MULTI-DISCIPLINARY PROFESSIONAL PRACTICES:
A CONSUMER WELFARE PERSPECTIVE
Charles River Associates
80 Bloor St. W. Suite 1501
Toronto, ON M5E 1R4
August 4, 1999>
Charles River Associates Canada Ltd., (CRA) has been commissioned by the Big 5 professional services firms in Canada to prepare an evaluation of the economic advantages and disadvantages to clients of multi-disciplinary professional practices (MDPs), in particular MDPs involving both lawyers and accountants and related consultants, and to evaluate appropriate regulatory frameworks that might be applied to such practices. Professor Michael Trebilcock of the University of Toronto Faculty of Law, senior consultant to CRA, and Lilla Csorgo, Senior Associate with CRA, have been principally responsible for undertaking this study.
MDPs involving lawyers, accountants, and other professionals have emerged as a major issue of controversy, particularly in the legal and accounting professions, and in recent years have been the focus of studies in Canada by the Inter-Provincial Chartered Accounting Task Force on the Multi-Disciplinary Activities of Members Engaged in Public Practice (1995), the Law Society of Upper Canada’s Futures Task Force (Final Report of the Working Group on Multi-Discipline Partnerships (1998)), and are currently under study by the Canadian Bar Association and the Canadian Federation of Law Societies. Beyond Canada, the issue has attracted study by the International Bar Association, the American Bar Association, the Law Society of England and Wales, English and Scottish Royal Commissions, and governing bodies of the legal profession in Europe, Australia and New Zealand.
Focussing specifically on MDPs between lawyers and accountants and related professionals, a number of regulatory constraints maintained by professional bodies in these two professions currently constrain the formation and operation of such practices. For example, the Institute of Chartered Accountants of Ontario maintains a rule that disqualifies a firm from holding itself out as a firm of chartered accountants unless all the partners in the firm are chartered accountants. The Inter-Provincial Chartered Accounting Task Force on the Multi-Disciplinary Activities of Members Engaged in Public Practice has recommended that public practice firms that perform third party reliance services or hold themselves out as chartered accountants must be under the direct control of Canadian chartered accountants. The Law Society of Upper Canada, in turn, (like other provincial law societies throughout Canada) maintains a number of professional rules of conduct that substantially constrain the formation and operation of MDPs between lawyers and non-lawyer professionals. The rule that most directly impacts MDPs is Rule 9 of the Professional Rules of Conduct which provides that lawyers may not directly or indirectly share fees with non-lawyers who bring or refer business to them. Other rules relating to unauthorized practice, permissible firm names, advertising and solicitation, confidentiality, solicitor and client privilege, conflicts of interest, and lawyers’ indemnity insurance and trust funds also impede the formation and operation of MDPs involving lawyers and non-lawyer professionals in various ways.
The premise of this study is that a principled evaluation of the advantages and disadvantages of MDPs and appropriate frameworks for regulating them should adopt a rigorous and single-minded consumer welfare perspective. Delegated self-regulation of the professions can only be justified in public interest terms. Its function is not to parcel up various monopoly privileges on particular professional domains in order to advance the economic self-interest of one or another professional group. Adopting this consumer welfare perspective, in Part II of this study we outline potential efficiency gains for consumers of professional services from MDPs. In Part III of this study, we evaluate the potential disadvantages to consumers of professional services from MDPs within a market or contracting failure framework. In Part IV of the study we first evaluate available supply-side empirical evidence on the emergence of large highly-integrated, full-service professional service firms within and across the professions of accounting/consulting and law, and then evaluate demand-side evidence of the kinds of consumers and kinds of transactions where the services of such firms seem to have the most salience, relying principally on client interviews. In Part V of the study, we review comparative regulatory experience. In Part VI of the study we evaluate various models for the regulation of MDPs involving lawyers, accountants, and other professionals with a view to identifying models that maximize the advantages and minimize the disadvantages of such firms to relevant segments of consumers of professional services. We argue for permitting and indeed facilitating fully integrated MDPs, with Inter-professional Co-ordination Committees that include representatives of demand-side interests constituted to resolve issues of conflicting regulatory requirements.
The demand for MDPs relative to more specialized professional firms is likely to depend upon the type of consumer and the type of transaction for which the consumer requires assistance. Professional services for some transactions for certain types of consumers are more efficiently provided by MDPs (see Part IV for a more detailed discussion of these customers), while others are more efficiently provided by more specialized firms. The economic theory of the firm provides some guidance as to why this is the case by analyzing the benefits and costs of integration.
The theory of the firm attempts to explain why some private sector activities are organized within firms (vertically integrated) while other activities are organized through the market. 1 The key is the relative cost of the alternative arrangements. For example, General Motors, as a demander of tires for its vehicles, may purchase them from an independent tire-manufacturing company or it may create its own tire-manufacturing division. In fact, firms, such as General Motors, exhibit a whole spectrum of methods of organizing inputs necessary to the production of its final goods. At one extreme, General Motors may decide to produce everything in-house, even to the point of producing raw inputs. In this case, it would be a fully vertically-integrated firm. Alternatively, General Motors may decide to sub-contract the production of all the inputs of vehicle production, including assembly, so that General Motors itself would merely be a coordinator of production and a reseller.
This is similarly the case for users of professional services. A large company, such as Microsoft, in producing business plans, marketing strategies and other inputs for which law, accounting, consulting and other expertise may be necessary, may choose to employ full-time staff to provide the whole gamut of these services. It is rare, however, to observe a firm characterized by such
full vertical integration. One reason is limited demand. A firm’s demand for such a variety of expertise may be episodic and may not warrant maintenance of full-time in-house expertise. The problem of co-ordinating all the different aspects of production, without the benefit of market signals with respect to value and scarcity of inputs, may also prove inefficient. For some professionals such as accountants, however, Microsoft may require their expertise with sufficient frequency that it may be more economical to employ dedicated accountants who are devoted full-time to Microsoft’s interests. The balance that a company like Microsoft strikes between these two models of obtaining professional services depends, in part, on the cost of obtaining these services from outside the firm and the relative benefits Microsoft derives from outside services. The outcome of such a cost-benefit analysis will not only depend on the client, service and transaction in question, but on the type of professional service firm providing it. Some services may be more efficiently provided by an MDP while others by more specialized firms. Just as both the legal and accounting/consulting professions have witnessed the growth of large full-service firms, so simultaneously both professions have witnessed the proliferation of small, specialized (or boutique) firms.
Subsection A below describes the costs that consumers may be able to reduce by dealing with a professional services firm that is able to offer a wide spectrum of services . Subsection B describes the reduced costs of production from which a firm may benefit by offering a wide spectrum of services. It further indicates how consumers may also benefit from these reduced production costs through reduced prices and enhanced quality. Subsection C discusses the benefits of integration that may be lost should legal services only be offered through law firms that are affiliated with the accounting firms, but the firms do not share revenues.
A consumer may incur reduced consumption-related costs when dealing with a firm, such as an MDP, that is able to offer a number of services and specialists in one location. The cost savings from which a consumer may benefit include a reduction in the following costs: search, contracting, co-ordination, monitoring, and information costs. These benefits are commonly referred to as the virtues of one-stop shopping. There are fixed costs associated with search, verification, and monitoring if the user contracts across several non-integrated suppliers of complementary services. These will be reduced if these services are provided by one integrated firm. The buyer can then either monitor randomly across the services and impute the verified quality to the entire integrated firm and/or rely on substantial brand name capital that would be at risk if the integrated firm were to fail to deliver on its promised quality. If buyers use these services only infrequently then they are more likely to resort to an integrated provider. Thus if a client firm engages only periodically in activities that require professional services, the client firm may wish to use a more fully integrated provider of those services. This is likely to be particularly true of small and medium sized enterprises (SMEs) seeking additional capital to finance expansion, or to enter new markets where a combination of corporate law, financial and business consulting services may be required. If the client firm is a frequent purchaser of these services, or alternatively is a highly sophisticated and specialized consumer of professional services, it may pay the user to assemble a team independently and to incur the enhanced search and monitoring costs. For instance, a firm that engages in many mergers may choose to divide up the finance and competition aspects of an individual acquisition across different law firms.
Suppose a consumer of professional services were interested in a major merger with a rival affecting a number of geographic markets. Such a transaction would require the consumer to obtain the expertise of specialists in a variety of areas – law, finance, accounting and so forth. The consumer would have to search for experts in each of these service areas and possibly in a variety of geographic locations. The costs of this search would likely increase if the consumer has not previously had dealings with professional firms in all these service areas in all the geographic areas in question. The consumer would then have to incur the additional cost of obtaining information on the quality of a number of firms in a number of areas before an informed decision could be made. Thus, the search process is likely to be time-consuming, resulting in the additional cost of delaying the merger. Despite the high search costs, however, given no other alternatives, it is in the consumer’s best interest to incur them because the cost of choosing an inappropriate or inferior firm in one service area or one geographic market could have consequences for the entire transaction. Given these costs and risks, a consumer may wish to reduce search costs by engaging an MDP that is able to provide all these services in many or all the geographic locations.
The MDP could offer to such a consumer the additional benefit of a signal of quality. An MDP is unlikely to invest in the assembly and promotion of a full gamut of specialized professional services if it did not expect a return on its investment. 2 In order better to assure a return, the MDP would benefit from providing a certain quality of service which is consistent with the size and specificity of its investment. Observing this signal would further reduce the consumer’s need to undertake the cost of attempting to discern quality. The issue of search costs is likely to be particularly relevant to smaller firms with little experience outside their local market seeking to grow nationally and internationally.
Should the consumer be well-informed with respect to the type and quality of services offered by a variety of firms in the relevant countries so that her search costs are low or negligible, the consumer may wish to by-pass an MDP in favour of a combination of specialized firms. Search costs tend to be consumer-specific. The more complex and geographically dispersed a transaction, the higher search costs are likely to be.
If a consumer chooses to complete the merger process using the services of a variety of professional firms, she will have to contract with each one. This increases costs not only because of the time required and cost of writing each contract, but also because of the cost of specifying the tasks that each firm must perform in order to avoid duplication or omitted tasks. The contracting costs are also likely to be further increased if the transaction is unique or complex. Consumer and producer requirements are less likely to be satisfied through standardized contracts. If an MDP were to be available, the consumer may choose not to incur costs of contracting with a large number of firms and only choose to contract with one. Furthermore, contracting for separate responsibilities is often not possible because it is not known ex ante what types of information are needed, or the informational requirements that would follow from information discovered in initial stages of investigation. Integration of information inputs into a single enterprise allows the efficient co-ordination of related inputs.
Once having entered into a series of contracts with separate firms to perform various parts of the merger process, the consumer must co-ordinate these tasks. Either the client or a designated service firm can perform this co-ordination role. In either case, it may involve a variety of firms that are normally rivals or otherwise do not have established lines and means of communication. As a result, the consumer will have to provide similar information to some or all of the service firms she has hired, since much of the same information will be relevant to the different service firms. For instance, business consultants, accountants or investment bankers in determining the cost savings of a merger would likely be interested in similar information as economists and lawyers determining, for anti-trust purposes, whether the merger results in an increase in efficiency. The net result is that the cost to the consumer of dealing with a variety of firms may be greater than if the consumer had only dealt with one. Again this will depend upon the individual consumer and her preferences and requirements.
If an MDP were available to a consumer, the consumer would be able to weigh the benefits of these reduced transaction costs against any cost she may incur from conducting the transaction through an MDP. For instance, a consumer may be interested in a specific type of highly specialized expertise that an MDP has not been able to assemble in its repertoire of services, or is not able to provide at a sufficiently high level of quality. It is this variety in consumer needs and preferences which explain the simultaneous emergence of large full-line professional service firms and highly specialized boutique firms. The costs to the consumer of dealing with the MDP may also include the possible costs and risks to solicitor-client privilege, conflicts of interest and independence discussed in section III.
B. Reduced Production-Related Costs
The benefits that the producer of professional services may realize from moving a function in-house rather than purchasing it on the open market or leaving it to his customer to purchase elsewhere include benefits specific to the technology of production – economies of scale and scope. The benefits may also include a reduction of transaction costs specific to the producer. These reduced production and transaction costs may in turn translate into lower costs to consumers by further reducing consumers’ transaction costs, by lowering the price paid by consumers, or by increasing the quality and variety of services made available to them.
Economies of scope arise when the total cost of producing a group of products or services is less when those products are produced by a single firm than when the same volume of those products or services are produced by a set of independent firms. For instance, in the case of an MDP in our merger example, it may be cheaper to produce the final product – the requirements of the merger – in one location. An MDP, for instance, may facilitate the co-ordination and collaboration between a tax accountant and tax lawyer. 3 This is not only a cost-saving to the producer, but also possibly to the consumer who, prior to the MDP, may have had to incur some of the cost of co-ordination herself. Further exemplifying economies of scope, "[l]lawyers and non-lawyers working together may also complement each other by bringing different problem-solving techniques to bear on an issue. As professionals become more specialized in order to satisfy complex client needs, a collaboration of professionals is more likely to result in optimal problem-solving approaches." 5 The consumer would benefit from the resulting increase in quality in service.
Economies of scale arise when the average cost of producing a good decreases with increased production of the good. Conjecturing that MDPs will result in economies of scale assumes that the introduction of an MDP will result in an increase in firm demand. This assumption is not unrealistic since product diversification is normally undertaken in order to increase the combined demand for a firm’s services and reduce its dependency on any one class of product or service. Such an increase in demand may be more likely in areas where the market is sufficiently small so that offering a limited set of services does not allow for growth opportunities and thus does not
allow scale economies to be achieved. An MDP may allow for the following: the employment of highly specialized people; technological investments that would otherwise be too costly; and an increase in production that would otherwise not be possible due to limitations in growth potential when product or service offerings are restricted.
With the increase in firm demand that may accompany an MDP service offering, a firm may be able to justify the hiring of more specialized people. Since the skills of these people are particular to a more limited set of tasks, they would likely be able to complete that task more efficiently and competently than someone whose expertise only touches upon the area. For instance, having tax accountants and tax lawyers or corporate lawyers and financial analysts in-house may be complementary in that they enhance each other’s productivity. Clearly, the MDP would not hire a specialized tax or corporate lawyer unless an increase in MDP demand justified it, allowing both the lawyer and the accountant or business consultant to concentrate on their areas of comparative advantage. Thus, the MDP may lead to an increase in firm demand, which would allow for the employment of more specialized personnel, allowing for a reallocation of tasks, resulting in a decrease in average costs and an increase in quality.
A reallocation of tasks within an MDP may, in some cases, translate into a substitution away from the demand for more traditional law firms in favour of MDPs and the non-lawyers employed there, with the net result that the overall demand for legal services may decrease. This is likely to be counter-balanced by several factors. First, the ability to substitute across disciplines is likely to be limited given the "narrow areas in which the skills of particular professions and occupations overlap in some substantial way." 5 Some products offered by law firms and other professional services firms are entirely distinct, or without complementarities. For instance, an accounting firm providing a valuation of physical assets and a law firm providing advice regarding a particular lawsuit may use informational outputs that are completely distinct. Consequently, as there is little by way of efficiencies to be gained by offering these products jointly, one would expect these types of services to continue to be offered by specialized firms. Second, MDPs "may result in the creation of new services, either through advances in quality or through the introduction of wholly original forms of service." 6 Where these lead to enhancements in the productivity of lawyers in an MDP context, e.g. through the acquisition of complementary skills, this is likely to lead to an increase rather than decrease in the demand for lawyers.
The increase in demand accompanying an MDP may also allow for investment in technologies that could not otherwise be justified, or, absent the MDP, would have resulted in two parties duplicating the investments. A major area of investment required in order to respond to business client needs is computer technology, such as databases containing information on firms, industries, and markets that permit rapid development of firm and industry profiles, allowing all branches of a professional services firm consistently, accurately and quickly to address client needs. Being able to offer this service benefits clients by providing them with a higher quality
service. Investments in such technologies, however, are costly and a firm that is small and limited in its growth potential by the services it is able to offer may find the cost prohibitive. If, however, the same firm is able to diversify its product offerings, the resulting increase in demand may render the investment feasible. Thus, markets, which would otherwise not be served by such a product, may now be served. Alternatively, even if a firm is able to make such an investment, an increase in demand would enlarge the client base over which the fixed costs of the investment are spread.
This type of decrease in average costs is equally true for more traditional fixed costs of production such as overhead. Some geographic markets may be so small that a professional services firm or branch location cannot be justified absent the ability to offer a full spectrum of services.
Possible Benefits to Consumers
Consumers may benefit directly from the enhanced production economies through the increase in quality of service that MDPs can provide – for instance, the greater specialized skill sets of the professional personnel and the improved technological capabilities. 7 Consumers may also benefit by being served in markets in which they had previously not been served. Consumers may also benefit from the lower costs of production. In a competitive market, greater production efficiencies translate into lower prices as competitors bid prices down towards the new, lower costs . As an MDP does not involve a decrease in the number of professional services firms competing for business but rather entails an extension of product offerings, the introduction of these services is more likely to increase rather than decrease the competitiveness of the market.
Limits on Alternative Means of Achieving Economies
It is possible that some of the economies associated with MDPs could be achieved by other means. For instance, an accounting firm and a law firm may decide to jointly invest in a database, the sharing of which would be established through a long-term contract. While such a system of organization is certainly possible, there are a number of factors that may make such a solution less attractive than keeping such a function strictly in-house. First, the contract is likely to be cumbersome and incomplete, particularly given the uncertainty of the demand and use for such a database. All possible contingencies could not possibly be contracted for so that contracting would become more a question of specifying rights, obligations and procedures rather than actual performance standards. 8 Such a situation is likely to be further exacerbated if an asset-specific investment is required by either party. For instance, the database may require one firm, Firm A, to invest in a computer system that has a lower value to Firm A absent the database. Once this commitment is made, the partner, Firm B, to the agreement may have an incentive to behave opportunistically, demanding, for instance, better contractual terms. Consequently, Firm A would end-up with lower than anticipated returns or, should the joint effort to produce the database fail as a result of opportunism, a costly investment that Firm A would not have otherwise made. 9
Even if the joint investment in the database were successfully contracted and produced, difficulties may arise due to an imperfect ability to measure output and use. For instance, one party to the investment may argue that the usage costs charged to it are too high because of inefficient maintenance of the database by the other party. Many of these transaction costs could be avoided or reduced were these transactions to be internalized within a firm rather than through a contracting process. With single ownership, the incentive for opportunistic behaviour would be reduced or eliminated. This again would lower the cost of producing the product, which would benefit final consumers.
Limits on Economies of Scale and Scope
There are limits, however, to the extent to which a firm may find it beneficial to internalize certain functions. There are limits to economies of scale and scope and some firms may simply become so big that the returns to scale are negative. This is evident from the decline in conglomerate business firms which faced span of effective control problems. There are real advantages to managers being well-acquainted with the businesses they run, and there is evidence that less diversified firms often perform better. 10
C. Efficient Incentive Structures: MDPs vs. Affiliated Law Firms
We have outlined a variety of factors that suggest that there can be a number of advantages associated with having a number of professional services offered by one firm. Some of the advantages of scale and scope are likely to be lost if professional service firms were only allowed to provide legal services through a separate firm, such as an affiliated law firm, since the efficiencies largely rely upon the services being produced in one organization. Furthermore, an affiliated law firm structure does not allow for revenue-sharing across firms. Without a revenue-sharing arrangement, in order to benefit from the arrangement the affiliated law firm and the professional services firm would have to rely on the other reciprocating should one refer work to the other. Should one firm fail to reciprocate with a similar volume or value of referrals, there would be little incentive to continue with such referrals and indeed incentives to "hoard" clients, even though referrals may be more efficient from the client’s perspective. Should the reciprocal arrangement fail, any benefits to integration that remain in the affiliated law firm arrangement would be completely lost.
Furthermore, a client’s monitoring of quality may prove to be more difficult with respect to an affiliated law firm structure compared to an MDP. When a client is unable to distinguish the quality of the legal advice from the quality of the accounting advice contained in a product jointly produced by both entities, the incentives to provide a quality product are distorted. Each firm bears only part of the cost in reputation of any reduction in quality. Should a client complain with respect to the joint product, each firm’s position may be to blame the other for the product’s shortcomings. This ‘reputational externality’ is internalized with the provision of the product by a single organization. An MDP can put in place incentives for professional personnel to produce quality products, in addition to being better able to monitor quality of output.
PART III : OBJECTIONS TO MULTI-DISCIPLINARY PRACTICES (MDPs)
A. Framework of Analysis
In this section of our study, we both identify and evaluate the principal objections to, or concerns that have been raised by, MDPs that include the provision of legal services as part of a broader array of professional services. In our view, the paramount perspective in evaluating these objections or concerns should be that of purchasers of professional services (i.e. clients). That is to say, the regulation of the professions must be grounded in a public interest justification that, in the nature of things, will overwhelmingly focus on the need to protect consumers of professional services against service deficiencies or ethical improprieties that are likely to arise in the absence of regulation. This consumer welfare perspective stands in sharp contrast to a producer welfare perspective that, in its most extreme form, is likely to view the rationale for professional regulation in large part as economic protectionism. From this latter perspective, issues relating to the regulation of MDPs quickly become reduced to turf wars between lawyers, accountants, and other professionals contending for different divisions of the rents from alternative delineations of professional monopolies. We believe that it is self-evident that the only principled justification for professional regulation is a consumer welfare perspective. The adoption of such a perspective enables us to evaluate both the advantages and disadvantages of MDPs within a single, consistent framework.
Within this framework, the principal justification for professional regulation is what economists refer to as market or contracting failures that are likely to arise in the absence of regulation. In the professional service context, these market failures are likely to fall into two broad categories: first, information asymmetries, and second, externalities. 11
With respect to information asymmetries, the efficient provision of many professional services involves the deployment of complex bodies of technical knowledge and expertise that are only likely to be acquired through protracted periods of formal and on-the-job professional training and experience. Comparable levels of expertise will rarely be possessed by consumers of professional services (in which event they should consider switching sides in the market place). This informational imbalance or asymmetry both explains the need for many consumers to purchase specialized professional services and also their vulnerability in engaging in such transactions. Consumers may be unaware of the precise technical issues that their circumstances require to be addressed; they may be unaware of which professional service providers are best equipped to provide assistance in resolving these issues; and they may have limited ability to monitor the quality, appropriateness, cost and efficacy of services once rendered. That is to say, in economists’ terms, professional services are often "credence" or "experience" goods, rather than "search" goods. 12 The severity of these information failures is likely to differ widely from one professional context to the other. For example, with respect to the provision of legal services, large multi-national corporations with recurrent needs for highly specialized professional services and in-house counsel and a supporting legal department to act as purchasing agents when external legal services are required may face modest informational barriers that are no more severe than those they face in a host of other professional and technical contexts where they are accustomed to purchasing services from sources external to the corporation and where regulation is often minimal or non-existent (e.g. strategic planning, marketing expertise, management consulting, information technology services). On the other hand, household consumers purchasing even relatively routine legal services in connection with, for example, family law, estate planning, tax, or civil litigation matters on a relatively episodic basis are likely to face much more severe information problems. Thus, it is a combination of both the technical complexity of the service in question and the degree of sophistication and discernment of the consumers of that service which provides the basis for this rationale for regulation.
The second major market or contracting failure rationale for professional regulation relates to externalities. With respect to some professional services, even if the direct purchasers of these services are sophisticated and discerning, the provision of professional services may have negative third-party effects which, in the absence of regulation, both service providers and service consumers may have inadequate incentives to internalize. For example, purchasers of engineering services, even if well informed, may assign too little weight to potentially negative effects on third parties of unsafe design and construction practices, in order to minimize project costs. Similarly, while the management of corporations or other entities that are subject to statutory audit requirements typically hire a firm’s auditors, the principal purpose of a statutory audit is the protection of shareholders in and lenders to firms subject to audit, and regulation may be required to ensure that auditors are not excessively deferential to incumbent management which have retained them and insufficiently sensitive to the interests of potentially affected third parties. In some cases, of course, these third parties may be sufficiently sophisticated and discerning that they can adopt self-precautionary strategies. In other cases, potentially affected third parties may either be unsophisticated or lack realistic self-precautionary options.
In our view, regulation of the quality, cost, and performance of professional services, including various ethical rules pertaining to professional conduct, must find a justification within the market or contracting failure framework sketched above in order to satisfy a public interest (or as we would prefer to characterize it, consumer welfare) test.
In evaluating the strength of objections and concerns relating to MDPs, ideally the analysis should proceed at both theoretical and empirical levels. That is to say, at a theoretical level, one can develop various tentative hypotheses as to the likely strength or otherwise of various objections or concerns relating to MDPs within the market or contracting failure framework sketched above, and then test these hypotheses against empirical evidence (an exercise that is facilitated if there is varied body of comparative regulatory experience upon which to draw).
There are various ways in which these objections and concerns can be taxonomized. The Working Group on Multi-Discipline Partnerships of the Law Society of Upper Canada (the Futures Task Force, September 25, 1998), identified three areas of primary concern: (a) solicitor-client privilege; (b) independence; and (c) conflicts of interest. In addition, several other issues characterized as "secondary and largely surmountable" were identified, including (d) the impact of lawyers’ participation in MDPs on coverage and liability insurance premiums under the lawyers’ mandatory professional indemnity scheme; (e) regulation of lawyers and professional responsibility with respect to ethical breaches by non-lawyer partners, including the unauthorized practice of law by such partners; and (f) problems in the extension of rules relating to the management of lawyers' trust funds to non-lawyer partners (Appendix 6).
The Canadian Bar Association's International Practice of Law Committee in a preliminary paper concluded that a multi-disciplinary practice could adversely effect the following six core values: (a) self-governance of the legal profession; (b) independence of the legal professional; (c) avoidance of conflicts of interest; (d) preservation of clients' confidentiality; (e) preservation of solicitor-client privilege; and (f) avoidance of the unauthorized practice of law.
Professors Kent Roach and Edward Iacobucci in a background study prepared for the Law Society of Upper Canada's Working Group on Multi-Disciplinary Partnerships ("Multi-disciplinary Practices and Partnerships: Prospects, Problems, and Policy Options", 1998, Canadian Bar Review, forthcoming) identify the following three broad problem areas and sub-issues within each of these areas (at pp 19-45):
1. Governance Concerns
(i) Unauthorized Practice
(ii) Disciplinary Jurisdiction Over Non-Lawyers
(iii) Self-Regulation of the Legal Profession
(iv) Advertising and Solicitation
(v) Assessment of Fees
(vi) Insurance and Compensation Funds
(vii) Trust Accounts
(viii) Disbarred Persons
2. Independence Concerns
(i) The Independence of Legal Advice
(ii) Outside Interests and Ancillary Businesses
(iii) Fee Splitting
3. Confidentiality Concerns
(iii) Conflict of Interest
In the following discussion, we confine our focus to what appear to be the primary areas of concern, i.e. (a) solicitor-client privilege; (b) lawyers' independence; (c) conflicts of interest; and (d) the unauthorized practice of law.
B. Solicitor-Client Privilege
Communications between clients and their lawyers have historically been accorded an extremely high degree of immunity from enforced disclosure in subsequent civil and criminal proceeding under the doctrine of solicitor-client privilege. The rationale for this doctrine is that without the immunity it provides, clients may be discouraged from fully confiding their legal secrets to their lawyers because of apprehensions that their lawyers may be called as witnesses in subsequent legal proceedings. However, without the ability of clients to confide fully in their legal advisors, the latter would be severely hampered in discharging their role as both advisors to and advocates of their clients in the adversarial processes that characterize the administration of justice in most common law jurisdictions. This privilege may be lost if a lawyer discloses privileged information to third parties who are not lawyers. In the context of MDPs, it is often argued that the very nature of these practices entail sharing of information between lawyers and non-lawyers, so that the risk of loss of privilege is pervasive. While it has been established that the privilege extends to non-legal personnel working under the supervision of a lawyer (e.g. paralegal staff, secretarial staff, and articling students), it is far from clear that the privilege would also extend to information disclosed by lawyers to non-lawyer partners in an MDP. While the privilege may also extend to information disclosed by a lawyer to non-lawyer professionals with a view to preparing material for litigation and may also extend to information provided by clients to a non-lawyer professional with a view to the latter in turn providing the information to a lawyer for the preparation of a legal opinion, there is serious doubt that the privilege would extend to cases where a lawyer has provided information to a non-lawyer partner (e.g. an accountant) for the performance of purely accounting functions, or where a client of a multi-disciplinary firm has provided information to an accountant to perform purely accounting functions unrelated to prospective litigation. 13
While the risks to solicitor-client privilege entailed in MDPs are legitimate concerns, in our view they are easily and commonly over-stated. If a client is involved in a complex transaction or dispute which genuinely requires inputs from a number of different types of professionals, the client will have little choice but to disclose relevant information to all of these professionals either directly or perhaps through the agency of his or her lawyer. While it is common in such situations for lawyers or their clients to obtain confidentiality agreements from other professionals involved in providing advice, confidentiality obligations are not coterminous with the doctrine of solicitor-client privilege, and disclosures made pursuant to such commitments may nevertheless be subject to subsequent mandatory disclosure in legal proceedings. Put differently, if a client's problem genuinely requires a multi-disciplinary approach to its resolution, then no matter how the multi-disciplinary inputs are organized and co-ordinated, solicitor-client privilege will be at risk relative to a situation where the only professional inputs required are legal. But, it must be emphasized, the source of this risk is the nature of the client's problem, not the mode of organization employed to address that problem. Moreover, it might reasonably be argued that in an MDP, lawyers may be able to exert more influence with both clients and non-lawyer professionals in exercising caution in making or requesting non-privileged disclosures than when clients purchase these services from separate service providers, many of whom may be unable to assert privilege. Finally, in order to keep the value of solicitor-client privilege to clients in perspective, it should be noted that beyond the right against self-incrimination in criminal law, clients themselves are typically discoverable in most civil litigation.
C. Legal Independence
Legal independence concerns about MDPs have several strands to them. First, it is argued that a lawyer's obligation of undivided loyalty to his or her client's interests are likely to be compromised in a multi-disciplinary firm, given the professional and economic interdependencies entailed in such a firm's structure. For example, it is argued that the professional and economic interests of non-lawyer members of the firm in ensuring that a transaction is consummated may lead them to bring pressures to bear on lawyer members of the firm to compromise their advice to a client where this advice might identify risks (e.g. tax, securities law, competition policy, environmental law risks) in proceeding with the transaction. Moreover, the economic interests of the lawyer in the firm may militate in the same direction. Second, it is sometimes argued that the multi-disciplinary form of practice is likely to create incentives for inappropriate forms of "steering", where non-lawyer partners "steer" clients to their lawyer partners or vice versa, because of economic interdependencies, when the client's interests would be better served by securing the professional services in issue from sources external to the firm.
Again, while these concerns are not without substance, it is easy to over-state their novelty and significance in the multi-disciplinary firm context relative to other established forms of professional practice. For example, in a large full service corporate/commercial law firm embracing many specialities, an individual lawyer may be subject to the same pressures from other partners to facilitate a transaction which in the former's view raises certain legal or other risks for the client. In-house corporate counsel potentially face similar pressures from their employers. Similarly, there will be incentives for lawyers in large law firms to steer clients to other members of the firm for other legal services when these services might be more competently provided by professionals outside the firm. Indeed, "steering" within large law firms is a widely-endorsed contemporary marketing strategy, except that it is called "cross-selling".
D. Conflicts of Interest
Concerns that MDPs involving lawyers and other professionals exacerbate conflict of interest problems again have several strands. First, it is argued that in large and professionally diverse multi-disciplinary firms, conflicts of interest are inherently likely to become more pervasive. Second, it is argued that some professions have different cultures and traditions than other professions in relation to the regulation of conflicts of interest and that lawyers, who are subject to stringent conflict of interest rules in order to ensure uncompromising fidelity to individual client's interests, are especially likely to find their commitment to these ethical norms in jeopardy in MDPs with non-lawyer professionals. For example, it is sometimes argued that accounting/consulting firms will often audit and/or provide consulting services to more than one major firm in the same industry, arguing that this often well serves their clients' interests both individually and collectively by developing substantial industry-specific expertise, while lawyers may be concerned that providing legal services to several major competitors in the same industry may compromise their ability to serve any one of these firm's interests effectively, particularly in the event of disputes between such clients. Third, it is often argued that divergent legal and ethical duties of lawyers and non-lawyer professionals may create insoluble dilemmas within MDPs. For example, auditors who are subject to legal duties to third parties may feel bound to disclose publicly information provided to them by their corporate clients even though this may be adverse to the latter's interests, while lawyers in the same firm possessed of this information (e.g. information about contingent liabilities of the corporate client) would feel duty bound not to disclose this information to third parties out of concern for jeopardizing the client's interests, and indeed such information may be subject to solicitor and client privilege.
Again, our view is that all of these concerns have merit but few of them are novel or sui generis to the multi-disciplinary form of practice. As to the first concern (pervasiveness of conflicts of interest), it is also true that conflict of interest problems become more pervasive as law firms grow larger in size and more diverse in the classes of specialized services that they provide. As to the second concern (different professional traditions with respect to conflict of interest), it is not the case that law firms are prohibited from acting for firms in the same industry which may be actual or potential competitors, and indeed law firms often do (albeit not in relation to the same matter). Obviously, a lawyer should disclose potential conflicts of interest to their clients, and clients have the prerogative of deciding whether substantial industry-specific expertise in the matter at hand matters more to them than the risk that they will receive less than uncompromising fidelity to their own interests exclusively. With respect to the third concern (divergent ethical duties), we believe that this may present a genuine problem precisely because it engages simultaneously both of the forms of market or contracting failure identified above (i.e. information asymmetries and externalities). While the lawyer's over-riding duty is to his or her client, the auditor has a dual duty both to his or her client and to potentially affected third parties whose interests may be adverse to that of the client, although even auditors have a duty not to disclose confidential client information without the client’s consent but rather to report material adverse information to the corporate board of directors, who in turn may face duties of public disclosure. In the event of non-disclosure by the board, an auditor may be required to qualify his opinion, or at the limit withdraw from the engagement. 14 In MDPs involving lawyers and accountants, and perhaps other MDPs that raise a similar divergence of duty to the client and duties to third parties (e.g. family lawyers and social workers with respect to reporting cases of child abuse), this problem clearly requires special consideration. For example, if an MDP acts in both capacities, rules could require advance disclosure to clients of possible conflicts of duty and/or a waiver of duties of confidentiality in the limited cases of a conflict of duties. Alternatively, lawyers might be limited to becoming partners in the consulting practices of large professional services firms, and not their accountancy practices which are organized in Canada as separate but financially linked partnerships. Again, it is important not to overstate the novelty of this problem. Lawyers not uncommonly sit on the boards of their corporate clients and face similar potential conflicts of interest to auditors.
E. Unauthorized Practice
It is sometimes argued that MDPs involving lawyers may facilitate the unauthorized practice of law by non-lawyer partners and personnel in such firms. One strand of this concern argues that MDPs may become a kind of regulatory "no-man’s land" that fall outside the effective reach of any of the self-regulatory professional bodies. Another strand of this concern emphasizes that as the provision of multi-disciplinary professional services becomes more highly integrated, it will, practically speaking, become impossible for external regulators to determine who is doing what, thus eroding the legitimate boundaries of professional competence. A third strand of this concern is that lawyers, particularly if they are a minority in a multi-disciplinary firm, will have limited ability to insist on non-lawyer partners and personnel confining themselves to their legitimate domains of professional competence, or to exercise effective supervision over such personnel to the extent that they are performing functions related to the provision of legal services.
We are sceptical of the force of these concerns. With respect to the first, it is not the case that multi-disciplinary firms will fall into some form of regulatory no-man's-land. Each self-regulatory professional body will continue to license and discipline its own professionals who are members of such firms and will retain the right to take enforcement action against non-lawyer personnel who are engaged in the unauthorized practice of law, and against lawyer members who facilitate or assist in the unauthorized practice of law by non-lawyer personnel. With respect to the second concern, while it may be the case that the closer integration of a range of multi-disciplinary professional services within a single firm will render professional boundaries less distinct, it is important to acknowledge that these boundaries even now, in a wide variety of other contexts, are far from distinct. Moreover, it seems incongruous to argue that bringing lawyers into multi-disciplinary firms is likely to increase rather than reduce reliance by these firms on non-lawyer personnel in the provision of legal services. Assuming that the boundaries that have traditionally been recognized around the various professional domains are approximately (albeit not precisely) an accurate reflection of relative specialized expertise and competence, substitution possibilities of lawyers by non-legally trained professional personnel would seem likely to be extremely limited. The principal efficiencies that are likely to be engendered by MDPs (as outlined in Part II) relate to complementarities in production and consumption, and not for the most part to substitution efficiencies. The third strand of the concern seems equally unpersuasive. Lawyer members of MDPs, even if they are a minority, can be held to professional obligations not to facilitate the unauthorized practice of law and, to the extent that non-lawyer personnel are involved in some functions relating to the provision of legal services, then to assume similar obligations of supervision or responsibility as currently pertain with respect to para-legal personnel and articling law students within law firms. Moreover, joint and several liability for professional deficiencies will maintain incentives for professionals to monitor other professionals within the firm to ensure that they are adhering to their respective spheres of comparative advantage, a goal that is in fact facilitated in a large multi-specialty MDP.
More generally, and more importantly, the concerns that MDPs may facilitate the unauthorized practice of law need to be evaluated in the market or contracting failure framework outlined above. The only purpose of prohibiting the unauthorized practice of law (or any other profession) is to protect ill-informed consumers or at-risk third parties. For the most part, in the present context, our principal concern is with clients who may be led or induced by virtue of incomplete information to purchase professional services from providers who are not competent to supply such services. We are not concerned, it must be repeated, with protecting professional territorial enclaves from competitive incursions from other disciplines or innovative modes of professional organization where these do not jeopardize clients' interests and indeed may enhance them. For many contexts where multi-disciplinary forms of practice seem most plausible, including especially lawyers, accountants and other business consultants, the present and prospective clientele are likely to be sophisticated and recurrent business purchasers of professional and other technical services (many of which are largely unregulated), and are likely to derive minimal, if any, benefits from vigorous and exacting monitoring of professional boundaries within multi-disciplinary firms.
PART IV : EMPIRICAL EVIDENCE ON THE EVOLUTION OF MDPs
A. The Supply Side
The number, size and variety of practices offered by professional service firms are increasing both domestically and internationally. This is the case when considering not only accounting firms and management consulting firms but also law firms that have expanded the types of services they offer. The steady increase in the range of services supplied by these firms is, as reflected in our interviews of existing and prospective MDP clients, partially in response to increasing demand for the types of services MDPs can offer. The growth and diversification of the Big 5 are considered in detail, as is the similar diversification of the largest Canadian and international law firms.
A.1 The Big 5
The growth in the scope of MDP services offered by professional firms (and the corresponding increase in demand) is reflected in a number of ways – growth in the number of lawyers who work for the Big 5, the relative growth of non-audit consulting versus audit services, and the increasing variety of services offered by the Big 5. Additionally, the Big 5 have exhibited growth in the number of employees and offices worldwide. In aggregate, the information points to a growing demand for highly diversified integrated service offerings around the world.
Growth in the Number of Lawyers
Each of the Big 5 professional services firms has steadily increased the number of lawyers on staff, while expanding the type of legal services offered. The growth in the number of lawyers on staff at the Big 5/6 far outstrips the overall growth in total staff members. The compound annual growth rate of the Big 6 (prior to the Price Waterhouse and Coopers merger) accounting firms between 1990 and 1997 in terms of staff was 3.6%, 15 while the number of lawyers hired by these firms over similar time periods in many cases more than doubled.
Arthur Andersen currently has on staff about 2,400 lawyers worldwide in affiliated law firms. 16 This is five times as many lawyers as it had in 1994. In addition, in 1998 Andersen had about 1,000 tax attorneys in the U.S., 20% more than in 1994. 17 Price Waterhouse, prior to its merger with Coopers & Lybrand, exhibited similar growth in the number of lawyers working there. In 1998, it had on staff 3,000 lawyers worldwide, about 30% more than in 1995. 18 In the U.S., in 1998, Price Waterhouse had about 500 tax lawyers, up from about 250 three years before. 19 The number of lawyers working at Ernst & Young outside the U.S. is similarly large – more than 1,170 lawyers in over 40 countries. Within the U.S., in 1998, about 800 lawyers worked at Ernst & Young, about double the number that had worked there a few years earlier. 20 In Europe, Ernst & Young had on staff about 600 lawyers in 1997. 21 In 1998, Deloitte & Touche had on staff approximately 2,202 lawyers worldwide. 22 KPMG indicated that in 1997 it had 1,125 employees who spent more than 50% of their time providing legal services. 23
Initially, the growth in lawyers on staff was largely in the area of tax advice and planning. The Big 5 are, however, increasingly diversifying into legal offerings . For instance, in 1997, the chairman of Coopers & Lybrand U.K. indicated that the firm’s law practices concentrated on low-to middle-level cross-border tax-centered corporate work. 24 But by November 1998, Gérard Nicolay, the managing partner of Coopers & Lybrand law firm in Paris 25 , had indicated that, at least in France, the provision of legal advice in matters related to tax law to the firm’s audit section represented less than 5% of the gross income of Coopers Law. 26 Following this model of legal service diversification, Coopers Law’s revenue grew by 30% in 1997, while the overall market for French legal services grew by just 5%. 27 Similarly at KPMG, in 1997, 60% of KPMG offices in Europe offered legal services that went beyond tax planning into such areas as corporate, financial, labour, and estate organization and planning. 28
Growth in Non-Audit Consulting
The increasing diversification of the Big 5’s service offerings is also reflected in the growth in the demand for non-audit consulting. Between 1989 and 1998, the compound annual growth rate of worldwide non-audit fee income for the Big 6 professional services firms combined was 26.4%, while in audit services the compound annual growth rate was 21.9%. 29 30 This difference in growth rates was more pronounced in the U.S. There the Big 6 professional services firms’ non-audit fees grew annually at a compounded rate of 27.7%, while audit fees grew at 17.5%. 311
Non-audit revenue also accounts for an increasing share of the Big 5’s income in Canada. In 1982, non-audit revenue accounted for 34.4% of the Big 5’s total revenue. By 1997, this share had increased to 52%, largely as a result of growth in tax and consulting practices. 32
Growth in the number of lawyers employed by the Big 5 and the increasing importance of non-audit sources of revenue is also reflected in the steady introduction of new service offerings by the Big 5. All of the Big 5 firms in Canada now offer services in over 30 practice areas. In addition to the traditional areas of audit, tax, corporate finance and management consulting, Big 5 service offerings now also include such areas as information technology consulting, environmental services, ISO 9000 certification, ethics consulting and so forth. In areas such as information technology, service offerings include Y2K compliance and data warehousing. Within the traditional areas of accounting and consulting, the types of services offered have also expanded considerably. Audit includes such practice areas as due diligence assistance, forensic accounting and information risk management. The tax area varies from corporate tax compliance to personal financial planning to tax treaty interpretation. Management consulting includes intellectual property management and internet and electronic commerce consulting, in addition to the more traditional supply chain management consulting and market research.
Number of Offices and Employees
In addition to diversifying their service offerings, the Big 5 have also expanded the number of offices and employees providing these services worldwide. Tables 1 and 2 indicate the Big 5/6’s total number of offices and employees from 1989-1998.
Table 1: Total Number of Big 5/6 Offices Worldwide
Table 2: Total Number of Big 5/6 Staff Worldwide
A.2 Law Firms
Canadian Law Firms
The five largest firms in Canada each have over 300 lawyers and the largest, McCarthy Tetrault, in 1998 had 613 lawyers, 34 in 8 Canadian offices and 1 international office, and 22 practice areas. 35 The remaining four largest law firms were similarly diversified (see Tables 3 and 4).
Table 3: Number of Lawyers at the 5 Largest Canadian Law Firms, 1989-1997 36
Blake, Cassels & Graydon
Gowling, Strathy & Henderson
Fraser Milner 38
Table 4: Number of Offices and Practice Areas of the 5 Largest Canadian Law Firms, 1999
Number of Offices
Number of Practice Areas
Blake, Cassels & Graydon
Gowling, Strathy & Henderson
The practice areas covered by these law firms include such diverse areas as alternative dispute resolution and high tech law. High tech law includes such subspecialty practice areas as Y2K legal services. 39 Other large law firms have similarly expanded beyond corporate work to such practice areas as arts, entertainment and media law. Osler, Hoskin & Harcourt reports that of its 28 practice areas, arts, entertainment and media law has been the most rapidly expanding and changed practice area over the last decade. 40
Generally, the practice of law in Canada has been increasing characterized by large firms covering a wide array of practice areas but also a growing number of boutique firms specializing in narrow areas of law, demonstrating that the market for law services allows for an equilibrium between these two types of firms.
International Law Firms
Internationally based law firms have experienced similar diversification and growth. The world’s largest law firm, Baker & McKenzie, had 2,300 lawyers worldwide in 1998. Between 1994 and 1998 it increased its number of lawyers at a compounded annual rate of 8.8%. 41 Baker & McKenzie’s compound annual gross revenue growth between 1994 and 1997 was also similarly large at 8.5%. 42 43 Table 5 indicates the current number of lawyers and offices at the five largest international law firms.
Table 5: Number of Lawyers and Offices of the 5 Largest International Law Firms
Number of Lawyers
Number of Offices
Baker & McKenzie
Clifford Chance 45
Jones, Day, Reavis & Pogue
Skadden, Arps, Slate, Meagher & Flom
Between 1991 and 1995, the number of overseas branches of U.S. law firms increased from 196 to 345. Most of this expansion was in the areas of crossborder transactions in finance, capital markets, and mergers. The expansion was largely client driven. A 1996 survey of 228 non-US branches of 72 U.S. firms indicated that 61.5% of the non-US branches were opened in response to client needs, while 28.5% reported that they had opened offices in the hope of generating new business. 46 In addition to international expansion, law firms, particularly in the U.S., are, like the accounting firms, expanding into areas beyond traditional legal areas. For instance, some law firms operate non-legal business units such as consulting firms that train corporations on how to avoid lawsuits, how to manage real estate ventures, or how to recover bankruptcy claims. Other law firms, such as the U.S. based Holland & Knight LLP, have developed an in-house staff of environmental-protection and compliance experts. 47
Following the premise of this study that a principled evaluation of the advantages and disadvantages of MDPs should adopt a rigorous and single-minded consumer welfare perspective, 14 corporate clients who have used the services of an MDP were interviewed by CRA to evaluate their experience. While 14 firms is far from being a representative sample of consumer MDP experience, it is suggestive of the types of factors MDP users take into consideration when making their professional service purchase decisions. Moreover, it is striking how consistent patterns of usage are with the predictions of the theoretical analysis developed in Part II of this study. More extensive surveys of this kind would be helpful in more fully illiminating the consumer calculus in purchasing professional services. The names of the interviewed MDP clients were provided by representatives of the Big 5. 48
Interviewed Company Characteristics and MDP and Law Services Purchased
Clients interviewed ranged from small domestic companies to large multinational enterprises ("MNE"). Notably, none of the clients were individuals or household consumers. Of the interviewed firms, 8 are companies located in Canada and 6 are foreign-based, 3 of which have or had commercial operations in Canada. A summary of the companies and the MDP and law services that they purchase is contained in Tables 6a (Canadian Located Companies) and 6b (Foreign Located Companies).
Table 6a: Interviewed Company Characteristics and MDP and Law Services Purchased
Canadian Located Companies
Type of Business
Size of Company
(number of domestic employees)
Services Purchased from MDP 49
Services Purchased from Law Firm(s)
|1) Travel and financial services|
|- expatriate labour law and tax issues|
|2) Clothing manufacturer and distributor|
|- intellectual property law|
|3) Timber, pulp/paper producer|
|- expatriate labour law and tax issues||- general counsel|
|4) live entertainment|
|5) Financial services|
- accounting and tax services related to withholding taxes
|- underwriting issues|
|6) Food distributor|
- trade-mark law
|7) Consumer durables retailer|
- securities law
|8) Industrial input manufacturer|
- labour law
|- criminal law (fraud)|
Table 6b: Company Characteristics and MDP and Law Services Purchased
Foreign Located Companies
Type of Business
Size of Company
(number of domestic employees)
Services Purchased from MDP 51
Services Purchased from Law Firm(s)
|1) Commercial insurance and personal financial services|
|2) Manufacturer and distributor of consumer non-durables|
|3) Distributor of consumer non-durables|
|4) Financial services|
|5) Entertainment production and distribution|
|6) Commercial durable goods manufacturer and distributor|
As indicated in Tables 6a and 6b, 12 of 14 interviewees continue to purchase legal services from law firms despite purchasing certain legal services from MDPs. Of these 12 companies, 7 purchase what may be considered more traditional commercial legal services from law firms: general counsel, labour and corporate/commercial/securities law. Alternatively, 5 of the 14 purchase these traditional commercial legal services from MDPs (3 of these companies are located outside of Canada). 53
Of the 12 companies that continue to purchase legal services from law firms, 9 also purchase what may be considered more specialized legal services from law firms: intellectual property (including patents, copyright, and trademarks); landlord/tenant law; civil litigation; securities law ; marketing and labelling practices; criminal law; competition law; and industrial property law. The interviewed firms also purchased specialized legal services from MDPs but the types of specialized services tended to be quite different: 3 of the 14 interviewed firms purchased legal services related to expatriate issues; 3 purchased tax law related services; and 3 purchased traditional law services that were specific to a foreign transaction in countries where their general legal counsel did not have offices. Only 1 purchased a number of specialized legal services such as environmental law services from an MDP. The interviews generally indicated that law firms continue to be preferred for the provision of more specialized legal services. The main exception to this was the provision of legal services related to expatriate issues, particularly expatriate tax issues. The two foreign-based companies that purchase all of their legal services from MDPs did not do so previously but do so now as a result of mergers between a Big 5 firm and law firms from which the legal services were originally obtained.
Client Experience with MDPs
The benefits that the interviewees noted that MDPs were able to offer were as follows:
- Ease of co-ordination: reduced search time to assemble providers of various professional services; reduced duplication and co-ordination in the provision and explanation of the issue-at-hand and related information; reduced time required to co-ordinate various sources and pieces of information; and reduced duplication of service;
- More business/client oriented: more familiar with entire business, have a broader perspective, and are more planning-oriented rather than merely solving problems reactively when they arise;
- A known element when expanding into a new geographic area;
- Professionals abide by areas of expertise, i.e. lawyers and accountants are less likely to undertake work that is outside their professional expertise;
- Volume discounts: purchasing a group of services at an MDP reduces the price of each individual service; and
- Particular expertise in certain areas of tax and tax law, including those related to expatriates.
Table 7a: Number of Interviewees Citing Following Benefits of MDPs
Ease of Co-ordination
More business/client oriented
Expansion into New Geographic Area
Professionals Abide by Expertise
Expertise in Tax and Tax Law
As indicated in Table 7a, the most commonly cited benefit to MDPs was "ease of co-ordination"; 9 of 14 interviewees referred to this benefit. Included within "ease of co-ordination" is reduced time and effort required to be put forth by the client from the beginning of the client’s purchase decision to the completion of the task. By using an MDP, a client need not expend so much time and effort in the following types of tasks: the assembly of a group of service professionals; the education of these professionals as to the client’s needs; the delineation of tasks among professionals; the provision of relevant information to all the professionals; the co-ordination of work among the professionals; and the assembly of the various pieces of output produced by the professionals into a final product. The types of transactions interviewees cited in reference to the ease of co-ordination MDPs offer were largely of two types: transactions, such as an acquisition, involving unfamiliar geographic regions, and ongoing strategic and operations decisions involving many aspects of the interviewee’s business.
Those interviewed who had been involved with international transactions or were considering such expansion were particularly interested in MDPs. All such companies cited the benefits that an MDP with an international presence can provide in combination with "ease of co-ordination".
A number of interviewees also indicated that in their experience with MDPs, the service provided tended to be more forward-looking in addressing their needs, partially as a result of the MDP being more knowledgeable and focused on business issues generally. In contrast, these interviewees indicated that in their experience law firms tended to be less forward-looking, only dealing with problems as they arose rather than trying to prevent the problem from arising in the first place through strategic advice.
Despite the positive experience of the 14 companies with MDPs, all, with one exception, also noted that there may be a number of disadvantages to relying exclusively on MDPs for professional services. Disadvantages cited by the interviewees are as follows:
- Insufficient expertise in specialized areas of the law;
- Insufficient diversity of opinion and insufficient checks and balances on services provided;
- Potential conflict between obtaining audit and operating advice from the same firm; and
- Risk of becoming too "business consulting" focused and losing sight of legal responsibilities
Table 7b: Number of Interviewees Citing Following Disadvantages of MDPs
Insufficient Expertise in Specialized Area
Insufficient Diversity of Opinion
Conflict of Interest
Too Much "Business Consulting" Focus
As indicated in Table 7b, 8 of 14 interviewees noted that they would not rely upon MDPs for the provision of legal services in highly specialized areas, as MDPs are not likely to have sufficient knowledge and experience in specialized areas of law. As noted in Table 6a, 9 of 14 companies interviewed obtain specialized legal services from law firms. In addition to the specialized legal services companies already obtain from law firms, a number of interviewees also indicated that should they require litigation services, they would likely turn to a law firm.
Only 1 firm of the 14 interviewed saw the provision of audit, legal and other services in one firm as a conflict of interest. When other interviewed firms referred to the conflict of interest issue, one saw it as a problem that was currently manifest in other areas such as an investment bank that is responsible for an IPO but is also involved in trading the stock. In those types of situation "Chinese walls" are put in place. If the client is uncomfortable with such a situation, the client is free to acquire the different services from different service providers. Another client noted that an auditor is currently bound to inquire about the contingent liabilities that the client’s law firm may be aware. That law firm would have to obtain the client’s consent to disclose any information – a requirement that would presumably apply both in the case of an affiliated law firm and an entirely independent law firm.
Demand Side - Conclusion
Generally, for the 14 firms interviewed, it would appear that there is an equilibrium of services provided by MDPs and law firms in combination. Consistent with the benefits hypothesized in Part II of this study, MDPs allow a company to reduce the time it spends co-ordinating the provision and use of a broad-range of professional services. This co-ordination task is largely transferred to the MDP. MDPs are particularly attractive to clients when they are part of an integrated solution that meets an overall business need, i.e. part of an overall acquisition or reorganization, part of an integrated plan dealing with share or compensation plans across national borders. They are also attractive to companies expanding internationally, particularly into developing countries. Small and medium sized businesses expanding into new markets but lacking extensive in-house professional expertise and wide geographic networks of professional contacts are likely to find the services of MDPs especially beneficial. However, where the service required is narrower in focus and more specialized, any cost of co-ordination born by the client as a result of obtaining this service from a non-MDP appears to be often outweighed by the benefit of the degree of specialized expertise provided. Based on the number of companies continuing to obtain legal services from law firms, even while using MDPs, it is obvious that the market can sustain both types of firms. Furthermore, all the interviewees indicated that corporate clients prefer to have the freedom of choosing for themselves between the different types of service offerings.
PART V: COMPARATIVE REGULATORY EXPERIENCE WITH MDP
A number of countries have adopted more liberal regimes than Canada with respect to partnerships between lawyers and non-lawyers and MDPs more generally. Other countries are grappling with these issues. The following section reviews the approaches taken in various countries.
Germany is characterized by what are probably the most liberal rules with respect to MDPs in the industrialized world. In 1994, the German Federal Attorney-at Law statute was amended to allow full partnerships between attorneys, patent lawyers, auditors, accountants, tax advisors and other similar professionals. The amendment also allows German lawyers to partner with foreign lawyers or other foreign professionals such as accountants to create international partnerships. 54 The amended statute did not introduce new rules with respect to conflicts of issues but rather indicated that where there are inconsistencies among the professional rules that apply to the members of an MDP, the most stringent rule must be applied. For instance, if a lawyer determines that there is a conflict of interest, that determination applies to all other partners in the firm, regardless of their professional designation. There is no specific rule which prohibits the provision of legal services for an audit client. 55
With the provision for the formation of MDPs, there was no call to introduce separate confidentiality rules as confidentiality is part of the German penal code and the same standard is applied to all professionals. 56
One of the few restrictions on MDPs in Germany is that only existing partners’ names can be used in the name of a partnership, so that the names of the Big 5 MDPs are not always immediately recognizable. 57
In 1994, the state of New South Wales relaxed its rules with respect to lawyer/non-lawyer partnerships. However, fee-sharing between lawyers and non-lawyers is only allowed if lawyers maintain control of the professional practice, retain a majority of the voting rights, and receive not less than 51% of the gross income earned by the partnership. 59 As part of the amendments to the Legal Profession Reform Act of 1993, non-lawyer partners are allowed to advertise or represent themselves as a member of the partnership, and accounting firms are allowed to use their names as part of an MDP partnership’s name. 60
With respect to issues of confidentiality and conflict, no changes were made to the ethical standards of the Law Society of New South Wales. The existing rules apply to the MDPs as they would to any other law firm. 61 Non-lawyer members of an MDP can also obtain professional indemnity insurance from the Law Society of New South Wales’ insurer, if the partnership wishes the coverage to extend to these partners. 62
The state of Victoria in Australia is also considering amending its legislation to allow for some form of MDPs. The Legal Ombudsman, which has the task of investigating any anti-competitive facets of the legal profession’s operation, is supportive of MDPs and has proposed the following MDP model: 1) individual members of the MDP be regulated by their own professional rules; 2) MDPs only be allowed in corporate form; 3) ex ante full disclosure of potential conflicts be mandated and billing require the disclosure of the type of professional service provider and the time spent by each service provider; and 4) investors also be allowed to be partners in an MDP. 63
C. The United Kingdom
MDPs in the U.K. are prohibited by the Law Society of England and Wales’ Practice Rule which prohibits lawyers from sharing fees with non-lawyers, partnerships with non-lawyers, and the sharing of ownership in an incorporated practice with non-lawyers. This is the case even though the Courts and Legal Services Act 1990 removed the statutory prohibition on solicitors sharing fees. The Law Society Practice Rule, however, has remained.
Since the mid-1980’s, there have been a number of changes regulating lawyers, which have allowed solicitors to work more closely with non-lawyers. More specifically, an amendment to the Law Society Practice Rules allowing solicitors to accept work from a firm of non-lawyers has resulted in the formation of a number of law firms that are affiliated with accounting firms. 64 Adoption of the accounting firm’s trade name is not permitted, although the association with the accounting firm can be recorded on the law firm’s letterhead and in other ways. 65
In Scotland, the Law Society of Scotland rejected MDPs despite a recommendation in their favour by the Director General of Fair Trade. 66 Despite this, affiliated law firm arrangements similar to those in England exist in Scotland as well.
A recent City of London Law Society Working Party Response to a Law Society Consultation Paper on MDPs of October, 1998, is critical of restrictive models of regulation and argues that a satisfactory regulatory framework should be capable of being fashioned which can encompass a very wide range of MDPs, which the Working Group believes are both responsive to the demands of clients and provide productive professional opportunities for lawyers.
MDPs or forms of MDPs exist in France and have existed for a considerable period of time due to the historical distinction drawn between an avocat and a conseil juridique. Until 1992, conseil juridiques, persons not licensed to litigate and who need not necessarily have gone to law school, drafted documents and negotiated transactions. Avocats only were allowed to litigate. The conseil juridiques, in the provision of their services, were free to form relations with other professionals, and did so frequently in an accounting firm setting. The New Reform Act of 1992 merged the two professions into one, that of an avocat, so that all persons providing legal services are now obliged to have a law degree. However, existing conseil juridiques were grandfathered so that the accounting firms found that they had lawyers in their employment. In some cases, the accounting firms separated the lawyers and formed new law firms that are "networked" with the accounting firms. The relationship, however, is normally quite close, not only sharing facilities but the same client base. 67
Since MDPs in France have been formed more through historical circumstances than design, the issues related to conflict and privilege are only now being addressed. In France, lawyers decide what client files and client related files are confidential and privileged. Consequently, a lawyers’ entire client file can be covered by confidentiality, unless the lawyer is involved in a crime or misdemeanor. French accountants also have confidentiality rules with respect to the provision of information to third-parties; however, these rules are less stringent than those that apply to lawyers since accountants have a duty to reveal certain information to authorities, such as the fiscal or antitrust authorities. Accountants may also be obliged to disclose confidential information to the Commission des Opération de Bourses 68 .
These differing rules on confidentiality raise the question of what approach lawyers and accountants should take with respect to conflicts of interest. Mr. Laurent Chambaz of the French National Bar Council in testimony before the American Bar Association indicated that lawyers tend to interpret the ethical constraints strictly, meaning that a lawyer should not act for a client if the client is already an audit client of the firm network. 69 Gérard Nicolay, the managing partner of Coopers & Lybrand Law Firm in Paris, France, also in testimony before the American Bar Association, indicated, however, that clients of his law firm are frequently the audit clients of the Coopers network. Regardless of this relation, Mr. Nicolay indicated that the Coopers lawyers strictly observe the rules of confidentiality and do not disclose any confidential information to the auditors. 70 In response to these differing opinions and practices, the Commission des Opération de Bourses has issued a report identifying functions that statutory auditors should not perform since they are likely to impair their independence: bookkeeping, valuation of assets (except for audit purposes), management of companies, litigation, and generally any service which might expose a company to risk.
MDPs are also not permitted in Spain but exist de facto 71 . A number of MDPs or practice forms similar to MDPs have developed through the acquisition of affiliated law firms by the Big 5. Since MDPs are prohibited by Spanish laws, the firms remain owned by the lawyers. 72
F. Other European Countries
Other European countries have less experience than France, Germany, Spain and the U.K. with MDPs and MDP types of organization and so are only now beginning to address the issues surrounding them. The results vary largely as result of a variety of historical approaches to legal services traditionally taken in these countries.
Italian law has long allowed the partnership of various professionals as long as the names of the members are included in the name of the firm, resulting in long and cumbersome titles. 73 Despite this freedom to form cross-professional partnerships, Italy, until quite recently, has been characterized by very small law firms. The biggest were at most 20-30 lawyers. Furthermore, many of the functions traditionally thought of in North America or in other parts of Europe as those of a lawyer are divided up among commercialistas, fiscalistas, notaries and other dignitaries, so that a client in completing a transaction has to deal with and coordinate a number of professionals. 74 Only recently, with the Big 5’s addition of legal services to their product offerings and the increasing demands of a global marketplace, have Italian legal firms begun to consolidate and grow. 75
In Finland, anyone can provide legal services to the public to the same extent as members of the Finnish Bar. Consequently, there have been no restrictions on MDPs to date. 76 Switzerland has taken a similarly permissive position. In Austria, a variety of professionals, including engineers and accountants, may enter into a legal partnership but the partnership must be controlled by the lawyers. 77 In the Netherlands, mergers between law firms and accounting firms are explicitly prohibited. As a result, professional service firms have created separate entities for their legal and accounting/consulting functions. 78
G. The United States
MDPs have recently been at the forefront of issues of concern to the American Bar Association (ABA). In 1998, the ABA set up a special twelve person commission to examine the question which held extensive public hearings on the issue and released a report on multi-disciplinary practice in June, 1999, unanimously recommending substantial relaxation of existing restrictions on MDPs.
The District of Columbia has the most liberal rules and allows for non-lawyers to enter into partnerships with lawyers; however, the practice must be restricted to the provision of legal services. In these types of arrangements, the non-lawyers must abide by the D.C. Rules of Professional Conduct, and the lawyer partners must undertake to be responsible for any breach by a non-lawyer. 79 Limiting services to legal services has seriously affected the ability of firms to offer a spectrum of services. Arnold & Porter, the first firm to organize under the D.C. rules, has since ceased offering other disciplines in its practice. 80
The legislation and rules in other states do not allow any form of partnership between accountants and lawyers. Despite these restrictions, there is a growing number of firms offering services that were traditionally reserved for lawyers. Florida now allows independent paralegal firms — owned by non-lawyers and not supervised by lawyers – to provide clients a limited range of low-end legal services. 81 The American Institute of Certified Public Accountants (AICPA) also now allows up to 30% of an accounting firm to be held by non-CPAs. 82 In other areas, firms such as banks, insurance companies, and pension funds hire lawyers to perform estate planning and estate administration services, while other firms offer such services as labour, environmental and employee benefits consulting. 83
The ABA Commission on MDPs in its recent report concluded that "there is an interest by clients in the option to select and use lawyers who deliver legal services as part of an MDP". An MDP is defined by the Commission as "a partnership, professional corporation, or other association or entity that includes lawyers and non-lawyers and has as one, but not all, of its purposes, the delivery of legal services to a client(s) other than the MDP itself or that holds itself out to the public as providing non-legal, as well as, legal services". The Commission includes within this definition law firms closely affiliated with other professional practices. The Commission noted that it had received strong testimony from business clients, representatives of consumer groups and ABA entities that amending the Model Rules to permit fee sharing and partnership and other association with non-lawyers is in the best interests of the public. The Commission also noted: "In considering the interests of the public in having the option to purchase legal services from an MDP, the Commission searched for empirical evidence of harm to clients in analogous situations, looking for example, for reports of actions alleging malpractice or breach of fiduciary duty against a law firm and a related ancillary business. It discovered none; moreover, none of the witnesses, including those opposed to a relaxation of the prohibitions…were able to identify any such reports". A summary of the recommendations of the ABA Commission is appended to this paper.
One distinctive feature of the ABA Commission’s recommendations is that in cases where MDPs involving lawyers are controlled by non-lawyers, the CEO of the MDP would be required to provide a series of undertakings to the highest court in the jurisdiction with the authority to regulate the legal profession undertaking that it will not directly or indirectly interfere with a lawyer’s exercise of independent professional judgement on behalf of a client; that it will establish, maintain and enforce procedures designed to protect a lawyer’s exercise on independent professional judgement on behalf of a client from interference by the MDP, any member of the MDP, or any person or entity controlled by the MDP; that it will establish, maintain, and enforce procedures to protect a lawyer’s professional obligation to segregate client funds; that the members of the MDP delivering or assisting in the delivery of legal services will abide by the rules of professional conduct; that it will annually review the procedures established to protect a lawyer’s exercise of independent professional judgement and amend them as necessary to ensure their effectiveness; that it will annually file a signed and verified copy of a certificate certifying compliance with these conditions along with relevant information about each lawyer who is a member of the MDP; and that it will permit the court to review and conduct an administrative audit of the MDP as it deems appropriate to determine and assure compliance of these conditions at the MDP’s expense.
A. The Status Quo
In evaluating regulatory models for MDPs it is important to recognize that we are not starting with a tabula rasa. In a mail-out survey undertaken by the Law Society of Upper Canada's Working Group on Multi-Discipline Partnerships, (Appendix 10, "Futures" Task Force Report), about one-third of the roughly 8,000 private practitioners who responded indicated that they maintained some form of referral arrangements with other professionals, most notably with accountants, but also real estate brokers, trustees in bankruptcy, financial planners, doctors, and patent/trade mark agents. About 760 of the respondents indicated that they maintained business arrangements with other professionals in order to provide multi-disciplinary services to clients. In addition, significant numbers of lawyers are employed by non-law firms, including government departments and agencies, corporations, non-profit agencies, labour unions, and community organizations. In areas such as personal banking and wealth management, investment banking, and private pension services, lawyers are increasingly employed by non-law firm institutions in these fields in order to facilitate the provision of a broader and more integrated set of professional services to clients. As noted above, large professional service firms in Canada and to an even greater extent elsewhere employ an increasing number of lawyers, especially in the tax advice and planning field. In addition, at least one of the Big 5 professional service firms in Canada, (Ernst & Young) has set up an affiliated law firm (Donahue & Partners) that has grown to 49 lawyers in 1999 since its inception in 1997. Parallel, although more striking developments in these contexts in other jurisdictions, especially Western Europe and Australia, confirm this process of erosion of traditional exclusive professional enclaves through greater integration of professional services.
While the Law Society of Upper Canada's Working Group on Multi-Disciplinary Partnerships (The Future's Task Force) largely rejects what it calls "the inevitability theory" of the growth of MDPs, current professional realities decisively negate as a realistic option complete suppression or prohibition of all such arrangements. More importantly, the thrust of the analysis and evidence developed in the present study strongly suggests that consumer welfare would be enhanced by adopting a more permissive or facilitative approach to MDPs than many features of current professional regulation allow. Thus, in our view, little purpose is to be served by debating regulatory options that involve more stringent regulation of MDPs than at present or more aggressive enforcement of existing restrictions, with a view to retrenching from the present diverse range of multi-disciplinary practice arrangements. As the Law Society of Upper Canada's "Futures" Task Force itself acknowledges in relation to the option of rejection of the MDP concept and the maintenance of the status quo viz. the practice of law partnerships of lawyers only: "Support of the status quo is a statement that improvement in the present practice model is not possible and there is no potential for useful change. Any such conclusion would obviously be superficial and unsupportable." 84 The National Multi-Disciplinary Partnerships Committee of the Federation of Law Societies of Canada recently reported, in a similar vein, that "there is a strong consensus of the Committee that multi-disciplinary partnerships will happen, whether law societies choose to regulate them or not". 85
B. MDPs Controlled By Lawyers and Providing Only Legal Services
The "Future's" Task Force considered four major options: (a) the acceptance, recognition and regulation of full multi-disciplinary partnerships; (b) the acceptance of the New South Wales Model viz. multi-disciplinary partnerships offering multi-disciplinary services provided that the partnership is in the effective control of lawyers; (c) the acceptance of the District of Columbia model viz. multi-disciplinary partnerships offering legal services only with no specific provisions for control, and (d) the recognition, acceptance and regulation of multi-disciplinary partnerships offering legal services only, provided that the partnership is in the effective control of lawyers.
The Task Force noted that the "captive" or affiliated law firm raises distinctive regulatory issues that require independent study and recommended that an effective vehicle be struck to undertake this study. Subject to this caveat, the Task Force recommended the rejection of options (a), (b), and (c) and the adoption of option (d) viz. multi-disciplinary partnerships offering legal services only, with the partnership in the effective control of lawyers. In the Task Force's view, "all of the concerns with respect to privilege, conflicts of interest, independence, public duty etc., would be eliminated as the service offering would be confined to the delivery of legal services.
Furthermore, adherence to required professional norms in the delivery of such services would be guaranteed by the controlling influence of lawyers." 86 The Task Force considered that this model presents lawyers with the opportunity to attract para-legals into their partnerships as well as non-legal professionals such as patent and trade mark agents, psychologists and social workers, forensic investigators, accountants etc., but in all cases subject to the constraint that they would be supporting the delivery of legal services only. The Task Force considered that more permissive options would entail unacceptable risks to clients relating to solicitor-client priviledge, legal independence, and conflict of interest. A similar interim recommendation has been adopted by the Canada Bar Association International Practice of Law Committee in its study of MDPs. The Law Society Task Force’s recommendations have now been adopted by the Benchers of the Law Society in the form of a new By-Law. 87 The By-Law defines "practice of law" very broadly to mean the giving of any legal advice respecting Canadian laws or the provision of legal services. MDPs between lawyers and non-lawyers are only permitted where non-lawyers are providing services that "support or supplement" the practice of law. In addition, lawyers, must have "effective control" over non-lawyers’ practices.
In our view, this proposal is deeply misconceived. First, restricting multi-disciplinary partnerships to the provision of legal services is, in a fundamental sense, something of an oxymoron. The defining characteristic of MDPs is that the services provided do not fall within the exclusive competence of members of one profession. The essence of the advantages from a client perspective of integrated professional service provision set out in Part II of this study is largely negated by attempting to confine MDPs to single-disciplinary practices — an obvious contradiction in terms. Moreover, as Roach and Iacobucci point out, 88 while limiting MDPs to the provision of legal services may reduce the dangers of conflicts of interest, loss of solicitor-client privilege or adverse affects on the independence of legal advice, it does not provide a guarantee of these essential attributes of the solicitor-client relationship. For example, information passed on by a lawyer to an accountant or trade mark agent within such a firm may not necessarily be subject to solicitor-client privilege.
Second, with respect to the proposed lawyer in control requirement, while it may mitigate some of the concerns about preserving the ethical standards of the legal profession, it does not solve them. Even if they control a firm, lawyers may not supervise non-lawyer partners as if they were employees. Moreover, non-lawyers remain outside the direct control of legal regulators. More importantly, even aside from enforcement issues, a control requirement does not respond to most of the ethical and practical problems concerning conflicts of interest, solicitation, advertising, steering, insurance and compensation, assessment of bills, or the loss of solicitor-client privilege, which can arise with non-lawyer partners, even when they constitute a minority of the partners.
Practically speaking, a lawyer in control requirement, coupled with the requirement that MDPs offer only legal services, almost certainly means that very few organizations will form multi-disciplinary partnerships, as exemplified by the experience in the District of Columbia and to a lesser extent the state of New South Wales in Australia. The proposed lawyer in control requirement, like the proposed mirror image accountant in control requirement proposed by the Canadian Chartered Accountants' Inter-Provincial Task Force, raises the unedifying prospect of a zero sum turf war between the accounting and legal professions that is likely to deprive many consumers of professional services of most of the advantages of multi-disciplinary service provision. While the Law Society’s "Futures" Task Force purports to accord great weight to the ethical objections and concerns relating to MDPs, as earlier indicated we believe that in most respects these have been over-stated, and in fact will only be marginally mitigated by adoption of the restrictions proposed by the Task Force.
As Roach and Iacobucci conclude in their background paper for the "Futures" Task Force: "We would not require lawyers to control MDPs and we would not restrict MDPs to the provision of legal services. Such blunt and restrictive regulatory requirements do not target specific mischiefs precisely enough, and moreover are doomed to irrelevance given the availability of exit options" (which include affiliated law firms). 89 We note also that the recent ABA Commission Report on MDPs rejects both of these restrictions as inconsistent with the potential client benefits from utilizing MDPs and with client choice.
In short, the only constructive way forward, viewing consumers’, not providers’, concerns as paramount, entails abandoning both of these requirements (i.e. that MDPs should be restricted to providing only legal services, and that these practices should be controlled by lawyers). This conclusion enables us to consider a number of much more constructive options.
C. The Affiliated Law Firm
First, at a minimum, affiliated law firms associated with broader groups of professional service providers should be both permitted and encouraged. Organizationally discrete affiliated law firms may reduce the problems associated with confidentiality and loss of solicitor-client privilege, and reduce client confusion about when they enjoy the attributes of a solicitor-client relationship in their dealings with various elements of the larger professional group. Affiliated law firms might also help contain conflict of interest problems and minimize the situations where lawyers and other professionals will have competing duties. However, there are still risks of conflicts of interests within the broader professional group of which the affiliated law firm is part; risks of disclosures of information to non-lawyer professionals entailing loss of solicitor-client privilege; and problems of steering. However, as we have argued above, these problems are inherent in the complexity of clients' professional needs that require multi-disciplinary solutions and are not peculiar to any particular professional organizational modality. In this respect, an ineluctable trade-off must be faced. The more hermetically sealed-off from the larger professional group of which it is a part that an affiliated law firm is, the greater the sacrifice in integration efficiencies described earlier in this paper. If effective and efficient multi-disciplinary service provision in many contexts requires a highly co-ordinated or integrated teamwork approach, it would be fanciful to suppose that the various ethical and related objections and concerns regarding MDPs can be entirely eliminated through an affiliated law firm structure.
Indeed, in order to enhance integration efficiencies, we would argue that several restrictive professional rules that are currently in place in the legal profession in Ontario and elsewhere should be relaxed. First, in order to minimize information asymmetries between service providers and clients, the affiliation between the law firm and the larger professional group of which it is a part should be clearly and publicly signified. In our view, this calls for allowing its law firm to adopt a firm or brand name that clearly signifies the affiliation (as is the case in a number of Western European and Australian jurisdictions). This signals to consumers and potential consumers of professional services both the potential advantages of fuller professional service integration but also some of the risks (the two sides of the ledger reviewed in Parts II and III of this paper). Second, current restrictions on advertising and solicitation, which in our view are anti-competitive, should be substantially relaxed so that MDPs have the ability to promote this form of organizational innovation to prospective clients, including existing clients of other service providers. There is little point to recognizing the potential advantages of this form of service provision to many clients while at the same time denying firms the ability to communicate these advantages to such clients. Third, the current rules on fee-splitting or revenue sharing in the context of MDPs involving lawyers should be abandoned. Appropriate incentives for fuller professional service integration are only created with some appropriate form of revenue pooling and sharing. While this is often said to raise the risk of "steering", we have argued above that this risk is already pervasive in many large firms within existing professions, including the legal profession, and moreover with more sophisticated purchasers of professional services is unlikely to prove a serious problem.
The counterpart problem raised by the prohibition on revenue pooling or sharing is client "hoarding" rather than "steering", where professionals are reluctant to enlist the assistance of other professionals in servicing the needs of the client because they derive no direct pecuniary benefits from this and may be tempted to over-reach their own professional competence in order to preserve all the economic benefits from the professional relationship in question for themselves. The experience with law firms which have formed loose affiliations with other law firms in other geographic centres, typically on some form of mutual referral basis, is instructive in this respect. These arrangements have in general been much less successful in yielding economic efficiencies from fuller professional integration than more unified ownership structures. Currently, where affiliated law firms are associated with larger professional groups, such as large accounting/consulting firms, typically a wide range of costs are shared including office space, support services, information technology, and professional development. Presumably, these costs are shared on some basis that reflects the relevant size and revenue contributions of the constituent elements of the professional group, but once one accepts that cost sharing on a revenue-related basis is appropriate, it is largely a semantic step then to recognize the advantages of a broader and more complete sharing of costs and revenues.
D. Fully Integrated MDPs
However, if one accepts the logic of the argument to this juncture, first against restricting MDPs to the provision only of legal services and then only if under the control of lawyers, and second in favour of affiliated law firms with high degrees of identification and integration with the larger professional groups of which they are a part, then the question must necessarily be faced of whether any useful purpose is served by insisting on this degree of organizational discreteness. The ABA Commission took the view that affiliated law firms and fully integrated MDPs are functionally similar. In other words, what is gained or lost by then permitting complete integration of lawyers within larger professional multi-disciplinary service firms (i.e. the full blown multi-disciplinary partnership)? The gains, at least conceptually, are easily identified. First, one ceases engaging in largely semantic charades, which has the virtue of forthrightness and intellectual honesty. Second, as a matter of principle, integration efficiencies are likely to be maximized when the most complete forms of professional integration are permitted. Third, joint and several liability across the partners in an MDP is likely in fact to enhance incentives for monitoring adherence by professionals to their respective spheres of comparative advantage. With respect to the losses or risks to consumers from integration, it may be arguable that, relative to the affiliated law firm, effective regulatory oversight by the governing bodies of the legal profession is rendered somewhat more difficult with more diffuse and pervasive professional interactions to monitor. Arguably again, solicitor-client privilege problems, confidentiality problems, conflicts of interest problems, and independence problems are rendered marginally more acute in a multi-disciplinary partnership relative to an affiliated law firm, but, as we have emphasized before, this is the inherent trade-off between the advantages of fuller service integration and some of the disadvantages. This is a calculus that in the end only clients, given their own particular circumstances, are able to make — a prerogative that clients in our interviews repeatedly and emphatically asserted.
We believe that there are several regulatory options that should be explored that would maximize the advantages to clients of professional service provision by MDP’s, while minimizing their disadvantages.
The first is continued individual licensing of professionals by each self-governing profession as at present, but with removal of restrictions that especially impede the formation of MDPs, such as prohibitions on fee-splitting, prohibitions on use of firm or brand names, and restrictions on advertising and solicitation. Prohibitions on individual unauthorized practice would continue and licensed professionals would be prohibited from facilitating or assisting in the unauthorized practice of law. Existing rules could be amplified to ensure that only lawyers have access to lawyer’s trust funds and that compensation for defalcations only applies to defalcations by lawyers. Rules could also clarify that mandatory lawyers’ indemnity insurance is only available with respect to legal services rendered by lawyers. The taxation of bills for legal services could be preserved by requiring that legal services be separately itemized on accounts rendered by MDPs. Issues relating to solicitor and client privilege, confidentiality, and conflicts of interest as they arise in an MDP context should attract a presumption that few special rules are required, recognizing that most of these concerns may arise in a wide range of other organizational contexts and are inherent in clients’ problems that require multi-disciplinary solutions rather than in the organizational modality deployed to provide solutions.
This option is the least intrusive, least bureaucratic, and most flexible approach to MDPs and will provide maximum latitude for the evolution of organizational modalities in the provision of professional services in the future and hence least constrain dynamic efficiency. However, it does not, in itself, resolve potential conflicts in regulatory or ethical requirements imposed by different professions.
Another proposal initially advanced by John Quinn in a background paper for the Professional Organizations Committee in 1979 (adapted from the Certificate of Authorization regime maintained for engineering firms by the Association of Professional Engineers of Ontario) and endorsed by the Research Directorate (of which Trebilcock was a member) of the Professional Organizations Committee and again endorsed recently by Roach and Iacobucci in a background paper for the "Futures" Task Force of the Law Society of Upper Canada, contemplates a form of firm licensing for MDPs, in addition to existing forms of individual licensing. As noted earlier, the ABA Commission on MDPs adopts a variant of this regime. A condition for the issuance of a Certificate of Authorization to a firm comprising members of more than one profession would be the firm's commitment to adhere to certain basic ethical requirements. Some of these requirements may involve a form of mandatory disclosure to clients and waivers with respect to aspects of solicitor-client privilege and confidentiality. Other issues might pertain to rationalized conflict of interest rules, directorships or investments in clients subject to audit (a rule now maintained by the accounting profession), and the provision of audit assignments and legal assignments for the same clients (to resolve the client third-party potential conflict), or alternatively a rule providing for waiver of solicitor-client privilege and confidentiality obligations in this case. Other rules would need to be adopted with respect to management of and access to lawyers’ trust funds and limiting exposure of mandatory lawyers’ indemnity insurance to claims arising out of actions by non-lawyer partners or personnel. These examples are merely illustrative of how such an approach to the potential advantages and disadvantages of multi-disciplinary practice might be elaborated. Regulatory over-reach would be discouraged by the fact that firms would possess a number of exit options, including the affiliated law firm option, which would be simultaneously available. The advantage of firm licensing over individual licensing is that it creates a collective rather than individual stake in ensuring compliance by all personnel within a firm with applicable rules and thus may provide more effective incentives to this end. However, the firm licensing approach is somewhat more bureaucratic than the individual licensing approach in that additional layers of licensing are entailed, especially if certificates must be obtained from each of the professional bodies of all participating professionals. It also does not, in itself, resolve potential conflicts in regulatory or ethical requirements imposed by different professions.
The ABA Commission’s proposals exemplify these difficulties. Certification of an MDP by the court (or in Canada the governing body of the legal profession) would only be required where the MDP is not controlled by lawyers. For MDPs controlled by lawyers, only individual licensing would be required. It seems incongruous in many respects that the regulatory authority of the legal profession over an MDP as a firm increases as the number of lawyers participating in such a firm decreases. By parity of reasoning, it would seem to follow that in the case of MDPs controlled by lawyers with a minority of accountants, the accounting profession should be able to insist on a firm-level certification regime whereby the lawyers are required to comply with the accounting profession’s regulatory requirements. However, if conditions for certification differ between the two professions, little will have been accomplished except additional layers of cumbersome and potentially dysfunctional professional regulation. These problems will increase exponentially if more than two professions are involved (which may often be the case).
Inter-professional Co-ordination Committees
These problems suggest the strong desirability of an inter-professional co-ordinated or joint approach to setting any special conditions for the issuance of individual or firm licenses in an MDP context. More concretely, we propose that where MDPs involving members of more than one self-regulating profession are proposed, a committee be struck comprising representatives of each of the professions involved, together with demand-side interests to be appointed by government (perhaps committees of about nine members, three from each profession and three from demand-side interests with the committee to be chaired by one of the latter, and with decisions to be made by a two-thirds vote). The mandate of such a committee would be to resolve potential regulatory conflicts between the two professions in an MDP context in ways that best serve consumer interests and to recommend appropriate rule changes to the professions with respect to participation by their members in MDPs. In the event of the governing bodies of the professions failing to adopt a committee’s recommendations, the government to whom they account would need to contemplate legislative or regulatory intervention. Such committees would need to be struck for each particular combination or configuration of professions in an MDP to ensure relevant expertise and to avoid a bureaucratic imbroglio with a large, single multi-stakeholder inter-professional committee. Once a particular committee resolves points of potential regulatory conflict between two or more professions whose members are proposing an MDP, it would be functus. Each committee would be given a tight timeframe for decision-making (e.g. three months from its constitution). In the event of an inability to reach decisions, a new committee would be struck. Once appropriate rule changes are in place, each profession would continue to licence and supervise its individual members as at present: firm certification or licensing would be unnecessary. Under this proposal, no one profession could assert supremacy in setting the conditions under which MDPs involving its members and members of other professions will be permitted — clearly an invitation to a counter-productive turf war in which the consumer interest is in danger of disappearing from view. Some refinements to this proposal will be required in the case of proposed MDPs between regulated and unregulated professionals. To the extent that the professional regulations of the regulated profession require modification to accommodate such arrangements, in some cases professional associations of the unregulated professionals may be sufficiently inclusive to appoint representatives of their interests to an Inter-professional Co-ordinating Committee. In other cases, where such bodies are lacking, government may need to appoint representatives of both demand-side interests and the unregulated profession.
In contrast to the sweeping and in many respects crude prophylactic approach that has hitherto been adopted by both the legal and accounting professions and that remains reflected in the recent proposals by the Law Society of Upper Canada and the Inter-Provincial Chartered Accounting Task Force, approaches along the lines that we have sketched would come to terms with both professional realities as they stand today and accelerating trends towards the internationalization and integration of professional service markets (as with many other markets). These approaches would move debates over the future role of MDPs beyond the domain of the unedifying professional turf wars that have come to dominate such debates and toward a co-operative rather than competitive focus on the only question that ought to dominate these debates: What do informed consumers of professional services want, and to the extent that there are currently grounds for concern that information asymmetries may distort such choices, what steps can the various professions involved take, through their governing bodies and inter-professional co-operative mechanisms, to enhance informed choice? In the end, as a matter of principle, how consumers purchase professional services should be their decision (as clients have repeatedly emphasized to us), not a decision taken for them by the professions or their professional bodies, whose paramount duty is to serve their clients’ diverse interests as effectively as possible. To date, inter-professional rivalry and the skirmishes that it has generated have prevented any serious focus on the possible form of inter-professional co-operative mechanisms or a targeted agenda of substantive issues requiring resolution through these mechanisms if MDPs are to be facilitated in ways that enhance consumer welfare (and coincidentally, the productivity and incomes of participating professionals). But unlocking the present inter-professional impasse demands that the hard work entailed in a constructive approach to the design of the details of a co-operative rather than competitive approach to these issues be accorded a central and immediate priority.
1. For a review of literature on the theory of the firm, see Paul Milgrom and John Roberts, Economics, Organization and Management, chapter 2, Prentice-Hall, 1992.
2. See Paul Milgrom and John Roberts, "Prices and Advertising Signals of Product Quality", Journal of Political Economy, 94 (1986), 796-821.
3. Kent Roach and Edward Iacobucci, "Multi-Disciplinary Partnerships: A Review of the Literature", Working Paper prepared for the Law Society of Upper Canada’s Working Group on Multi-Disciplinary Partnerships (1998) at 59.
4. Ibid., at 59.
5. John Quinn, "Multidisciplinary Services: Organizational Innovation in Professional Service Markets", Working Paper #7, prepared for The Professional Organizations Committee, 1978, at 50.
6. Ibid., at 7.
7. The Report by the American Bar Association’s Commission on Multidisciplinary Practice notes that there was "strong testimony from business clients, representatives of consumers groups, and ABA entities that amending the Model Rules to permit fee sharing and partnerships and other association with a nonlawyer is in the best interests of the public." ( American Bar Association Commission on Multidisciplinary Practice Report to the House of Delegates, August, 1999, Appendix C, at 8.)
8. See Paul Milgrom and John Roberts, Economics, Organization & Management, 1992 Prentice-Hall, Inc., at 32.
9. For further discussion of asset specificity see B. Klein, R. Crawford, and A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process", Journal of Law and Economics, 21 (1978), 297-326.
10. See for example, Cynthia Montgomery and Birger Wernerfelt, "Tobin’s q and Importance of Focus in Firm Performance", American Economic Review 78 (March 1978), 246-250; and, Frank Lichtenberg, "Industrial De-Diversification and Its Consequences for Productivity", National Bureau of Economic Research Working Paper 3231 (January 1991).
11. See Michael Trebilcock, Carolyn Tuohy, Alan Wolfson, Professional Regulation (Staff Study, Professional Organization Committee, Ontario Ministry of the Attorney-General, 1979), Chapter 3.
12. See R.R. Nelson and Winter, An Evolutionary Theory of Economic Change, Harvard University Press, 1982.
13. See Roach & Iacobucci "Multi-Disciplinary Practices & Partnerships", op cit, pp 36-42.
14. Written Remarks of Roger Page, Deloitte & Touche, ABA Commission on MDPs, March 11, 1999.
15. Competitive Intelligence Service, February, 1998.
16. Information provided by Arthur Andersen Canada.
17. Elizabeth MacDonald, "Accounting Firms Hire Lawyers and Other Attorneys Cry Foul", The Wall Street Journal, August 22, 1998.
18. David Segal, "Tax Advisers Target Law Firms’ Clients", The Washington Post, November 11, 1998.
19. MacDonald, August 22, 1998.
20. MacDonald, August 22, 1998.
21. David Rubenstein, "Big Six Poised to Enter Legal Market: Head of Andersen’s Legal Arm has Expansion Plans", Illinois Legal Times, October 1997.
22. Information provided by Deloitte & Touche Canada.
23. "Big six mobilize legal forces", International Tax Review, April 1997, at 15.
24. Patrick Wilkins, "Accountants on the march: The Second Stage", Commercial Lawyer, 1997.
25. Coopers & Lybrand—CLC Juridique et Fiscal.
26. Gérard Nicolay, "Accounting Firms and Legal Services: Meeting Client Needs", testimony before the American Bar Association Commission on Multidisciplinary Practice, November 12, 1998.
27. Gérard Nicolay, November 12, 1998.
28. David Rubenstein, Accounting Firm Legal Practices Expand Rapidly…", Corporate Legal Times, November
29. Note the merger between Price Waterhouse and Coopers Lybrand occurred in 1998.
30. AON Global Professional Services.
31. AON Global Professional Services.
32. AON Global Professional Services.
33. International Accounting Bulletin, Competitive Intelligence Services, February 1998.
34. Financial Post 500. In 1998, the five largest Canadian law firms had the following numbers of lawyers: McCarthy Tetrault, 613; Fraser Milner, 372; Blake, Cassels & Graydon, 366; Fasken Martineau, 362; and Stikeman, Elliott, 345.
35. McCarthy Tetrault home page, www.mccarthy.ca/en/practicearea/default.htm
36. Financial Post Magazine, "Top 500", 1990-1999. The next largest 5 law firms in 1998 were similarly large: Osler, Hoskin & Harcourt, 328; Goodman Phillips & Vineberg, 265; Borden & Elliot, 236; Ogilvy Renault, 235; and Heenan Blaikie, 225.
37. Fasken Campbell Godfrey only.
38. As of October 1998, Fraser &Beatty and Milner Fenerty merged to form Fraser Milner.
39. McCarthy Tetrault home page, www.mccarthy.ca/en/practicearea/default.htm
40. Osler, Hoskin & Harcourt, www.osler.com/Firm/Arts_Entertainment.html
41. "The Global 50", The American Lawyer, November 1998.
42. The American Lawyer, November 1998.
43. This type of growth was not limited to only the biggest firms. Between 1994 and 1997, the top 100 U.S. law firms grew in terms of revenue at an annual compound rate of 9.7%( The American Lawyer, November 1998).
44. The American Lawyer, November 1998.
45. Rogers & Wells of New York and Clifford Chance of London each voted in May 1999 to press on with a merger that would create a combined firm with 2,400 lawyers around the world ( The Economist, May 29, 1999 at 5).
46. Chris Klein, "U.S. branches face fierce competition from UK solicitors, accountants", The National Law Journal, August 2, 1996.
47. Darryl van Duch, "Bullish on Spinoffs", The National Law Journal, August 10, 1998.
48. We understand that the client contacts provided to us were largely determined on the basis of availability and willingness to participate in the interview process. Consequently, while it cannot be guaranteed that the sample is unbiased, care was taken to ensure that interviewees were not chosen on the basis of the Big 5’s impression of their MDP experience.
49. Where MDPs include services provided by a Big 5 firm in combination with an associated law firm. Services include accounting and audit.
50. Multinational enterprise.
51. Where MDPs include services provided by a Big 5 firm in combination with an associated law firm.
52. Was an MNE up until 1997.
53. Traditional law services purchased from an MDP for a specific, foreign transaction were not included in "traditional law services".
54. Summary of the Testimony of O. Verhoeven before the American Bar Association’s Multidisciplinary Practice Commission, November 13, 1998, at 1.
55. Verhoeven, at 2.
56. Verhoeven, at 2.
57. John E. Morris, "King Arthur’s March on Europe: Arthur Andersen is on a mission to conquer the continent’s high-end legal markets. Can the accountants beat the lawyers at their own games?", The American Lawyer, June 1998, at 4.
58. New South Wales Solicitors’ Professional Conduct and Practice Rule, section 40.1.
59. Michael Fizt-James, "The law society’s verdict on multidisciplinary partnerships", The Law Times, Vol. 9, No. 33, at 3.
60. New South Wales Solicitors Manual, section 48G.
61. Summary of the Testimony of Andrew Scott before the American Bar Association’s Multidisciplinary Practice Commission, November 13, 1998, at 2.
62. Law Society of Upper Canada, The "Futures" Task Force – Final Report of the Working group on Multi-Discipline Partnerships, Appendix 6, September 25, 1998.
63. Andrew Scott, at 1.
64. Summary of the Testimony of Alison Crawley before the American Bar Association Multidisciplinary Practice Commission, November 12, 1998, at 1.
65. Law Society of Upper Canada, at 22.
66. Jocelyne Boujos and Glennda Scully, "Multi-Disciplinary Professional Practice: Recent Developments and Attitudes of Current Practitioners in the Accounting and Legal Professions", Australian Accounting Review October 1997, at 3.
67. "Background Paper on Multidisciplinary Practice: Issues and Developments" submitted to the American Bar Association Multidisciplinary Practice Commission, January 1999, at 5.
68. Summary of the Testimony of Laurent Chambaz before the American Bar Association Multidisciplinary Practice Commission, June 8, 1998, at 1.
69. Chambaz, at 1.
70. Summary of the Testimony of Gérard Nicolay before the American Bar Association Multidisciplinary Practice Commission, June 8, 1998, at 1.
71. Stratton Sheryl, "Multidisciplinary Practice Issues at Home and Abroad", Tax Analysts, December 28, 1998, at 3.
72. John E. Morris, "King Arthur’s March", at 4.
73. Stratton Sheryl, at 3.
74. "A glimpse of out future: Lawyers, accountants, and management consultants?" Journal of Management Consulting, November 1, 1998, at 3.
75. "International: PwC snaps up Italian firm and looks to merge German offices", The Lawyer, September 29, 1998.
76. Stratton Sheryl, at 3.
77. Stratton Sheryl, at 3.
78. Phillippa Cannon, "The Big 5 continue to encroach", International Tax Review, January 1, 1999, at 25-26.
79. District of Columbia Rule of Professional Conduct 5.4(b).
80. Law Society of Upper Canada, at 25.
81. Ward Bower, "Multidisciplinary Practices – The Future of the Legal Profession", http://www.hg.org/wardbower.html, August 997, at 1.
82. Darryl Van Duch, "Big Six in Hot Pursuit of Legal Biz", National Law Journal, August 18, 1997, at 2.
83. Ward Bower, at 1-2.
84. "Futures" Report, at 51.
85. Press Release, 30 th June, 1999
86. "Futures" Report, at 53.
87. By-Law 25, adopted by Convocation April 30, 1999.
88. Kent Roach and Edward Iacobucci, "Multi-diciplinary Practices and Partnerships: Prospects, Problems and Policy Options", Working Paper proposed for "Futures" Task Force of Law Society of Upper Canada, 1998), at 93.
89. Ibid at 96.