Why the “License Rental” Business Model is Problematic

image7-29Solo lawyers continue to occasionally call in wanting to discuss a business opportunity that has come to be known as the “license rental” model.  In short, these lawyers are being offered an opportunity to affiliate with an out-of-state firm or occasionally a non-lawyer owed company and it’s often presented as an attractive way to develop a stable flow of recurring business.  The out-of-state firm or non-lawyer owned company is wanting to direct cases to the lawyers they are contacting as a way to offer legal services in the jurisdictions in which these lawyers practice.  The actual work may occur under an of counsel or contract attorney relationship and participating lawyers will receive some portion of the fee coupled with an understanding that the required amount of work will be minimal.  Targeted practice areas include but are not limited to debt settlement, mortgage foreclosures, estate planning, traffic violations, and criminal expungements.

Those who take the time to call me are usually wanting to make sure that, if they sign on to something like this, their malpractice coverage will be in play should a misstep ever occur.  Before I answer that question, however, I always start by asking if they have given any thought to whether signing on is ethically permissible because many times the opportunity under consideration often won’t ethically pass muster for a number of reasons.

Let’s start with the obvious.  If it’s a non-lawyer owned company making the offer, any lawyer who signs on may be assisting a lay entity in the unauthorized practice of law.  However, even if the offer is coming from an out-of-state law firm, the unauthorized practice of law issue may still be a problem, particularly if the local lawyer is contractually required to essentially relinquish control of all matters to the out-of-state firm, which is often the case.  Making matters worse, some of these firms turn over the responsibility for managing all client matters to nonlawyer assistants who are not properly supervised.  Were a local lawyer to agree to simply sign off on all work being done by these nonlawyers, this too would constitute assisting nonlawyers in the unauthorized practice of law.

Another problem with the license rental model is that the out-of-state entity often markets a one-size-fits all solution to the legal problems they will want their local lawyers to bless.  If a local lawyer in fact does so without first consulting with the client about the various legal options available and without regard to the true needs of the client, this lawyer would be ceding his or her independent legal judgment to someone else in violation of ABA MRPC 5.4 Professional Independence of a Lawyer.

Depending upon the specifics of the opportunity under consideration, additional ethical concerns that can come into play include improper fee splits, preventing clients from having a chance to meaningfully consult with their local lawyer, and unreasonable limitations on the scope of representation.  Hopefully after discussing the ethical issues, those who have called me start to realize the opportunity they have been presented with isn’t as attractive as it’s been made out to be.

With the ethical issues fully vetted, I then turn to the initial insurance coverage question and here’s where it gets interesting.  I have yet to hear of a situation where the out-of-state firm or non-lawyer owned company provided malpractice insurance for their local lawyers. Instead, they require all local lawyers who sign on to document that they have a malpractice policy in place which leads these lawyers to believe that their own policies would respond.  Here’s the problem.  These out-of-state businesses often have no intention of letting you make any of their clients your clients and they will place severe limitations on what their local lawyers can and can’t do.  In short, the local lawyers are often simply being asked to sign off on work done by others who are all out of state.  This is why the colloquialism “license rental business model” came into being.  It really is an apt description.  The rub here is that malpractice polices usually only cover lawyers for work they do on behalf of clients of the named insured, which is their firm.  Under the license rental model, lawyers would be providing services for clients of another firm, thus no coverage.

Please understand that the purpose of this post is not to try and convince lawyers to never take advantage of business opportunities with others.  Sometimes the proposal under consideration actually turns out to be on solid ground, at least from an ethical perspective.  My message is just this, sometimes when an opportunity seems too good to be true, it turns out that’s because it is.

All opinions, advice, and experiences of guest bloggers/columnists are those of the author and do not necessarily reflect the opinions, practices or experiences of Solo Practice University®.

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