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Ethics Opinion

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RI-223

January 18, 1995

SYLLABUS

    Participation of a lawyer in a for-profit prepaid legal service plan is permissible, provided that:

      (a) the plan is not a lawyer referral plan;

      (b) the plan allows the lawyer to exercise independent professional judgment on behalf of the client, to maintain client confidences, to avoid conflicts of interest, and to practice competently;

      (c) the operation of the plan does not involve improper advertising or solicitation or improper fee sharing;

      (d) the plan is in compliance with other applicable law.

    It is incumbent upon the participating lawyer to assure that the plan is in compliance with ethics rules.

    References: MRPC 1.1, 1.7, 1.8, 1.10, 5.4, 5.5, 5.6, 6.3, 7.1, 7.2, 7.3, 8.4; R-6; RI-147; CI-723; ABA OP 87-355; District of Columbia Op 155; Shapero v. Kentucky Bar Ass'n, 486 US 466, 108 S Ct 1916, 100 L Ed 2d 475 (1988).

TEXT

The Committee has received numerous inquiries from lawyers regarding participation in one or another prepaid legal services plans (PLSP) currently operating or proposing to operate in the state. Because such programs vary widely and because ethical issues involving them frequently turn upon the individual factual circumstances, rather than review the propriety of each individual program, the Committee has decided to publish an opinion addressing the various ethical issues lawyers may face in personally evaluating the propriety of participating in a PLSP. The Committee has previously approached participation in lawyer referral services (LRS) in a similar fashion. R-6.

As with R-6, it must be stressed that (1) the Committee does not have jurisdiction to review the propriety of the PLSP, but concerns itself with whether participation in the PLSP by Michigan lawyers would comply with the Michigan Rules of Professional Conduct; (2) these are guidelines based upon the experience of the Committee in reviewing particular PLSP to date, and are not meant to be an exhaustive list of criteria. A lawyer should consult the ethics rules in answering questions not covered here. In addition, many ethical issues raised by PLSP will be dependent upon the factual circumstances; ultimately, it is the individual lawyer's responsibility to assure compliance with the ethics rules.

In view of the increasing interest in this area, and recognizing that prepaid legal service plans can offer increased access to legal services, the Committee in this opinion sets forth guidelines to aid lawyers in assessing the propriety of their participation in for-profit legal service plans.

Most non-profit prepaid legal service plans are owned and operated by plan sponsors which for a modest monthly charge offer subscribers (individuals or businesses) certain "covered" legal services for no additional cost and other specified services at reduced fees. The covered legal services are provided by participating lawyers and usually include specified services or a defined number of chargeable hours of legal services; the reduced or discounted fee services usually cover additional or enhanced services for more complex or adversary matters matters at a fixed hourly rate or contingent fee arrangement, both for less than fees customarily charged by lawyers for similar services. Certain matters are explicitly excluded, such as matters where the interests of two plan members are in direct conflict; matters adverse to the plan sponsor; and other extraordinarily complex matters.

1. "Lawyer Referral Service" Distinction.

A PLSP is distinguishable from a lawyer referral service (LRS). A lawyer referral service is a device by which a referral of a client is made to a lawyer. It does not matter whether the LRS calls itself a "referral service," "group advertising," or some other name, if in fact a referral is made. R-6; CI-723. If an LRS is operated for-profit, a participating lawyer may pay only the reasonable costs of advertising, but may not pay other costs of a for-profit LRS. MRPC 7.2(c); R-6. A lawyer may pay the usual charges (in addition to advertising costs) of not-for-profit referral services.

If the PLSP does not refer clients to the lawyer nor recommend the lawyer's services, this "for-profit/not-for-profit" distinction does not apply to a PLSP. Even if the PLSP does refer clients to the lawyer (thus making it a LRS), participation by a Michigan lawyer would still be permissible, so long as the lawyer paid no costs other than the reasonable costs of advertising for the "for-profit" sponsor, and the lawyer assured compliance with the guidelines in R-6.

This analysis is made still more complex (and therefore more risky for the lawyer) because it is not always easy to determine whether the plan sponsor is a "for-profit" or "not-for-profit" entity. Mere incorporation under the Michigan Non-Profit Corporation Act (PA 162 of 1982, MCL 450.2101 et. seq.) is not necessarily a safe harbor nor is the granting of tax qualification or exemption by governmental entity. A Michigan non-profit corporation is any corporation incorporated to carry out any lawful purpose or purposes not involving pecuniary profit or gain for its directors, officers, shareholders or members. MCL 450.2108(3). Nevertheless, high ranking officers e.g., executive directors of commonly encountered "not-for-profit" organizations, typically realize pecuniary gain e.g., salary and bonuses in much the same form as gain is delivered to the officer/equity owners of a private, "for-profit" organization. The factual circumstance of this distinction is the responsibility of the lawyer participating in the PLSP.

In addition, the "for-profit/not-for-profit" distinction is not without its own constitutional dimensions. The distinction retained by MRPC 6.3 and 7.2(c)(ii) is a hold-over from the former Michigan Code of Professional Responsibility DR 2-103(D)(4)(a). Some commentators have observed that the distinction between profit and non-profit plans was probably objectionable on First Amendment, equal protection and right to counsel grounds. Lawyers are warned to consider those implications as case law develops.

So long as the PLSP is not referring clients to the lawyer, nor recommending the lawyer's services, then there would appear to be no special prohibition upon participation in even a for-profit PLSP by MRPC 6.3(b), nor by MRPC 7.2(c)(ii). In the course of administering the plan, the plan sponsor may choose to inform subscribers or potential subscribers of the identity of participating lawyer or firms; the participating lawyers or firms may choose to make presentations at seminars, workshops, or other gatherings to inform and educate subscribers or potential subscribers about the availability and need for legal services provided through the PLSP. Such activities are not "referring clients to the lawyer," nor "recommending the lawyer's services." In and of themselves, they do not transform the PLSP into a LRS.

If there is a recommendation of the lawyer or a referral of clients, then the PLSP would also be governed by rules governing lawyer referral services. See, R-6.

2. Professional Independence.

A lawyer may not allow the sponsoring entity to interfere with the lawyer's exercise of independent professional judgment on behalf of a client, nor to direct or regulate the lawyer's professional conduct. MRPC 5.4 contains the traditional limitations on nonlawyer involvement in the practice of law, including the prohibition against division of fees with nonlawyers and the prohibition against lawyer partnerships with nonlawyers. MRPC 5.4(c) states:

    "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."

MRPC 5.4 [together with MRPC 1.2(a), 1.7(b) and 1.8(f)] assure that the lawyer will abide by the client's decisions concerning the objectives of the representation serving the interests of the client and not those of a third party.

As general guidelines, the plan sponsor should have no dealings with the plan subscribers on legal issues after their matters have been undertaken by the participating lawyer. The lawyer-client relationship with the plan member should not be any different than a traditional lawyer-client relationship; the plan member (not the plan sponsor) becomes the client, and there should be no interference by the plan sponsor. Separate written agreements or engagements between the lawyer and the plan, as well as between the lawyer and the plan member, should clarify this basic relationship.

Although a PLSP arrangement does not contemplate explicit outside direction or regulation of a lawyer's judgment in rendering legal services, there may be hidden pressures. If a lawyer becomes financially dependent upon participation in the PLSP, to the extent that the participating lawyer or law firm's practice is exclusively or predominantly dependent upon the PLSP, a conflict of interest may arise between the lawyer's duties to the firm and the lawyer's duties to the client under MRPC 1.7(b). Other potential problems could occur if the plan or plan sponsor undertakes to set limits on the amount of time a lawyer may spend with each client's matter, or to fix the number of matters which must be handled by the lawyer, or to require the lawyer to commit to the plan that the lawyer will not represent a client beyond the scope of the agreement in the plan. One safeguard against this problem would be to provide a method by which time and services over the minimum "covered services" purchased, could be engaged from the lawyer by the plan member as part of the enhanced or additional services at the different fee rates.

Issues of unauthorized practice of law may also arise. This will depend upon the facts of the particular plan and how it operates. MRPC 5.5(b) would prohibit a lawyer from participating in a PLSP if the PLSP engaged in or assisted in any unauthorized practice of law.

3. Confidentiality.

The participating lawyer must assure that client confidences and secrets are preserved in accordance with MRPC 1.6. Quality control mechanisms or other features of the PLSP would be unacceptable to the extent that they lead to the disclosure by the lawyer of protected information. A lawyer should not participate in a plan which requires the lawyer to disclose information relating to the representation except in compliance with MRPC 1.6. Blanket advance consents for disclosure should be neither sought nor accepted from plan members by the participating lawyer since to do so usually compromises the ability of the lawyer to make the required "full disclosure" required by MRPC 1.4(b) and 1.6(c)(1).

4. Conflicts of Interest.

The lawyer must be in compliance with MRPC 1.7, 1.8, 1.9 and 1.10 in the avoidance of conflicts of interest. The PLSP may refuse to include in services provided under the plan any representation against the sponsor or other plan members, but the lawyer must be able to, and should, advise the client to seek other counsel in such matters. In addition, the plan sponsor must not impose restrictions upon a lawyer's ability to represent a member once the member becomes a client of the lawyer, or after the lawyer's participation in the plan terminates. MRPC 5.6 states:

    "A lawyer shall not participate in offering or making:

      "(a) a partnership or employment agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement or as permitted in Rule 1.17; or

      "(b) an agreement in which a restriction on the lawyer's right to practice is part of the settlement of a controversy between private parties."

5. Competence.

The participating lawyer must assure that the lawyer is competent in the areas of law covered by the plan, and has the ability to adjust the volume of matters to one the lawyer may competently handle in conformity with the requirements of MRPC 1.1. A plan must permit the lawyer to reject matters outside the lawyer's area of competence, or which overextend the lawyer's existing workload.

6. Advertising and Solicitation.

This Committee has previously held that a not-for-profit Chamber of Commerce may not be permitted to advertise a lawyer's offering of legal services at a discounted rate as an incentive for membership in the Chamber of Commerce. RI-147, since this would be a lawyer giving value for the referral of the Chamber member. It is permissible for a plan sponsor to pay to advertise legal services provided under its auspices, as long as the advertisement is truthful. MRPC 7.2(c) states:

    "(c) A lawyer shall not give anything of value to a person for recommending the lawyer's services, except that a lawyer may:

      "(i) pay the reasonable cost of advertising or communication permitted by this rule;

      "(ii) participate in, and pay the usual charges of, a not-for-profit lawyer referral service or other legal service organization that satisfies the requirements of Rule 6.3(b); and

      "(iii) pay for a law practice in accordance with Rule 1.17."

If the purpose of the advertising is to refer clients or recommend the lawyer's services, the lawyer would not be permitted to pay anything other than the reasonable cost of advertising unless the LRS satisfied the requirements of MRPC 6.3(b). Written communications are permitted as provided in MRPC 7.3 and Shapero v. Kentucky Bar Ass'n, 486 US 466; 108 S Ct 1916; 100 L Ed 2d 475 (1988).

Communications about the services available from the lawyers associated with the plan must comply with MRPC 7.1. That Rule prohibits communications that are false, fraudulent, deceptive, or misleading, requires that the communication not contain a material misrepresentation of fact or law, or omit a fact necessary to make the statement considered as a whole, not materially misleading; nor may the communication create an unjustified expectations about results to be achieved, or make comparisons which cannot be factually substantiated. A participating lawyer must assure that all advertising is accurate, that it does not mislead or create unjustified expectations, and that documentation and records are kept in accordance with MRPC 7.1 and 7.2. Any advertising should make it clear that the legal services for a plan subscriber will be rendered by a lawyer, not by the plan sponsor.

7. Fee Arrangement.

Typically, both for-profit and not-for profit PLSP may provide for plan members to pay a monthly fee to the plan sponsor, part of which is kept by the plan sponsor to cover its overhead/"profit," and part of which is paid by the plan sponsor to the participating lawyer for those services which the plan offers at no additional cost to the plan member. Typically, the monthly fee is paid in order to assure that the specified legal services will be available for no additional cost, or at reduced fees; however, a subscriber/plan member may never need to consult a participating lawyer during the period of membership. Thus, the subscription may be partially or wholly unused. Ordinarily, the plan member begins the monthly payments before representation by a lawyer commences. The lawyer gives nothing of value to the plan sponsor other than the lawyer's agreement to provide legal services to subscribers in accordance with the plan provisions. Under these circumstances, the plan sponsor is compensating the lawyer; the lawyer is not compensating the plan.

A lawyer may participate in a for-profit or not-for profit lawyer referral service (LRS) so long as the lawyer does not pay a fee or share the lawyer's fee with the LRS. MRPC 5.4(a); R-6; ABA Op 85-150. Under the situation described, the lawyer is paid the fees expected and no less. There is no sharing of the legal fee with the plan sponsor in contravention of MRPC 5.4(a).

There is historical background which supports the conclusion that a lawyer may participate in a for-profit PLSP without violating the fee sharing prohibition of MRPC 5.4. The flat prohibition against the lawyer's participating in for-profit plans previously contained in MCPR DR 2-103(D)(4)(a) was retained in MRPC 6.3(b) only as to lawyer referral services (LRS). Moreover, a principal goal of the Model Rules of Professional Conduct was to allow "for experimentation in methods of delivering legal services." See American Bar Association, The Legislative History of the Model Rules of Professional Conduct, (1987). The primary evil sought to be prevented by MRPC 5.4(a) is interference with the participating lawyer's independence of the lawyer's professional judgment and client confidentiality must be assured in accordance with the guidelines outlined above. Another evil sought to be prevented by MRPC 5.4 is that the total fees should not be unreasonably high. In light of the goal of the PLSP to make legal services more widely available at a lower cost to persons or entities of moderate means, the likelihood of an unreasonably high fee is low. On the contrary, PLSPs are regarded by many to be one of the methods by which legal services may be delivered in non-complex matters to persons or entities who otherwise would be under represented. For all these reasons, the Committee concludes that the retention by the PLSP plan sponsor of portions of the monthly payments from plan members to cover a profit, in addition to its administrative cost, does not constitute improper fee sharing in violation of MRPC 5.4, nor does it constitute giving anything of value to a person for recommending the lawyer's services in violation of MRPC 7.2(c).

Some plans also require, as a condition to the lawyer's participation in the PLSP, that the lawyer also participate without additional charge in one or more seminars, workshops or other presentations for the purpose of educating present or potential plan subscribers/members on the availability and need for the services provided by the PLSP. So long as these presentations are done principally for educational purposes (and the marketing of the plan or the lawyer services is an incidental not primary effect), such presentations are also permissible and to be encouraged. MRPC 7.1.

 
     

 

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