3 Ways to Tweak the Lawyer Regulatory Rules Now

I’ve previously written about my “wish list” for structural change to the rules regulating the practice of law. I’ve also gone more granular on how the ABA’s proposal to modify the attorney advertising rules could be greatly improved.

There are also several other areas of the Rules of Professional Conduct that could be changed to make it easier for attorneys to innovate in the delivery of legal services.

Rule 1.15: the safekeeping property” rule

Rule 1.15 contains the lawyer trust accounting obligations. While the rule is well-intentioned, it isn’t flexible enough to account for situations where the client’s interests are already adequately protected. For example, legal fees paid by credit card: as long as those fees are earned relatively quickly, the client doesn’t gain any further protection from the trust accounting rules, as 1) the client isn’t actually “out of pocket” until the credit card grace period has run and 2) the client has recourse to the card issuer to charge back unearned fees in the event there is any dispute with the lawyer.

Getting recourse via the card issuer is a much easier, faster, and cleaner way for the client to get satisfaction than trying to proceed under the Rules. Yet Bar Committees and attorneys worry endlessly that Rule 1.15 prevents attorneys from using services that involve any form of prepayment for legal services by credit card. Why? Because the card processor or marketing intermediary may hold client funds while they are in transit to the attorney’s trust account.

As virtually all online commerce occurs via credit card, this means that all sorts of innovative consumer offerings aren’t going to get off the launching pad – for no reason other than the rigidity of a rule that offers no additional consumer protection in this setting.

This problem is vanishingly easy to solve: carve out an “intermediary exception” in Rule 1.15, or creating an exception to trust accounting for smallish payments made by credit cards (say, under $500 or $1000 – the level below which most innovative limited scope services will be sold).

Rule 5.4: protecting independent professional judgment

Rule 5.4 is effectively a conflicts-avoidance rule, designed to protect the independent professional judgment of lawyers from conflicts that might arise if third parties had a claim on a lawyer’s fees. Unfortunately, it has metastasized into a rigid rule prohibiting any form of fee splitting with non-lawyers.

I could go on at great length about the harm this causes, and the naivete of this rule, with its presumptions A) that other lawyers are somehow above pressuring each other over shared fees and B) that lawyer independence isn’t similarly threatened by the economic realities of running a law practice, regardless of the form in which bills are paid. And in a more perfect world, we would restyle this rule into less of a rigid prohibition and more of a general guideline that attorneys should resist all potential threats to their independence, regardless of the form in which such threats come calling.

Instead, I will observe that Rule 5.4 could be greatly improved by adding a simple carveout for ordinary business expenses that take the form of fee splits. The most obvious of these is credit card processing charges. Every fee paid by credit card is “split” with the card processor, as the processor’s 2-3% fee is deducted from the top before the funds are deposited in the attorney’s account. But marketing and advertising charges are increasingly likely to come out of fees as companies figure out better ways to unlock the consumer legal market by offering fixed-price services. Clients will pay for these services using credit cards, and the providers of these marketplaces – which may include private parties, courts, or bar associations – will want to be paid for generating that demand and facilitating the transaction. The easiest way to do that? Deduct that marketing fee from the legal fee paid. Again, this should be a non-event as long as the marketplace provider doesn’t interfere with the lawyer’s independent professional judgment. Here’s one potential formulation of a new exception to Rule 5.4:

(5) a lawyer or law firm may pay a portion of a legal fee to a credit card processor, group advertising provider or online platform for identifying and hiring a lawyer if the amount paid is a reasonable charge for payment processing or for administrative or marketing services, and there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship.

Safe Harbors

I’d rather have less-detailed rules, but to the extent states are going to have such rules, they could help their members out a lot by using safe harbors. What’s a safe harbor? In this context, it would simply be a list of state Bar-approved services. Lawyers could know that as long as the third-party marketing service they are working with is on the “approved” list, they wouldn’t have to worry about ethics compliance – at least for using the service. Safe harbors could be used for Rule 5.4, or 1.15, or even rule 7.2, for lawyer referral services.

Doing so isn’t without cost. A Bar adopting safe harbors would need to invest time in coming up with safe harbor criteria, with administering the program, and with ensuring that safe harbor lists were up-to-date. This would need to be a well-thought-out program, and the resources would need to be spent to ensure that it was running and doing the intended job. But this is the sort of process that should be well within the wheelhouse of any competent regulatory agency to build and implement.

Don’t get me wrong: I strongly believe it would be better for all concerned if the Bar regulators simply stripped the Rules down to the basics and focused on the purpose of the Rules, as I’ve suggested for rules 1.15 and 5.4 here, rather than mechanical compliance. But for those regulators who can’t get comfortable with taking such an extreme approach, adopting a “safe harbor” system is a great start that can offer the benefit of consumer-protective rules while eliminating most of the chilling effects of lawyer over-compliance.

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