Oct. 21 --Lawyers who want to market their legal services through group-coupon or deal-of-the-day programs may usually offer “coupon deals” that entitle a user to buy legal services at a discounted rate, but they may not be able to structure “prepaid deals” to comply with all the requirements of ethics rules, the ABA's ethics committee concluded Oct. 21 (ABA Standing Comm. on Ethics & Prof'l Responsibility, Formal Op. 465, 10/21/13).
Prepaid deals for legal services are not inherently unethical but they present unique challenges, the committee said, especially in regard to proper handling of legal fees paid in advance. Coupon deals are less problematic, it found, but still must be structured to meet all ethical requirements such as avoiding false and misleading statements, ensuring competent and diligent representation, and appropriately handling all money received.
The committee disagreed with certain state bar ethics opinions on this subject. For example, it concluded that:
• these arrangements usually don't involve improper fee-sharing with nonlawyers;
• users who buy a deal are not prospective or actual clients at the time of purchase;
• additional fees may be charged in some circumstances; and
• a purchaser's entire payment doesn't always have to be refunded if the deal is not redeemed.
The opinion provides a road map for compliance -- with cautions about potential speed bumps -- rather than giving a simple thumbs-up or thumbs-down.
The committee distinguished between “coupon deals” -- such as selling a coupon for $25 that entitles the user to buy up to five hours of legal services, which ordinarily cost 200 per hour, at a 50 percent discount -- and “prepaid deals” -- such as selling five hours of legal services for $500 when the services usually cost $200 per hour.
The buyer of the coupon deal would pay $25 to the marketing organization and then pay the lawyer $100 per hour for up to five hours of legal services, while the buyer of the prepaid deal would pay the marketing organization $500 up front, the committee said of these scenarios.
Coupon deals usually can be formulated to comply with ethics rules, the committee said, while it is less certain that prepaid deals can be structured to meet all professional requirements.
The committee concluded the payments that go to group marketing programs do not entail sharing a legal fee in violation of Model Rule 5.4. It agreed with opinions from Maryland, North Carolina and South Carolina on this point, and rejected the contrary conclusion of opinions from Alabama, Arizona, Indiana and Pennsylvania.
The up-front payment to the marketing organization is not a legal fee but is merely payment for advertising, which Model Rule 7.2(b)(1) permits so long as the cost is reasonable, the committee reasoned. “[M]arketing organizations that retain a percentage of payments are obtaining nothing more than payment for advertising and processing services rendered to the lawyers who are marketing their legal services,” particularly if the transaction is a coupon deal, the opinion states.
The marketing program's fee for enabling the coupon deal is permitted under Rule 7.2(b)(1), the committee advised, if the payment is reasonable given the cost of alternate types of advertising. Moreover, a fee that amounts to a significant portion of the purchase price would be deemed reasonable if it compensates the marketing organization for additional services such as processing payments for service providers or getting a provider's advertising message to a large group of people, the committee said.
The committee noted that marketing organizations that offer these deals typically collect payments and retain a portion for the advertising services, remitting the remainder to the lawyer in a lump sum without identification of individual purchasers.
Lawyers must evaluate, the committee said, whether the payment in question is money for fees paid in advance under Model Rule 1.15(c); if so, the funds must be identified by the purchaser's name and deposited into a trust account.
Money paid to a lawyer for a coupon deal may be deposited into the lawyer's general account, the committee said, because the purchase of a coupon merely establishes the discount applicable to the cost of future legal services. The funds collected and forwarded to the lawyer are not legal fees under Rule 1.15(c), it said.
On the other hand, money from a prepaid deal constitutes advance legal fees, according to the opinion, because the marketing organization collects all of the money to which the lawyer will be entitled for legal services that fall within the terms of the deal. Thus, the lawyer must arrange with the marketing organization to obtain information needed to identify buyers and deposit prepaid fees into a trust account, the committee said.
When a coupon deal is purchased and never used, it said, the lawyer may retain the proceeds if the offer explained that the cost of the coupon is nonrefundable. However, monies paid as part of a prepaid deal likely need to be refunded if the deal is never redeemed, so as to avoid collecting an unreasonable fee, the committee said.
Moreover, the committee said, the duty to avoid receipt of an unreasonable fee generally compels a full refund if a conflict of interest or other ethics impediment prevents the lawyer from performing the legal service, even if the offer says the payment is nonrefundable.
It is possible, the committee suggested, that no refund would be required in this situation if the prepaid deal were for a simple service at a modest charge, such as a prepaid deal offering an initial consultation at a reduced flat rate, as long as the offer made this clear.
If a lawyer chooses to make a refund when not obligated to do so, such as when a coupon purchaser has failed to use a coupon deal before it has expired, the lawyer may choose to refund only the lawyer's portion of the payment, provided that this limitation was disclosed at the time of purchase, the opinion states.
The committee emphasized that the advertising associated with the deal must not be misleading or incomplete in violation of Model Rule 7.1, which prohibits lawyers from making false or misleading statements about their services.
A lawyer's offer should carefully define the scope of services offered, including whether court costs and other expenses are excluded, and should explain under what circumstances the purchase price may be refunded, to whom and what amount. Advertising a coupon deal will usually present fewer hurdles than advertising a prepaid deal, the committee suggested.
The committee also said the mere purchase of a deal for legal services does not make the buyer a client or even a prospective client. Before establishing a lawyer-client relationship, it said, the lawyer should determine whether any conflicts of interest exist and whether the lawyer can competently handle the representation. The lawyer's advertisement and communications should explain that no lawyer-client relationship will be formed if there is a conflict or if the lawyer must decline the representation for some other reason, the committee said.
Lawyers should recognize, the committee said, that purchased deals generally can be traded or given as gifts. A lawyer planning a coupon offer should decide whether the service can or should be transferable, and the lawyer's coupon or voucher should caution any holder to review all terms of the purchase on the marketing organization's website, including whether the coupon is transferable, the committee said. It is not clear whether a prepaid deal could be transferable, it noted.
In addition, the committee advised that lawyers must comply with Model Rule 1.1 on competence by limiting their offer to services and practice areas in which they are competent and limiting the maximum number of deals to avoid being overwhelmed by too much work.
Moreover, it said, if the offer limits the number of hours of legal services the lawyer is obligated to provide, the lawyer should consider what will happen if more hours are needed to complete the services and should communicate whether the client will have to pay more fees in that event and, if so, the rate or amount.
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