, confusing.  Let’s start with the basics.  Model Rule 5.4, which has been adopted in pretty much every jurisdiction, states clearly that a it is misconduct to share a fee with a non-lawyer except under one of four enumerated circumstances and, at least the way I read it, the agreement described by Avvo does not fall within any of them.  Of course, however, it is possible that a particular jurisdiction has different language that would recognize the validity of this type of agreement, and some jurisdictions have ethical opinions that have concluded it would be OK to share a fee with a non professional under certain circumstances.

Thus, at least as far as the Model Rule is concerned, unless allowed by one of the specific exceptions, splitting fees with a non lawyer is unethical, inherently or otherwise.  It just is. Why?  Because the rules say so, period.  Because the rules take the view that splitting fees with a non lawyer inherently creates a situation that may compromise a lawyer's professional independent judgment.  In other words, according to the Model Rules, splitting fees with non-lawyers is inherently unethical.

If you are going to argue the specific agreement does not violate the rule, you are going to have to develop some sort of analysis to show the agreement is not an example of splitting a fee.

Avvo wants it both ways.  They claim, without analysis, that their program does not constitute splitting fees, but, just in case, they also claim that even if it is, splitting fees is not unethical unless there is a conflict of interest.  Problem is there is no analysis to support the first part of this conclusion and the second part is contrary to the state of the law.  

As an aside, I am assuming here, of course, that Avvo does not want to be considered a law firm.  If it is a law firm, then the applicable rule is 1.5(e), which allows the splitting of fees among lawyers in different firms.  Yet, Avvo would not want that rule to apply because this is allowed only if the requirements in that rule are strictly met, which is not the case in the Avvo type business relationship with the lawyer. 

So, this brings us back to the question of whether the Avvo-Lawyer agreement does or does not constitute splitting of a legal fee with a non-lawyer (which, as stated above would be a clear violation of the rules).

According to Avvo, here is how the service works: A customer selects a lawyer for a particular legal need through the Avvo website and pays for the service the full flat fee assigned for that service up-front.  Avvo retains that money until after the service is performed.  Then, on the 7th of the month, Avvo will send the lawyer the full fee, and in a separate transaction will deduct a “per-service marketing fee” for each completed legal service. The amount of this fee depends on the service, and ranges from a $40 marketing fee for a $149 service to a $400 marketing fee for a $2995 service.  Avvo specifically says the withdrawal of the service fee is a separate transaction “to avoid any fee-splitting concerns.”

[By the way, note that Avvo pays the attorney on the 7th of the month, not when the work is completed, so God forbid you finish the work on the 8th or you’ll have to wait a month for your check...  But I digress.]

What could go wrong?  Let’s review. 

Let’s start with the fact that when a client pays for services up-front, a lawyer has an ethical obligation to keep a client’s money in a separate trust account, which in many jurisdictions has to be an interest bearing account (IOLTA) account.  Since most jurisdictions have held that flat fees are not earned upon payment, by definition (at least in those jurisdictions) they fall in the category of fees that need to be in a trust account.  According to the Avvo plan, however, the lawyer is allowing Avvo to handle those fees with (to my knowledge) no assurance that the fee will be held in a trust account, much less an IOLTA account, with the interest paid to the appropriate state agency.  That could be a problem.

Then let’s think about the second transaction.  The first thing to notice is that the amount of the so-called marketing fee varies depending on the amount of the flat fee.  Unless I am missing something, this sounds to me like the marketing fee is really a percentage of the attorney’s fee.  You’d have to do the math to determine the amount of the percentage, but since both fees are pre-determined, it shouldn’t be difficult.  So, what is really happening here is that Avvo is collecting a percentage of the fee the client pays the attorney.  The fact it does it separately, in a second transaction, does not change that fact.  Does that sound to you like splitting a fee with a non-lawyer?

Next, does anyone see anything wrong with a lawyer giving Avvo direct access to a lawyer’s (or the firm’s) bank account so Avvo can make withdrawals directly?  I see two issues here.  You can see the problem if the attorney gives Avvo access to the firm's trust account, right?  First, giving anyone (other than the bank) access to that account in and of itself is a problem.  Second, when Avvo takes money out of that account to pay for the marketing fee, the lawyer is by definition using client money to pay for operating expenses.  That's, at least, commingling.

Maybe these problems can be avoided by giving Avvo access to the firm's operating or general account.  I suppose that would be OK in terms of ethical issues, but I wonder whether it is a good idea.  This is a personal decision, but I wouldn't feel comfortable giving others the ability to take money out of my bank account directly... but that's just me...  I would want assurances on the security measures taken to protect my bank account information.  I don't want my account to be vulnerable if the other company gets hacked and my information is stolen or misplaced or something... Maybe, the best option is for the lawyer to open an account to be used only for transactions with Avvo.  That could work, if that is something Avvo would agree to.   None of this has to do with the rules of professional conduct or ethics, though... So let's get back to that discussion.

So after all this, what is Avvo and what is it doing?  If Avvo is not a referral service, and it doesn't want to be considered to be a provider of legal services (a law firm) either, we are forced to go back to the issue of splitting fees with a non-lawyer.

When it talks to consumers Avvo says it "offers legal services" but when it talks to lawyers and its regulators it says we offer "a platform" for "marketing" of legal services.  If Avvo is offering legal services then it should be subject to the same regulations that all legal services providers are subject to.  If it isn't then the lawyers it serves need to make sure that by entering into agreements with it, the lawyers don't violate the rules the lawyers are subject to.  

Maybe I am missing something here.  Please explain it to me if I am.

Now, having said all that, I want to be clear that what I am saying here is simply that I have some concerns over whether agreeing to participate in the system designed by Avvo would violate the rules.  I am not saying that it is necessarily a bad idea to find a way to make it work.  Maybe it is a good idea for potential clients to have access to legal services through platforms like Avvo, RocketLawyer or LegalZoom.  That is a different question.  If it is, then we need to work to change the current rules.  I have no problem with that.

For more on this go here.

UPDATE (2-10-16):  Part II of my comment on Avvo Legal Services.

UPDATE (4-9-16):  Avvo now offers legal forms.  My comments here.

UPDATE (6-19-16):  Ohio opinion suggests participating in Avvo Legal Services might be unethical

UPDATE (8-1-16):  Florida adopts rules that make it unethical to participate in program like Avvo Legal Services

UPDATE (8-12-16):  South Carolina opinion finds participating in program like Avvo Legal services unethical

UPDATE (10-10-16):  Pennsylvania issues opinion finding participating in program like Avvo Legal Services is unethical.

Critique of Florida Access To Justice Commission's Initial Recommendations

Back in July, the Florida Supreme Court rejected a proposal to improve legal aid funding by increasing annual bar dues by $1000 which would have netted something on the order of $10 million in additional legal aid funding.  At the same time, a newly formed task force called the Florida Commission on Access to Civil Justice was working on recommendations to deal with the issue.

Those recommendations are now available and, at least according to Sam Wright of Above the Law, they are disappointing.  For example, the first one, recommends "support of the continued development of the Statewide Gateway Portal and approval of a pilot project, subject to obtaining adequate funding.”  Huh?  What the heck does that mean?  It appears it is a plea for funding to create a self help website.  Really?  You want to provide access to legal representation because there is no funding, by asking for funding so that people can represent themselves?

The second recommendation is even more precious: to approve the Commission’s adoption of an aspirational goal of 100 percent access to effective assistance for essential civil legal needs.”  Let's see, aspirational goal vs. $10 million in additional legal aid funding...  Tough one!  

Not everything is bad news, though.  One recommendation is to apply some income from class action litigation for financing legal aid. Yet, all in all, the recommendations seem to be weak. Read the details and critique of the rest at Above the Law.

Also, the recommendations do not address another issue under debate in the state.  Maybe the state could do better at providing access to legal representation, if it lowered barriers that prevent lawyers from other states from practicing there.  Yet, just this month, the Florida Bar tabled a proposal to adopt reciprocity or some other form of admission on motion. More on that here.

Quick review of the basics of handling money

IPethics&Insights has a short post reviewing the basics on handling clients' money, firm bank accounts and the like, here.

Illinois amends lawyer trust account guidelines

The Supreme Court of Illinois has announced amendments to existing lawyer trust account guidelines. The new amendments to Rule 1.15 of the Illinois Rules of Professional Conduct help clarify the obligations that all lawyers have to manage and protect client funds. Go here for more on the story. Go here to view the new rule changes.

Video of oral argument on sanctions and other interesting issues

The Illinois Supreme Court just heard oral arguments in a case where the administrator of the state's disciplinary authority is appealing a ruling arguing that the sanctions imposed in a particular case were too lenient.  You can watch the video by going here, or, if you prefer just the audio, you can go here.  Surprisingly, the attorney facing the sanctions represents himself!

The case (In re Mulroe), is about an attorney who mishandled a client's money.  To make a long story short, he deposited it into one account, then moved it around into other accounts and eventually took too long to repay it.  He apparently had very sloppy accounting of the money in all his accounts and was guilty of commingling at the very least. It sounds like he had a number of accounts, kept money in all of them and moved the money around using it for whatever he needed to use it at the time.  He claimed he always had enough money, but that was adding the funds in all his accounts at any given time.

The disciplinary authority found the attorney had violated the rules and imposed sanctions but also found that the conduct was not "dishonest" - that it was the result of sloppy bookkeeping rather than of intent to convert the client's funds.  The administrator appealed arguing the sanctions should more severe because the conduct should be considered to be dishonest.  In fact, he argued the conduct was the equivalent of misappropriation.  The administrator argued that the lawyer engaged in a willful violation of the fiduciary duty to maintain client's funds properly.

Interestingly, the controversy seems to revolve around whether the conduct was "dishonest."  In my opinion, however, the better way to approach the issue would be to adopt the view of the ABA Standards for Sanctions which is based not on a value judgment of the character of the conduct but on the “mental states” of the lawyer who engaged in it. 

The ABA Standards recognize three different mental states: intent, knowledge and negligence.  In this case, the administrator is arguing that the attorney acted with "knowledge" while the attorney argues he was merely negligent. 

If you listen to the argument you will hear how at one point the discussion seems to be heading that way, although by raising another alternative mental state: "recklessness."  One of the justices asks the attorney point blank if the conduct does not show that he was reckless which makes the attorney look very uncomfortable.

I have always had a problem with the term recklessness (particularly in torts) because it can only be defined as either a high degree of negligence or as disregard for the consequences of the conduct.  If it is the former, it is negligence; if it is the latter, it is knowledge.  So I am afraid "recklessness" adds nothing but confusion to the issue.

The oral argument is long (almost one hour), but it is worth watching.

DC's IOLTA program will be mandatory

The IOLTA program in the District of Columbia used to allow attorney's to "opt out" from participating. This will no longer be allowed. Go here for the story in the Blog of the Legal Times and here for the story in the Legal Profession Blog. I wonder if the move will generate yet another challenge by the Washington Legal Foundation...

Podcast on IOLTA Accounts

The Legal Talk Network has posted an informative podcast on the many details that relate to keeping IOLTA accounts. You can listen to it by clicking on the "play button" below or, if you can't see the button, you can find the program here.  If you can see the program below, you can also download it by clicking on the three dots on the right side of the volume control.

New article on the constitutionality of IOLTA programs

IOLTA programs are a mechanism for funding legal services for the poor. They require attorneys to place certain funds in interest generating accounts and banks to provide the interest to an agency that uses it to provide funds for legal services. All states have IOLTA programs. This approach to raising funds for legal aid has been under attack by opponents of legal aid for years. Here is a link to a post in another blog which discusses a new article on the subject.

D.C. considers IOLTA program

The Blog of Legal Times is reporting that the District of Columbia Bar is looking to join the more than 40 state bars around the country that have made participation in a trust program mandatory. Proposed changes to the D.C. Rules of Professional Conduct governing interest on lawyers' trust accounts, or IOLTA, are under review at the D.C. Court of Appeals. Click here for a copy of the D.C. Bar’s proposal, submitted to the court in September. More on the story here.

Attempt to rescue IOLTA plan during bad economy

As all other states, Illinios has an IOLTA program which uses the interest earned in certain lawyer trust bank accounts to fund legal aid programs. During the current bad economy, though, the interest rates have fallen so low that the program has not been generating much income at all. In an attempt to remedy the situation, last Friday the Illinois Supreme Court approved an amendment to Rule of Professional Conduct 1.15 which guarantees an interest rate of least 1 percent on IOLTA accounts. Ruth Ann Schmitt, executive director of the Lawyers Trust Fund, said the rule change provides banks the option of paying a ''safe harbor'' yield equal to 70 percent of the Federal Funds Target Rate or 1 percent, whichever is higher.

Economy hurts Legal Aid

In an article in The New York Times today we are reminded that "Scores of legal aid societies that help poor people with noncriminal cases — like disputes over foreclosures, evictions and eligibility for unemployment benefits — are being forced to cut their staffs and services, even as requests for help have soared." Since, as the article points out "Legal aid groups have long benefited from little-known programs that draw interest earned from short-term deposits that lawyers hold in trust for clients during" many legal aid groups "have been hit hard by the Federal Reserve’s steep reduction of its benchmark interest rate, which finally plunged last month to near zero." The article is available here.

New FDIC Rule Averts IOLTA Trouble

Marcia Coyle of the National Law Journal reports:

The Federal Deposit Insurance Corp. has announced that, effective immediately, client funds deposited in Interest on Lawyer Trust Accounts -- regardless of amount -- are eligible for full deposit insurance coverage under the Temporary Liquidity Guarantee Program through Dec. 31, 2009.

The American Bar Association, state and federal lawmakers, community and consumer groups, law firms and individual lawyers had mounted a nationwide campaign to persuade the FDIC to include IOLTA funds in the expanded insurance program. . . . .

ABA President H. Thomas Wells Jr. said that if the FDIC had failed to expand full coverage for IOLTA, lawyers would have had to consider abandoning IOLTA for fully insured, noninterest-bearing accounts or moving IOLTA funds from community banks to the larger "too big to fail" banks. "Abandoning IOLTA would have been catastrophic for IOLTA programs in all 50 states, which provide funding for legal aid for the poor," said Wells. "Moving the accounts to larger banks would have defeated the FDIC's purpose in creating the TLGP."

See the full story here.