A very significant new decision from the First Appellate District, Division 4 has found LegalMatch to be an unauthorized legal referral service (Jackson v. LegalMatch.com, case no. A152442, filed 11/26/19.)  The decision reverses a trial court decision after trial that LegalMatch.com was not engaged in referral service activity within the meaning of Business and Professions Code section 6155 and remands the case back to the trial court on the issue of whether LegalMatch is culpable of “unclean hands” that bar its ability to recover unpaid subscription fees from attorney Dorian Jackson.

The Court of Appeal bottomed its analysis on the plain language of section 6155.  The section says that “[a]n individual, partnership, corporation, association, or any other entity shall not operate for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys, and no attorney shall accept a referral of such potential clients,” unless “[t]he service is registered with the State Bar of California and . . . is operated in conformity with minimum standards for a lawyer referral serviceestablished by the State Bar” or “is operated in conformity with” standards set by the Supreme Court.  The Court of Appeal noted that section 6155(h)(1) provides that “[p]ermissible joint advertising,among other things, identifies by name the advertising attorneys or law firms whom the consumer of legal services may select and initiate contact with,” while subdivision (h)(2) statesthat “[c]ertifiable referral activity involves, among other things, some person or entity other than the consumer and advertising attorney or law firms which, in person, electronically, or otherwise, refers the consumer to an attorney or law firm not identified in the advertising.”

The appellate court agreed with Jackson the trial court  erred when it found that LegalMatch did not engage in referral activity because it did not exercise judgment on a client’s legal issues. It also found that the term “referral” was not ambiguous and that the “plain and commonsense” meaning of “referral” was clearly applicable to the services that LegalMatch provided, referring clients to lawyers who paid a fee to be matched to clients

Section 6155 provides no definition of “referring” or “referral.” Instead, the statutory text appears to focus on the actof connecting potential clients with attorneys, with the additional requirement that the covered individual or entity operate for the direct or indirect purpose of doing so. (§ 6155, subd. (a).) Read in the context of the statute, the plain meaning of the term “referral” means no more than the “act or an instance of sending or directing to another for information, service, consideration, or decision.” (Black’s Law Dict. (11th ed.Westlaw2019).)

LegalMatch.com is only one of many similar services that have proliffered in the last two decades.  One can wonder that it took the civil courts so long to interpret the very broad and very clear language of the statute.

Moreover, as paying for referrals from an uncertified legal referral service is a cause for discipline under Rule of Professional Conduct 7.2(b)(2), lawyers who are paying subscription fees to services like LegalMatch are subject to potential State Bar action.  The Office of Chief Trial Counsel (OCTC) has shown no interest in prosecuting such cases since 1996 when it initiated several such cases against lawyers participating in uncertified legal referral service.  Those cases were settled for low-level discipline, private and public reprovals.  This opinion, assuming it survives the inevitable appeal, may push OCTC to prosecute these types of cases again.

On the other side of the equation, the LegalMatch opinion comes at a time when the various groups are pushing for a relaxation of the rules regarding non-lawyer participation in the marketing and delivery of legal services., under the rubric of increasing access to legal services.  It can be expected that those forces will meet this opinion with calls for the amendment or repeal of section 6155, The certification process for legal referral services is cumbersome and only a few legal referral services operating on a for-profit basis have been certified.  I have counseled many lawyers interested in establishing referral services who have abandoned the idea after an exploration of just what is required.

The LegalMatch opinion is certainly timely and any lawyer utilizing such services should be aware of its implications.

 

On July 11, 2019, the State Bar Board of Trustees voted to put out for public comment the recommendations of the Task Force on Access Through Innovation of Legal Services (ATILS).  ATILS was formed in July 2018 following the Board’s consideration of a report from Prof. William Henderson of the University of Indiana Maurer School of Law.

Prof. Henderson is well known for the groundbreaking scholarly work on the dynamics of the legal marketplace and the effect those dynamics have on the legal profession.  The Board commissioned Prof. Henderson to report on those changing dynamics.  His Legal Market Landscape Report concluded that

There is widespread consensus among lawyers, judges, legal academics, regulators and sophisticated clients that the legal market is in a period of significant tumult.  Further, there is also agreement that this tumult may be the early stages of a fundamental transformation. Yet, what is new and disconcerting for many is that these changes are not being driven by licensed lawyers or the organized bar. Rather, the causes are powerful external market forces that cannot be easily categorized using our familiar and well-established frameworks. At a minimum, our frameworks need updating.

Now, after a year of study, ATILS has produced an outline of how those frameworks could be updated.  The recommendations, while still tentative, are nothing less than revolutionary.  They include creating new exceptions that authorize the practice of law by nonlawyers in specified areas, allowing certified nonlawyers to provide legal services through technology (e.g. Legal Zoom), and changing the rules that prohibit nonlawyers from having ownership interest in entities providing legal services, principally California Rule of Professional Conduct 5.4 “Financial and Similar Arrangements with Nonlawyers.”

There is a lot to unpack in the ATILS report. It deserves close attention from every lawyer who represents private clients, and especially from lawyers who represent real people as clients, what Prof. Henderson calls the PeopleLaw sector of the profession. These changes could fundamentally change your professional life.

The proposed changes to Rule 5.4 are perhaps the most revolutionary. The current Rule, only adopted November 1, 2018, but reflecting legal principles long held, says

(a) A lawyer or law firm shall not share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law, … [limited exceptions];

(b) A lawyer shall not form a partnership or other organization with a nonlawyer if any of the activities of the partnership or other organization consist of the practice of law.

(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 independent professional judgment or interfere with the lawyer-client relationship in rendering legal services.

(d) A  lawyer  shall  not  practice  with  or  in  the  form  of  a  professional  corporation  or other organization authorized to practice law for a profit if: (1) a nonlawyer owns any interest in it, except that a fiduciary representative of  a  lawyer’s  estate  may  hold  the  lawyer’s  stock  or  other  interest  for  a reasonable time during administration; (2) a  nonlawyer  is  a  director  or  officer  of  the  corporation  or  occupies  a position of similar responsibility in any other form of organization; or (3) a  nonlawyer  has  the  right  or  authority  to  direct  or  control  the  lawyer’s independent professional judgment.

(e) The Board of Trustees of the State Bar shall formulate and adopt Minimum Standards for Lawyer Referral Services, which, as from time to time amended, shall be binding on lawyers.    A lawyer shall not accept a referral from, or otherwise participate in, a lawyer referral service unless it complies with such Minimum Standards for Lawyer Referral Services.

(f) A  lawyer  shall  not  practice  with  or  in  the  form  of  a  nonprofit  legal  aid,  mutual benefit or advocacy group if the nonprofit organization allows any third person to interfere with the lawyer’s independent professional judgment, or with the lawyer-client  relationship,  or  allows  or  aids  any  person  to  practice  law  in  violation  of these rules or the State Bar Act

Rule 5.4 has been described as a rule necessary to preserve lawyer control over the provision of legal services because nonlawyers, not being fiduciaries, might not provide those services consistent with the best interest of the clients but in the best interest of the entity providing those services. Put another way, in the ever-present tension between law practice as profession and law practice as business, non-attorney ownership or control will tilt things too much to the business side.

With that in mind, ATILS proposes two alternative ways to change Rule 5.4.

Alternative 1 would continue to impose a general prohibition against forming a partnership with, or sharing a legal fee with, a nonlawyer. “The Alternative 1 amendments would: (1) expand the existing exception for fee sharing with a nonlawyer that allows a lawyer to pay a court-awarded legal fee to a nonprofit organization that employed, retained, recommended, or facilitated employment of the lawyer in the matter; and (2) add a new exception that a lawyer may be a part of  a  firm in which a nonlawyer holds a financial interest, provided that the lawyer or law firm complies with certain requirements including among other requirements, that: the firm’s sole purpose is providing legal services to clients; the nonlawyers provide services that assist the lawyer or law firm in providing legal services to clients; and the nonlawyers have no power to direct or control the professional judgment of a lawyer.”

Alternative 2 reflects a more radical revision. “Alternative 2…would largely eliminate the longstanding general prohibition and substitute a permissive rule broadly permitting fee sharing with a nonlawyer provided that the lawyer or law firm complies with requirements intended to ensure that a client provides informed written consent to the lawyer’s fee sharing arrangement with a nonlawyer.”

The bedrock of these proposed changes is the idea that the current regulation scheme is preventing the efficient delivery of legal services and access to justice. “To the extent these rules promote consumer protection, they do so only for the minority of citizens who can afford legal services. Modifying the ethics rules to facilitate greater collaboration across law and other disciplines will (1) drive down costs; (2) improve access; (3) increase predictability and transparency of legal services; (4) aid the growth of new businesses; and (5) elevate the reputation of the legal profession.” Henderson Legal Market Landscape Report, at page 7.

These changes, along with the others recommended by ATILS, would erode the monopoly over the provision of legal services currently held by lawyers.  Of course, any change in the Rules of Professional Conduct must be approved by the California Supreme Court (Bus. & Prof. Code § 6077).  There will be winners and losers if these ideas are enacted, and some of those losers are going to be lawyers.

The independence of the legal profession has almost become a religious principle to some lawyers.  Yet, the marketplace changes described by Prof. Henderson are very real.  Rule 5.4, and its equivalent in other states, is being violated every day by hundreds, if not thousands, of legal services providers.

Avvo Legal Services prompted a backlash that resulted in a number of legal ethics opinions (including San Diego County Bar Association formal ethics opinion 2019-2).  The new owner of Avvo Legal Services pulled the plug on the business, but a similar model exists for many others.  And there are many other legal services providers where non-lawyer participation and control is hidden.

Will California allow legalize non-lawyer ownership of legal services providers?  We don’t know, but stranger things have happened.