Fee Splitting is Mostly About Protecting Lawyers, Not Clients

Last month, the South Carolina Bar issued an advisory ethics opinion that, while it didn’t name Avvo, squarely took aim at its new Avvo Legal Services, referring to “[a]n attorney directory website [that] released a new fixed-fee legal referral service.” According to the ethics opinion, here’s how the service works:

* 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.

South Carolina found that this arrangement violates Rule 5.4(a) of the South Carolina Rules of Professional Conduct, which says that a “lawyer or law firm shall not share legal fees with a nonlawyer.”1 According to South Carolina, there’s just no way around the fact that ultimately, a chunk of the fee goes to Avvo. And that fee, South Carolina notes, can’t be considered advertising because it is only incurred if the service is provided.

Avvo is, understandably, less than thrilled about this.

While we understand the mission of the South Carolina Bar Ethics Advisory Committee, the opinion is notable for its complete lack of recognition of the needs of consumers.

So who is right?

South Carolina is likely correct that its rules prohibit Avvo’s arrangement. Rule 5.4(a) has some very narrow exceptions, such as purchasing the practice of a deceased attorney and paying the estate the purchase price or including non-lawyer employees in a retirement plan. Avvo doesn’t fall under those, so it’s tough to see how they get around that violation. That said, Avvo isn’t wrong. The prohibition against splitting fees with non-lawyers is both protectionist and, to put it bluntly, dumb. It’s based on the “fear of Sears”—the notion that if you allow attorneys to share fees with non-attorneys, the next step is that Wal-Mart runs all the law firms, and independence and confidentiality go out the window.

As far as independence, that stance takes a rather dim view of lawyers and assume we would not be capable of making ethical and responsible decisions with non-lawyers with whom we would like to split fees. (It takes an equally dim view of the non-lawyer partners, obviously.) For Avvo in particular, it presumes poor behavior when Avvo actually does provide an assurance of fair, consistent fees, and there’s no reason to believe that partnering with Avvo leads to a drastic increase in fees or decrease in the quality of services.

Confidentiality is a different issue, however. Non-lawyers aren’t covered by the ethics rules or any other guidance on this topic. A non-lawyer partner could presumably violate client confidentiality with impunity, if we presume menace, or simply by a lack of understanding of the obligations. So how do we solve that problem?

It’s relatively simple. Rewrite the ethics rules to allow fee-splitting between lawyers and non-lawyers, but bring those non-lawyers within the scope of the applicable ethics rules, including confidentiality and conflicts of interest. In other words, if you want to split fees with a lawyer, you’ve got to follow the rules.

For Avvo, that would require entity-level regulation, meaning services like Avvo would be regulated, to some extent, by the bar. It’s unclear at this point whether that would be a palatable solution for Avvo, but it’s got to be better than trying to thread the needle on an outdated rule like 5.4(a) in state after state after state.

  1. A rule which is substantively the same as the <a href="https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_4_professional_independence_of_a_lawyer/">Model Rule.</a> 


  1. Avatar Brian Joseph Hoops says:

    Great article, your recommendation definitely makes sense. It’s time to integrate lawyers and nonlawyers, while ensuring adequate oversight.

  2. Avatar Aurelia says:

    Sorry, but the proposed solution doesn’t make sense. How exactly do you suggest “bring[ing] those non-lawyers within the scope of the applicable ethics rules”? How would bar associations regulate non-lawyer entities to make sure they comply with the rules? And what would happen if Avvo then violated the rules? They don’t have a law license that can be suspended or revoked – there are no consequences at stake.

    Frankly, I’m really not concerned about what’s a “palatable solution for Avvo.” It’s about consumer protection. By limiting the provision of legal services to attorneys and disallowing fee-splitting, consumers are being served only by individuals who (ostensibly) operate within the ethical obligations of the legal profession (and there are repercussions if they don’t). It sets a baseline standard for doing business (and that includes setting reasonable fees, when to refund, ensuring that the client understands the terms for retainers, flat fees and advance fee deposits, etc.).

    If Avvo gets to profit from the practice of law without ethical accountability, attorneys are at a disadvantage if they can’t do the same. Much like medical care, consumers of legal services should be able to expect a reasonable standard of practice from everyone involved in providing those services, and enjoy protection from those who don’t meet that standard. I applaud the South Carolina opinion and hope other states follow suit.

    • Avatar Sam Glover says:

      As for how to implement entity regulation, it’s pretty easy. The legislature says “if you want to deliver legal services or refer business to lawyers, you have to comply with the ethics rules.” If they don’t comply, they aren’t allowed to provide those services.

      Seems like a natural compromise (and maybe an optimal situation) when states are considering eliminating or creating exceptions to their UPL laws, actually.

      I don’t think anyone is concerned with what would be a palatable solution for Avvo. I read that as an aside in Lisa’s post. But as she pointed out, fee-splitting rules don’t have a thing to do with consumer protection. They were created as lawyer protection, which is apparently the only justification ever offered for them.

      If Avvo gets to profit from the practice of law without ethical accountability, attorneys are at a disadvantage if they can’t do the same.

      Agreed. So why are you objecting to making Avvo accountable ethically?

      • Avatar cpat says:

        First, I don’t share your optimism that legislative action to regulate unlicensed legal services providers will be “pretty easy.”

        Additionally, ABA comments on Rule 5.4 state that the prohibition of fee splitting is intended to protect a lawyer’s independent professional judgment. So, “lawyer protection” is most certainly NOT the “only justification ever offered” for the rule against fee splitting. I suppose we can disagree on the true reasoning behind the rule, but that isn’t the point – the rule is there, and lawyers must abide by it.

        Look, I agree with Aurelia. Currently, legal tech has found a way to sell legal services without ethical oversight, and that is not good for consumers or lawyers.

        If state legislatures want to promulgate rules to regulate this kind of business, then that’s great. However, as it stands RIGHT NOW state bar associations have been delegated the authority to regulate the practice of law. The rules have been developed over centuries, and are there for a reason. Should we just let legal tech do whatever they want until legislatures get around to creating a entirely new type of oversight?

      • Avatar Matthew Kreitzer Esq says:

        I think the strongest rebuke that I have heard of services like Avvo Legal Services is that they bypass the important and fundamental role of the Attorney Consultation. I was recently at a CLE hosted by a high ranking member of Virginia’s Ethics Counsel. Ethics counsel concluded, in quite plain language, that not only do such services violate a triad of ethical rules, but they are ultimately bad for the consumer.

        My favorite argument is simply that consumers do not know what they do not know. This leads consumers down the rabbit hole of taking the cheapest, easiest sounding service and running with it. I have seen horrible repercussions in fields such as Estate Planning, Family Law, and Business Law.

        By anecdote, and not one of my own cases, I have heard of a case where a well-meaning family with a child suffering from serious disabilities decided they wanted to plan for the child’s future. “Simple will is all we need of course!” Common sentiment amongst laymen. So they set out on these services to get a Will done. Little did they know they the child had qualifying assets that disqualified them from Medicaid. Child turns 18, and….well any disability planning attorney can tell you what happened next. A tidal wave of debt from poor planning.

        Similar things happen in Business Law, with small businesses opting for “do it yourself” LLC incorporation documents which do not adequately protect their individualized business plan. Additionally, such documents do not explain important compliance issues, opening them up to litigation from savvy Creditors attorneys like myself.

        These kinds of problems are rife in these kinds of models of legal services. They take away an important step; helping the client determine what they need.

        I would maintain that fixing the ethics problem only dodges the main issue, and these services do more harm than good.

  3. I don’t think this issue is as simple as you state. Attorney’s have professional obligations that go far beyond making a profit for the shareholder. For-profit companies do not and I frankly doubt they can be regulated into it. Just talk to any attorney who has worked for an insurance “captive” firm. One cannot serve two masters.

    Adding another layer of those who need to be paid is not going to solve access to justice issues. Lawyers’ business models are adapting (albeit very slowly) to a changing market. Smart incorporation of technology, restructuring of the law firm model, and better funding of entities who provide legal services to those who can’t afford it are all absolutely needed and we should focus on those efforts. They are real and they will make a difference. But de-professionalizing the practice of law and handing it over to the Wal-Marts of the world is not the answer.

  4. Avatar Paul Spitz says:

    I think you could argue that the money that goes to Avvo isn’t a referral fee, rather it’s compensation for providing payment processing and essentially a guarantee that the lawyer will get paid. Those are valuable services, particularly the payment guarantee, as any solo or small should agree.

  5. Avatar Alex says:

    The fee splitting issue cuts both ways. It also means that practicing attorneys are not able to raise equity investment to construct their own tools. Because building and optimizing legal tech is actually hard (harder than practicing law) and expensive (running a law firm is low overhead), attorneys don’t end up building the tools, so the tools we get are subpar.

    Example: let’s say you want to build an online estate planning practice where clients enter data into forms and a document engine builds documents that the attorney customizes, or whatever. Maybe 10 years ago that was a 1M plus project (hand waving number. Idk, Rocket Lawyer and Legal Zoom raised tens of millions and didn’t do a whole lot more than that.). Nowadays, my guess is that you really need 100-150K and 6 months of time to get anywhere with the same idea, and you’d be better off involving a developer, marketer, and COO with equity because you can’t afford to put those people on salary in an early stage. Yes, a lawyer can get an MVP with gravity forms and wordpress for a lot less done on the weekend, but document automation, driving traffic, building systems, hiring people, etc, is not that easy. The firms with 100-150K to invest, don’t want to screw around chasing the $500 cases, and the true solos/smalls, don’t have the resources to make it happen.

    By the time that the tools you need are created by non-lawyers, deployed in non-lawyer markets, and made consumer-friendly enough for lawyers to (a) figure out by themselves and (b) afford from their own cash flow…when all those other conditions are met, my suspicion is that the AVVOs and LegalZooms will have already won. Or maybe they have already won.

    Near term: the fee splitting provisions maximize the total revenues captured by lawyers.

    Medium term: fee splitting bans limit the upside of the handful of lawyers that could successfully raise equity and deploy it. This probably makes the legal market less winner take all and more equal.

    Long term: software will eat much of the legal market; AVVO already has the clients, and they will figure out a way to keep those clients by building software and systems to make practicing law efficient, and then license those systems to the lawyers, who will ultimately end up like franchisees that own a McAvvo practice.

  6. Avatar Rob L. says:

    Avvo can fix this problem with one simple fix. Charging the lawyer a fixed monthly fee to participate in the service regardless of the number of clients handled by the lawyer. However, this is where the problem with these arrangements is exposed. If it is a fixed fee per month: If the lawyer is not getting enough clients to justify the service he bows out and Avvo is not making money. If clients are flooding in, the lawyer is happy, but Avvo is not happy because look at that money we are losing by not charging per client!!

    Face it folks. Avvo does not care about lawyers. Avvo does not care about clients. I doubt they do much screening into who they let participate in the service. It’s about Avvo making a killing and you cannot control that with attorney ethics boards.

    • Avatar Rob says:

      I don’t think it even requires that it be based on a time frame such as a monthly fee. If Avvo were to charge the same fee for each transaction they would be off the hook. By charging significantly more as the fee that the attorney is going to get increases Avvo is clearly fee splitting. For example, AVVO sets the fee for a 15 minute call at $39 with a marketing fee of $10 but if the consumer purchases a 30 minute call the price goes up to $69 with a marketing fee of $25. It cannot possibly cost Avvo anymore to bring that client to the attorney for a 30 minute call than a 15 minute call and yet Avvo takes 50% of the fee increase.

      Avvo has asserted that it does have increased costs associated with higher credit card fees for the higher priced items which I would agree makes sense. The problem is that the increase we are talking about is miniscule in comparison to the increased marketing fee.

      Avvo also asserts that it is concerned about consumers access to legal services and that is what the bar should be focused on. However, if Avvo is truly concerned about consumers access as opposed to Avvo profits they could forgo the inflated marketing fee increases and reduce the cost of the legal services to the consumers that they contend they are most concerned about.

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