I prepared this material for a presentation this week at the Northwest Regional Conference for…
This piece originally appeared as an article in the Washington State Bar Association’s NW Lawyer magazine.
Most of us are now familiar with “daily deal” websites such as Groupon and Living Social, which sell steeply discounted vouchers for goods and services. While daily deal sites typically hawk treats from cupcakes to spa treatments, professionals – including lawyers – have experimented with offering their services through such sites. A Missouri attorney drew much attention a couple years ago when he ran a Groupon offering a will and durable power of attorney for $99.[i] This article delves into the ethical issues for attorneys eying these uncertain waters.
Daily deals represent a huge discount from the merchant – deeper even than the price tag suggests. The merchant typically agrees to offer a service at 50% off the sticker price but the daily deal site takes a 50% cut of the reduced purchase price. Hence the Missouri attorney might have earned as little as $25 for drafting those two legal instruments.
From an ethics standpoint the red flags are easy to spot: the percentage-based payment to the daily deal site looks like fee-splitting; the high cost-per-consumer looks like a kickback for client referrals; and the handling of funds seems out of compliance with trust accounting rules. Yet on close analysis daily deal sites are not the ethics booby traps they first appear.
Attorney use of daily deal sites is “fraught with peril,” warns the Indiana bar ethics committee.[ii] But bar ethics committees are almost evenly divided on the issue of whether daily deal sites may be used by attorneys. For use in bean-counting jurisprudence, here’s the roundup: Maryland, New York, North Carolina, and South Carolina all approve of daily deal sites, albeit with some strong warnings;[iii] Alabama, Indiana and Pennsylvania categorically disapprove of daily deal sites.[iv] But smoke does not always indicate fire,[v] and this article shows that the apparent peril is not what it seems.
A referral scheme?
RPC 7.2(b) prohibits the use of for-profit referral services but allows attorneys to pay the “reasonable cost” of advertising. Are daily deal sites camouflaged referral services or does an attorney merely pay reasonable advertising costs?
Some jurisdictions conclude that the cost of daily deal marketing is too high to be a “reasonable” cost of advertising. Indeed, merchants pay daily deal sites a very high percentage of the consumer purchase price, usually 50%. An Alabama advisory opinion states bluntly that the “percentage taken by the site is not tied in any manner to the ‘reasonable cost’ of the advertisement.”[vi]
Let’s assume that impermissible referral schemes can be identified on cost structure and price alone (they cannot – see below). Even so the high cost of daily deal advertising cannot be characterized as unreasonable. Who is best situated to determine the value of a marketing tool to a law firm? What would it mean for an attorney to elect an “unreasonably” priced means of communicating her services? The attorney investing her firm’s resources is the most skeptical individual on the planet when it comes to valuing the marketing tool. Most practitioners have spam filters full of unreasonably priced advertising – they are the ones we believe will deliver poorly for the cost.
The Washington Bar’s RPC Committee has been helpful in identifying what makes a for-profit referral scheme impermissible. In the Committee’s view, it is permissible for an attorney to pay the cost of “ministerial services” to communicate information about an attorney’s practice, but the service may not be paid for subjective appraisals that bolster an attorney’s profile.[vii] Daily deal sites fair well on this test, since they do no more than post an attorney’s listing without providing an evaluation. Indeed, the Maryland Bar ethics committee opined that daily deal sites do not constitute impermissible referral schemes since, “the website does not take any particular action to refer a prospective client to a specific product or service.”[viii]
Focusing on the high, percentage-based cost of daily deal sites is also unfair because it disfavors attorneys in solo and small practice settings. The percentage-based pricing of Groupon means that a solo-practitioner can instantly reach a large audience without upfront capital investment. Larger firms may have the ability to pay out of pocket for marketing campaigns, but the small fish rarely have this luxury. Sure, Groupon gets a windfall if the attorney’s campaign takes off, but Groupon takes a haircut and shoulders the loss if the deal fizzles. The high premium charged by Groupon for this arrangement might sound familiar: using high percentage-based fees to offset the risk of providing services with no upfront fee. Contingent fees, anyone?
The percentage-based cost structure of daily deal sites also raises eyebrows because of the prohibition on fee-sharing with non-lawyers under RPC 5.4(a). This limitation, of course, is meant to safeguard the attorney’s independent professional judgment.[ix] Naysayers, such as the Indiana Bar, have likened daily deal sites to fee sharing with a brokerage firm.[x]
Opinions from Maryland and North Carolina suggest that costs paid to the daily deal site are either (a) shared fees, (b) referral fees or (c) the reasonable cost of advertising.[xi] Under RPC 7.2 alone a disjunctive would make sense, because reasonable advertising costs are an express exception to the general rule against for-profit referral fees. But the fee-splitting prohibition in RPC 5.4 makes no exception for reasonable advertising costs. So the fee-sharing issues cannot be resolved merely by defending the reasonableness of the cost charged by daily deal sites.
The ethics question specific to RPC 5.4 is whether daily deal sites impede an attorney’s exercise of professional judgment. Here, the leading concern is that a representation might be foisted upon an attorney without the opportunity for her to exercise independent judgment. Could an attorney-client relationship is formed at the moment a consumer purchases the attorney’s daily deal? In that case the attorney is onboard literally before she knows it.
Maryland, New York and South Carolina all agree that appropriate safeguards could protect the attorney’s exercise of judgment in undertaking a representation. When a consumer purchases a voucher on a daily deal site, the terms of the purchase agreement may be modified by ‘fine print’ language appearing with the offer.[xii] Verbiage on the deal offer can make clear that before a relationship is formed with the attorney a conflict check must be performed and the attorney must choose to take the case. Naturally, the monies collected must be returned if she does not take the case (see below regarding trust accounting issues), but the attorney is safeguarded from being dragged into a matter. So long as the attorney retains control over the decision to undertake the representation, it is unclear how a daily deal site would undermine professional independence.
When a daily deal is purchased, the consumer’s funds are transferred first to the advertiser, then to the attorney. Unearned attorney fees, of course, must be deposited into a client trust account per RPC 1.15A(a)(1). Are trust accounting rules violated where the client’s payment is in the possession of the advertiser?
Unlike other jurisdictions, in Washington flat fee legal services are not subject to trust accounting.[xiii] Preparation of a will and representation in an immigration process are services routinely performed for a flat fee cost. For such matters it is permissible for an attorney to receive unearned monies via the daily deal site without regard to trust accounting rules.
What if the attorney chooses not to work with a prospective client who has already bought a flat fee daily deal? A flat fee client must be advised in writing that he “may or may not have a right to a refund of a portion of the fee” if representation is terminated before all work is performed.[xiv] Certainly the attorney would be required to completely refund the amount received, less a pro-rated amount for any work performed. (North Carolina opines that it would be categorically excessive for an attorney to retain the payment from an uncollected voucher).[xv] It appears the consumer would be able to then get the remaining portion of his original purchase price back from the daily deal site. Groupon, for example, will issue a complete refund of a purchased deal if the service provider refuses to honor the voucher.[xvi] So it seems a flat fee could be completely reimbursed to a prospective client if the need arose.
What of unearned fees? Funds could be deposited directly from the daily deal site into a trust account, but prior to deposit they have been held by the daily deal site. This scenario seems potentially analogous to prepaid legal service providers. In exchange for a monthly fee such services agree to pay for specified legal services for the consumer. Washington RPCs expressly endorse lawyers’ participation in such arrangements.[xvii] By this analogy the daily deal site is in the role of a third-party payer for legal services, rather than a mere custodian of a client’s funds.
However this appears at odds with how the daily deal transactions are actually structured. Groupon’s terms stipulate that the merchant (here, the lawyer/firm) is the seller of the deal voucher, and that funds retained by Groupon are compensation for marketing, etc.[xviii] On those terms it seems Groupon would be in the position of temporarily holding unearned legal fees belonging to the client, unlike a prepaid legal services provider that pays an attorney from the provider’s own coffers.
It would likely be wise for an attorney to steer clear of accepting unearned legal fees through daily deal sites. Apart from the trust accounting issue, flat fee matters are simply better-suited to daily deals than indeterminate representations. With flat fee matters it would be easier for the attorney to gauge the scope of her potential commitments and better plan on the front-end.
In addition to the ethics hurdles unique to daily deal sites, such communications must still comply with all general communication rules. For starters, the daily deal must actually be a deal: the voucher must represent the actual discount it purports to be.[xix] A 50% discount on the flat fee cost of preparing a will must actually be a 50% discount. This will be tricky in application, since firms that customarily charge flat fees may routinely (and appropriately) adjust the quote to the individual client.[xx] Firms may have a more difficult time explaining a ‘sticker price’ for their services than an auto shop pricing an oil change.
A deal listing should explain the preconditions that must be met before the attorney accepts a representation, including that a conflict check be performed, that the attorney be qualified to accept the representation, and that the attorney chose to accept the matter. But North Carolina has opined that if an attorney – even at the time of the initial consultation – discovers she has underestimated the time for a flat fee, she has assumed this risk and must honor the daily deal voucher.[xxi]
The fact that an attorney could escape disciplinary sanction for using daily deal sites is hardly a ringing endorsement. Some might balk at the company one would share on such sites. Is the dignity of an attorney, or the profession itself, undermined by a marketing media associated with discounted donuts and beer tastings?
Those on high horses may want to recall our profession’s call to reaching the underserved. Washington State in particular has focused enormous energy on equal access to justice, recently allowing the practice of law by non-attorneys.[xxii] Yet such developments come at a time when many firms struggle and record numbers of new attorneys find themselves unemployed. Discounted legal services – such as the Bar’s Moderate Means program – help the legal marketplace meet the needs of the underserved.
Indeed, daily deal advertisements – such as for a flat-rate will – may bring individuals into their first contact with lawyers. The tackiness of an advertisement’s verbiage is most certainly in the attorney’s control, but it is difficult to see how making legal services affordable undermines professional dignity.
For those who missed it, the Washington State Bar Association’s RPC Committee was disbanded last year with little fanfare and no feedback from Bar membership. (At press time the Board is awaiting proposals for reconstituting the RPC Committee). The rapid growth of law practice technology and new media makes this all the more painful for attorneys trying to get their ethical bearings in new territory. There is a cogent argument that attorney use of daily deal sites – at least on flat fee matters – is compliant with professional ethics. Yet without more authoritative guidance, attorneys will remain justifiably anxious. Only time will tell who wants to be the first penguin to dive off the iceberg into the uncertain waters of daily deal marketing.
[iii] Md. State Bar Assn. Comm. on Ethics, Dkt. No. 2012-07 (2012) (on file with the author); N.Y. State Bar Assn. Comm. on Prof. Ethics, Op. 897 (Dec. 13, 2011), available at http://tinyurl.com/75usewx ; N. Car. Bar Assn. Ethics Comm., Op. 10 (Oct. 21, 2011), available at http://tinyurl.com/d6dpkhy; S. Car. Bar Assn. Ethics Advisory Comm., Op. 11-05, available at http://tinyurl.com/cs6lv4p . An ABA journal article once reported that the Missouri Bar had endorsed the use of Groupon by an attorney, but the Bar later clarified via Twitter it had taken no formal position on the issue. An undated announcement is available at http://tinyurl.com/ccx4tsa. See Amber Hollister, What Hath the Web Wrought, Advertising in the Internet Age, Oregon St. Bar Bull. (May 2011), available at http://tinyurl.com/6kposeh.
[iv] Ind. Op., supra n. 2 (opining that sites are not likely compliant); Ala. Bar Assn. Off. Gen. Counsel, Formal Op. 2012-01 (2013), available at http://www.alabar.org/ogc/PDF/2012-01.pdf (opining that daily deal sites necessarily or potentially violate multiple RPCs); see Thomas G. Wilkinson, Jr., Ethics Digest, Penn. Lawyer (Nov./Dec. 2011) (reporting on a Pennsylvania Bar ethics opinion advising daily deal sites are impermissible).
[v] Cooks amongst us may have experienced a wok filled with smoking oil; it reaches the flash point and ignites if, and only if, no extinguisher is on hand.
[vi] See supra note 4.
[viii] See supra note 3.
[ix] RPC 5.4, cmt. 1.
[x] See supra, note 4.
[xi] See supra note 3.
[xiii] RPC 1.5(f)(2).
[xiv] RPC 1.5(f)(2). Note that RPC 1.15(f)(2) requires a written fee agreement with specific verbiage before undertaking a flat fee representation. To comply with the rules for accepting flat fees an attorney should ensure that the “fine print” terms of her daily deal listing include provisions required by the RPC; the client must agree to these terms before the fee is transmitted.
[xv] See supra note 3.
[xvii] RPC 7.2(b)(2) (attorney may pay the usual charges for a legal services plan); RPC 7.3 (d) (attorney pay participate in plan notwithstanding the provider’s in-person solicitation of consumers).
[xix] See RPC 7.1 (communications about lawyer’s services must not be false or misleading).
[xx] See RPC 1.5(a) (factors to be considered in determining reasonable fee include time and labor involved, and time limitations imposed by client).
[xxi] See supra note 3.
[xxii]See APR 28 (regarding limited license legal technicians).