Can a North Dakota lawyer pay a per-referral fee to join an internet lawyer referral service?

Plain-English summary

A North Dakota bankruptcy lawyer asked whether he could join a California-based, internet lawyer referral service that links consumers with counsel. Participating lawyers had to meet competence qualifications, carry malpractice insurance, list themselves in an associated Directory of Lawyers, and pay a $100 fee to a third party for each referral that converted into an engagement (waived if it did not convert). The service was organized as a California nonprofit corporation with a pending 501(c)(3) application. The committee analyzed the arrangement under Rule 7.2(d).

The committee found the arrangement involves giving value to a person for recommending the lawyer's services, which Rule 7.2 generally prohibits; because the service directs consumers to specific lawyers and charges fees tied to receiving referrals, it is a referral service rather than mere advertising in a directory. But Rule 7.2(d)(2) permits a lawyer to pay the usual charges of a not-for-profit lawyer referral service, while barring payment to a for-profit service for referring clients.

Whether a service is not-for-profit depends on the facts. The committee opined that a referral service incorporated as a North Dakota nonprofit under N.D.C.C. ch. 10-33, or tax-exempt under Section 501(c)(3), qualifies as not-for-profit for Rule 7.2(d)(2), while declining to decide the status of nonprofits formed under other jurisdictions' laws. It stressed that every entity making up the service, including the Directory of Lawyers, must operate not-for-profit, and that participating lawyers remain responsible for compliance with Rules 7.1 (no false or misleading communications), 7.2, and 7.3 (no improper direct contact). It concluded the lawyer may participate on the conditions that all constituent entities operate not-for-profit and the service complies with the other rules.

In practice

Under this opinion, a North Dakota lawyer may pay to participate in a lawyer referral service only when the service, and every entity composing it, operates on a not-for-profit basis. The committee applied Rule 7.2(d)(2) to treat a service incorporated as a North Dakota nonprofit or recognized as a Section 501(c)(3) organization as not-for-profit, while leaving open the status of out-of-state nonprofits. A for-profit service that charges for referrals falls outside the exception, and the participating lawyer remains responsible for the service's compliance with the advertising and solicitation rules.

Common questions

Q: Can a lawyer pay a per-referral fee to a referral service?

A: Only if the service is not-for-profit. The committee held that Rule 7.2(d)(2) permits paying the usual charges of a not-for-profit lawyer referral service but bars paying a for-profit service for referring clients.

Q: Does incorporating as a nonprofit make a service not-for-profit for this rule?

A: The committee opined that a service incorporated as a North Dakota nonprofit under N.D.C.C. ch. 10-33, or tax-exempt under Section 501(c)(3), qualifies, but it declined to decide whether nonprofits formed under other states' laws qualify.

Q: Is it enough that the referral service itself is nonprofit?

A: No. The committee said every entity constituting the service, including the associated Directory of Lawyers, must operate on a not-for-profit basis for the arrangement to qualify under Rule 7.2(d)(2).

Q: What else must the lawyer check?

A: Compliance with the other communication rules. The committee directed that communications through the service must not be false or misleading (Rule 7.1), must identify a responsible lawyer or firm (Rule 7.2), and must not involve improper direct contact (Rule 7.3), with the participating lawyer ultimately responsible.

Background and rules framework

The opinion interprets North Dakota Rule of Professional Conduct 7.2 (Model Rule 7.2), and in particular the Rule 7.2(d)(2) exception allowing payment of the usual charges of a not-for-profit lawyer referral service, along with Rules 7.1 (Model Rule 7.1) and 7.3 (Model Rule 7.3). North Dakota later revised its Rules of Professional Conduct, so the rule text quoted in the opinion reflects the version in force at the time.

The opinion is issued under North Dakota Rule for Lawyer Discipline 1.2(B), the safe-harbor provision protecting good-faith reliance on a written ethics-committee opinion.

Citations and references

Rules of Professional Conduct:

• Model Rule 7.2 / N.D.R. Prof. Conduct 7.2 (advertising; payment for recommendations; not-for-profit referral service exception)
• Model Rule 7.1 / N.D.R. Prof. Conduct 7.1 (communications about legal services)
• Model Rule 7.3 / N.D.R. Prof. Conduct 7.3 (direct contact with prospective clients)
• N.D.R. Lawyer Discipline 1.2(B) (safe harbor for reliance on a committee opinion)

Statutes:

• N.D.C.C. ch. 10-33 (North Dakota nonprofit corporations)
• Internal Revenue Code Section 501(c)(3) (tax-exempt organizations)

Other opinions cited:

• State Bar of Arizona Ethics Op. 05-08: absolute bar on paying a for-profit referral service
• State Bar of Michigan Ethics Op. RI-223: incorporation or tax status alone is not a not-for-profit safe harbor
• North Carolina 2004 Formal Ethics Op. 1: participation in a hybrid for-profit referral/directory service
• New Jersey ACPE Op. 13; Nebraska Op. 95-3; Vermont Op. 95-02 (referral-service distinctions)

See also

• AL Ethics Op. 1995-08: LRS Percentage-Fee Programs
• AL Ethics Op. 1991-43: For-Profit Referral Hotline

Source

• Landing page: https://www.sband.org/page/ethics_opinions
• Original PDF: https://cdn.ymaws.com/www.sband.org/resource/resmgr/docs/for_lawyers/opinion_06-01.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

STATE BAR ASSOCIATION OF NORTH DAKOTA
ETHICS COMMITTEE
OPINION No. 06-01
March 22, 2006

The Committee has received, by letter dated January 5, 2006, a request to determine
whether the North Dakota Rules of Professional Conduct permit participation in a lawyer referral
service in which participating lawyers receive referrals from a nonprofit corporation on the
condition that the lawyers list themselves in a third-party directory and pay fees to a third party
for each referral that results in an attorney-client engagement.

FACTS

The Requesting Attorney practices law in North Dakota in the area of bankruptcy. A
California-based lawyer referral service (“service”) plans to operate a nationwide internet-based
referral service focusing on linking consumers seeking bankruptcy counsel with bankruptcy
counsel looking to represent consumers, The lawyer referral service is a California nonprofit
corporation that has applied for designation as a § 501(c)(3) corporation under the Internal
Revenue Code. It plans to provide other services to assist consumer bankruptcy lawyers, such as
credit counseling. The service will also provide referrals for consumers seeking general
litigation attorneys, and in the future, it may provide referrals in additional disciplines.

The lawyer referral service will be governed by an agreement between lawyers
(“participating lawyers”) and the service. In addition, the service will maintain rules and
procedures for its operation that include oversight of its members and complaint processing.

In order to participate in the lawyer referral service, a lawyer must be a member of the
State Bar of North Dakota in good standing and not under investigation. In the case of

bankruptcy, the lawyer must be admitted and in good standing to practice before the United

States Bankruptcy Court in North Dakota. The lawyer referral service requires each participating
lawyer to be “qualified” in one of four ways:

a. Specialization certification by a State Bar;

b. Certification from an independent organization of lawyers in a field of
specialization where designation is not obtained solely by payment of a fee;

Cc. Execution of a statement signed under penalty of perjury that the lawyer has been
engaged in the area for at least five years and represents himself or herself to be
competent in that field; or

d. In the case of bankruptcy, execution of a statement signed under penalty of
perjury that the lawyer has been engaged in bankruptcy for at least three years,
filed at least 100 petitions and represents himself or herself to be competent in
bankruptcy.

In addition to the above requirements, the participating lawyer must carry at least the
minimum statutory amount of malpractice and errors and omissions insurance, or other such
minimum amount established by the lawyer referral service or the North Dakota Bar.
Participating lawyers must also be listed in the Directory of Lawyers (“Directory”) specified by
the lawyer referral service.

The Directory of Lawyers is open to all attorneys and law firms in North Dakota, subject
to an annual fee up to $1,000. Currently the Directory does not charge a fee to attorneys listed in
the Directory. The listing in the Directory of Lawyers must comply with all advertising rules for
attorneys in North Dakota, and the listing must contain, at a minimum, the name of the law firm
or lawyer; street and mailing address; telephone number; email address; qualifications to handle

specific types of legal work; and language capabilities. Lawyers listed in the Directory are solely

No

responsible for the content of the listing. The lawyer referral service will not be a party to the
contract for listing in the Directory.

The lawyer referral service anticipates that the largest source of its referrals will come
from debt negotiation and settlement companies, while some of its referrals may come from
consumers who contact the web site directly. The service will not make any referral unless the
consumer specifically requests one. The referral itself will take place by email over the internet,
but the lawyer referral service maintains a toll-free nationwide telephone number

Each consumer who requests a referral will receive listing information of up to three
lawyers from the Directory of Lawyers, and the lawyers will each receive information about the
consumer that the consumer consented to disclose to the lawyers. Referrals will be provided to
lawyers on a rotating basis.

Participating lawyers must pay a $100.00 fee to a third party in order to receive referrals.
Should a participating lawyer fail to convert a referral into an attorney-client engagement, the
$100.00 is waived. The third party payee could be the same party responsible for the Directory
of Lawyers but not necessarily. A participating lawyer must notify the service within two days
of accepting a referral as a client, and failure to do so is grounds for terminating the lawyer’s
participating in the service.

Participating attorneys must agree that fees for clients it obtains through the lawyer
referral service will not be any higher than the fees charged to its other clients and that any
transactional costs associated with the service may not be passed on to the consumer.

DISCUSSION
The Committee’s opinion is that the proposed arrangement, as described above, involves

a lawyer giving value to a person for recommending the lawyer’s services. N.D.R. Prof.

Conduct 7.2(d). However, the proposed arrangement does not violate the proscription in Rule
7.2(d) of the North Dakota Rules of Professional Conduct, provided that the lawyer referral
service is not-for-profit. The Committee does not interpret provisions of the North Dakota
Century Code or the United States Bankruptcy Code.

North Dakota Rules of Professional Conduct bar attorneys from giving anything of value
to a person for recommending the attorney’s services, with certain exceptions. Rule 7.2 states:

(a) Subject to the requirements of Rule 7.1 and 7.3, a lawyer may market and advertise
legal services through media, including published and on-line directories;
newspapers, newsletters and other periodicals; outdoor advertising; electronic
advertising, including radio, television, video and the Internet; and through text-based
communications including written correspondence and email.

(b) A copy or recording of an advertisement or communication must be kept for two
years after its last dissemination along with a record of when and where it was used.
For written correspondence and e-mail, a lawyer shall retain for two years from the
date of sending a list of addresses. When a lawyer uses recorded voice
communications and transmits a communication by telephone call, the lawyer shall
retain for two years from the date of the call a record of any telephone number called.

(c) Any communication made pursuant to this Rule must include the name and office
address of at least one lawyer or law firm responsible for its contents.

(d) A lawyer shall not give anything of value to a person for recommending the lawyer’s
services, except that a lawyer may

(1) pay the reasonable costs of advertisements or communications permitted by
this Rule;

(2) pay the usual charges of a not-for-profit lawyer referral service or legal
service organization; and

(3) pay for a law practice in accordance with Rule 1. 17.

The lawyer referral service described to the Committee involves multiple entities. For
example, a lawyer may only participate in the service if that lawyer enlists in the Directory of

Lawyers chosen by the service. Potentially, a third entity would collect the fees charged for

receiving referrals. The facts and circumstances of the arrangement may bring these associated
entities within the scope of the Rules.

The proposed lawyer referral service has the trappings of both an advertisement and a
referral service. The service indicates that any lawyer referred to consumers will be listed in a
Directory of Lawyers, which the Committee assumes will be accessible to consumers. The
Directory of Lawyers may charge lawyers a fee for being listed, and, consequently, any lawyer
participating in the lawyer referral service incurs a fee for being listed in the Directory. Under
these facts, a participating lawyer gives value in order to receive referrals. In the same vein, a
participating lawyer must pay a third party a “transmission” fee for referrals that result in an
attorney-client engagement. Payment of fees to a third party in order to receive referrals falls
squarely within the prohibition of Rule 7.2(d).

Because the Committee concludes that the proposed lawyer referral service arrangement
involves lawyers providing value to persons for recommending the lawyer’s services under Rule
7.2(d), the arrangement is only permissible if it falls under one of the exceptions to Rule 7.2(d).

Reasonable costs of advertisements or communications permitted by Rule 7.2

In the Committee’s opinion, the lawyer referral service does not involve payment of
reasonable costs of advertisements or communications as contemplated by Rule 7.2(d)(1).
Nebraska Ethics Advisory Opinion No. 89-3 (a lawyer may not pay another to advertise and then

refer clients to the lawyer). [Cf, Alabama State Bar Ass’n v. R.W. Lynch Co., 655 So.2d 982

(Ala. 1995) (finding a group advertising arrangement was not a referral service where, among
other things, calls were not screened, no representation was made in regard to attorney
experience or skill, and callers were forwarded to an attorney based on geographic location

only).] Although advertisements and communications may comprise some of the arrangement,

the value to the participating lawyer is the referral of consumers seeking representation, as
opposed to the value of purely advertising in the Directory of Lawyers. See N.D.R. Prof.
Conduct 7.2, Comment (“A lawyer is allowed to pay for advertising permitted by this Rule ...,
but otherwise is not permitted to pay another person for channeling professional work.”). See
also New Jersey Advisory Committee on Professional Ethics Opinion 13, 132 N.J.L.J. 267
(October 5, 1992) (explaining that programs may contain si gnificant aspects of advertising while
constituting referral services). Si gnificantly, the service directs consumers to specific lawyers,
and it identifies specific consumers.

In turn, the fees charged, or potentially charged, to the participating lawyer are directly
attributable to participation in the referral service and for receiving referrals. For example, a
participating attorney only pays a $100.00 fee upon converting a referral into an engagement.

[Cf. R.W. Lynch Co., 655 So.2d at 984 (participating attorneys pay a flat rate fee for advertising,

as opposed paying a fee for each referral).]

Usual charges of a not-for-profit lawyer referral service or legal service organization

Rule 7.2(d)(2) permits a lawyer to pay the usual charges of a not-for-profit lawyer
referral service, but lawyers are prohibited from paying a for-profit lawyer referral service for
referring clients. State Bar of Arizona Ethics Opinion 05-08 (interpreting same language as
North Dakota Rule 7.2 as absolute bar to payment to a for-profit referral service).

Whether an organization is not-for-profit depends on the facts and circumstances of each
case. The Requesting Attorney described the proposed lawyer referral service as a California
nonprofit corporation with a pending application to be recognized as a 501(c)(3) organization for
purposes of the Internal Revenue Code. The Committee’s opinion is that a lawyer referral

service incorporated as a North Dakota nonprofit corporation under N.D.C.C. Chapter 10-33 or

tax exempt under § 501(c)(3) of the Internal Revenue Code will constitute a not-for-profit lawyer
referral service for purposes of Rule 7.2(d)(2). Cf. State Bar of Michigan Ethics Opinion RI-
223, January 18, 1995 (opining that neither incorporation under Michigan Nonprofit Corporation
Act nor governmental tax qualification provide a not-for-profit safe harbor). While nonprofit
organizations established under other jurisdictions might be not-for-profit for purposes of Rule
7.2(d)(2), this Committee declines to make such a determination.

The Committee does not know if the proposed Directory of Lawyers has been
incorporated as a nonprofit corporation under North Dakota or whether it is tax exempt under §
501(c)(3). Each entity constituting the lawyer referral service must operate as a not-for-profit in
order for the arrangement to be considered a not-for-profit lawyer referral service. N.D.R. Prof.
Conduct 7.2(d)(2). [See Nebraska Ethics Advisory Opinion 95-3 (concluding an attorney may
not participate in a “for-profit” lawyer referral program), Vermont Bar Association Advisory
Ethics Opinion 95-02 (attorneys may participate in a for-profit lawyer referral service if the
attorneys do not pay fees to the service). Cf. State Bar of Michigan Ethics Opinion R-G,
December 15, 1989 (if a lawyer referral service is for-profit, a lawyer may pay the reasonable
costs of advertising, but may not pay other costs of the for-profit); North Carolina State Bar 2004
Formal Ethics Opinion 1 (concluding a lawyer may participate in a for-profit service with aspects
of both a lawyer referral service and a legal directory because the potential harm to the consumer
of a pure lawyer referral service is avoided).] The not-for-profit requirement of the exception
alleviates the tension between maximizing profits and achieving the public purposes behind the
lawyer referral service, which include providing consumers with true and accurate information

about the largest possible number of attorneys.

The Committee additionally draws attention to Rules 7.1 through 7.5 regarding
information about legal services. In particular, communications made on or through the lawyer
referral service must not be false or misleading, N.D.R. Prof. Conduct 7.1; communications must
contain the name and office address of at least one lawyer or law firm responsible for their
content, N.D.R. Prof. Conduct 7.2; and communications must not involve direct contact with
potential clients that would violate N.D.R. Prof. Conduct 7.3. Participating lawyers remain
ultimately responsible for determining whether the lawyer referral service complies with
applicable North Dakota Rules of Professional Conduct.

CONCLUSION

The Requesting Attorney may participate in the proposed lawyer referral service without
violating Rule 7.2 on the following conditions: (1) that all entities constituting the lawyer referral
service operate on a not-for-profit basis under Rule 7.2(d)(2), and (2) the lawyer referral service
complies with all other applicable North Dakota Rules of Professional Conduct.

This Opinion is provided pursuant to Rule 1.2(B) of the North Dakota Rules for Lawyer
Discipline. This rule provides:

A lawyer who acts with good faith and reasonable reliance on a written opinion

or advisory letter of the ethics committee of the association is not subject to

sanction for violation of the North Dakota Rules of Professional Conduct as to

the conduct that is the subject of the opinion or advisory letter.

This Opinion was drafted by Adele Page and unanimously approved by the Committee

on April 12, 2006.

Mitek Hanson, Chair