Previously, I’ve discussed why attorneys can’t work for equity. But there is a very common form of debt transaction that is used to pay for legal services—credit card payments—which raises important ethical questions.
Until recently, ethical rules designed to ensure the trustworthiness and good moral character of attorneys barred them from taking credit cards.
At a high level, professional ethics codes—such as those embraced by the American Bar Association—are guided by theories of virtue ethics. These theories emphasize the character of a person, rather than the results of one’s actions. When it comes to the ethical guidelines of the legal world, the transcendent question is always, “Is a lawyer taking a risk that should be permitted of a lawyer of good character?”
In the 1960s and ‘70s, the ABA issued several opinions (Formal Opinions 320 and 338, and Informal Opinions 1120 and 1176) which considered the dangers of allowing people to borrow money for legal services. The essence of these opinions was that a lawyer of good moral character would not permit a client to risk the peril of borrowing money to obtain legal services.
But in 2000, the ABA issued a brief one-page statement in which it noted that the Association’s current Model Rules of Professional Conduct does not impose any restrictions on the acceptance of credit card payments. Thus, the previous opinions were withdrawn, and lawyers could accept credit cards with a clear conscience.
But the rise of online credit card processing and the threat of data breaches pose new concerns for lawyers.
In the old days, when credit cards were manually swiped, there was little reason to worry about a client’s privacy. But the 2000s and the age of the Internet have given rise to a whole new slew of ethical concerns.
Today, lawyers must guard against data breaches and utilize trust accounting. I frequently speak with credit card companies about best practices, both as a vendor and as a customer. Most lawyers (myself included) use Law Pay, a credit card processor which specifically services the legal industry. Similar services are utilized by professionals in the medical, psychological, and accounting fields.
But a few lawyers use popular online payment processors like PayPal and Venmo, a practice that should be strongly discouraged. This is because ethical guidelines require attorneys to segregate client funds between an operating account (for funds that have been earned by the attorney) and a trust account (for funds not yet earned). Funds are dispersed from the trust account into the operating account as they are earned by the attorney. While PayPal, Venmo, Facebook, and other payment options are becoming increasingly popular among those who have eschewed the writing of checks, they do not have this functionality. Attorneys cannot adhere to existing guidelines for taking payment if they use these payment systems.
However, Law Pay has a system for fund segregation in place and has been endorsed by nearly every State Bar Association. There are others that allow for segregated funds payments. For instance, QuickBooks and Zelle both offer this. As a side note, given QuickBooks popularity among bar associations for IOLTA accounting, I’m surprised that State Bar Associations have not endorsed its use for IOLTA payments.
Regardless of what payment portal your attorney uses, the ability to segregate earned and unearned funds is a hallmark of a mature legal operation. In contrast, failing to segregate funds—which is the case with anyone who uses common online payment processors—is a hallmark of scam operations.
While credit cards do present some ethical concerns, they are vastly preferable to the old alternative of placing a lien on legal work.
Before the advent of credit cards, attorneys who offered payment plans did so by placing a lien on their legal work. Here’s how this would work for a patent attorney taking on a client needing assistance in filing a patent claim.
The attorney would draft a fee agreement and security agreement in which the client would agree to have a lien placed on the patent application or the issued patent. This document would define the payments that the client would have to make to pay off the lien. Failing to do so would result in the attorney taking ownership of the intellectual property contained in the patent. The IP would be sold off so that the attorney could collect the fees they were owed, and any remaining money would be returned to the client. It should be noted that patent attorneys are not patent collectors—the lien is simply the most convenient way to make a client pay up.
But liens are complex and time consuming to manage. A client looking to reduce their costs with the use of a lien-based payment plan would find that their legal costs would increase significantly, as the lawyer would have to account for the vast amount of time and paperwork necessary to make the lien work.
Given that many individuals do not have the means to pay cash up front for legal services, accepting credit cards is the most secure and cost-effective payment option that can bridge this gap. However, attorneys must be careful to not rely on consumer-oriented payment processors like Venmo, and clients should exercise due diligence and only work with attorneys that use trust accounts to protect fee payments which have not been earned.