12 STEPS TO A HEALTHIER LAW PRACTICE IN 2020: STEP 5 – SHARING IS CARING

Happy May? In November 2018, 69 new or amended California Rules of Professional Conduct (“CRPC”) were thrust upon California’s more than 250,000 lawyers. These rules were renumbered and reorganized to align with the American Bar Association’s (“ABA”) Model Rules and replaced the 46 ethics rules that California lawyers had been following for nearly 30 years.  Despite each of us having been responsible for adhering to these rules over the last year, many California lawyers and law firms still do not know, or do not fully appreciate, the significance of the modifications. Therefore, as we enter into this new decade and the second full year of these rules being in effect, I invite you and your firm to join my 12-step program to a healthier law practice in 2020 and the years to come. Each month I will feature an article on the key ethics rule changes aimed at guiding you and your firm to a healthier law practice by better managing your risk of liability.  “Step 1 – Take Responsibility” was published in January; “Step 2 – Treat Others The Way You Want To Be Treated” was published in February; “Step 3 – Avoid Conflict” was published in March; and “Step 4 – Money Does Not Buy Happiness” was published in April 2020.

You can access each article directly on this blog page or you can subscribe to this blog to ensure that you don’t miss any of the 12-steps.  Please note that the articles on this blog are not legal advice and do not take into account specific facts or circumstances for which a tailored analysis and risk management plan is recommended.

STEP 5 – SHARING IS CARING

“When we share, we open doors to a new beginning.” ― Paul Bradley Smith

Children are taught in pre-school that “sharing is caring.” Those who share are seen as more generous, more kind, more social, more empathetic. Sharing with others is thought to create supportive environments within which everyone learns the balance of self and community, ensuring that everyone’s needs are met.

When the word “sharing” is used in reference to the legal profession in 2020, it is most likely referring to the highly contested nationwide debate about whether lawyers should be permitted to share expertise and knowledge, for example, with nonlawyers in exchange for legal fees and ownership interests in law firms. The crux of the debate, at least outwardly, seems to focus on whether this sharing will ultimately be caring or harmful to consumers of legal services.

Generally, any sharing of legal fees and law firm ownership between lawyers and nonlawyers is presently prohibited by ABA Model Rule 5.4, and by all states to varying degrees, including California. However, the ABA has recognized that sharing with nonlawyers may help to provide many Americans with better access to affordable legal services.  The ABA House of Delegates’ Resolution 115 entitled, “Encouraging Regulatory Innovation”, which was passed on February 17, 2020, evidences the ABA’s commitment to explore whether sharing will “improve the accessibility, affordability, and quality of civil legal service” while ensuring “necessary and appropriate protections that best serve clients and the public …”  The resolution notes that “more than 80 percent of people below the poverty line” and “many middle-income Americans [] lack meaningful access to effective civil legal services.”  The ABA made clear that it was not presently recommending any changes to any of its Model Rules, “including Rule 5.4, as they relate to nonlawyer ownership of law firms, the unauthorized practice of law, or any other subject.”  Instead, the ABA’s resolution is meant to push each US jurisdiction into collecting and evaluating data on this issue to determine what innovations may work best before the ABA recommends a regulation model to the county. 

Until recently, California has been applauded as one of the few states that has taken the early initiative to evaluate its current rules and regulations prohibiting sharing with nonlawyers in an effort to find solutions to the access to justice problem and to improve the delivery of legal services through technology and innovation. A 2018 Legal Market Landscape Report commissioned by the California State Bar concluded that too many Californians needing legal services cannot afford an attorney or don’t have meaningful access.  The report further found, among other things, that “a growing proportion of consumers are choosing to forgo legal services rather than pay the high price[;] …[;]” “the public interest may be better served by regulatory approaches that encourage innovation in one-to-many legal solutions created by professionals from multiple disciplines[;]” and “[m]odifying ethics rules premised on one-to-one legal services to facilitate greater collaboration across law and other disciplines could have many benefits: driving down costs; improving access; increasing predictability and transparency of legal services; aiding the growth of new businesses; and elevating the reputation of the legal profession.” Through the July 2018 creation of its Task Force on Access Through Innovation of Legal Services, also known as ATILS, the California Bar publicized its willingness to address the concerns highlighted by the report and to consider permitting lawyers and law firms to share with nonlawyers through possible changes to certain regulations and rules of professional conduct. Unfortunately, in light of its recent lawsuit against LegalMatch.com, the California Bar’s intentions are being questioned.

CRPC 5.4 – Financial and Similar Arrangements with Nonlawyers

Rule 5.4 presently prohibits a California lawyer from sharing legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law.  There are currently five exceptions to this rule: (1) payment by a firm after a lawyer’s death; (2) the purchase of a law practice; (3) compensation to nonlawyer employees; (4) participation in a State Bar approved lawyer referral service; or (5) the payment of court-awarded legal fees to a non-profit organization that employed, retained or recommended employment of the lawyer or law firm in the matter. Rule 5.4(a)(1-5).  Rule 5.4(b) further prohibits a lawyer from forming a partnership or other organization with a nonlawyer if the partnership or other organization practices law.  A lawyer is also not allowed to practice in a professional corporation where a nonlawyer owns any interest, a nonlawyer is a director, officer or occupies a position of similar responsibility within the corporation, or if the nonlawyer has the right or authority to direct or control the lawyer’s independent professional judgment. Rule 5.4(d)(1-3). 

On July 11, 2019, almost one year after California’s Task Force came into existence, the State Bar’s Board of Trustees authorized a 60-day public comment period on a set of regulatory reform options for improving access to legal services.  Among these were two proposed alternative revisions to rule 5.4. In sum, the first, more conservative Alternative 1 (Recommendation 3.1) proposed allowing a lawyer to be a part of a firm in which a nonlawyer holds a financial interest providing that certain regulatory compliance requirements are met; and the second, broader and more radical Alternative 2 (Recommended 3.2) generally proposed eliminating the prohibition against fee sharing with a nonlawyer so long as the client has given informed written consent to the fee sharing arrangement. The Bar was flooded with public comment concerning these proposed rule changes.

On March 12, 2020, the Bar released a new proposed version of rule 5.4. This version only recommended expanding upon the existing exception for fee sharing arrangements with a properly qualified nonprofit organization by allowing a lawyer to share or pay a legal fee that is not court awarded, but arises from settlement or other resolution of the claim or matter. Although this particular change was recommended in the first proposed alternative back in July 2019, all other proposed changes suggested then were not included this time around. Many believe this proposal is a step back and does not go far enough to help provide greater access to justice. The deadline to submit public comment on this new 5.4 proposal expired on May 18, 2020.

Lawyer Referral Services

Exception (4) to rule 5.4(a), which allows a lawyer to share legal fees with a lawyer referral service “established, sponsored and operated in accordance with the State Bar of California’s Minimum Standards for Lawyer Referral Services[,]” was completely deleted in Alternative 2 of the Bar’s July 2019 proposed rule changes, but it was left untouched in the Bar’s March 2020 recommended revision to 5.4.  Importantly, just days before the Bar released its March 12 proposed revision to 5.4, the Task Force’s final report to the Board of Trustees dated March 6, urged the Bar to “[c]onsider recommendations for amendments to the Certified Lawyer Referral Service rules and statutes with relevant Rules of Professional Conduct to ensure that they properly balance public protection and innovation in light of access to justice concerns and with a particular emphasis on ascertaining if existing laws impose unnecessary barriers to referral modalities (such as automated referrals or online matching services) that are in the public interest.” It further stated: “The Task Force believes that innovative referral activity carries the potential of enhancing the ability of consumers to consult with a qualified lawyer, particularly on the basic issue of whether a consumer is facing a civil justice legal problem, and that existing laws should be reviewed for possible revisions that are in the public interest.” 

Since 1997, the State Bar has required that in order to operate an LRS that may share legal fees with lawyers under rule 5.4(a)(4), an application for certification must be submitted for the Bar’s approval in compliance with the Bar’s stringent set of rules governing LRS marketing, client procurement, fees and governance. See Lawyer Referral Services Rules. California defines an LRS as ‘an individual, partnership, corporation, association, or any other entity, or a service or agency of an entity, which operates for the direct or indirect purpose of referring potential clients to lawyers, whether or not the term “referral service”, is used.’  See Business & Professions (B&P) Code section 6155(a). The Bar asserts that certification is required to protect the public from harm by ensuring that clients receive referrals for attorneys who are experienced, insured, qualified and committed to serving clients with a wide range of legal problems.  A California lawyer who accepts a referral from or pays a fee to an LRS that is not certified by the California Bar violates rule 5.4 and can be subject to discipline. Rule 5.4(e).

However, unlike most states, California does not just regulate individual attorney participation in LRS programs through its rules of professional conduct.  California also has statutory regulations setting forth the conditions under which a lawyer referral service may operate in the state and, through the State Bar Rules, the State Bar can enforce the statute directly against uncertified LRS services.  B&P Code section 6155.

Alternative Legal Service Providers

Although California lawyers are prohibited from paying referral fees to non-lawyers under rule 5.4, they may pay non-lawyers or nonlawyer owned entities the reasonable costs of advertisements or communications permitted by rule 7.2.  See also Rule 5.4, Comment [2]. B&P Code § 6155(h)(1) does not prohibit attorneys from jointly advertising their services, whereby the names of the advertising attorneys or law firms whom the consumer of legal services may select and initiate contact with are identified; as opposed to subsection (h)(2), which states that “[c]ertifiable referral activity involves, among other things, some person or entity other than the consumer and advertising attorney or law firms which, in person, electronically, or otherwise, refers the consumer to an attorney or law firm not identified in the advertising.”

Nonlawyer owned, online alternative legal service providers (ALSP) have long distinguished themselves from lawyer referral services required to register with the Bar.  Many such services believe that they are in compliance with the rules of professional conduct and other applicable laws, and because their business models are different from a Bar certified LRS, they are not providing a lawyer referral service and, thus, not required to register with the Bar.  LegalMatch.com “was” one such ALSP that connected individual consumers seeking legal assistance on a particular legal issue to a subscribed lawyer who practices in that area of law in the proper geographic location.  LegalMatch has its headquarters in California and, according to its website, it has been operating here since 2000. Its website further notes that LegalMatch has served more than 4 million consumers.

On August 10, 2015, LegalMatch sued a California attorney in the San Francisco Superior Court entitled LegalMatch.com v. Jackson, wherein LegalMatch alleged a breach of contract claim against Jackson for failing to pay his $3,000 subscription fee for participation in LegalMatch. Jackson cross-claimed on the basis that his contract with LegalMatch is illegal and unenforceable because LegalMatch is operating an uncertified lawyer referral service in violation of B&P Code section 6155.

Nearly two years later on July 17, 2017, after a bench trial on the issue of whether LegalMatch is an impermissible LRS, the trial court rejected Jackson’s argument finding that LegalMatch does not engage in referral activity within the meaning of section 6155. In reaching this conclusion, the trial court stated that LegalMatch does not “exercise any judgment on any legal issue, … [and] does not evaluate the consumer’s input in order to generate a conclusion that a legal issue is presented[.]” Judge Karnow’s order further emphasized that an important function of B&P Code section 6155 is consumer protection and there was no evidence of consumer confusion or consumer harm.

More than two years later on November 26, 2019, the appellate court reversed the trial court’s ruling, holding that LegalMatch is engaging in “referral” activity prohibited by B&P Code section 6155. The Appellate Court relied on the B&P Code section 6155(a) definition of “lawyer referral service” in its determination that “a referral occurs when an entity engages in the act of directing or sending a potential client to an attorney.  The act of referring is complete when LegalMatch routes a potential client to attorneys who match the geographic location and area of practice – regardless of whether LegalMatch exercises legal judgment on an individual’s issue before communicating that information to lawyers on its panel.” Although the Court did not specifically focus on the subscription fee paid to LegalMatch by Jackson and other participating lawyers under ethics rules 5.4 and 7.2, the court noted that at the time of its ruling, LegalMatch did not list or otherwise “advertise” the name of the attorneys subscribed to their service to potential clients, and that clients do not learn the name of their potential lawyer until after the referral has occurred.  The case was sent back to the trial court to evaluate the issue of unclean hands in light of the appellate court’s interpretation of section 6155. 

LegalMatch tried to appeal the appellate court’s ruling, but the California Supreme Court declined to accept review on March 11, 2020, leaving the Court of Appeal’s ruling intact. The remittitur was filed with the trial court on April 21, 2020.  

The Task Force’s March 6 final report to the CA Bar Board of Trustees, was considered by the Board of Trustees the day after our state’s high court denied review of the LegalMatch ruling. In its report the Task Force specifically addressed the appellate court’s ruling against LegalMatch and warned the CA Bar that if it didn’t consider “potential amendments to Certified Lawyer Referral Service (LRS) rules and statutes in light of a recent case [Jackson v. LegalMatch] that has clarified the scope of what is considered to be referral activity[,]” and take into account “social media, search engines, and other technology-based marketing,” it may have “an unintended chilling effect on a lawyer’s use of technology to provide information about the availability of legal services.”

Approximately two months later on May 4, 2020, the State Bar filed its lawsuit against LegalMatch in the San Francisco Superior Court, Case No. CGC-20-584278, alleging a violation of B&P Code section 6155.  The complaint relied on the appellate court’s decision in the Jackson case and claims that it is the responsibility of the State Bar to protect consumers and that “[u]nless the State Bar is granted the remedies sought herein, including injunctive relief by order of the Court, the Defendant will continue to engage in the unlawful acts and practices set forth [in the complaint] and will continue to cause injury and harm to the general public.” Yet, there are no allegations or claims in either the Bar’s lawsuit or the Jackson case that LegalMatch has caused any consumer injury or harm.  The Bar further emphasized in its complaint that attorneys who accept or have accepted referrals from LegalMatch also violate B&P Code section 6155.

The Bar’s complaint states on page 5 that, “[o]n March 20, 2020, shortly after the Jackson decision was issued, the State Bar wrote to LegalMatch to demand that LegalMatch ‘immediately cease operations until such time as it is duly certified as a lawyer referral service under section 6155 and State Bar Rules.’” The State Bar further states that LegalMatch has failed to respond to the State Bar’s March 20, 2020 directive.

In a May 7 telephonic hearing to address the Bar’s request for a Temporary Restraining Order (TRO) to halt the operation of LegalMatch until the company is registered with the bar, a declaration by LegalMatch’s COO, Anna Ostrovsky, said that LegalMatch had already filed an LRS application with the Bar and that the decision over LegalMatch’s status as a certified lawyer referral service “is now entirely within the control of the State Bar of California.” The receipt of the application was not mentioned in the Bar’s complaint, TRO motion or its reply briefs.  Judge Schulman criticized the State Bar for moving forward with its motion despite clear evidence that LegalMatch replied to the Bar’s March 20 letter on the same day and had submitted its LRS application to the Bar on March 31, 2020.  Not only had the Bar refused to act on LegalMatch’s LRS application before filing its TRO request, but it had the application for more than a month before deciding to file its complaint against LegalMatch.  Judge Schulman remarked that under normal circumstances, a court ought to give heavy deference to a public agency empowered to protect the public to seek injunctive relief. He went on to clarify:

Here, however, we have a very unusual situation, where a statutory scheme that has been in place for many years was construed for the first time in a matter of first impression in November 2019 that did not become final until April 7. We also have the application of that scheme to a company that, so far as the record before me reveals, has operated in the same fashion for many years. I have no factual showing before me by the moving party that any member of the public was ever harmed by the operation of that company before the statutory scheme was interpreted to mean something different.

Judge Schulman denied the TRO stating that the Bar has failed to meet its burden of showing the need for a temporary restraining order because it has the ability to act promptly on LegalMatch’s LRS application. He further expressed: “I’m disappointed with the state bar for failing to fully disclose the factual background leading to this application. I expect better of counsel representing the state bar.” 

All of the recent litigation against LegalMatch has managed to take the access to justice debate to new heights. Not only have California’s antiquated lawyer referral rules and statutes been highlighted for the country to critique, but a major spotlight has been put on one of the legal profession’s proven leaders, the California Bar. It remains to be seen whether the Bar will also pursue action against lawyers who participate in LegalMatch, but one thing is for sure, the entire country will be watching. No matter where you may fall in the access to justice debate, it cannot be ignored that the State Bar’s Office of General Counsel is attempting to enforce the very rules and statutes that its Task Force and Board of Trustees have recognized may need to be changed and have already spent significant time and effort to do so.

Most recently, on May 14, in the wake of the reprimand received by its Office of General Counsel, the Bar’s Board of Trustees voted to follow Utah’s example and move forward with the Task Force’s recommendation of a “regulatory sandbox” that would allow lawyers to partner with non-lawyers to create consumer-facing technologies on a limited, experimental basis, with the aim of increasing access to civil legal aid.  Presumably, innovative legal service providers, like LegalMatch, would be subject to fewer regulations and eased rules around the unauthorized practice of law, fee sharing and nonlawyer ownership if they were approved to play in the sandbox.  Although this move by the Bar helps to reinforce California’s interest in continuing as a leader of innovation among the states, it remains to be seen whether the Bar’s various departments will continue to move in opposing directions or if they will unite to determine if sharing between lawyers and nonlawyers is caring for California consumers.

Please contact author, Kendra Basner, if you have any questions about this article or if you would like guidance as to the application of or compliance with these rules.

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