The State Bar of California, the agency that regulates attorneys admitted to practice in California, is sending formal warning letters to California attorneys listed on the website www.upcounsel.com.  According to UpCounsel’s website, “Founded in 2012 and headquartered in San Francisco, UpCounsel is the trusted go-to resource for businesses to access amazing lawyers effortlessly and cost-effectively for any legal need.”  The State Bar of California objects to the payment of fees to UpCounsel, a company not directly regulated by the agency.

Letters from the agency to California attorneys listed on UpCounsel include the following admonitions:

“The State Bar of California has received information regarding the operations of UpCounsel, Inc.  Our review of the company’s website shows that you have registered with UpCounsel, Inc., and currently maintain a profile on its website advertising your availability to provide legal services.  We have opened this file in order to address our concern that your registration with UpCounsel, Inc., may result in a violation of the Rules of Professional Conduct.  We are closing our file with the issuance of this letter to you informing you of our concern.  Should we receive complaints or other information demonstrating possible misconduct, we will consider further action at that time.

It is our understanding that UpCounsel, Inc., offers an online service which allows those in need of legal assistance to connect with and possibly hire attorney(s) who have registered with the company. It is also our understanding that when a registered attorney is hired and legal services are rendered, the subsequent payment of fees by the client is processed by UpCounsel, Inc., and not the attorney.  Fees owed to the attorney are transmitted via a standard cloud-based third-party service to the lawyer’s account.  Also, during the transmission process, a previously agreed upon processing fee (which is based on a percentage of billings) is deducted and remitted to the account of UpCounsel, Inc.

Rule 1-320 of the California Rules of Professional Conduct prohibits, with certain limited exceptions, the sharing of legal fees between a member of the State Bar of California and a non-attorney.  The rule also prohibits a member from compensating a person or entity for the purpose of recommending or securing employment of the member by a client, or as a reward for having made a recommendation resulting in employment of the member.

While at this time there does not appear to be the level of conduct that would likely lead to the imposition of discipline in the State Bar Court, we are concerned that a percentage-based processing fee to be paid to UpCounsel, Inc., would constitute an improper sharing of legal fees.”

 

The warning letters effectively prohibit California attorneys from providing services through www.upcounsel.com under the current payment terms of UpCounsel.

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Q: Hypothetical: Let’s say I manufacture a product, I can make a lot of them, and my margin is good, but I’m bringing in an investor because I need someone to help me with advertising. I also have a couple of independent contractors (relatives) who are helping me out. But we’ve got this outsider who has some money, and he likes this product, and he wants to help me build this business. What business form and what other general concerns might you have for me, the primary owner of this business, (and inventor and manufacturer of this product), that I plans to sell nationwide?

A: There are quite a few issues embedded in the hypothetical, so let’s address some of them:  

In terms of formal entity, there is first the issue of whether you need to form an entity. With any really active business, really any business that is going to be selling products nationwide, you need a legal entity to provide some protection of the personal assets of the owners from the liabilities of the business.

It’s also important to have an entity so that the transactions by the business can be separated from personal transactions.

It’s also critical to have an entity so that the intellectual property that’s associated with the product or service is held by that entity and not just by an individual. That helps provide continuity because individuals can come and go, and it’s also very important for an investor.

An investor wants to know what he or she is investing in, and wants to know that their investment will represent a share, or a portion, of the business including the IP of the business. Consequently, it’s important to have an entity and for everyone who is either an employee of the entity or an independent contractor who is consulting for the entity assigned all of their work product to the entity so that it’s known clearly and there is a clear record that there is an entity which has all rights, including the intellectual property rights associated with the business.

 

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