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2010 Formal Ethics Opinion 4

October 29, 2010

Lawyer Participating in Barter Exchange

Opinion provides guidelines for participation in a barter exchange.


Inquiry:


Lawyer would like to participate in a trade or “barter” exchange that is an association of businesses that exchange goods or services. Members of the barter exchange are paid in barter dollars that can be used to pay other members for their services. For example, a lawyer who is a member prepares a will for a member who is a landscaper and receives barter dollars that can then be used by the lawyer to purchase a variety of services from other members, not solely landscaping services. The barter exchange manager publishes a directory of members and may advertise to members the goods or services available from other members. In addition to an entrance fee and a monthly administrative fee, the exchange manager requires members to pay a cash transaction fee of 10% on the gross value of each purchase from a member through the exchange. For example, if a lawyer provides $500 in services to another member, in addition to the fee paid to the lawyer, the recipient pays a $50 fee to the manager of the exchange for a total payment of $550 (barter dollars and cash) for the legal services.


The barter exchange lists all participating businesses in the “trading network.” From this list, a member who would like to buy services or goods selects a business. A “buyer” who needs legal services would select a lawyer from the list of lawyers available in the trading network. Members are encouraged to call the exchange manager to get linked with other members when in need of particular goods or services. Trades between participating businesses are voluntary and the provision of goods or services is between the two participating businesses without interference from the barter exchange or its manager. Members are not under any obligation to use the barter exchange for goods or services and, if a member cannot find a suitable business in the trading network with which to do business, the member may pay cash for goods or services to a business that is not a member of the exchange. Similarly, a member of the exchange is not required to do business with an exchange member who requests goods or services.


The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248, 96 Stat. 324 (1982), recognized the barter exchange manager as the third-party record keeper and clearinghouse for barter transactions among the members of an exchange and also recognized “trade” or “barter” dollars as legal, taxable dollars that may be used as an alternative payment method. Under TEFRA, all trade revenue is treated as taxable income and must be reported using Form 1099-B.


May Lawyer participate in the barter exchange?


Opinion:


Yes, as long as the lawyer’s professional judgment is not compromised by participation in the exchange, the lawyer ensures that listings and advertisements of the exchange comply with the requirements for legal advertising, there is full disclosure of the states in which the lawyer is licensed, and clients do not use barter dollars to pay in advance for litigation or other expenses of representation.


This inquiry raises the following questions: (1) whether a lawyer may accept payment for services in a form other than money; (2) whether a barter exchange is a lawyer referral service and, therefore, subject to the restrictions on lawyer referral services; (3) whether a participating lawyer can comply with the advertising and solicitation limitations in the Rules of Professional Conduct; (4) whether payments to the barter exchange violate the prohibition on sharing legal fees with a nonlawyer; and (5) whether clients may pay litigation expenses in barter dollars. Each of these questions is addressed below.


A lawyer may accept payment for legal services in a form other than money. See Rule 1.5, cmt. [4]. Therefore, there is no prohibition on accepting barter dollars as payment for legal services.


With regard to lawyer referral services, Rule 7.2(b) provides as follows:


A lawyer shall not give anything of value to a person for recommending the lawyer's services except that a lawyer may


(1) pay the reasonable costs of advertisements or communications permitted by this Rule; [and]


(2) pay the usual charges of a not-for-profit lawyer referral service that complies with Rule 7.2....


A lawyer referral service is a service that purports to screen the lawyers who participate and to match prospective clients with suitable participating lawyers. See 04 FEO 1 (online matching service not subject to nonprofit limitation on lawyer referral services). Comment [6] to Rule 7.2 adds that a lawyer referral service:


is any organization that holds itself out to the public as a lawyer referral service. Such referral services are understood by laypersons to be consumer-oriented organizations that provide unbiased referrals to lawyers with appropriate experience in the subject matter of the representation and afford other client protections, such as complaint procedures or malpractice insurance requirements.


A barter exchange that provides a complete, impartial list of all participating lawyers, does not purport to recommend or select a lawyer for an exchange member seeking legal services, and does not restrict the number of participating lawyers is not a lawyer referral service.


The next question is whether a participating lawyer can comply with the limitations on lawyer advertising and solicitation in the Rules of Professional Conduct. A lawyer participating in a barter exchange will be responsible for the content of all advertising about the lawyer’s services to other members. Rule 7.1(a) allows advertising that is not false or misleading. As long as the trading network list or directory of members and any other advertisement to members of the barter exchange does not include information about a participating lawyer that is false or misleading, a lawyer may be included in the list, directory, or advertisement. In addition, to avoid unauthorized practice of law, the participating lawyer must ensure that all exchange listings, directories, or advertisements identify the states in which the lawyer is licensed.


Rule 7.3(a) prohibits in-person solicitation of prospective clients either by a lawyer or by an agent of a lawyer. If the manager of the exchange, or a third party such as a broker, engages in in-person solicitation of exchange members on behalf of other exchange members, a lawyer who is an exchange member may not allow such solicitation to occur on the lawyer’s behalf. If participation in the in-person solicitation or brokerage of services is a condition of membership in the exchange, a lawyer may not be a member of the exchange.


The next question is whether the fee structure for the barter exchange violates the prohibition on sharing legal fees with a nonlawyer in Rule 5.4(a). The manager of the barter exchange charges a cash transaction fee of 10% on the gross value of each purchase from a member through the exchange. The transaction fee is paid by the recipient of the services; the lawyer is not required to give 10% of his fee to the exchange manager. Although prohibited in the context of compensating nonlawyer employees (see RPC 147), paying for services of a nonlawyer based upon a percentage of a legal fee is not per se fee sharing. The use of credit cards to pay for legal services has long been allowed, although credit card banks routinely charge a “discount fee” that is a percentage of the legal fee charged to the credit card. See CPR 129 (lawyers may accept payment of legal fees by credit card). Paying a percentage fee to a barter exchange manager is no different than paying a discount fee to a credit card bank. The fee is a surcharge on the transaction and is not fee sharing with a nonlawyer. See ABA Formal Opinion 88-356 (1988)(lawyer placement agency’s fee based on the amount of the legal fee is not fee splitting).


We agree with the following conclusion of the New York State Bar Association Committee on Professional Ethics in N. Y. State Bar Ass’n. Comm. on Prof’l. Ethics Op. 665 (1994), which allows a lawyer to participate in a barter exchange:


There are a number of rationales for the prohibition against sharing legal fees with non-lawyers: (1) to avoid the possibility of a nonlawyer interfering with the exercise of the lawyer’s professional judgment in representing a client, (2) to ensure that the total fee paid by the client is not unreasonably high, and (3) to ensure that the nonlawyer is not motivated to engage in improper solicitation of business for the lawyer. [Citations omitted.] We do not believe that the proposed barter exchange implicates these concerns so long as the barter exchange exercises no influence over the professional judgment of the lawyer, the lawyer’s legal fee complies with [the reasonableness requirement of] DR 2-106(A) of the [New York] Code [of Professional Responsibility], and the exchange sponsor does not engage in in-person solicitation of customers or use written advertising materials that the lawyer/participant could not use.


The last question is whether a member of the barter exchange who contracts with a lawyer may pay in advance for litigation expenses or other expenses of representation by advancing barter dollars to the lawyer. Rule 1.15 requires a lawyer to account for funds entrusted to the lawyer for payment of third parties by depositing those funds into a trust account. Because barter dollars cannot be deposited into a trust account, all advance payments of litigation expenses by a barter exchange client must be paid in cash or by check or credit card.


In summary, a lawyer may participate in a barter exchange as long as the exchange exercises no influence over the professional judgment of the lawyer; the listing and advertisements of the exchange are truthful, not misleading, and identify the states in which the lawyer is licensed; there is no in-person solicitation of members by the barter exchange manager or a broker on behalf of the lawyer; and advance payments of litigation expenses or other expenses of representation are not in barter dollars.

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