Can a lawyer use an online flat-fee referral service that takes a 'per service marketing fee' calculated as a cut of the fee earned on each matter?

Plain-English summary

An attorney directory website offered a fixed-fee referral service: the lawyer agrees to offer set flat-fee services at prices the website sets, the service refers the client and processes payment, holds the funds until the work is done, then transfers the full fee to the lawyer and charges the lawyer a "per service marketing fee" that varies with the service performed (for example, $200 on a $995 uncontested divorce, $125 on a $595 single-member LLC).

The opinion concludes the arrangement violates Rule 5.4(a)'s bar on sharing legal fees with a non-lawyer, none of whose exceptions apply. The committee reasons that splitting the transaction into two steps, paying the lawyer in full and then collecting a service-based charge, does not change the substance: "A lawyer cannot do indirectly what would be prohibited if done directly," and the service is "claiming a certain portion of the fee earned by the lawyer as its 'per service marketing fee.'"

In the alternative, assuming for argument that Rule 5.4(a) did not apply, the opinion holds the arrangement would violate Rule 7.2(c)'s bar on paying for referrals and would not be saved by the exceptions. The 7.2(c)(1) "reasonable costs of advertisements" exception does not fit because the charge is based on the fee collected rather than a fixed advertising cost; the committee calls it "a contingency advertising fee arrangement" with no rational basis for charging more by case type. The 7.2(c)(2) exception for a legal service plan or not-for-profit referral service does not apply because the service is neither, and the 7.2(c)(3) exception for the sale of a practice under Rule 1.17 is inapplicable.

In practice

Under this opinion, and under the South Carolina rules as they stood in 2016, a referral-service charge that scales with the lawyer's earned fee is treated as fee sharing with a non-lawyer barred by Rule 5.4(a), regardless of being routed through a separate transaction. The opinion holds that even analyzed only as advertising, such a charge is a payment for a referral under Rule 7.2(c) that the 7.2(c)(1) reasonable-cost exception does not cover, because reasonable advertising cost is measured by a fixed market rate, not by the fee the lawyer collects. The committee distinguishes permissible advertising costs (fixed per ad, per run, or per inquiry) from a charge pegged to the legal fee earned.

Common questions

Q: Can a lawyer pay an online service a percentage of the fee earned on referred matters?

A: No. The opinion holds that a charge calculated from the fee the lawyer earns is improper fee sharing with a non-lawyer under Rule 5.4(a), even if structured as a separate "marketing fee" transaction.

Q: Does splitting it into two transactions avoid the fee-sharing rule?

A: No. The opinion states a lawyer cannot do indirectly what would be prohibited directly; routing the service's cut through a second transaction does not change that it is taking a portion of the earned fee.

Q: Can the charge qualify as a reasonable advertising cost under Rule 7.2(c)(1)?

A: No. The opinion holds that a charge based on the legal fee collected, rather than a fixed advertising cost assessable by market rate, is a contingency advertising fee that the exception does not cover.

Q: Do the other Rule 7.2(c) exceptions apply?

A: No. The opinion finds the service is neither a prepaid or group legal service plan nor a not-for-profit referral service under 7.2(c)(2), and the 7.2(c)(3) exception for selling a practice under Rule 1.17 does not fit.

Background and rules framework

The opinion interprets South Carolina Rule of Professional Conduct 5.4(a) (a lawyer or firm shall not share legal fees with a non-lawyer, subject to listed exceptions; Model Rule 5.4) and Rule 7.2(c) (a lawyer shall not give anything of value for recommending the lawyer's services, with exceptions in 7.2(c)(1)-(3); Model Rule 7.2), and references Rule 1.17 (sale of a law practice; Model Rule 1.17) via the 7.2(c)(3) exception. Comment 7 to Rule 7.2 frames reasonable advertising costs by reference to fixed-rate media such as newspaper, online directory, and broadcast ads.

Citations and references

Rules of Professional Conduct:

• MR 5.4 / SC RPC 5.4(a) (sharing legal fees with a non-lawyer)
• MR 7.2 / SC RPC 7.2(c), 7.2(c)(1)-(3) (paying for recommendations; exceptions)
• MR 1.17 / SC RPC 1.17 (sale of a law practice)

See also

• SC Bar Ethics Op. 14-01: Attorney-matching service gag clause
• SC Bar Ethics Op. 13-09: Paying for "Preferred Closing Attorney" status barred
• SC Bar Ethics Op. 13-05: Co-op TV ad call rotation is not a referral payment

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-16-06/
• Original PDF: https://www.scbar.org/media/5xiom21u/16-06.pdf

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER'S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Facts:

An attorney directory website released a new fixed-fee legal referral service. The service works as follows:

• Attorney signs up for the service by agreeing to offer certain flat fee services.

• The fee for the service is set by the internet advertising directory website(service).

• The service makes the referral to the attorney, who then contacts the client to arrange a meeting and begin the representation.

• The service handles payment processing from the client and holds the funds until the service is completed.

• Upon completion of the work, the service transfers the full amount of the fee to attorney's account.

• Upon completion of the work, the service charges the attorney a "per service marketing fee" which seems to be based upon the service provided and is only incurred when the lawyer provides the service. For example, the fee for an uncontested divorce may be $995, and the fee is $200, while the fee to start a single member LLC is $ 595, and the fee is $125.

Questions Presented:

1. Does the arrangement above violate the prohibition against sharing fees with a non-lawyer as described in Rule 5.4?

2. Alternatively, does the arrangement violate the "reasonable costs of advertisements or communications" as described in Rule 7.2 (c) (1)?

Summary:

The arrangement described herein violates the prohibition of sharing fees with a non- lawyer as described in Rule 5.4(a). In the alternative, assuming, for the purposes of this question only, that the arrangement does not violate Rule 5.4(a), the arrangement would violate the Rule 7.2(c) prohibition of paying for a referral and is not saved by the exceptions found in Rule 7.2(c)(1), (2), or (3).

Discussion:

Fee Sharing

Rule 5.4 (a) prohibits a lawyer or law firm from sharing legal fees with a non-lawyer, subject to certain exceptions set forth in 5.4 (a) (1)-(4). The exceptions generally fall into two categories: payments to a deceased lawyer's estate or payment to non-lawyer employees in a compensation or retirement plan that is based in whole or in part on a profit sharing arrangement. The exceptions do not apply here.

In the situation described above, the service collects the entire fee and transmits it to the attorney at the conclusion of the case. In a separate transaction, the service receives a fee for its efforts, which is apparently directly related to the amount of the fee earned in the case. The fact that there is a separate transaction in which the service is paid does not mean that the arrangement is not fee splitting as described in the Rules of Professional Conduct.

A lawyer cannot do indirectly what would be prohibited if done directly. Allowing the service to indirectly take a portion of the attorney's fee by disguising it in two separate transactions does not negate the fact that the service is claiming a certain portion of the fee earned by the lawyer as its "per service marketing fee."

Reasonable costs of advertisements or communications

Rule 7.2(c) prohibits a lawyer from giving anything of value to a person for recommending the lawyer's services, with three exceptions. The first exception, found in 7.2(c)(1) allows for a lawyer to pay for the "reasonable costs of advertisements or communications permitted by this Rule."

Assuming that any advertising or solicitation done by the service complies with the requirements of Rule 7.2, the question becomes whether the payments made by the lawyer to the service can be considered the "reasonable costs of advertisement or communication." Comment 7 to the rule discusses reasonable advertising costs and lists such items as newspaper ads, on-line directory listings, radio/television advertisement, etc. The permitted type of advertising described in the comments typically is of a type that has a fixed cost per ad or per run of air time, and reasonableness can be assessed by the market rate for the type of advertising.

The service, however, purports to charge the lawyer a fee based on the type of service the lawyer has performed rather than a fixed fee for the advertisement, or a fee per inquiry or "click." In essence, the service' s charges amount to a contingency advertising fee arrangement rather than a cost that can be assessed for reasonableness by looking at market rate or comparable services.

Presumably, it does not cost the service any more to advertise online for a family law matter than for the preparation of corporate documents. There does not seem to be any rational basis for charging the attorney more for the advertising services of one type of case versus another. For example, a newspaper or radio ad would cost the same whether a lawyer was advertising his services as a criminal defense lawyer or a family law attorney. The cost of the ad may vary from publication to publication, but the ad cost would not be dependent on the type of legal service offered.

By basing the advertising charge to the lawyer on the fee collected for the work rather than having a fixed rate per referral or other reasonable cost for the advertisement, a lawyer utilizing this service cannot claim the exception to the prohibition of paying for referrals contained in Rule 7.2(c)(1).

The remaining exceptions found in Rule 7.2(c)(2) and (3) are likewise inapplicable. Rule 7.2 (c)(2) allows an exception to the rule for the usual charges of a legal service plan or not for profit lawyer referral service. The comments to Rule 7.2 define a legal service plan as a" prepaid or group legal service plan or similar delivery system" that assists clients in finding attorneys. The service's design does not appear to be a sort of prepaid system like commercial plans in which a person pays a fee to be a member. The service likewise does not appear to be a "not for profit" lawyer referral service. Therefore, the exceptions found in Rule 7.2(c)(2) do not apply.

Rule 7.2(c)(3) allows an exception for payment for a law practice in accordance with Rule 1.17, which is not applicable to this scenario.