Sydney M. Cone Comments on ABA Commission Report Released June 8, 1999 - Center for Professional Responsibility

June 22, 1999

 

Multi-Disciplinary Practice ("MDP")
Comments on ABA Commission Report Released June 8, 1999 (the "Report")

Sydney M. Cone, III
Counsel, Cleary, Gottlieb, Steen & Hamilton
C.V. Starr Professor of Law, New York Law School

Summary of the Report

General; Two Categories of MDP

As a general matter, the Report, while endorsing the principle of protecting the core values of the legal profession, advances policy reasons for permitting lawyers to practice in MDPs. The Report divides MDPs into two categories- those controlled by lawyers, and those controlled by non-lawyers- and would subject the latter category to special requirements.

"Control"

The Report does not define "control" for the purpose of determining whether an MDP is controlled by lawyers or by non-lawyers. For this purpose, a state that decides to permit lawyers to practice in MDPs might adopt a black-letter definition of "control," or might leave the concept of "control" to common law definition by the courts. A conventional definition would require an MDP controlled by lawyers to be majority-owned by, and to be effectively managed by, lawyers actively practicing law in the MDP, would define ownership in terms of both capital and profits, and would forbid management or ownership arrangements with individuals or entities outside the MDP. Such a definition would exclude the possibility that an appearance of control by lawyers could be used to mask effective control of an MDP by non-lawyers without triggering the Report's special requirements that apply to the MDP controlled by non-lawyers.

The MDP Controlled by Lawyers

As regards the MDP controlled by lawyers, the Report is essentially permissive. In effect, it would permit an MDP controlled by lawyers to operate as though it were a firm of lawyers engaged not only in legal practice but also in other professional activities. Thus, it would broaden the activities in which a firm owned and controlled by lawyers may engage. At the same time, this approach would require the lawyer owner-managers of such an MDP to enforce rules of legal ethics throughout the MDP (including on non-lawyers within the MDP).

On the other hand, the Report would continue the prohibition against passive investment in law firms. By extension, the only investment that would be permitted in an MDP controlled by lawyers would be investment made by the lawyer and non-lawyer professionals active in the MDP.

The MDP Controlled by Non-Lawyers

As regards the MDP that is controlled by non-lawyers and that owns a legal practice, the Report, as a condition to permitting such an MDP, would subject it to the disciplinary authority of the courts. To achieve this objective, the Report would require such an MDP to submit to the jurisdiction of the relevant state court, periodically to provide the court with a certification to the effect that its legal practice had been conducted in compliance with the rules of ethics of the legal profession, and to be subject to possible "administrative audit" by the court.

Under the Report, professionals in an MDP controlled by non-lawyers, including its non-lawyer professionals, could invest in the legal practice of the MDP.

 

Commentary

The following comments relate principally to the Report's proposed MDP controlled by non-lawyers. Because such an MDP would be required to file periodic certifications with a state judicial authority, it is sometimes referred to below as a "reporting MDP."

1. Benefit Analysis. While the Report seems to favor the creation of the reporting MDP, it does not provide an analysis weighing the benefits to be derived from reporting MDPs against possible harm that they might cause to the core values of the legal profession. Rather, the Report seems to assume that the expected benefits are self-evident, and that the protection of core values is essentially a matter of adopting a program of judicial administration. The specific assumption seems to be that the integrity of those core values will be ensured by the Report's proposed certifications to be submitted by reporting MDPs, together with the Report's proposal concerning possible administrative audits of reporting MDPs. The Report does not examine the validity of this assumption which (as indicated below) seems open to question.

2. Maintenance of Core Values. Legal disciplinary rules are subject to interpretation. The core values of the legal profession rest on interpretations made in the best interest of the client. In an MDP controlled by non-lawyers, ultimate management would be in the hands of non-lawyers more likely to be concerned with economic performance by the MDP than with interpretations of legal professional rules made in the best interest of the client. It therefore would be surprising, as these rules were interpreted from time to time by lawyers in the MDP, if the lawyers were uninfluenced by the economic concerns of the non-lawyers in positions of ultimate control. Accordingly, it seems reasonable to expect that there would be an incentive for the lawyers in an MDP to interpret the legal rules of professional ethics in a manner most consistent with the interests of a management comprising non-lawyers, as contrasted with the best interests of the client. For this reason, there seems to be a substantial risk that, over time, the operation of MDPs controlled by non-lawyers would lead to the erosion of the core values of the legal profession.

This risk would hardly be reduced by the Report’s statement that lawyers in an MDP would not be required to take "instructions" from its non-lawyer owner-managers. Management’s views as to the MDP’s economic interests, including its interests in respect of particular clients, transactions and assignments, would not have to be communicated through "instructions." Lawyers within the MDP who were alert to its activities and sensitive to their own career opportunities could be expected to be keenly aware of management’s views even in the absence of "instructions." The threat to independent legal judgment would not be formal "instructions" from above but informed perceptions from below.

a. Discipline of Non-Lawyer Owner-Managers. The Report is silent on the question of whether the non-lawyer owner-managers of MDPs would be subject to discipline and, if so, in what form. Unlike the lawyers in the MDP, the non-lawyer owner-managers could not be suspended or disbarred from the practice of law. The matter of disciplining them is left entirely to the states adopting the Report. By failing to address the subject of whether legislation or judicial rules should create disciplinary measures for non-lawyer owner-managers and, in this connection, by failing to consider whether disciplinary measures for non-lawyer owner-managers could be adequate to ensure that the legal profession's core values would not be eroded, the Report does not add credibility to its recommendations for reporting MDPs.

3. The Role of the Courts. Control (ultimate ownership and management) of the reporting MDP would lie outside the legal profession; yet the reporting MDP would be permitted to engage in the practice of law as though it were controlled by legal professionals. This is the conundrum that the Report poses but essentially fails to address. Instead, the Report would convert the problem into one of judicial administration. It would turn the problem over to the courts, and leave to them the formulation of appropriate guidelines for ensuring that a legal practice ultimately controlled by non-lawyers had been conducted as though it were ultimately controlled by members of the legal profession. As a consequence, in each state the judiciary and the legislature would be called upon to decide whether they think it advisable for the courts to accept this novel assignment by taking jurisdiction over, and by accepting supervisory responsibility for, reporting MDPs.

This assignment would involve the courts in administrative activities quite unlike the handling of disciplinary cases relating to licensed members of the bar practicing in firms controlled by lawyers. In passing on a complaint relating to one or more members of the bar in a firm controlled by lawyers, a court functions essentially as a tribunal applying an established body of rules and precedent to a given fact situation. As appropriate, the court reaches a decision on the basis of relevant authority which often includes prior cases comprising the common law of legal practice. The equivalent of an adversarial judicial proceeding may be held to hear opposing arguments. If discipline seems appropriate, the court may (among other remedies) suspend or disbar a lawyer from practice. Put succinctly, the court here acts as a court.

In contrast, to deal with a legal practice controlled by non-lawyers, the Report would turn the court into an administrative agency having the open-ended assignment of policing MDP compliance with legal rules of ethics. This would take the court radically beyond such limited and discrete areas of administrative responsibility as (for example) overseeing the continuing legal education of lawyers. The court would become the investigative auditor of the ethics of the legal practice of every MDP controlled by non-lawyers. Legislative and judicial policy would have to be developed for this purpose. Subject to that policy, the court would need to develop procedures for verifying and substantiating MDP certifications, for reviewing the legal practice of MDPs, for evaluating that practice in the light of legal rules of ethics, and, generally, for carrying out these police functions in the context of a legal practice offering services to the public for the economic benefit of entities controlled by non-lawyers. Since the non-lawyers themselves would not be subject to suspension or disbarment from the practice of law, there would likely be a perceived need for the legislature and judiciary to prescribe remedies that would be appropriate in the context of an administrative audit.

a. Certifications and Administrative Audits. The reporting MDP would provide the relevant state court with certifications as to the MDP's compliance with that state's rules of professional ethics for lawyers, and would permit the court to conduct an administrative audit of the reporting MDP to assure compliance with those rules. Thus, in the first instance, it would be up to the MDP (owned and managed by non-lawyers) to determine whether it had maintained the core values of the legal profession; and the administrative burden would then fall on the courts to decide whether to verify the certification, whether to conduct an audit and, in the affirmative, to do so.

b. Certifications. The certifications would not seem designed to encourage interpretations of legal ethical rules made in the best interests of the client. Rather, this administrative approach to legal ethics would seem designed to encourage minimalist interpretations not inconsistent with the periodic filing of clean certifications, and unlikely to contribute to the maintenance of the core values of the legal profession. In this connection, the reporting MDP could be witness to a novel dynamic involving the non-lawyer owner-managers, responsible for filing clean certifications, and the MDP's practicing lawyers, charged with observing legal rules of professional ethics that are designed to protect the best interests of the lawyers' clients.

c. Administrative Audits. A state that adopted the Report and thereby assumed responsibility for conducting administrative audits of reporting MDPs could be expected to find it necessary to create and fund administrative support for the relevant court. If, however, the state did not create a judicial office of MDP administration (or its equivalent), the Report's recommendations might prove ineffectual in respect of reporting MDPs in that state.

Were a judicial office of MDP administration to decide to carry out an audit, it would get scant guidance from the Report, which is altogether silent on difficult questions that could arise in the course of an audit. How would the auditors be expected to go about verifying compliance with various disciplinary rules? How would they deal with client confidences and secrets? It would seem appropriate for the Report to have dealt with these questions in some detail in evaluating the efficacy of its proposal.

4. The Big Five Firms. The Report expressly recognizes the interest of firms known as the Big Five in practicing law. The Report's proposed program of judicial administration, based on certifications and audits, seems at bottom to be a response to problems inherent in permitting the Big Five to acquire and operate law firms and at the same time maintaining the core values of the legal profession. Conceptually, at least, the Report might have examined whether lawyer-controlled MDPs would not adequately meet the perceived need for MDPs. A system limited to lawyer-controlled MDPs would alleviate the Report's concerns over the maintenance of the core values of the legal profession.

5. Capitalization of Legal Practice. Under the terms of the Report, a Big Five firm would be able to acquire a hitherto independent law firm, thereby adding the substantial capital of the Big Five firm to the legal practice thus acquired. On the other hand, the Report would not permit independent law firms (including such a firm that transformed itself into an MDP controlled by lawyers) to acquire passive capital. Viewed from the perspective of the capitalization of legal practice, these features of the Report present an anomaly.

 

Conclusion

 

As just mentioned, the Report takes an anomalous position as regards the Big Five and the capitalization of independent law firms.

The Report strains to bridge the fissure between the core values of the legal profession and the MDP controlled by non-lawyers. The Report implicity recognizes that such an MDP cannot be treated as though it were an MDP controlled by members of the legal profession (controlled, that is, by persons trained in, and with a daily incentive to further the core values of, their own profession). The Report also effectively recognizes that the MDP controlled by non-lawyers would institutionalize the fissure underlying the Report. At the top of this MDP would be the non-lawyer owner-managers with ultimate responsibility for the MDP’s economic results. At some inferior level within this MDP would be the legal professionals charged with loyalty both to the non-lawyer owner-managers and to the core values of their profession. They would embody the conflict which the Report effectively recognizes but does not adequately address.

The Report would seek to cure this conflict by bringing in a judicial constabulary to police MDPs controlled by non-lawyers. Such an MDP would have to file certifications with the judiciary as to its compliance with the rules governing the legal profession. The judicial constabulary would be empowered to subject the MDP to "administrative audit." Just how this would be done in the context of the rules of legal ethics, the Report does not say. The application of, and compliance with, these rules is not always self-evident. Indeed, their application is embodied in substantial case law forming the jurisprudence of legal practice. The Report ignores this jurisprudence and turns facilely to the notion of "administrative audit," which is the Report’s philosophers’ stone. It exists only in the imagination of its creators. Thus would the Report seek to paper over the fissure upon which it rests.

In sum, the MDP controlled by non-lawyers would be fraught with danger to the core values of the legal system, and the novel policing function that the Report would bestow on the judiciary cannot be viewed as an adequate response to that danger.

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