Groupon or Groupoff? Ethics Rules and Practical Considerations for Lawyers

Image Courtesy of Groupon Inc.

In 1977, the United States Supreme Court in Bates v. Arizona State Bar held lawyers have a right to advertise their services.  However, this right is subject to additional rules and regulations.  In North Carolina legal advertisements must conform to the North Carolina State Bar’s Rules of Professional Conduct 7.1 through 7.5.  The nature of advertising is changing though.  The State Bar confirmed in Formal Ethics Opinion 10 in October 2011 that in addition to traditional forms of advertising, a lawyer could use daily online coupon deals such as Groupon and Living Social to promote their services.

Online coupon services generally operate in the following manner:  a business lists their services with a daily deal coupon company (hereinafter, the provider) at a significant discount.  The provider then sends an e-mail to regional subscribers containing the deal.  If the consumer wants the deal, they purchase the offer through the provider.  The provider then takes a percentage of the sale price.  Within a given time period, the consumer then redeems the coupon at the business.  Thereafter, the business is sent a check from the provider regardless of whether the service or goods are actually rendered.

However, these offers are subject to special requirements.  Bobbi Jo Boyd, Professor of professional responsibility and ethics at Campbell Law School, notes that navigating the rules seems akin to, “walking through a minefield.”  In the FEO, the State Bar outlined the additional requirements for advertising through these types of providers.  Special attention must be given to ensure that the advertisement is not misleading, that the money from the provider is handled as an advanced payment, that the fees are not excessive, and that the lawyer is competent to handle the matter.  The full opinion is provided here.

Professor Boyd draws special attention to the fee the attorney receives and observes that “The fees that lawyers receive from these services are considered advanced payments that must go into the trust account.”  She notes further that practitioners must be careful not to transfer the funds to their operating account until earned by the actual provision of legal services.

The State Bar has made clear that the fee that the provider collects from the service provider is not a violation of Rule 5.4(a), which normally prohibits fee sharing with non-lawyers.  Rather, the fee is considered valid as the reasonable cost of advertising, pursuant to Rule 7.2(b)(1).

In light of these additional regulations, is the juice worth the squeeze? At their core, these coupon deals are a form of advertising.  The expense of traditional advertising is to deliver a message, whether it is running an ad in The News & Observer, or bidding on a Google-style “pay per click” online service.  With coupon deals, the goal is to deliver the service or product, rather than the message, by enticing customers through a cheap price.

In this offer situation, the business runs the risk of losing money on the transaction. Despite more customers, businesses may still suffer a loss because their profit margins for the deal are slashed.  Additionally, the provider takes a percentage of every coupon sold.  The idea, however, is to attract repeat customers who will come back to pay full price.

One difficulty is that the offer is likely to cut significantly into profit margins. The FEO states that the, “advertised discount may not be illusory: the lawyer must have an established, standard fee for the service that is being offered at a discount.”  While retailers can offset this loss with repeat customers, it is unclear how effective this would be for legal services.  What drives a customer to come back for a full priced artisan muffin may not motivate them in to pursue full priced legal services.

Businesses have had mixed success with repeat customers.  A 2010 study cited by Forbes noted that out of the 150 businesses surveyed, two-thirds reported that their Groupon promotions were profitable.  The remaining third claimed to have lost money on their Groupon experience. Businesses in the money losing group reported that only 25% of these customers spent money beyond the face value of their Groupon discounts, compared to a 50% rate for the customers of businesses who reported a profitable promotion.  Similarly, just 13% of the money losing group’s customers returned to the business in question, compared to a healthy 31% of the former.

Furthermore, it is unclear how services, as opposed to goods are received by the targeted customers.  Providers rely on a “culture of deal-hunting” and target people who like to make impulse buys.  A source working for one of the major providers was unable to say whether the same person who buys twenty cupcakes for six dollars is also the type of person who will want to pursue a legal matter.

If a lawyer wants to use one of these providers, there are several things to look for.  First, providers typically have exclusivity clauses, so a lawyer should be careful to choose a company with a broad solicitation base and a good reputation.  Second, the refund policies of the provider should be scrutinized.  Typically, providers advertise to businesses that they can keep windfall payments from unused coupons.  However, the FEO made clear that a lawyer cannot keep these windfalls, so the provider must have a clear process for handling refunds to the customer that would normally be a windfall for the business.

Third, the due diligence providers perform in signing on companies for their service is important.  The stories are legion of daily deals gone wrong, where a business is overwhelmed by throngs of coupon holders expecting high quality at a low price.  If the customer experience is bad, then both the reputation of the provider and the business may suffer.  Therefore, a lawyer should be selective in which provider he uses because the quality of his work may be associated with the reputation of the provider.

The future of online group coupons is still in flux.  One of the largest providers, Groupon, recently downwardly revised their reported earnings.  The nature of the service may also change. Another major provider, Living Social, is experimenting with a physical space called 918 F St., located in Washington, D.C.  The idea is to have a place where different businesses can come to set up temporary shop, allowing them to make in person contact with their customers.  Something in this vein may be more conducive to what the lawyer wants to do and how he wants to reach potential clients.

 

Harry Lorello, Former Senior Staff Writer
About Harry Lorello, Former Senior Staff Writer (7 Articles)
Harry graduated from Campbell Law in 2013. He attended Guilford College, graduating in 2008 with a Bachelor of Arts in History and Education. During both 1L and 2L summers, Harry interned for the North Carolina Department of Justice Property Control Section, where he worked on issues ranging from property to employment law. During his 2L year, Harry worked as a clerk for the Lanier Law Group, which focuses on workers' compensation.
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