It’s an exciting time for the legal services industry. Companies like UpCounsel, LegalZoom, and the UK’s Co-operative Legal Services are proving that there are viable alternatives to the traditional (and expensive) attorney-client model. In this transitioning landscape, Responsive Law serves as the voice of the everyday consumer. Responsive Law is a national non-profit organization whose mission is to increase access, affordability, and accountability in the legal system. Protecting consumer interests is one of our core objectives, one which is often best accomplished by advocating for right-sizing regulation of the legal services industry.

Regulation is a double edged sword. This set of rules and laws varies from field to field, and in many cases they help protect customers and ensure fair business practice. For example, pharmaceutical companies must submit new drugs to the FDA for approval, which helps protect consumers from worthless “snake oil” products. In the legal world, laws that keep attorney-client communication confidential are important consumer protections.

On the other hand, regulations can also work towards the customer’s detriment, by protecting entrenched interests and preventing competition. This is all too often the case in the legal industry, where many of the rules and laws governing the supply of legal services are written by the industry’s oligarchs: the bar associations. When regulations are so strict that they inhibit innovation that could help consumers, it is Responsive Law’s mission to overturn them.

One potent example of a rule which is helping the bar associations and hurting everyone without a law degree is the widespread prohibition on fee sharing. Responsive Law, which advocates on behalf of the consumers of legal services, today offers as a guest post a primer on what fee-sharing is, and how allowing it could revolutionize the legal services industry.

 

An Out-Dated Rule

The prohibition on fee sharing is a near-universal feature of state bar regulations, but everywhere has its roots in American Bar Association Model Rule 5.4. This code, intended as a guideline for state bar associations across the country, governs the professional independence of a lawyer. It prohibits, in most cases, a lawyer or law firm from sharing legal fees with a non-lawyer. Section 5.4(c) is especially relevant: “A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Overall, this rule has the impact of limiting the financial structure of law firms to the traditional “lawyers partnered with lawyers” model.

The justification often given for the restriction is twofold, but neither argument stands up to scrutiny. First, allowing fee sharing could give non-lawyers influence over an attorney’s handling of a case, and—the argument goes—non-lawyers cannot be trusted to act in the client’s best interests. The worry is that, were a lawyer in partnership with an unscrupulous investor, the investor’s desire for profit might lead the attorney to make racking up fees a higher priority than doing right by his clients. In reality, attorneys already have financial incentives which may conflict with their clients’ best interest. Solo practitioners are under pressure to pay their bills, and lawyers at large firms are under pressure to meet their required billable hours.”  Under the current regime, attorneys’ ethics training, rather than customer choice, is the sole method of consumer protection.

Second, there is a deep-seated fear about the commercialization of the practice of law. The cultural distinction of being a “profession” is important to attorneys and bar associations. For decades, members of the ABA’s House of Delegates invoked the “fear of Sears” – the idea that sharing legal fees with non-lawyers would lead the famous department store to open up its own law shop. The entrenched interests in the legal industry quail at the idea that legal services might become an everyday product, less glamorous and expensive than they currently are. Consumers, on the other hand, would jump for joy if dealing with the legal system were as simple as picking out a new fridge.

 

Reality Check

The ban on fee sharing causes much more harm than good.

First, the wording of the rule itself is overbroad, creating burdensome technical hurdles to innovation. An ethics class professor once demonstrated the problem this way:  Taking a dollar bill in each hand, he declared that the right was his client’s money, the left the firm’s. He put the bills in the same pocket – and was suddenly guilty of fee-sharing. (Never mind the fact that it was perfectly clear that each party was entitled to one dollar.) Because Rule 5.4 is written so broadly, it is absurdly easy for any legal service provider to make a technical violation based upon something as simple as how money is transmitted via the internet before it reaches its final destination. Innovators like UpCounsel have to tread carefully around arcane distinctions, and constantly watch their backs for an incoming lawsuit from Bar Associations or lawyers unhappy with the idea of facing competition.

Second, legal service startups cannot seek the investor funding that allows innovation in other fields to flourish. It’s not enough to have a business model that could reshape the legal industry – a startup must contort its financial structure to avoid non-lawyer investment and fee sharing. The result: fewer choices and higher prices for consumers.

 

The H&R Block of Law Firms

Not only are the reasons for disallowing fee sharing flawed, but allowing the practice would be of great benefit to consumers. Good lawyers, of course, have always put their clients’ interests first. No matter what their financial structure is, they are bound by the rules of professional conduct. Services like UpCounsel do a better job of protecting consumers by enabling them to find a good lawyer. Consumer choice and a free market are powerful incentives with the potential to drastically lower the cost of legal services.

If the rules on fee sharing were relaxed or dropped, innovative companies like UpCounsel could do even more for their clients. Think H&R Block, but navigating the legal system instead of the tax code. Almost every law firm providing services to middle-income individuals is a small business of no more than a dozen attorneys. A large national firm specializing in these issues could provide standardized training to the attorneys it works with, perform quality control on services offered to clients, and let lawyers focus on practicing law rather than finding clients. Economies of scale would bring the costs of legal services down, while creating opportunities for attorneys fresh out of law school. Angel investors could actually act on a great proposal for a new legal services model, and bring it into reality. Under current regulations, none of this can happen. Rules intended to protect consumers from unscrupulous lawyers are actually making it harder to connect them with good ones.

 

Progress Stops at the Water’s Edge

Fortunately, in recent years there has been an international push to modernize the legal services industry. Australia and the UK have liberalized restrictions on fee sharing, moves which are shaking up those countries’ stagnant legal industries. In the UK the Co-operative Group and other “Tesco Law” firms are building economies of scale and offering cheaper, standardized services to customers. Likewise, in Australia innovative firms like Rocketlegal are offering alternatives to traditional practices. Consumers have reacted positively to the idea of brand names offering affordable quality legal service.

Unfortunately, here in the US the American Bar Association has refused to even consider relaxing Rule 5.4. Despite initial indications in December 2011 that the ABA’s Commission on Ethics 20/20 would consider “proposing a limited form of nonlawyer ownership of law firms,” in April 2012 the Commission declared that no changes to the policy were on the table. Since then, the New York State Bar’s Task Force on Nonlawyer Ownership has likewise rejected any form of nonlawyer ownership, and all of the ABA Commission’s proposed changes have been withdrawn. In January of 2012 we testified to the Ethics 20/20 Commission that, “By adopting a proposal slightly less progressive than that adopted by the District of Columbia 21 years ago, the ABA would bring the business of law in the United States into the 1980s, while service providers in other industries and lawyers in other parts of the world are exploring how to better serve their customers using 21st century business models.” It now appears that even this was too much innovation for the ABA’s tastes.

There is a ray of hope for changes to the ABA’s rules: the court system itself. The underreported Jacoby & Meyers lawsuit against the states of New York, Connecticut, and New Jersey is still working its way through the court system. Jacoby & Meyers has challenged these states’ ban on non-lawyer investment in law firms, which it argues is an unconstitutional restriction on law firms’ freedom of association. In November, the U.S. Court of Appeals for the Second Circuit kicked the case back down to district court, ordering Jacoby & Meyers to broaden their complaint to cover all the provisions of New York law which prohibit non-lawyer investment. If successful, these cases could overturn the prohibitions on fee sharing and outside investment in those states, setting a precedent with national impact.

 

A Double Edged Sword

While business rules and regulations often work to protect consumers, they can also do harm. In the legal services industry, entrenched interests have adopted some self-serving “consumer protections” that in fact stifle consumer choice and innovative service providers. To offer consumers better options requires a two-fold approach. Firms like UpCounsel offer new models and improved services to consumers.

Meanwhile, advocacy groups such as Responsive Law fight to level the playing field in the consumers’ interest. In testimony to the Task Force to Expand Civil Legal Services in New York, multiple comments to the ABA Ethics 20/20 Commission on Alternative Law Practice, and public dialogue, Responsive Law continues to push for changes that will benefit consumers of legal services. The Law Firm of Sears & Roebuck should be our goal, not something to fear!

About the author

Tom Gordon

Tom Gordon is Executive Director of Responsive Law, a national nonprofit organization that advocates policies that foster a more user-friendly legal system. Tom is a lawyer by training, and has been engaged in advocacy on behalf of consumers of legal services since 2000.

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