A recent Law 360 story by Emily Sawicki, “NJ Ethics Board Says Referral Fees Only For In-State Attys”, reports that new guidance provided by the New Jersey Supreme Court's Advisory Committee on Professional Ethics recommends against the payment of referral fees for out-of-state lawyers, reasoning that such fees, considered payment for legal services, can only be provided to attorneys licensed to practice law in the state.

The opinion on referral fees, Opinion 745, came as a response to inquiries regarding attorneys from outside New Jersey requesting referral fees, the advisory committee said, including instances in which in-state attorneys who spend their winters in Florida "present local lawyers with legal issues that involve New Jersey law," and attorneys from neighboring states represent New Jersey clients. Opinion 745 was issued March 7 and made available.

In both of these instances, it is generally not appropriate to pay out-of-state lawyers referral fees, the opinion stated, unless the attorney is eligible and licensed to practice law in New Jersey.  The opinion also detailed limitations on who should pay such fees.  "Only New Jersey lawyers who are certified trial lawyers … may pay a referral fee," according to the opinion, which clarified that the state's professional conduct rules "prohibit other New Jersey lawyers from paying referral fees."

New Jersey's Rules of Professional Conduct also detail the limited scope under which referral fees should be paid, pointing out such fees are only appropriate for attorneys who are not part of the same law firm.  Clients must consent to each of the lawyers involved and be notified of the fee division, and the fee must be "reasonable," the ethics rules dictate.  "The division is in proportion to the services performed by each lawyer, or, by written agreement with the client, each lawyer assumes joint responsibility for the representation," according to the professional conduct rules.

The ethics committee clarified that the fee is "considered payment for legal services rendered in the case," but is not payment "in proportion to actual services rendered."  Because of this distinction, only New Jersey lawyers are eligible to collect such fees.  "People who are not permitted to practice law in New Jersey may not receive fees for legal services rendered," the opinion said.

The referral fee guidance also notes that it is not appropriate to pay a referral fee to a lawyer who is unable to take up a case or must bow out of a case due to a conflict of interest.  However, if a certified New Jersey lawyer must exit because an "unforeseen conflict arises in the midst of litigation and was not foreseeable," it is appropriate to pay the lawyer for legal services rendered, the opinion stated.

"Certified lawyers may pay referral fees to lawyers who were in good standing and eligible to practice law at the time of the referral but who later were suspended or disbarred at the time the case was concluded and the referral fee was payable," the opinion stated, citing precedent set in 2008 in the New Jersey Appellate Division case Eichen Levinson & Crutchlow LLP v. Weiner.

In that case, the opinion said, "the court reasoned that the referring lawyer was not required to have performed any legal work on the referred cases to obtain the referral fee and, at the time of the referral, the lawyer was eligible to practice."

The payment and acceptance of referral fees are dictated by individual state ethics rules and, therefore, there may be instances in which a New Jersey lawyer may accept a referral fee when doing work in other states.  It is up to the lawyer to ensure such fees are permitted, and that services fit the "specific needs of the client."

A recent Law 360 story by Thy Vo, “Colo. Justices Say Firm’s Departing Atty Fee Is Unenforceable, reports that the Colorado Supreme Court has found a family law firm's contract requiring a departing attorney to pay a fee for every client he took with him is unenforceable, ruling in a unanimous decision that such a provision would improperly limit the attorney's practice and incentivize attorneys to drop clients with less lucrative claims.

In the published decision, the justices said Modern Family Law's reimbursement contract requiring that lawyers pay a fixed fee for clients that follow them, without any consideration for actual costs, violates the state's rules of professional conduct for attorneys.  While there are circumstances where reimbursement would make sense — like if a firm spent additional money to court a big client — justices called the firm's "undifferentiated" fee a "direct intrusion on the attorney-client relationship."

"Of particular concern, such a fee forces attorneys to make individualized determinations of whether a client is 'worth' retaining and incentivizes them to retain clients in high-fee cases and to jettison clients with less lucrative claims," Justice Melissa Hart wrote on behalf of the court.

Troy R. Rackham of Spencer Fane LLP, counsel for former Modern Family Law associate Grant Bursek, told Law360 that they are "grateful" for the court's opinion.  The $18,000 that the firm demanded from Bursek when he left was roughly a quarter of his total net compensation at the time, Rackham said.  "He decided to challenge the unfairness of the provision … and wanted to create a precedent that firms shouldn't be able to do this," Rackham said.

The Colorado law firm's reimbursement agreement required departing attorneys to reimburse the firm for "marketing expenses related to any client, case or active matter" that they took with them.  The contract lays out a fixed fee of $1,052 per client, plus 1.5% in monthly interest, based on "historic" expenses for clients of the Denver office, according to the ruling.  When Bursek left the firm in September 2019 and 18 clients decided to go with him, Modern Family Law demanded he pay $18,936 under the agreement.  Bursek refused, prompting the family law firm to sue him for breaching their contract.

Modern Family Law contended that Bursek, a competent lawyer who previously ran his own firm, exercised his autonomy in signing the reimbursement agreement, allowing him to benefit from the firm's marketing.  He wasn't required to sign the agreement unless he opted to use the firm's marketing services and the reimbursement doesn't apply to clients that Bursek brought to the firm or who were generated by referrals, according to the firm's petition for writ of certiorari.

A trial court concluded that the per-client reimbursement provision unreasonably restricted Bursek's right to continue representing his clients and said the entire agreement was unenforceable.  On appeal, a Colorado Court of Appeals panel agreed that the fee was unreasonable and unenforceable, and held that a fee that "disincentives an attorney from leaving a firm" can pass muster if it's not "unreasonably restrictive."  Courts should consider several factors when assessing reasonableness, such as attorney autonomy, client choice, and the financial burden on a law firm when an attorney departs, the panel said.

The appellate panel also reversed the trial court's tossing of the entire agreement, finding parts of the contract unrelated to the per-client fee were enforceable.  That included a provision requiring Bursek to pay the firm's attorney fees and costs for disputes related to the agreement.

In the ruling, Justice Hart said Modern Family Law's fixed fee is "fundamentally at odds" with a rule aimed at protecting a lawyer's professional autonomy and ensuring clients have the freedom to choose an attorney.  While reasonableness is an appropriate standard for assessing whether a financial disincentive impermissibly restricts a lawyer's right to practice, the justices said they didn't need to address that question here because Modern Family Law's fee doesn't take into account actual costs associated with specific clients.

A recent Law 360 story by Sarah Martinson, “Calif. Bar Adopts AI Guidelines Tackling Confidentiality, Billing”, reports that the California bar has approved guidance for attorneys using generative software — systems that produce images and text — addressing confidentiality, competence, nonlawyer supervision and billing, as other states consider passing similar guidelines.

Erika Doherty, program director for the bar's Office of Professional Competence, said at a meeting of the California bar's board of trustees that the guidelines would be the first addressing large language models, or LLMs, to be approved by a regulatory agency for lawyers.  "The benefit of that is that there is guidance available for lawyers as of right now," she said.  "The downside of that is that this is an evolving technology, and so it's going to need to be continually updated."

The guidelines advise attorneys not to input client information into any generative tool without sufficient confidentiality and security protections, and to consult with information technology or cybersecurity professionals about whether an system meets strict confidentiality, security and data retention requirements.

To meet competency requirements, attorneys should understand how the tech, generally referred to as generative AI, works and its limitations before using it, the guidelines say.  "Overreliance on AI tools is inconsistent with the active practice of law and application of trained judgment by the lawyer," they say.  On non-lawyer supervision, the guidelines advise managerial and supervisory attorneys to establish clear policies for the use of generative AI.

The guidelines also advise attorneys to charge for actual time spent working on crafting prompts and editing outputs and not to charge for time saved using the technology.  "A fee agreement should explain the basis for all fees and costs, including those associated with the use of generative AI," they say.

Since OpenAI LLC released its chatbot ChatGPT in November 2022, lawmakers and state bar authorities have been trying to figure out the best way to regulate the technology.  In June, a New York judge sanctioned two personal injury attorneys for submitting a ChatGPT-generated brief that cited nonexistent case law, finding the lawyers "abandoned their responsibilities" to check their work, and their behavior rose to "bad faith" when they then waited weeks to come clean.

This month, the State Bar of Michigan issued an opinion saying that judges have an ethical obligation to understand advancing technology, including so-called artificial intelligence, and to ensure its use in the legal system is consistent with the law.  And a Florida bar ethics committee released proposed guidelines for how attorneys can ethically use generative AI in their legal work.  Those guidelines addressed confidentiality, oversight, billing and advertising. Florida bar members have until January to comment on the proposed guidelines.

A recent Law 360 story by Lynn LaRowe, “NJ Atty Reprimanded For Claiming ’Lowest’ Fees In The State’”, reports that a New Jersey lawyer has been reprimanded by the state's highest court for touting on his website that his firm offered "the lowest fees in the state," as well as for related misconduct, court records show.  In an order, the New Jersey Supreme Court accepted the recommendation of its Disciplinary Review Board to reprimand Alan N. Walkow, who was reportedly based in Oakhurst when he operated the website in 2019.

The website violated professional conduct rules by misleading potential clients with the claim that the firm had "attorneys" when Walkow was actually a solo practitioner, and by claiming to have "the lowest fees in the state," according to the board's decision.  The board noted that Walkow "could not have known the rates of all lawyers in the state," adding that the state's professional rules of conduct prohibit a lawyer from comparing their services to that of other lawyers in advertising unless the claim can be substantiated.

The board also faulted the attorney for failing to cooperate with disciplinary authorities while a complaint was pending against him from the state's Office of Attorney Ethics.  Walkow failed to respond to certified, regular and email correspondence sent to him by the OAE after it launched an investigation in response to a referral from the state's Committee on Attorney Advertising.  The ethics office also published notices about the complaint in several area legal publications.  Walkow phoned the ethics committee in February 2020 and told them he was no longer practicing law, had moved and provided them with new contact information.

Walkow never filed a written response to the referral and failed to appear for a virtual demand interview in June 2022.  "Respondent violated this [rule of professional conduct] twice – first, by failing to participate in any way in the OAE's investigation of the CAA's referral, and again by failing to answer the complaint," the disciplinary review board said in its decision.

A formal complaint was filed against Walkow in November 2022, which resulted in the current reprimand for failing to participate in the investigation, for failing to respond to the complaint and for misleading advertising.  "Additionally, respondent did not include the disclaimer regarding the fact that his advertisement had not been approved by the court," the decision said.

Walkow was previously reprimanded in March for practicing law while his license was suspended for failing to keep up with continuing legal education requirements.  "It should be noted that respondent also defaulted in the matter in which the court recently reprimanded him," the disciplinary board's decision said.  "Thus, having experienced the disciplinary processes underpinning that matter, respondent had a heightened awareness of his obligation to cooperate with disciplinary authorities."

A recent Law 360 article by Hilary Gerzhoy and Julienne Pasichow, “Avoiding The Ethical Pitfalls of Crowdfunded Legal Fees”, reports on the ethics of crowdfunding for legal fees.  This article was posted with permission.  The article reads:

Within two days of being charged with manslaughter in the death of Jordan Neely, Daniel Penny had crowdfunded over $1.5 million to cover his legal fees.  Penny was charged with killing Neely, a Michael Jackson impersonator, on a New York City subway after placing him a fatal chokehold.  The case was widely covered and highly politicized.

Democrats, including Rep. Alexandria Ocasio-Cortez, D-N.Y., and New York Gov. Kathy Hochul, called for charges against Penny and justice for Neely's family.  Republicans, including Florida Gov. Ron DeSantis, Rep. Marjorie Taylor Greene, R-Ga., and Rep. Matt Gaetz, R-Fla., voiced their support for Penny.

Crowdfunding legal services is a relatively new phenomenon.  It's most often used to fund litigation involving individuals — as opposed to corporate entities — that implicates human rights issues, the environment and judicial review.

In one widely publicized case, two Yemeni refugees with valid immigrant visas were intercepted at Dulles International Airport, handcuffed and sent out of the country — the result of former President Donald Trump's temporary seven-country travel ban, which had been signed just a few hours earlier while the brothers were en route.  The crowdfunding campaign raised $36,600 in its first week.

While crowdfunding legal services provides a way for many to access lawyers when representation would otherwise be unaffordable, it also comes with a bevy of ethics risks.  This article will examine the key ethical rules governing crowd-sourced legal funds and the steps lawyers can take to mitigate their risk.

The Daniel Penny Case

In May, the Manhattan District Attorney's office charged Penny, a 24-year-old U.S. Marines veteran, with second-degree manslaughter after he killed Neely on a New York City subway earlier that month.  For more than three minutes, Penny placed Neely in a fatal chokehold leading to his death.  Penny claimed self-defense, stating that Neely was threatening passengers on the train.  It was later learned that Neely had been suffering from a mental health crisis and was experiencing homelessness at the time he was killed.  Penny was released on $100,000 bond.  On June 28, he appeared in court in Manhattan to plead not guilty.

The law firm representing Penny — Raiser & Kenniff PC — arranged for a fundraiser on the Christian crowdfunding site GiveSendGo to cover Penny's legal fees.  As of Sept. 29, the fundraiser has collected nearly $3 million.  How can Penny's legal team use those crowd-sourced funds? What restrictions are imposed by the ethics rules?

This article will examine the critical steps to ensure compliance with the American Bar Association's Model Rules of Professional Conduct, which are largely adopted in most jurisdictions.

Confidentiality Runs to the Client, Not the Funders

Perhaps the most fundamental feature of the lawyer-client relationship is the protection of client confidences.  Model Rule of Professional Conduct 1.6 prohibits a lawyer from revealing "information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted [under certain enumerated circumstances]."

A lawyer must make reasonable efforts to prevent inadvertent or unauthorized access to the information, a standard that is highly fact-dependent and considers the sensitivity of the information and the extent to which additional safeguards would enhance security versus hinder the representation.  Lawyers who organize fundraisers, manage crowdfunded donations and apply them toward legal fees must ensure that they neither represent nor imply that they will provide information about the representation to donors in exchange for donations.

It is best to obtain informed consent for any information that will be disclosed to donors and to steer clear of "providing specific information about how the funds will be used to effectuate the legal strategy," as articulated by the D.C. Bar in a 2018 ethics opinion.  To avoid any ambiguity, lawyers should note in the narrative section of the fundraiser that they will not provide any information about the objectives of the representation, actions taken, specific uses of the funds or developments in the case.

When donors fund a lawyer's representation of a client through crowd-sourcing, they must do so with the understanding that they will receive no information about the representation.  We recommend including the proposed narrative language for the fundraiser in the engagement letter signed by the client, which should also describe the fundraising arrangement and the fact that the collected funds will be applied to legal fees and expenses as they are earned or incurred.

There may be instances in which a client wants a lawyer to provide case updates to donors or specific individuals.  To do so, the lawyer must obtain informed consent from the client.  This requires that the lawyer explain the risks of disclosure to the client and have the client approve of the exact information to be disclosed.

Most importantly, the client must understand that disclosing privileged and confidential information about the representation to third parties will destroy the attorney-client privilege and prevent the lawyer from later claiming privilege over the disclosed information.  The same warning should also be given to a client who is managing the fundraiser themselves and wishes to disclose case information or updates to donors.

Crowd-sourced Funds Cannot Interfere with a Lawyer's Professional Independence

Before accepting crowd-sourced funds as payment for legal services, a lawyer must obtain informed consent from the client.  This is true regardless of whether the lawyer is self-administering the funds as they are earned or whether the client is paying the lawyer's invoices using crowd-sourced funds.  Lawyers should consider including relevant language providing for this arrangement in their engagement letter with the client.  Under the Model Rules, even if such an arrangement is in place, a lawyer may not, under any circumstances, allow the person or persons paying the lawyer's fees to "direct or regulate the lawyer's professional judgment in rendering such legal services."

While donors' generosity often enables a client to pursue legal claims or defenses where it would otherwise be financially impossible, donors cannot control how the fundraised money is used within the representation.  Only the client determines the objectives of the representation and whether to follow the lawyer's recommended strategy.

Ensuring that the narrative statement on the fundraising website contains language informing donors that they will not be permitted to exert control or influence over the objectives of the representation or the methods by which they are carried out — in addition to not being entitled to case information — may prove helpful in warding off donors who believe that their dollars earn them a say in the representation.  There may be situations in which the donors' interests differ from those of the client — for example, where donors may wish to minimize the amount spent on the representation to get more for less or avoid taking steps in the representation that may be costly.

In circumstances where the lawyer is aware of divergent interests between the donors and the client, the lawyer cannot accept the representation or continue the crowdfunded payment arrangement unless the lawyer is certain that they can exercise independent judgment and will not allow the donors to interfere with their professional decision making.

Be Circumspect About Trial Publicity

Crowdfunded cases are often those that are highly publicized, political and involve public figures. They tend to come with an increased public desire for publicity and insider information.  Many of these cases go to trial, which further extends the period in which the public remains interested and heightens public intrigue.

Model Rule 3.6 governs trial publicity and warns lawyers against making statements that are likely to prejudice the proceedings in any way.  This is all the more true in highly publicized cases, where a lawyer's statements about a case are likely to be widely disseminated.  While media attention on a case does not change lawyers' confidentiality obligations under Model Rule 1.6, Model Rule 3.6 provides that lawyers can provide concrete facts about the case if they are unlikely to cause prejudice.

Lawyers can reveal basic information about the claim at issue, people involved, public records, the existence of a pending investigation, the scheduling or results of litigation, and requests for help in obtaining evidence, and they can offer warnings of danger to an individual or to the public.  In criminal cases, lawyers can provide additional information to the public, including, among other things, information about the residence and occupation of the accused, and the location, time and place of the arrest.

Where a client has suffered prejudice due to recent bad publicity, the lawyer can make statements to mitigate that prejudice.  A lawyer should not speak publicly about a case, however, without the consent of their client after the client weighs the risks and benefits of such disclosures.

Treat Cowdfunded Legal Fees as Advanced Fees, Safeguarding Them in a Trust Account

The two most prominent ethics opinions to address crowdfunded legal fees, a 2015 Philadelphia Bar opinion and a 2018 D.C. Bar opinion, emphasize the importance of safeguarding crowdfunded fees in a trust account and not moving them over to an operating account until they are earned.

As the D.C. Bar opinion notes, because crowdfunding can "trigger areas of confusion that may not be present in a traditional client-self pay situation," lawyers should establish, in a written fee agreement, the rate of their fees, the scope of the representation and specific plans for crowdfunded money, such as the ownership of excess crowdfunds and responsibility for payment if the crowdfunds do not fully cover legal fees and expenses.

Critically, funds collected by a lawyer on a client's behalf through crowdfunding should be treated as advanced fees and placed in a trust account for the client.  In the crowdfunded legal fees context, lawyers need to be especially cognizant of their duty not to charge excessive fees under Rule 1.5.  For example, if a matter resolves quickly, a lawyer would be hard-pressed to claim all of the proceeds of the fundraiser as fees.

Conclusion

The crowdfunding of legal fees represents an exciting opportunity to provide access to legal services to those for whom it might be otherwise unattainable.  With a principled approach — paying special attention to your obligations to maintain confidentiality and your professional independence, and safeguarding funds in a trust account — you can protect yourself from ethics mishaps while serving a wider array of clients.

Hilary Gerzhoy is a partner and vice chair of the legal ethics and malpractice group at HWG LLP.  Julienne Pasichow is an associate at the firm.

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