Legal Referrals by Advocacy Organizations Can Violate the Law

Labor Law - Joshua Dale, Michel & Associates

By Joshua Robert Dale
Managing Partner at Michel & Associates, P.C. – Employment & Business Law

Many local governments in California contract private non-profits to advise low-income residents regarding their rights as tenants.  Ostensibly, these non-profits are supposed to educate tenants, assist with disputes and recommend proper legal representation when necessary, especially when landlords allegedly abuse tenants’ rights.

Many such organizations in California provide much-needed assistance to deeply underserved minority and immigrant communities.  They have dedicated staff and usually an army of volunteers who truly want to help people.  For a growing number of non-profits, however, such contracts have become revenue streams stemming from relationships with plaintiffs’ attorneys — relationships that appear to violate California’s prohibition against “running and capping.”

Running and capping are colloquial terms describing when a lawyer pays non-lawyers to generate clients.  Historically, “runners” were non-lawyers hired to find and deliver leads on potential clients; and “cappers” were non-lawyers posing as satisfied clients to help persuade the lead to hire the attorney.  Later, the term “capper” took on a broader description and included any non-lawyer who directly solicited a potential client on behalf of an attorney, regardless of whether deception was involved.

The rules against running and capping were implemented as checks against unscrupulous commercialization of the law, and the dangers of exploiting the unsophisticated and vulnerable.  Thus, California Business and Professions Code section 6151(a) prohibits “any person, firm, association or corporation in any manner or in any capacity [from acting] as an agent for an attorney at law or law firm … in the solicitation or procurement of business for the attorney at law or law firm.”

The fear is that a non-lawyer’s for-profit involvement in soliciting legal business corrupts the sanctity of the lawyer-client relationship, and potentially allows the non-lawyer to control a substantial aspect of the client’s litigation.  The profit motive enters the picture and its primacy may subvert the client’s objectives.  These prohibitions were created in direct response to the very real dangers of ambulance-chasing and the commoditization of the practice of law.

Other versions include physicians referring patients to personal injury lawyers in exchange for a referral fee or the bail bondsman being paid to recommend certain criminal defense attorneys.  More sophisticated instances masquerade as well-intentioned legal-service providers, but hawk legal services like consumer products.  The compelling reason for prohibiting such practices remains unchanged: consumer protection.

The Housing Advocate Profit Model

The rights of housing advocates to directly participate in housing discrimination litigation were cemented in Walker v. Fair Housing Foundation(9th Cir. 2001) 272 F.3d 1114.  In Walker, a housing advocacy non-profit had contracted with the City of Lakewood to provide housing counseling to residents.  During a press conference on behalf of an aggrieved tenant suing a landlord, a spokeswoman for the non-profit charged that the type of racial discrimination the tenant had experienced was prevalent within the city’s low-income housing.  The tenant was not residing in city-controlled housing at the time, but instead was alleging that a private landlord in Lakewood had discriminated against her.

The city, perturbed at the broad accusations about discrimination within its borders, did not renew the non-profit’s contract and also made disparaging comments about the non-profit’s performance of its contract.  In response, the non-profit joined the tenant’s lawsuit as a plaintiff and added the city as a defendant, alleging that the city had violated the non-profit’s rights to advocate under state and federal laws.  When the city challenged the non-profit’s standing to participate in the suit, the federal Ninth Circuit Court of Appeals found that the non-profit could be a proper plaintiff to a housing discrimination claim under both state and federal law, because the law contemplated that such advocates could suffer retaliation for their advocacy and could therefore seek redress under both laws.

Following Walker, it became common for housing advocacy non-profits to join with tenants as plaintiffs in lawsuits against landlords.  This shift of the non-profit’s role from facilitator of tenant lawsuits to active partner had some perverse consequences.  With skin in the game, some non-profits began cultivating networks of preferred attorneys to whom they referred tenants.  The non-profit would assemble tenants into multi-party packages or classes of plaintiffs and then refer them to one of the preferred attorneys, who would then represent the non-profit and the tenants jointly in a lawsuit against a landlord.

The process of assembling tenants begins with an investigation of the landlord by the non-profit.  The non-profit may be contacted by an aggrieved tenant through the city’s housing services department – this is the intended effect of the non-profit’s contract with the city to provide housing counseling – or the non-profit may select a group of apartment complexes in a city for a spot investigation, without the non-profit having any prior basis for believing discrimination is occurring against tenants there.

The non-profits dispatch cursorily-trained investigators to conduct door-to-door interviews with tenants at the targeted complex.  These investigators have no special qualifications for conducting investigations; the pay is low, and the turnover rate is high.  These investigators are sent with a set of prepared questions to ask of tenants and instructions to have an undiscerning eye about tenant complaints.  During the door-to-door interviews, tenants are encouraged by the investigators to make complaints, whether objective indicia of discrimination are described to the investigators by the tenants or not.  Investigators sometimes draw up complaint forms against tenants’ stated wishes, and pressure the tenants to sign.  Tenants are offered inducements to ascribe to the complaints, including promises of free rent, immunity from eviction, and monetary recovery.

The purpose of the door-to-door investigations is to gather tenants to provide negotiating leverage for a planned lawsuit.  The non-profit then brings in one of their preferred outside attorneys, who sets a meeting with the tenants, and then encourages the tenants to join a joint lawsuit with the non-profit against the landlord.  Further inducements are made to the tenants to join the joint lawsuit:  free rent or freezes in rent, immunity from eviction, and monetary recovery.

Following the meeting, any undesirable clients – tenants whose behavioral history as a tenant or criminal record might be a drag on the claims of the joint group – are culled from the main litigation group and referred out to another attorney.  Then the group’s attorney makes a settlement demand to the landlord, seeking money for the tenants and reimbursement of the non-profit’s inflated investigative costs.  When landlords, who’d had no prior complaints from the tenants about alleged discrimination, are suddenly hit with the hefty settlement demand from the group, many naturally resist, and litigation is commenced against them on the group’s behalf.

Thus, the non-profit has solicited a group of plaintiffs, bundled them together, given them to a pre-selected outside attorney and stands to benefit financially as a plaintiff in the same lawsuit.  In any context other than housing discrimination advocacy, this would unquestionably be running and capping in violation of California law; and despite claims to the contrary, such practices are not sanctioned by state and federal housing discrimination laws.

Federal Law on Legal Referrals By Advocacy Organizations

The US Supreme Court has addressed the relationship between non-profit organizations and the provision of legal services on three occasions.   First, inNational Association for the Advancement of Colored People v. Button (1963) 371 U.S. 415, it was held that civil rights organizations could only associate with attorneys if the organization sought to advance policy objectives through litigation and did not seek recovery of monetary damages.  Under a statute prohibiting “running and capping” and solicitation, the Virginia State Bar attempted to enjoin the NAACP from engaging in the practice of retaining and paying lawyers on behalf of its members and constituents in civil rights cases. The high court also noted that the NAACP’s litigation policy clearly prohibited ordinary damages actions.  Looking at just the facts before the court, it was obvious that the NAACP had no financial interest in the cases; nor did the NAACP control the litigation beyond merely securing representation.

In the second case, Brotherhood of Railroad Trainmen v. Virginia (1964) 377 U.S. 1, the high court determined that fraternal organizations and unions could advise members to obtain legal counsel and recommend which counsel to retain.  Again, the Virginia State Bar sought to enjoin this organization from activity it deemed to be illegal solicitation because the trainmen’s union had a previously formalized fee sharing arrangement with its recommended lawyers. Considering the fee-splitting practice had stopped before the case was at bar, the high court reasoned that simply advising members to seek counsel or recommending lawyers is not the equivalent of practicing law or soliciting business.

Following Button and Brotherhood of Railroad Trainmen, the Supreme Court took another look at the issue over a decade later in In re Primus (1978) 436 U.S. 412.  In Primus, the issue was more narrow than in the prior cases, dealing specifically with whether an independent attorney who had been referred by the ACLU to represent a woman in a civil rights action against the state of South Carolina had violated state running and capping prohibitions by contacting the woman and referring her to free legal services offered by the ACLU with which the attorney was affiliated.  Expounding its holding in Button, the Supreme Court found that the attorney’s solicitation was a furtherance of political expression activity protected under Button.  The Court specifically found that the fact that the ACLU might benefit monetarily through an attorney’s fee award in the litigation did not take the solicitation outside the realm of protected political speech because it was established that the individual attorney herself would neither have received any pecuniary gain from handling the suit in either the form of a share of any monetary award to the client or a share of an attorney’s fee award.  The attorney’s role would have been limited to being paid as a staff attorney by the ACLU without regard to the outcome of the case.

To extract some rules from these three cases: under federal law, non-profit organizations can lawfully engage in client referrals to attorneys so long as the non-profit (1) advances policy objectives truly for no financial gain; (2) only generally advises its members to retain counsel; or (3) recommends specific counsel with whom no fees are shared.  As to attorneys, attorneys can participate in such arrangements with non-profits so long as the attorney (1) receives no pecuniary gain from the litigation in the form of attorney’s fees or a share of the damages award, or (2) is a staff attorney for the politically expressive non-profit organization.

California Law on Legal Referrals By Advocacy Organizations

As with federal law, there is no statutory exception under California law allowing non-profit housing advocacy groups to engage in practices amounting to running and capping.  There are certain types of non-profit services within California that can lawfully refer clients to attorneys without being subject to the running and capping prohibitions, among these being Certified Lawyer Referral Services and Qualified Legal Services Projects.  Housing advocacy non-profits cannot qualify under either of these exceptions.

Certified Lawyer Referral Services (“CLRS”) are allowed refer clients – such as aggrieved tenants – to lawyers participating in the service, but referral services are barred from engaging in any solicitation activities to facilitate such a referral. (See California Business & Professions Code, § 6155, and Rules and Regulations of the State Bar of California for Lawyer Referral Services, rules 7.1(d) & 19.1(d).)  The profit model of non-profit housing advocacy groups allegedly involved in running-and-capping arrangements requires wholesale identification of tenants in the same low-income housing development and the bundling of such plaintiffs.  Any CLRS engaged in such prohibited activities would see the State Bar suspending or revoking the group’s certification.

Additionally, non-profit housing advocacy groups would find difficulty qualifying as Qualified Legal Services Projects (“QLSP”) because such projects must operate through accredited, non-profit law schools or meet State Bar guidelines for providing legal services to the indigent as a QLSP. (See Bus. & Prof. Code, §§ 6213-6214.)  Among the requirements for those non-profits seeking to qualify as a QLSP that are not affiliated with a law school, such requirements include that any attorney fee awards generated must be used to provide further pro bono legal services to indigent members of the community.  (See id., § 6213, subd. (d); and Rules and Regulations of the State Bar of California for Legal Services Trust Fund Program, rule 3.673, subd. (B).)  To ensure that a sufficient number of the QLSP’s clients qualify as “indigent,” the QLSP must screen the income levels of its clients and provide a report to the State Bar of the percentage of clients who qualify.  (See State Bar Legal Services Trust Fund Program Eligibility Guidelines (Dec. 2010), at § 2.3.4.)

Here, the advocacy profit model does not require that attorneys that are part of the referral group use any attorney fee award for providing further pro bono services; rather, the attorneys –  who are independent of the non-profit and have their own practices – are free to use the attorney fee award in furtherance of their own practices in a manner unrelated to any housing litigation or indigent clients.  Additionally, the non-profit housing advocates who utilize the described business model do not screen tenant’s income levels or screen for any other eligibility criteria beyond the tenant’s residency in the targeted housing complex.  In fact, the authors are not aware of any of the non-profits who utilize the housing advocacy model described herein as ever attempting to register with the State Bar as a QLSP or seeking monies from the state’s IOLTA trust fund that are made available to registered QLSPs.

The Legal Ethics of the Business Model

Lawyers engaging with non-profits utilizing such practices are placing themselves and their legal careers at risk. Violations of the running and capping prohibitions can be treated as misdemeanors, punishable by fine and/or imprisonment. (See Bus. & Prof. Code, § 6153.) While the running and capping statute applies to the runners and cappers themselves (see Bus. & Prof. Code, § 6152, subd. (a)), lawyers who employ runners or cappers to solicit legal business may be held criminally liable on either aiding and abetting or conspiracy theories. (See Hutchins v. Municipal Court (1976) 61 Cal.App.3d 77, 81.)

That seems rather obvious, since the lawyer is held liable for his voluntary act – employing the services of a runner and/or capper. But even when a non-profit’s referral only results in a new case for the receiving lawyer, it is incumbent upon the lawyer to verify that the referring organization does not stand to gain financially from the representation. The problem is rules prohibiting solicitation rely on vague standards that can be argued either way. (See Rules Prof. Conduct, rule 1-400(B)(1) [prohibiting solicitations for legal services “in which a significant motive is pecuniary gain”] [emphasis added].)

More importantly, lawyers engaging in what is determined to be the use of runners or cappers are subject to discipline by the State Bar.  And the State Bar Court has held that such conduct can constitute an act of “moral turpitude.”  (SeeIn the Matter of Nelson (Rev. Dept. 1990) 1 Cal. State Bar Ct. Rptr. 178.)  A lawyer who commits an act of moral turpitude is subject to suspension or disbarment, even in the absence of any related criminal charges or conviction. (See Bus. & Prof. Code, § 6152.)

Additionally, depending on the arrangement the lawyer has with the non-profit with regard to how the non-profit’s referral of the clients is compensated to the non-profit, such an arrangement may run afoul of the prohibitions against fee-splitting with non-lawyers.  (See Rules Prof. Conduct, rule 3-320.)  Non-profits and attorneys using the business model described above have largely seemed to avoid this as an issue, however, as the non-profit’s compensation is derived solely as a function of its role as a plaintiff in the joint action, and not from some other form of reimbursement or fee-splitting arrangement with the attorney.

Conclusion

If Walker pushed some housing advocacy non-profits toward a revenue model that includes certain less-than-honorable practices, some may ask, “So what? Aren’t the interests of aggrieved tenants still being furthered by an arrangement that also rewards those protecting tenants’ rights?”

In many instances, the answer is “yes,” however, in other instances the answer is a resounding “no,” especially when the non-profit has overpromised the benefits of participating in joint litigation. Tenants, uninformed about all applicable laws, may believe they are “bulletproof” and engage in behavior which harms other tenants and/or results in a lawful eviction.  In other instances, by inflating benign landlord activity into alleged discrimination in order to get a quick settlement payoff from a landlord, the non-profit creates a chilling effect for landlords who otherwise would invest in facilities and equipment that tenants enjoy and are beneficial.

As one example, the developer of low-income housing scraps plans for a playground at a new development after receiving repeated threats of discrimination lawsuits over how it allowed access to playgrounds at existing communities. The net effect of casting too wide a net in the interest of revenues – rather than concentrating on landlords who are willful violators – actually encourages landlords to engage in the very denial of services the housing discrimination laws were intended to remedy.

Public policy debates aside, lawyers who accept referrals as described in this article from housing advocacy non-profits should take a hard look at the relationship and determine if the risks are worth the monetary gains. At some point, some enterprising defense counsel may decide to defend a landlord client from a housing discrimination lawsuit by examining the relationship between the lawyer and the housing advocacy non-profit client/plaintiff.

At that point, how the lawyer handled issues such as client intake, representations to tenants regarding potential litigation results and informed consent regarding waiver of conflicts between the tenants and the non-profit, may all be subject to a level of scrutiny that could be damaging to the lawyer’s practice.

Joshua Robert Dale is a Long Beach attorney who has represented plaintiffs as well as defendants – private and public – in employment and housing discrimination cases.