Can a collections lawyer pay a percentage of recoveries to a third-party software/electronic-network company that connects the firm with creditor clients?

Plain-English summary

A law firm asked the Disciplinary Commission whether it could license software from the National Attorney Network, Inc. (NAN), an Atlanta company whose software electronically connects creditors and law firms for collecting accounts receivable. Under the arrangement, the attorney fee was negotiated directly between the firm and the creditor/client, and NAN received 3% of the net proceeds recovered as a software-licensing and electronic-data-transfer charge. The firm withheld and remitted that 3% to NAN, and the creditor/client was fully informed of the fee.

The Commission reviewed the agreement and concluded there was nothing ethically impermissible about it. As the opinion stated, the firm was "not splitting legal fees with a non-lawyer entity," nor was it "participating in a prohibited for-profit referral service by paying for referrals in any way." On that basis, the firm could continue to participate in the network and could ethically remit the software-licensing monies it had been holding pending the opinion.

Currency note

This opinion was issued in 1997, before the 2002 Ethics 2000 revisions to the ABA Model Rules of Professional Conduct and Alabama's subsequent amendments to its Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Is paying a percentage-based fee to a software/collections network fee-splitting with a non-lawyer?

A: Not on these facts. The opinion concluded the firm was not splitting legal fees with a non-lawyer entity, because the attorney fee was negotiated separately with the client and the 3% went to NAN for software licensing and electronic data transfer.

Q: Does paying the network fee make it a prohibited for-profit referral service?

A: No. The opinion concluded the firm was not participating in a prohibited for-profit referral service or paying for referrals in any way.

Q: Could the firm release the network fees it had been holding pending the opinion?

A: Yes. The opinion concluded the firm could ethically remit to NAN the software-licensing monies owed to date.

Background and rules framework

The opinion addresses two long-standing concerns in collections practice: sharing legal fees with a non-lawyer (the subject of Rule 5.4) and paying a third party for client referrals (the subject of Rule 7.2). The opinion does not quote or cite specific rule numbers; it analyzes the NAN agreement directly and finds neither concern present, treating the 3% charge as payment for software and data-transfer services rather than as a division of the legal fee or a payment for referrals.

Citations and references

The opinion does not cite specific Rules of Professional Conduct, statutes, or cases by number. It analyzes the National Attorney Network agreement and addresses, in the Commission's own words, whether the firm was "splitting legal fees with a non-lawyer entity" or "participating in a prohibited for-profit referral service."

See also

• AL Ethics Op. 1992-13: Fee-Splitting With a Non-Lawyer
• AL Ethics Op. 1993-20: Rule 5.4 and Fee-Splitting With a Non-Lawyer
• ABA Ethics Op. 464: Fee Division With a Lawyer Who Shares With Nonlawyers
• RI EAP Op. 2005-01: Flat Annual Fee to a Consumer Lawyer-Matching Website Is Permissible Advertising, Not Referral Fee-Sharing

Source

• Landing page: https://www.alabar.org/office-of-general-counsel/formal-opinions/1997-01/
• Original PDF: https://www.alabar.org/assets/2019/02/1997-01-1.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

ETHICS OPINION

RO-97-01

Participation in National Attorney Network

QUESTION:

"This letter will serve as my request for a formal opinion from the Disciplinary Commission concerning the question regarding our firm's licensing of software to participate in an electronic collection network. Specifically, this relates to the National Attorney Network Inc. located in Atlanta, Georgia. NAN licenses computer software that electronically connects creditors and law firms for the efficient collection of the creditors' accounts receivable. The attorney fee is negotiated and agreed upon directly between the attorney and the credit grantor/client. NAN receives a fee of three percent of the net proceeds recovered for software licensing and electronic data transfer.

The present practice is for us to remit directly to the client the net proceeds of accounts collected on a monthly basis. We would withhold the agreed upon attorney's fees due our law firm. We would also withhold the three percent NAN Network Licensing fee and remit that to NAN. The creditor/client is fully informed of the amount of the NAN licensing fee and the practice of the law firm withholding and remitting it. In fact they prefer not to have the accounting responsibility for the NAN fee. Some credit grantors may even erroneously misstate the terms of our engagement by referring to our authorization to retain 'an attorney's fee of 28%'. Their intent, however, is for us to retain an attorney fee of 25% and also cover the cost of the 3% NAN license fee as well. Their engagement letter would require our firm to pay all charges (the three percent due the National Attorney Network) for the collection of accounts using that system. Our firm also would negotiate its contingency fee with a credit grantor with full knowledge that payment of the NAN licensing fee would be part of our expense or overhead.

A copy of the National Attorney Network Agreement is enclosed for your review. The pertinent parts have been highlighted in yellow.

Also enclosed for your review is a copy of the letter from the general counsel for the National Attorney Network. This letter contains their opinion regarding the ethical compliance. Please advise if we can continue participating in the National Attorney Network.

We have also retained in our possession certain monies representing the three percent fee while this ethical question can be considered. Your direct instructions regarding permission to remit those funds being held to the National Attorney Network is necessary as well."

ANSWER:

Our review of the agreement you have with National Attorney Network, Inc., leads us to conclude that there is nothing ethically impermissible about it. You are not splitting legal fees with a non-lawyer entity, nor are you participating in a prohibited for-profit referral service by paying for referrals in any way.

In light of this, you may continue to participate in the network and you may ethically remit to National Attorney Network, Inc., monies owed for software licensing fees to date.

MLM/vf

1/3/97