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FTC Weighs in on Internet Legal Referrals in Letter to Bar

Pamela A. MacLean
Texas Lawyer: The National Law Journal
June 26, 2006

While the State Bar of Texas seemingly frowns on its business practice, an Internet legal referral service that promises to match lawyers with potential clients is hoping to change the Bar's mind.

And the online business, California-based LegalMatch, has found a powerful new supporter in its quest: the Federal Trade Commission.

In a May 26 letter to the State Bar of Texas, FTC planning and policy chief, Maureen Ohlhausen, says that the Internet-based client-attorney matching services "have the potential to lower consumer costs of obtaining information about the price and quality of legal services, which is likely to lead to more intense competition among attorneys, ultimately benefiting Texas consumers."

Legal matching services generally charge lawyers to sign up. Consumers seeking legal help with divorces, wills, child custody and trademark issues help describe their needs and locations online. The service sends this to lawyers in the same region and interested attorneys respond — somewhat like a dating service — with their qualifications and rates, allowing clients to shop for the right match.

But there has been a long-simmering debate in state bars around the country since the advent of these services in 1999 about whether they violate ethical rules on advertising and the bans on nonlawyer referrals for legal help.

The State Bar of Arizona and Washington State Bar Association issued ethics opinions last year foreclosing use of the services, saying that lawyers may not pay to participate in for-profit Internet matching services. Meanwhile, Rhode Island approved the online matching in 2004 as a boon to consumers, quickly joined by North Carolina, South Carolina and Utah.

The FTC letter "is a powerful endorsement of the industry," says Anna Ostrovsky, general counsel for San Francisco-based LegalMatch.

Most states have been sitting on their hands. The nation's largest state bars, the State Bar of California and the New York State Bar Association, remain mum on the topic but have ethics committees pondering it.

Texas may be the key.

The Undecided

LegalMatch asked Texas to clarify whether the service violates Texas Ethical Rule 7.03, which prohibits state lawyers from paying a nonlawyer to solicit or refer prospective clients.

In August 2005, State Bar of Texas ethical opinion No. 561 indicated that lawyers may not pay to be listed on a privately sponsored Internet site that gathers information about potential clients. But it was not clear whether it covered all of the online matching services.

That opinion could be detrimental to LegalMatch's business in Texas, says Peter Kennedy, a shareholder with Austin's Graves, Dougherty, Hearon & Moody. Kennedy is pushing the State Bar's Professional Ethics Committee to reconsider and clarify ethical opinion No. 561 on behalf of LegalMatch.

"LegalMatch is concerned that the uncertainty of the application of the rule to legal matching services may have a chilling effect on attorneys' participation" in the service, Kennedy says.

In its letter to the State Bar, the FTC states that "online legal matching services are likely to make it less expensive for consumers to evaluate providers of legal services. The information sent to inquiring clients is likely to allow consumers to compare the price and quality among several competing attorneys more cheaply than other methods of comparison."

Ohlhausen concludes: "The burden should rest on the proponents of a restriction on competition to show that it is necessary to prevent significant consumer harm and that it is narrowly drawn to minimize its anticompetitive impact."

"Texas views on the matter are very important to us and the nation of the whole. The timing is important," Ostrovsky says. "Not only will it provide guidance to bar associations around the country, but also Texas in making this decision."

Austin attorney W. John Glancy, chairman of the State Bar's Professional Ethics Committee, says he cannot disclose how the panel is leaning, when it might make a decision or who besides the FTC has submitted comments.

"It has been complete limbo for us for seven years," Ostrovsky says. "That's why we are so excited about [the FTC letter]. We asked the FTC to intervene six months ago to offer third-party guidance," she says.

Ostrovsky says that state bar associations' rules on advertising were written before the Internet and many states have been slow to change. The ethics opinions "only add to the confusion" for lawyers, she says.

"California has not done anything either positive or negative, they simply ignored the issue," Ostrovsky says. "New York is in the same situation."

While some states take no formal position, they create confusion among lawyers who call ethics hotlines and are told they can't participate, she says.

Dennis Maio, a lawyer with the San Francisco office of Reed Smith and a member of the State Bar of California Ethics Committee, says, "I think the issue has been brooded about a bit." But he says the panel has not taken a position.

He describes concerns that arise in considering a potential client who writes a 2,000-word email about needing a divorce only to have the lawyer representing the client's spouse receive the Internet solicitation. "Now there is no confidentiality and the lawyer is obligated to use it against her," he says.

James Cooper, FTC deputy director of policy planning, says the key is whether the services are really a referral. "When you go to the state bar for a referral you get the next person on the Rolodex," he says. With the Internet service, "you get five or six offers. It is a different model and has the potential to offer benefits to consumers."

LegalMatch, one of at least four outfits providing the services, has found it hard to keep up with the growing consumer demand. Ostrovsky says that there are thousands of lawyers participating in its system and tens of thousands of cases coming in each month from people looking for help.

The New York state bar is reviewing, but has not resolved, the matching-service issue, a spokesman says. Among new restrictions on attorney advertising proposed by New York's appellate courts is updating all manner of attorney advertising online. Pamela A. MacLean is a staff reporter and California bureau chief for The National Law Journal, a Texas Lawyer affiliate, in which this article originally appeared. Texas Lawyer senior reporter John Council contributed to this article.

The New York state bar is reviewing, but has not resolved, the matching-service issue, a spokesman said. Among new restrictions on attorney advertising proposed by New York's appellate courts is updating all manner of attorney advertising online. [See story, Page 20.]

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