Can a North Carolina lawyer let a vendor install a self-service kiosk in the law office, collect rent or referral fees for client sign-ups, and be listed in the vendor's marketing?

Plain-English summary

A lawyer whose practice is mostly DWI defense was approached by a company that sells ignition-lock services (often court-ordered in DWI cases). The company wanted to rent space in the law office for a self-service kiosk where the lawyer's clients could sign up, with the lawyer holding no ownership or control over the kiosk or company. The committee works through four inquiries about rent, recommendations, referral fees, and marketing.

On rent, the opinion concludes the lawyer may host the kiosk but may not collect rent if the rent turns on client sign-ups. Rule 1.7(a)(2) bars a representation that may be materially limited by the lawyer's personal interest, including financial interests; the rental income gives the lawyer a financial interest in clients signing up through the kiosk, creating a personal conflict, and because the conflict is caused by the lawyer's financial interest in sustaining that income, it is nonconsentable under Rule 1.7(a) (citing 99 FEO 1). On a bare recommendation, the opinion concludes the lawyer may recommend the company through the kiosk if he takes no rental fee, provided the recommendation is in the client's best interest and rests on the lawyer's independent judgment (Rule 5.4(c)).

On referral fees, the opinion concludes the lawyer may not accept a per-client referral fee from the company, because tying payment to performance creates a financial windfall that interferes with the lawyer's professional judgment and is a nonconsentable conflict under Rule 1.7(a) (citing 99 FEO 1 and 2006 FEO 2; written disclosure does not cure it). On marketing, the opinion concludes the lawyer may participate in the company's marketing, including being listed among the company's providers or affiliates, provided he complies with Rule 7.4 on intermediary organizations. Because the company's marketing refers consumers to the lawyer, it functions as an intermediary organization, so the lawyer must make reasonable efforts to ensure the company satisfies Rule 7.4(b)'s conditions and, if it does not, must seek to correct the noncompliance or withdraw from the arrangement (Rule 7.4(c)).

In practice

Under this opinion, the conduct each inquiry addresses is governed by existing rules. The lawyer may allow the kiosk in the office but may not accept rent tied to client sign-ups, a nonconsentable personal conflict under Rule 1.7(a)(2) and 1.7(a). With no rental fee, the lawyer may recommend the company through the kiosk if the recommendation serves the client's best interest and reflects the lawyer's independent judgment (Rule 5.4(c)). The lawyer may not accept a per-client referral fee, which the opinion holds is a nonconsentable conflict that disclosure cannot cure (Rule 1.7(a); 99 FEO 1; 2006 FEO 2). The lawyer may be listed in the company's marketing if he ensures the company, as an intermediary organization, complies with Rule 7.4(b), correcting noncompliance or withdrawing under Rule 7.4(c) if it does not.

Common questions

Q: Can a North Carolina lawyer rent office space to a vendor for a self-service kiosk the lawyer's clients use?

A: The lawyer may host the kiosk but, per Opinion #1, may not collect rent if the rent turns on client sign-ups, because the rental income gives the lawyer a financial interest in clients signing up through the kiosk and creates a nonconsentable personal conflict under Rule 1.7(a).

Q: Can the lawyer recommend the vendor's service to clients?

A: Yes, if the lawyer takes no rental fee. Opinion #2 concludes the lawyer may recommend the company through the kiosk if the recommendation is in the client's best interest and derives from the lawyer's independent judgment (Rule 5.4(c)).

Q: Can the lawyer take a referral fee for each client who signs up?

A: No. Opinion #3 concludes a per-client referral fee creates a financial windfall that interferes with the lawyer's professional judgment and is a nonconsentable conflict under Rule 1.7(a); written disclosure to the client does not neutralize it (citing 99 FEO 1 and 2006 FEO 2).

Q: Can the lawyer be listed in the vendor's advertising as a provider?

A: Yes, with conditions. Opinion #4 concludes the lawyer may participate in the company's marketing if he complies with Rule 7.4: because the company refers consumers to the lawyer, it acts as an intermediary organization, so the lawyer must ensure it meets Rule 7.4(b) and, if not, must seek to correct the noncompliance or withdraw under Rule 7.4(c).

Background and rules framework

The opinion interprets North Carolina Rule 1.7 (concurrent conflicts of interest, including 1.7(a)(2) on material limitation by the lawyer's personal financial interest, and 1.7(a) on nonconsentable conflicts), Rule 5.4(c) (a lawyer's independent professional judgment must not be directed by one who recommends or pays for the lawyer's services), and Rule 7.4 (intermediary organizations, including the 7.4(b) conditions and the 7.4(c) duty to correct or withdraw, with a cross-reference to Rule 7.3 on solicitation and Rule 5.4(a)(6)). These correspond to ABA Model Rules 1.7, 5.4, 7.2, and 7.3. The opinion relies on prior NC opinions 99 FEO 1 (referral fee from a third-party investment advisor impairs judgment; CPR 241 and RPC 238) and 2006 FEO 2 (lawyers may not accept a finder's fee from a financial company for a referral).

Citations and references

Rules of Professional Conduct:

• Model Rule 1.7 / NC Rule 1.7(a), 1.7(a)(2) (concurrent and nonconsentable conflicts; personal financial interest; Comment [10])
• Model Rule 5.4 / NC Rule 5.4(c), 5.4(a)(6) (independent professional judgment)
• Model Rule 7.2 / NC Rule 7.4 (intermediary organizations; conditions and duty to correct or withdraw)
• Model Rule 7.3 / NC Rule 7.3 (solicitation of clients)

Other opinions cited:

• 99 FEO 1 (referral fee from a third-party advisor impairs professional judgment; CPR 241; RPC 238)
• 2006 FEO 2 (lawyer may not accept a finder's fee from a financial company for a referral)

See also

• ABA Formal Op. 474: Referral Fees and Conflicts of Interest
• ABA Formal Op. 464: Fee Division With a Lawyer Who Shares With Nonlawyers

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2023-formal-ethics-opinion-3/

Original opinion text

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

Inquiry #1:

Lawyer’s practice consists mostly of representing clients on charges of driving while intoxicated (DWI). Lawyer has been approached by a third-party business (Company) that offers ignition lock services that are often ordered by the court in DWI cases. Company wants to rent a space in Lawyer’s law office to install a self-service kiosk that would allow Lawyer’s DWI clients to sign up for an ignition lock serviced by the business. Company would pay a rental fee to Lawyer to have the kiosk installed in Lawyer’s law office. The kiosk would be entirely supported by Company, and Lawyer would have no ownership interest or control over the kiosk or the Company.

May Lawyer permit Company to rent space in Lawyer’s law office and install the ignition lock self-service kiosk for Lawyer’s clients to use?

Opinion #1:

No, if Lawyer will collect rent from Company. Per Rule 1.7, a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if the representation of one or more clients may be materially limited by a personal interest of the lawyer, including financial interests of the lawyer. Rule 1.7(a)(2); see also Rule 1.7 cmt. [10] (“[A] lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed financial interest.”).

In this instance, the rental fee to be paid to Lawyer creates a financial interest in the kiosk. Although Lawyer does not have a direct financial interest in Company’s business, Lawyer has a financial interest in receiving additional rent from Company, which presumably will continue if Lawyer’s clients sign up for Company’s services through the kiosk in Lawyer’s office (and which will presumably discontinue if clients do not sign up for Company’s services, thus creating an incentive for Lawyer to refer clients to Company through the kiosk). As such, Lawyer has a personal conflict of interest in recommending Company to clients pursuant to Rule 1.7(a)(2).

Many conflicts of interests are consentable. However, in the present scenario where the conflict is caused by Lawyer’s financial interest in sustaining income from the kiosk, the conflict is not consentable. Therefore, Lawyer’s financial interest creates a nonconsentable personal conflict of interest for Lawyer under Rule 1.7(a). See also 99 FEO 1. Although Lawyer may allow Company to place a kiosk for ignition lock services in his office, he may not accept a rental fee for the kiosk.

Inquiry #2:

May Lawyer recommend Company to his clients for ignition lock services via the kiosk if Lawyer does not receive a rental fee from Company for the kiosk?

Opinion #2:

Yes, provided Lawyer’s recommendation of Company is in the client’s best interest and is derived from Lawyer’s independent judgment. Rule 5.4(c).

Inquiry #3:

May Lawyer receive a referral fee from Company for each client that signs up for Company’s services via the kiosk in Lawyer’s office?

Opinion #3:

No. Accepting a referral fee for every client referred to Company could create a significant financial windfall, interferes with Lawyer’s professional judgement, and therefore is a nonconsentable conflict of interest. Rule 1.7(a).

The Ethics Committee previously opined that a lawyer may not receive a referral fee for referring a client to a third-party investment advisor. The opinion provides:

A lawyer must exercise independent professional judgment on behalf of a client when referring a client to a third party for services related to the subject matter of the legal representation. See Rule 1.7(b). If a lawyer will receive a referral fee from the third party, the lawyer's professional judgment in making the referral is or may be impaired. Written disclosure to the client will not neutralize the potential for the lawyer's self-interest to impair his or her judgment. Other ethics opinions are consistent with this holding. CPR 241 rules that a lawyer who sells insurance should not sell insurance to clients for whom he has done estate planning. Similarly, RPC 238 permits a law firm to provide financial planning services provided no commission is earned by anyone affiliated with the firm.

99 FEO 1.

Lawyer must not allow his personal financial interest in receiving referral fees to interfere with his professional judgment. Rule 1.7(a)(2); see also Opinion #1. Here, the referral fees are tied to performance by Lawyer. If Lawyer does not refer enough clients to Company, Company will likely remove the kiosk from Lawyer’s office and Lawyer will lose that additional source of income. Lawyer is, therefore, more likely to refer every DWI client to Company for ignition lock services even if the referral is not in the client’s best interest. Because accepting a referral fee may impair Lawyer’s professional judgment, it is a nonconsentable conflict of interest to accept a referral fee from Company. See also 2006 FEO 2 (lawyers may not accept a “finder’s fee” from a financial company in exchange for a referral).

Inquiry #4:

May Lawyer participate in Company’s efforts to market their product, which includes listing Lawyer’s name and contact information in the Company’s list of providers or affiliates?

Opinion #4:

Yes, provided Lawyer complies with Rule 7.4.

Intermediary organizations are organizations that engage in “referring consumers of legal services to lawyers or facilitating the creation of lawyer-client relationships between consumers of legal services and lawyers willing to provide assistance.” Rule 7.4(a). When participating in an intermediary organization, a lawyer must make reasonable efforts to ensure that the intermediary organization’s efforts comply with the professional obligations of the lawyer, including the following:

(1) The intermediary organization does not direct or regulate the lawyer’s professional judgment in rendering legal services to the client;

(2) The intermediary organization, including its agents and employees, does not engage in improper solicitation pursuant to Rule 7.3;

(3) The intermediary organization makes the criteria for inclusion available to prospective clients, including any payment made or arranged by the lawyer(s) participating in the service and any fee charged to the client for use of the service, at the outset of the client’s interaction with the intermediary organization;

(4) The function of the referral arrangement between lawyer and intermediary organization is fully disclosed to the client at the outset of the client’s interaction with the lawyer;

(5) The intermediary organization does not require the lawyer to pay more than a reasonable sum representing a proportional share of the organization’s administrative and advertising costs, including sums paid in accordance with Rule 5.4(a)(6); and

(6) The intermediary organization is not owned or directed by the lawyer, a law firm with which the lawyer is associated, or a lawyer with whom the lawyer is associated in a firm.

Rule 7.4(b). If a lawyer discovers that an intermediary organization in which the lawyer participates is noncompliant with Rule 7.4(b), the lawyer must either seek to correct the noncompliance or withdraw from participating in the intermediary organization. Rule 7.4(c).

In this scenario, Company is acting as an “intermediary organization” in that its marketing efforts are “referring consumers of legal services to [Lawyer] or facilitating the creation of lawyer-client relationships between consumers of legal services and Lawyer[.]” Rule 7.4(a). Accordingly, Lawyer is tasked with ensuring that Company complies with Rule 7.4(b); if Lawyer discovers that Company is not in compliance with the Rules, Lawyer must seek to correct Company’s efforts or withdraw from participating in Company’s marketing efforts pursuant to Rule 7.4(c).