Why New Jersey Gets it Wrong on Avvo Legal Services

OK, so one of the last things I read work-wise, before going off the grid to chase after Amelia Earhart in Kiribati for three weeks, was this joint opinion by three committees of the New Jersey Supreme Court taking issue with Avvo Legal Services. 1

I’ve long lambasted the issuance of regulatory ethics opinions on matters related to attorney speech. The principle behind prophylactic ethics opinions – “err on the side of caution when interpreting the ethics rules” – fits very poorly with the First Amendment principles protecting access to information about legal services. Unless regulators engage with these principles, they are doing the bar and the public a disservice whenever issuing advisory opinions in this area.

That said, this New Jersey opinion is better than some on this front, as it addresses the fee-splitting bogeyman head-on. And in so doing, the Committees conclude that Avvo Legal Services “does not insert itself into the legal consultation in a manner that would interfere with the lawyer’s independent professional judgment.” We agree. And this is an important point, as the animating principle behind Rule 5.4 – which prohibits the splitting of fees – is the protection of the attorney’s independent professional judgment.

However, there are three big ways in which New Jersey arrived at the wrong conclusion:

Incoherence on Fee-Splitting

There are two ways of thinking about fee-splitting: let’s call the first the “mechanistic” formulation, and the second the “principled” formulation.

In the former, any agreement to split a legal fee violates the rule. You don’t need to look beyond the terms of the transaction; if the fee is getting split, the rule is violated.

In the latter, the focus is not on the mechanics of the transaction, but on the reality of the arrangement. If the deal with a non-lawyer third party puts the lawyer’s independent professional responsibility at risk, the rule is violated.

So in the “principled” formulation, regulators will look past some technical fee splits (e.g., credit card processing fees) because they do not risk conflicts. And in the “mechanistic” formulation, regulators will look past some conflict-laden business deals (e.g., cross-referral arrangements) because they do not technically involve the splitting of a legal fee.

As Avvo Legal Services does not involve the splitting of a fee – the entire fee is paid to the attorney, and the attorney pays Avvo a separate marketing fee – it shouldn’t run afoul of New Jersey’s rule unless the state follows the “principled” formulation and finds that our program conflicts with the professional independence of lawyer participants.

New Jersey didn’t do that; in fact, it explicitly found that Avvo Legal Services does not create such interference. Yet the opinion still finds that Avvo Legal Services constitutes prohibited fee-splitting. Why?

It’s possible that the New Jersey Committees didn’t fully understand how Avvo Legal Services works. They may have assumed – incorrectly – that Avvo deducts its marketing fee from the legal fee prior to passing it through to the attorney.

However, the rest of the opinion leads me to believe that the Committees are grasping at something more amorphous: a free-floating finding of fee-sharing in the absence of either a technical fee-split OR an indication of risk to a lawyer’s independent professional judgment.

Such a principle would be incoherent and dangerous. It risks subjecting ANY expenditure of money by an attorney to the whims of the regulators. Because ALL legal fees are “shared” at some point. They get shared with landlords, office supply vendors, secretaries, plant waterers, brass polishers, and software programmers. And they get shared in rough proportion to their size because with more legal fees there are more goods and services for lawyers to buy.

New Jersey seems to want to have the leeway to apply Rule 5.4 to any transaction it sees fit. But regulation doesn’t work that way: Rule 5.4 is either violated via the letter of the rule (“no sharing of a legal fee”), or via the spirit of the rule (“no third party deals that put attorney independence at risk”). So how can Avvo Legal Services be a problem when it involves neither of these?

What’s a “Lawyer Referral Service?”

New Jersey prohibits attorneys from participating in for-profit lawyer referral services, and the opinion finds that Avvo Legal Services constitutes just such an “impermissible attorney referral service.” Why? Because the marketing fee charged by Avvo Legal Services is based on the legal services provided to the client who Avvo has connected with the attorney.

There’s no analysis of why such a structure is bad for clients, or even how such “cost per action” payment for marketing makes Avvo Legal Services a “lawyer referral service.” As I’ve long pointed out – but as the New Jersey Committees only tacitly acknowledge in the opinion – the key definition of a “lawyer referral service” is the existence of consumer deception inherent in “steering” a potential client to a particular lawyer. And there are actually some ethics opinions that lay this out pretty clearly, including this one:

“Opinion 13 set forth three factors for distinguishing between impermissible referral services and advertising. The first factor is whether the marketer limits access to information or whether, like a “Yellow Pages” directory, the entire list of participating attorneys is available to the consumer. The second factor is whether the marketer, explicitly or implicitly, guides consumers to a specific attorney. In contrast to directories such as “Yellow Pages,” a referral service “is a directing intermediary, not just an encounter between the consumer and the passive information made available by the attorney.” The third factor is whether the marketer serves a public purpose (providing information about attorneys or putting people in touch with attorneys) or primarily a commercial purpose.”

The state issuing that guidance? New Jersey. 2

Avvo Legal Services has no such opacity or guidance of consumers to a particular attorney; consumers are free to choose from any participating attorney. And New Jersey doesn’t conclude differently. Its opinion simply declares that the cost-per-action nature of Avvo’s marketing fee renders the program a disqualified lawyer referral service. As shown below, that’s not how this whole “lawfully interpreting the rules” business works.

Blowing Off the First Amendment

The opinion includes this gem:

“The First Amendment does not protect lawyers who seek to participate in prohibited attorney referral programs or engage in impermissible fee sharing.”

That’s glaringly wrong. It’s not a question of “protecting” lawyers; it’s a question of how the Constitution dictates that speech-impacting Rules of Professional Conduct be interpreted.

Prohibiting attorneys from participating in lawyer referral services is a form of commercial speech regulation. This means such a prohibition must meet the Central Hudson requirements of necessity and narrowness.

So the New Jersey Bar can’t simply say that lawyers can’t participate in lawyer referral services, and it can’t define “lawyer referral service” so broadly that the term captures ANY new form of marketing that the Bar isn’t entirely comfortable with. The Bar must show a significant government interest driving its rule, and it also must show that its regulation advances that interest in a minimally-speech-restrictive fashion.

The rationale for a special restriction on lawyer referral services has been – as New Jersey’s earlier Opinion 43 and other such opinions note – that such services present a special risk to the public, characterized as they are by a lack of transparency and directive conduct.

That’s fine, but the rule always must be interpreted in light of the limited box in which it sits (i.e., constraining a specifically problematic set of deceptive marketing practices). So if New Jersey is going to find that Avvo Legal Services is a lawyer referral service prohibited to New Jersey attorneys, it’s got to make an empirical finding that something about our program fits within this rationale. Similarly, if New Jersey is going to find that a form of advertising is off-limits because of the method of payment, that conclusion must also be supported by evidence that the practice is harmful to the public.

The New Jersey Committees don’t remotely do that. Rather, their opinion simply concludes that the First Amendment doesn’t apply here.

Such a position ignores the copious volume of cases laying out how the First Amendment limits attorney advertising regulation. And integral to those limits is the recognition of the importance of consumer access to justice and information about legal services. Opinions like this one – which flout these Constitutional limits in seeking to impose broader restrictions – run contrary to both the law and the purpose of the rules.

Notes:

  1. This trio included the Advisory Committee on Professional Ethics, the Committee on Attorney Advertising, and the Committee on the Unauthorized Practice of Law.
  2. See N.J. CAA Opinion 43 (June 2011).

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