California bills target legal fees, ads and client leads

Lawyers, in large part, tend to be well organized. They prepare for meetings, hearings, depositions, trials and just about everything else they confront. So it would naturally make sense that lawyers also prepare for potential changes to the way that the profession is regulated because that could impact the way they operate. Two pending bills could merit such attention.

If adopted, Assembly Bill 931 would pose several changes. First, it would add Business and Professions Code section 6156, which would prohibit California licensees or the organizations employing them from sharing fees with an out-of-state alternative business structure. This contrasts with the current Rule of Professional Conduct 5.4, which places restrictions only on sharing fees with nonlawyers or organizations not authorized to practice law. Since an alternative business structure is definitionally a legal practice, this would effectively create a new limitation.

Though the bill does not currently identify what actual damages fee-sharing with another law firm would potentially cause, the penalties it provides include three times that amount or $10,000, whichever is greater, plus attorney's fees and costs and injunctive relief. Of course, as with other violations of the terms of the State Bar Act, this could also potentially expose lawyers to discipline.

So, what is the answer? To the extent that the fee sharing is the result of co-counseling on a matter, lawyers could consider having separate engagement agreements for the two firms. In that way, the clients would still be paying the same amount for fees, but the California lawyers would not be receiving--and, therefore, would not be sharing--any portion of the fees from or for the alternative business structure.

Of course, such an approach would not work in the instances of a referral since the client would not sign an engagement agreement with a lawyer who is not providing any legal services. Unless the final draft of the bill otherwise precludes it, one remaining option could be paying a referral fee to an individual lawyer who refers a client.

Assembly Bill 931 would also add some regulations specific to litigation funding. Consumer legal funding transactions would need to be in writing and contain specified provisions, including a five-day right of rescission, the maximum amount the consumer would pay, disclosure of how charges will be accrued, and a written acknowledgement by the consumer's lawyer that the disclosures have been reviewed with the consumer, that the lawyer is being compensated on a contingency basis, that all litigation proceeds will be disbursed through the lawyer's client trust account, and confirmation the lawyer has not and will not receive a referral fee in conjunction with the transaction. Accordingly, lawyers who anticipate having clients who will require litigation funding from such sources should familiarize themselves with these requirements, including that they are prohibited from receiving any amount for referrals, either directly or through their or a family member's interest in a lending company that their clients use.

Like Assembly Bill 931, if passed, Senate Bill 37 would also add new obligations for lawyers. The bill provides a reminder that current law places limits on how lawyers may procure clients. Among other things, that includes the prohibition of runners and cappers, any persons or organizations who work for lawyers or firms in the solicitation or procurement of business for firms in restricted locations in exchange for consideration. Lawyers are also restricted in what referral services they may accept client referrals from. The bill would provide for a private right of action for statutory damages, fees, and injunctive relief should lawyers violate these restrictions.

Second, Senate Bill 37 would revise the definition of advertisements to include any communication, through any written, recorded, or electronic means, whether available to or directed generally to members of the public or to a limited group of individuals, that provides information concerning a lawyer or the lawyer's services for the purpose of encouraging individuals to secure the services of the lawyer or a law firm. Such a revision would then create an obligation for lawyers to comply with advertising requirements for any such communications. 

The scope of prohibited advertising communications would be enlarged to include those containing predictions about the potential success of a legal matter; references to past results, unless the lawyer limits the information or characterization to objectively verifiable facts; and from containing misleading, deceptive, or false statements, words, or phrases regarding a lawyer's or a law firm's skills, experience, reputation, or record. The bill would, for example, prohibit advertising awards from organizations that charge for the award and are not recognized within the legal profession as being from bona fide organizations. That is, pay-for-play awards could not be part of lawyer advertising. To the extent a consumer is misled by an advertisement in violation of these provisions, they would be entitled to bring a civil lawsuit for statutory damages, attorney's fees, and injunctive relief.

Whereas any legislation is not certain to be adopted until it is, both bills are progressing. And these are likely to impact at least how some lawyers operate in obtaining clients and in ensuring the clients are able to afford the sometimes substantial costs of litigation. Accordingly, now is a great time for lawyers who may be impacted by the legislation to weigh in on any suggestions for improvements of the terms. Even if that is not the case, it may be good form to start adapting procedures in anticipation of change. What better way to prepare than to get ahead of the curve.

The Rosing Pott & Strohbehn Ethics and Risk Management Team writes a monthly legal ethics column with practical insights to assist California Practitioners understand cutting edge ethics issues, manage risk, and ensure compliance. More about the Team and the authors--Heather Rosing, Dave Majchrzak, Christine Rosskopf, and Joanna Storey--can be found at https://rosinglaw.com/people/.