ETHICS DOCKET NO. 2004-07

MARYLAND STATE BAR ASSOCIATION, INC.

COMMITTEE ON ETHICS

ETHICS DOCKET NO. 2004-07

May a provider law firm for a prepaid legal service organization include literature promoting the services of a financing company to assist the client in financing their legal representation in its referral letters to member clients?

According to your inquiry, Company X is a publicly traded company which creates and markets a legal representation program to the general public. Persons availing themselves of this program become members of the program and pay Company X a monthly premium. Company X, in turn, enters into agreements with one law firm in each of the 50 states and the District of Columbia whereby the law firm becomes a provider firm to the members who enroll in Company X's program. Pursuant to the program, members receive legal advice from the provider law firms either for free, on a subsidized basis, and/or at a discounted rate. Company X pays each provider law firm a monthly retainer based on the pro rata number of memberships in the provider law firm's jurisdiction, but the provider firm pays no referral fees to Company X.

Your inquiry is a follow-up to an earlier inquiry from you to this committee which we have responded to in Ethics Docket 2004-03. Needless to say, if the issues discussed in 2004-03 suggest to you that the plan outlined above creates ethical problems, then those problems must be addressed independently. This opinion does not attempt to address the issues raised in 2004-03.

You advise that your law firm is the only provider law firm in the State of Maryland, as well as the District of Columbia. You estimate that there may be 50,000 subscribers in the DC-Maryland area. The firm provides legal services to persons who have enrolled in Company X's program and among the benefits to such persons is a 25% reduction on your regular rates and fees. Calls for legal services come on in an 800 number and 80% to 90% of the time, the matter is referred to a member of your firm. This is considered an in-house referral. The other 10% - 20 % of the calls - an outside referral - are referred to an attorney outside of your firm who has been pre-screened and is willing to offer similar discounts on their fees. It seems that with every client who calls the 800 number, there is a referral letter that goes out to the client, either referring them to an "in-house" attorney in your firm or to an outside attorney.

Even with those discounted rates, however, many clients are unable to afford legal services. Company X has plans to address that problem and has aligned itself with a financing company (hereinafter the "Financing Company") which is offering to finance loans for the discounted legal fees to be paid to your firm by clients referred to you by Company X.

Although your firm has no relationship with the Financing Company, and knows nothing about them, Company X wants you to include the Financing Company's literature with all of your referral letters to encourage clients to have their fees financed by the Financing Company. Whereas Company X could send the literature to its subscribers, they prefer to have your firm do so.

One of your ethical concerns is whether your firm would be permitted to send the literature to prospective clients because it would seem to be an endorsement of the Financing Company when in fact, there is no relationship between your firm and the Financing Company and you cannot vouch for the Financing Company as an entity about which you have any knowledge.

Although you did not mention this in your letter, companies that finance legal fees may require some information from the lawyer in the loan application process and also may require periodic reports on the status of a protracted case where they have financed the legal services. This scenario requires consideration of client confidentiality (Rule 1.6) and other ethical issues which arise in dealing with companies that finance legal services. We commend to you for consideration the opinion of this committee set forth in Docket 94-51.


Rule 1.6. Confidentiality of information states as follows:
(a) A lawyer shall not reveal information relating to representation of a client unless the client consents after consultation, except for disclosures that are impliedly authorized in order to carry out the representation, and except as stated in paragraph (b).
(b) A lawyer may reveal such information to the extent the lawyer reasonably believes necessary:
(1) to prevent the client from committing a criminal or fraudulent act that the lawyer believes is likely to result in death or substantial bodily harm or in substantial injury to the financial interests or property of another;
(2) to rectify the consequences of a client's criminal or fraudulent act in the furtherance of which the lawyer's services were used;
(3) to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client, or to establish a defense to a criminal charge, civil claim, or disciplinary complaint against the lawyer based upon conduct in which the client was involved or to respond to allegations in any proceedings concerning the lawyer's representation of the client.
(4) to comply with these Rules, a court order or other law.

We foresee that if a Maryland subscriber has a dispute with the Finance Company, that subscriber would be entitled to legal services from your firm yet it would have been your firm that appeared to endorse the Financing Company and in fact referred the client to that Financing Company. You might find yourself in a law suit against the Financing Company for one client at the same time that you are seeming to suggest that the next client who comes in the door go to that same Financing Company for a loan to pay your fees for that next client's case.

Carrying this a step further, in representing that client who has a dispute with the Financing Company, the zealous representation of your client's interests in the case against the Financing Company may be impacted by the fact that the next client coming in may not be able to retain your services unless his or her loan is approved. You may be inclined to hold back in a case against the Financing Company for fear that vigorously pursuing a case against them for the first client may affect the Financing Company's ability (or willingness) to approve the next client's need for an advance to pay your fees. Vigorously asserting your first client's claim against the Financing Company may mean that the second client's loan application would be denied and without that loan approval, client number two may not be able to afford to retain you. This scenario implicates rule 1.7(b) which says:

Rule 1.7. Conflict of interest: General rule.

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

(2) the client consents after consultation.

(c) The consultation required by paragraphs (a) and (b) shall include explanation of the implications of the common representation and any limitations resulting from the lawyer's responsibilities to another, or from the lawyer's own interests, as well as the advantages and risks involved.


If Company X insists that as a condition or your firm's participation as a provider law firm that you must, in all instances, include with your referral letters the advertisement of the Financing Company's offer of advancing a loan to your clients to pay your fees another rule must be considered.

Compensation to an attorney for providing legal services can take many forms. One form can be the assurance provided by Company X that their system will provide for the firm more referrals and therefore a stream of future legal fees coming your way as compensation for your discounted services to past clients they referred to you. The rule which is impacted is Rule 1.8. which provides as follows:

Rule 1.8 Conflict of Interest: Prohibited Transactions.

(f) a lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client consents;

(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and

(3) information relating to representation of a client is protected as required by Rule 1.6.

As noted in Rule 1.8(f)(2), the lawyer's independence of professional judgment is a matter to be maintained and protected. Another rule which addresses your relation with Company X raises that concern. That is Rule 5.4 which states as follows:

Rule 5.4. Professional independence of a lawyer.
(c) 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.

This rule prohibits you from permitting Company X to regulate your professional judgment as to whether your client should consider taking out a loan from the Financing Company. You are required to use your independent professional judgment in such matters.

Another issue which has not been discussed: it is presumed that Company X and the Financing Company have a financial - business interest between them for your clients to seek loans from the Financing Company. For a case where a similar relationship led to a class action lawsuit, see Reynolds v. Beneficial National Bank, et al, 288 F. 3d 277 (2002). In Reynolds, the fact that the finance company paid a fee to H & R Block to set up short term loans to Block's customers who wanted their tax refunds immediately was not disclosed and the interest rates were exhorbitant. To the extent that you may be asked (even required) by Company X to send literature to clients advertising the Financing Company's loan services, your relationship with your clients is being used to promote the business opportunities for the Financing Company and Company X with a potential for harm to your clients. The H & R Block case suggests that problems with these types of mass produced loans have arisen before and you may be well advised to steer clear of becoming involved.

In conclusion, even if you get beyond the issues of confidentiality with appropriate consultation with your client, the committee is troubled by the potential for harm to the client arising from your loss of the ability to exercise your independent professional judgment as to whether a client should or should not be encouraged to seek a loan from the Financing Company to fund your fees.

We trust that the foregoing is responsive to your inquiry.