Can a North Carolina lawyer offer a discounted legal service on a Groupon-style daily-deal website that keeps a percentage of each sale?

Plain-English summary

A lawyer wanted to advertise on a "deal of the day" or group-coupon website, where registered consumers buy discounted services online and the website company keeps a percentage of each sale. The inquiry asks whether a lawyer may offer a discounted legal service through such a site despite the company's fee. The opinion answers yes, with conditions.

On the fee-sharing question, the opinion reasons that the website company's percentage is the cost of advertising, not a prohibited division of legal fees under Rule 5.4(a). The fee is paid whether or not the purchaser ever claims the service, the lawyer earns the fee by performing the legal work, and there is no interaction between the company and the lawyer about the representation beyond transferring the proceeds. Rule 7.2(b)(1) permits paying the reasonable cost of advertising, so a lawyer may participate as long as the percentage is reasonable compensation for the advertising service. The opinion compares 2010 FEO 4, which permitted a barter-exchange program charging a ten-percent transaction fee.

The opinion then sets out the professional responsibilities that attach. The advertising may not be misleading under Rule 7.1: the discount cannot be illusory, so the lawyer must have an established standard fee for the discounted service, and the ad must disclose that hiring a lawyer is an important decision to be made only after investigating the lawyer's credentials, and that a conflict or a determination that the service is inappropriate may prevent representation, in which case the buyer's money is refunded. Under Rule 1.15-2(b), the payments are advance fees that must be deposited in the trust account and not moved to the operating account until earned. Once a buyer pays, a professional relationship arises and the buyer is at least a prospective client protected by Rule 1.18.

On fees, Rule 1.5(a) bars a clearly excessive fee: a lawyer may not keep a windfall for doing nothing, so if a buyer never claims the service within the designated time, the lawyer must refund the advance payment (or credit it against the actual rate if the buyer still wants the service). Finally, Rule 1.1 requires competent representation: the lawyer must consult each buyer about what is actually needed, perform the advertised service even if it takes more time than expected without extra charge, and, if the buyer does not need the service or a conflict bars it, refund the entire payment, including the website company's cut, to make the buyer whole.

In practice

Under the North Carolina rules as they stood at the time of the opinion, participating in a daily-deal or group-coupon advertising program is permitted, and the website company's percentage is treated as advertising cost rather than fee-sharing, if the percentage is reasonable. Per the opinion, the discount cannot be illusory, the ad must carry the stated disclosures, buyers' payments must go into the trust account as advance fees, and buyers are entitled to prospective-client protection under Rule 1.18.

Per the opinion, a lawyer may not keep an unearned payment as a windfall: an unclaimed deal must be refunded or credited, and if the lawyer determines the buyer does not need the service or a conflict bars representation, the full payment (including the company's cut) must be refunded. The opinion's endnote adds that the lawyer may not condition the offer on the buyer's agreement that the payment is an earned-on-receipt flat or minimum fee.

Common questions

Q: Does the website company's cut count as illegal fee-sharing with a nonlawyer?

A: No. The opinion concludes the percentage is the cost of advertising, not a division of legal fees under Rule 5.4(a), because it is paid regardless of whether the buyer claims the service and the company has no role in the representation; Rule 7.2(b)(1) allows paying the reasonable cost of advertising.

Q: Where do the buyers' payments go?

A: Into the trust account. The opinion states the payments are advance fees under Rule 1.15-2(b) that must remain in trust and may not move to the operating account until earned by providing the legal service.

Q: What happens if a buyer never claims the deal?

A: The lawyer must refund it. Per Rule 1.5(a), the opinion concludes a lawyer may not keep a fee for doing nothing as that is inherently excessive; the unclaimed advance payment must be refunded, or credited against the lawyer's actual rate if the buyer still wants the service.

Q: What must the advertisement disclose?

A: The opinion requires that the discount be genuine (the lawyer must have an established standard fee), and that the ad state hiring a lawyer is an important decision to make after investigating credentials, and that a conflict or a determination that the service is inappropriate may prevent representation, with a refund if so.

Q: What if the buyer does not actually need the service or there is a conflict?

A: The opinion concludes the lawyer must refund the buyer's entire advance payment, including the amount the website company retained, to make the buyer whole; under Rule 1.1 the lawyer must first consult each buyer to determine the service actually required.

Background and rules framework

The opinion applies North Carolina Rule 5.4(a) (sharing legal fees with nonlawyers, the analogue of Model Rule 5.4) and Rule 7.2(b)(1) (paying the reasonable cost of advertising), then layers in Rule 7.1 (misleading communications), Rule 1.15-2(b) (depositing entrusted funds in a trust account), Rule 1.18 (duties to prospective clients), Rule 1.5(a) (clearly excessive fees), and Rule 1.1 (competence). It draws on prior North Carolina authority, including 2010 FEO 4 (a barter-exchange transaction fee) and 2008 FEO 10 (advance fees may not be made earned-on-receipt here).

Citations and references

Rules of Professional Conduct:

• MR 5.4(a) / NC Rule 5.4(a) (sharing legal fees with a nonlawyer)
• MR 7.2 / NC Rule 7.2(b)(1) (paying the reasonable cost of advertising)
• MR 7.1 / NC Rule 7.1 (false or misleading communications)
• MR 1.15 / NC Rule 1.15-2(b) (depositing entrusted funds in a trust account)
• MR 1.18 / NC Rule 1.18 (duties to a prospective client)
• MR 1.5 / NC Rule 1.5(a) (clearly excessive fee)
• MR 1.1 / NC Rule 1.1 (competence)

Other opinions cited:

• NC 2010 FEO 4: a lawyer may participate in a barter-exchange program charging a ten-percent cash transaction fee (compared).
• NC 2008 FEO 10: a lawyer may not condition the discounted offer on the buyer's agreement that the payment is an earned-on-receipt flat or minimum fee.

See also

• ABA Formal Op. 465: Daily-Deal Marketing
• AL Ethics Op. 2012-01: Groupon Legal Deals

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2011-formal-ethics-opinion-10/

Original opinion text

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

Inquiry:

Lawyer would like to advertise on a “deal of the day” or “group coupon” website. To utilize such a website, a consumer registers his email address and city of residence on the website. The website company then emails local "daily deals" or coupons for discounts on services to registered consumers. The daily deals are usually for services such as spa treatments, tourist attractions, restaurants, photography, house cleaning, etc. The daily deals can represent a significant reduction off the regular price of the offered service. Consumers who wish to participate in the “deal of the day” purchase the deal online using a credit card that is billed.

The website company negotiates the discounts with businesses on a case-by-case basis; however, the company’s fee is always a percentage of each “daily deal” or coupon sold. Therefore, the revenue received by the business offering the daily deal is reduced by the percentage of the revenue paid to the website company.

May a lawyer advertise on a group coupon website and offer a “daily deal” to users of the website subject to the website company’s fees without violating the Rules of Professional Conduct?

Opinion:

Yes. Although the website company’s fee is deducted from the amount paid by a purchaser for the anticipated legal service, it is paid regardless of whether the purchaser actually claims the discounted service and the lawyer earns the fee by providing the legal services to the purchaser. Therefore, the fee retained by the website company is the cost of advertising on the website and does not violate Rule 5.4(a) which prohibits, with a few exceptions, the sharing of legal fees with nonlawyers. The purpose for the fee-splitting prohibition is not confounded by this arrangement. As noted in Comment [1] to the rule, the traditional limitations on sharing fees prevent interference in the independent professional judgment of a lawyer by a nonlawyer. There is no interaction between the website company and the lawyer relative to the legal representation of purchasers at any time after the fee is paid on-line other than the transfer of the proceeds of the “daily deal” to the lawyer. Rule 7.2(b)(1) allows a lawyer to pay the reasonable cost of advertisements. As long as the percentage charged against the revenues generated is reasonable compensation for the advertising service, a lawyer may participate. Cf. 2010 FEO 4 (permitting participation in a barter exchange program in which members pay a cash transaction fee of ten percent on the gross value of each purchase of goods or services). There are, however, professional responsibilities that are impacted by this type of advertising.

First, a lawyer may not engage in misleading advertising. Rule 7.1. Therefore, the advertised discount may not be illusory: the lawyer must have an established, standard fee for the service that is being offered at a discount. Moreover, the lawyer’s advertisement on the website must include certain disclosures. Clients should not make decisions about legal representation in a hasty manner. The advertisement must explain that the decision to hire a lawyer is an important one that should be considered carefully and made only after investigation into the lawyer’s credentials. In addition, the advertisement must state that a conflict of interest or a determination by the lawyer that the legal service being offered is not appropriate for a particular purchaser may prevent the lawyer from providing the service and, if so, the purchaser’s money will be refunded (see below for explanation of the duty to refund).

Second, a lawyer must deposit entrusted funds in a trust account. Rule 1.15-2(b). The payments received by the lawyer from the website company are advance payments1of legal fees that must be deposited in the lawyer’s trust account and may not be paid to the lawyer or transferred to the law firm operating account until earned by the provision of legal services.

Third, a professional relationship with a purchaser of the discounted legal service is established once the payment is made and this relationship must be honored. The lawyer has offered his services on condition that there is no conflict of interest and the service is appropriate for the purchaser, and the purchaser has accepted the offer. At a minimum, the purchaser must be considered a prospective client entitled to the protections afforded to prospective clients under Rule 1.18.

Fourth, a lawyer may not retain a clearly excessive fee. Rule 1.5(a). If a prospective client fails to claim the discounted legal service within the designated time (before the “expiration date”), one might consider the advance payment forfeited. Even if it is assumed that this is a risk that is generally known to consumers, however, it does not justify the receipt of a windfall by the lawyer. As a fiduciary, a lawyer places the interests of his clients above his own and may not accept a legal fee for doing nothing. Such a fee is inherently excessive. Therefore, if a prospective client does not claim the discounted service within the designated time, the lawyer must refund the advance payment on deposit in the trust account for the prospective client or, if the prospective client still desires the legal service, the lawyer may charge his actual rate at the time the service is provided but must give the prospective client credit for the advance payment on deposit in the trust account.

Last, a lawyer has a duty of competent representation pursuant to Rule 1.1. The lawyer must consult with each prospective client to determine what service the prospective client actually requires. If competent representation requires the lawyer to expend more time than anticipated to satisfy the advertised service, the lawyer must do so without additional charge. Similarly, if upon consulting with a prospective client the lawyer determines that the prospective client does not need the legal service or that a conflict of interest prohibits the representation, the lawyer must refund the prospective client’s entire advance payment, including the amount retained by the website company, to make the prospective client whole.

End Notes

• 1. In light of the many uncertainties of a legal representation arranged in the manner proposed, a lawyer may not condition the offer of discounted services upon the purchaser’s agreement that the money paid will be a flat fee or a minimum fee that is earned by the lawyer upon payment. See 2008 FEO 10.