April 8, 1999
STATEMENT OF PROFESSOR JOHN DZIENKOWSKI
UNIVERSITY OF TEXAS SCHOOL OF LAW
ABA COMMISSION ON MULTIDISCIPLINARY PRACTICE
This Commission has devoted enormous effort in studying the reality and feasibility of lawyers’ practice of law in organizations other than traditional law firms. This Commission has heard from a range of witnesses respecting the demand of users, large and small, for comprehensive solutions from a team of professional advisors. Although I am not expert on the demands of the market, I do believe that significant demand exists for such services from a spectrum of clients from multinational corporations to small businesses to individuals. For purposes of my discussion, I accept that consumers in the marketplace are demanding changes to the methods in which professional services are offered and delivered, and that consumers expect lawyers and other professionals to meet these changes. The questions, then, are what forms of practice structure should be permitted, and what rules should govern the practice of law in these organizations?
I have attended one set of Commission hearings in Los Angeles and have read all of the materials on the Commission’s web site. Witnesses have suggested a range of alternative practice structures in which lawyers and non-lawyers can deliver integrated services. For purposes of public dialogue, the Commission has outlined, on its web site, five possible approaches, which range from ad hoc teaming between separate firms of professionals for client specific projects to fully integrated multidisciplinary firms. Given my assumption that clients are demanding efficient and effective integration of professionals, and coordinated delivery of services in multiple competencies, the status quo cannot meet this demand. Therefore, Model 1, which reflects the status quo, is not an adequate answer to this demand. Further, Model 3 assumes that Model Rule 5.7 could be interpreted as a rule permitting MDP practice to occur. In light of the troubled history behind Rule 5.7 and the fact that it has not encouraged MDP practice to occur, I also do not believe that this is an adequate response to the demand for MDP services. Accordingly, my remarks focus primarily on the three models that represent change in the rules: Model 2, which sets forth the rule in the District of Columbia, and which would permit non-lawyers to become partners (and share fees) with lawyers in a law firm dedicated solely to the practice of law; Model 4, which would permit a law firm to enter into contract(s) with other professional service providers for back office support and to team with these providers on specific client engagements; and Model 5, which would permit a fully integrated multidisciplinary practice between lawyers and non-lawyers.
In Part II of these remarks, I comment at length on each of these three models. As part of this evaluation, I also address the hypotheticals posed by the Commission respecting these models. In Part III, I discuss the changes to the Model Rules that I believe are needed to permit multidisciplinary practice and protect core values. Importantly, many of the changes I propose have the added benefit of allowing traditional law firms to compete successfully with multidisciplinary firms. In Part IV, I respond to the questions posed to me by Commissioners during the February hearings. Finally, Part V argues why the ABA must address accommodate multidisciplinary practice in this global marketplace for legal services in the 21 st Century.
After close study and evaluation, I believe that Model 5, the fully integrated multidisciplinary firm, is optimal because it would satisfy the strong demand for integrated services; it could be regulated so that the core values of the legal profession would not be endangered; and it would best satisfy the needs of individual clients and the small firms and solo practitioners that service them. I believe that the fully integrated model allows the market to work without imposing unnecessary restrictions upon the form of MDP practice. As long as the core values of the profession are properly protected, why should we be concerned with regulating the specific form of MDP practice. However, if the Commission or the House of Delegates decides not to support Model 5, I do believe that Model 4 – the contract model – modified to allow sharing of legal fees in a joint venture does accommodate many but not all forms of MDP practice. Thus, at a minimum, the ABA should amend its rules to permit liberal contractual affiliations between law firms and non-law firms to provide MDP services to the public. Subsequently, the states will follow the ABA’s lead to allow lawyers and non-lawyers to meet the demands for this truly interdisciplinary form of professional services.
II. ANALYSIS OF DIFFERENT PRACTICE STRUCTURES
- Model 2: The District of Columbia Approach
The District of Columbia is the sole U.S. jurisdiction that permits fee sharing and partnerships between lawyers and non-lawyers. Under D.C. Rule 5.4, any partnership between a lawyer and a non-lawyer must have as its sole purpose providing legal services to clients; all non-lawyers in the partnership must abide by the D.C. Rules of Professional Conduct; and the lawyers in the partnership must ensure that the non-lawyers comply with all of these rules. Fee sharing between lawyers and non-lawyers is allowed only through such partnerships. As noted in the Commission’s background paper, only a few firms in D.C. have taken advantage of this rule, in part because the non-lawyer partner option is available only to firms with offices exclusively in D.C.
I believe this approach is significantly flawed because it limits the services that may be provided by a firm: the terms of the rule direct that the firm must "solely" offer legal services. Consumers today increasingly have problems with legal, financial, and business components. They want to retain professionals with the necessary skills to solve these problems, and do not care about what the professionals call themselves. Let me give you just one example. A recent article in the Legal Times discussed necessary business planning for possible disruptions to computer operations because of the "Year 2000" (Y2K) problem. As the reporter noted, "the most effective contingency planning requires a multidisciplinary approach incorporating at least four elements: business prioritization, computer technical advice, public relations, and legal advice." I would expect that a lawyer would have a central role on any team providing Y2K advice, but I do not believe that the work done by the other team members could properly be called "legal services." Contingency planning for Y2K offers a paradigm for multidisciplinary service, but such services could not be offered by lawyers and non-lawyers practicing together under D.C. Rule 5.4. One could give many other examples, such as family mediation services, web design and market study in coordination with an international business transaction that fail the "solely the practice of law" requirement.
The primary purpose in regulating the legal profession is to protect the public interest. It is very difficult to provide a valid justification for a rule that permits lawyers in law firms to practice with non-lawyers, but does not permit lawyers to practice in other practice structures. Under this type of rule, mediation centers, estate planning and family wealth firms, and consulting firms could not add practicing lawyers to their partnerships and integrated teams of professionals. Indeed, this rule would frustrate, rather than advance, the delivery of integrated, multidisciplinary services to users. By its very definition, multidisciplinary services cannot and would not be fostered under this rule. If the ABA were to adopt DC Rule 5.4, it is likely that the DC experience with its rules would be replicated throughout the country. A few law firms would consider adding non-lawyer partners. However, for the most part, the rule would not change current practice.
The Commission asked a number of questions stemming from its hypothetical involving Model 2. Essentially, this hypothetical proposed a law firm with a lawyer, accountant, and financial planner as partners, where the CPA and financial planner continued to practice part of their time in other firms. The Commission hypothesized that the CPA firm advised a client, and the law firm was asked to represent a client who was adverse to the client of the CPA firm. The Commission asked whether the clients of the CPA firm would be imputed to the law firm and, if so, how could any conflicts between the clients of the two firms be resolved?
Assuming the rule did allow such an arrangement, the resolution of this hypothetical turns on the fact that the law firm and the CPA firm are separate legal entities, with separate client lists. The firms offer different, and distinct, client services. As a result, under the existing rules, conflicts would not be imputed between the two firms. For example, under Model Rule 5.7, matters handled by a law firm’s in an ancillary business are not imputed to the law firm. There is no reason to treat the hypothetical CPA firm and law firm any differently. Of course, the practitioners in the CPA firm and the law firm must preserve client confidences, and cannot share confidential information with the other firm, unless the client expressly consents. Thus, automatic imputation between all members of the law firm and all members of the CPA’s accounting firm does not seem to be required by any rules and should not as a matter of policy be done.
But, Hypothetical 2.1 poses a situation where an accountant audits a Husband’s financial statements and the law firm in which the accountant is a partner is asked by the Wife to represent her in a divorce. As with any individual working in a firm, whether a paralegal, a secretary, or another employee or a lawyer, when the firm examines a matter for actual or potential conflicts, all individuals who may have a conflict must be identified. When the accountant notifies the law firm partners that he or she has personally worked on an audit of the husband, under current D.C. Rule 5.4 and the former client conflicts rules, the CPA and all of the CPA’s law partners would be disqualified if information from that audit was related and material to the divorce.
- Model 3: Ancillary Business Model
The ancillary business approach is based upon current Model Rule 5.7. Although this approach – lawyers and non-lawyers owning ancillary businesses and law firm sending clients to these businesses for non-law services – has some initial appeal, this approach to MDP has many problems. Model Rule 5.7 in its two forms has a troubled past largely affected by various customary practices that currently exist in the states with respect to title companies and other businesses owned by lawyers. The original rule sought to limit lawyer investment in law-related ancillary business services to services only provided to clients of the law firm and under the direction and control of the lawyer owners. The focus of the rule was to limit conflicts of interest between the law and non-law services and to limit problems of solicitation of the general public. The amended rules abandoned these policies and instead focused solely on whether a client receives the protection of the attorney-client relationship in the ancillary business. Both versions of the rule have been criticized and should be amended to focus on the protection of clients. The amendments and the failure of the ABA to require disclosure to clients of the lawyer’s ownership interest in an ancillary business illustrate the political compromises that have been made in Rule 5.7. This rule does not address the fundamental questions necessary to protect client interests and the general public. And, thus it poses very significant dangers for the profession if it decides to use this rule as the provision to regulate MDP services.
Rule 5.7 is not designed to regulate the delivery of MDP services; instead, it is a rule addressing lawyer investment in a law-related business such as a title company, document production service, or real estate brokerage company. If the client receives services that are not distinct from the delivery of legal services, the lawyers must ensure that both the law firm and the non-law firm comply with the Model Rules. If the lawyers make it clear that the law-related services are not legal services and separate and distinct from the legal services, then the ancillary business does not need to comply with the Model Rules.
If Rule 5.7 were applied to foster MDP services, lawyers would continue to control and own law firms, and lawyers and non-lawyers could own non-law ancillary businesses. However, non-lawyers in such ancillary businesses could not participate in the delivery of legal services to clients. Thus, if the MDP services were delivered seamlessly together with legal services, I would interpret Rule 5.7 as prohibiting non-lawyer ownership in the entity. In other words, the status quo would remain in force reinforcing Rule 5.4. If the non-law services were delivered in a distinct manner from the legal services with full disclosure to the client, the lawyer and non-lawyer could jointly own the non-law entity. Given these artificial restrictions on partnering and ownership, it is difficult to see how MDP services would proliferate. Furthermore, given the weak reasons underlying the artificial restrictions, MDP practice could provide the situation in which such rules would face antitrust and FTC scrutiny. What justifies a rule that allows lawyers to partner in a non-law entity and send business back and forth and even fail to disclose the ownership interest to the client and not allow non-lawyer investment in an MDP practice? Therefore, I do not believe that Rule 5.7 in its present form can be used to structure the future of MDP service in the American legal profession.
The two hypotheticals presented by the Commission involving the ancillary business model ask questions of imputation between the law firm and the ancillary business. If the law firm and the ancillary business provide integrated services, which by definition carry the protection of the rules of professional responsibility, all joint work for clients would be imputed back to the firm and would require compliance with the conflicts rules. Even if the law firm invokes the aspect of Rule 5.7 that removes the protection of the rules from the non-law service, to the extent that there is overlap with the legal work, the client would receive protection from the ethics rules. However, if the non-law entity solely performed non-legal work for a company, the non-law representation should not be imputed to the law firm and its clients (Hypothetical 3.1).
- Model 4: Contract Approach
The Commission’s Statement of Hypotheticals and Models defines a Contract Model of MDP services in which the law firm may agree to an advertising affiliation with a professional services firm, agree to refer clients to that entity on a nonexclusive basis, or agree to purchase or exchange services from that firm. In the Commission’s description of the contract model, no mention is made of a sharing of fees or costs. Thus, I presume that the Commission’s contract model differs substantially from the model that I refer to as the joint venture model.
The Commission’s contract model is permissible under the current rules of professional responsibility and some law firms have created such contractual affiliations. I presume that this is the case with the Miller & Chevalier law firm and their association with PricewaterhouseCoopers. Although law firms could affiliate in such an arrangement in virtually all fifty states, very few have done so with other professional services firms or with other law firms in the so-called law firm networks.
As the Commission noted in its background paper, and as some witnesses have explained, law firms have established affiliations with other professional providers in many countries outside of the United States. These affiliations appear to take many forms, depending on the regulatory structure of the country. I heard testimony from Mr. Cochran, a lawyer in the Scottish firm of Dundas & Wilson, where Mr. Cochran explained that his firm had a relationship with Arthur Andersen whereby Andersen provides office support services to his law firm, including telephone and computer system maintenance, and his law firm and Andersen team together to offer services to clients.
Several members of the Commission pressed Mr. Cochran as to why this contract approach would not be sufficient to meet client needs. I think the simple answer can be found in the March 18, 1999 Wall Street Journal article, Drive to Go Global Spurs Law Firm Merger Talk, which reports that many American firms are seeking to merge with London firms to create a single firm with a global presence, or are enlarging the size and the number of their branch offices. For the most part, U.S. law firms are not growing by joining a legal network. They recognize that a common partnership fosters a shared culture and produces consistently high work product with uniform attention to professional standards. One firm creates a fabric of mutual dependence, teamwork, and collaborative effort, rather than an ad hoc approach to client problems. The urge to merge driving law firms is the urge to create one firm culture, with numerous lawyers trained in multiple specialties, that can provide a range of legal services, and provide clear accountability to clients. The contract model proposed by the Commission fails to deliver any of these values that both clients and law firms believe to be important. Two firms with separate methodologies and technologies, including different policies and procedures, will lead to uneven work product. A contractual arrangement will also foster competition instead of collaboration between the firms.
I also believe that any contracts between law firms and other service providers would open up a new regulatory battleground. As long as the legal profession embraces the prohibition against fee sharing with non-lawyers, these contractual arrangements will lead to numerous complaints that the cost-sharing contracts amount to fee-sharing, and that the amount of back office support either subsidizes the law firm or constitutes profit sharing between the law firm and the other provider. These arrangements would provide little regulatory comfort that rules prohibiting fee-sharing and payment of referral fees are being honored. All that is being honored in these arrangements is the comfort of the familiar – the time-tested traditional law firm teaming on an ad hoc basis with another service provider.
Moreover, the contract model may, as a practical matter, preclude the joint offering of services in those situations where the demand is most acute – to the individual or small firm client. The solo and small firm practitioners that service such clients may find it too complicated or cumbersome to contract with other professionals, or may be fearful that doing so will increase their exposure to liability without a concomitant sharing of the risk of such exposure. For the small firm or solo practitioner considering a possible multidisciplinary arrangement, a fully integrated structure simply makes more economic sense, because the risks and costs of such a venture are more easily spread among the various participants.
With these criticisms of Model 4 in mind, I turn to address the Commission’s hypotheticals for this Model. Almost all involve a law firm contracting with a professional services firm, in which the professional services firm provides support services, and teams with the law firm for specific client engagements, and the two firms advertise their relationship. The Commission asks whether the clients of the professional services firm should be imputed to the law firm when the law firm has not worked on the matter with the professional services firm. This question is similar to the question asked for Model 2, except here the relationship is one step farther removed. In this question, the law firm only has a contractual relationship with the professional services firm for support, and teams on some client relationships, but there are no dual partners of the firms. There is plainly no basis to impute the clients of the professional services firm to the law firm. The consequences of imputing clients in these circumstances are far-reaching, since it would mean that every client of each law firm in a network like Lex Mundi would have to be imputed to every other firm in the network. The ABA has already rejected that approach in its Formal Opinion 94-388 (Dec. 5, 1994). To impute here would therefore be a giant step backwards for the bar. Of course, if a lawyer worked on a matter with the professional services firm, that lawyer’s personal experience would continue to serve as a basis for checking conflicts or for the compliance with the rules of professional responsibility.
In Hypothetical 4.1, A & B should be free to accept the representation of Wife even though Husband used the contractually affiliated XYZ’s accounting services. For the benefit of informing the public, I would recommend but not require that A & B and XYZ’s engagement letter with clients indicate that the firm has a contractual affiliation with XYZ but no imputation of conflicts arises and the firms do not share information. The answer to this hypothetical would be the same regardless of the matter handled by the accounting firm – accounting or litigation -- support because these firms are two separate entities.
In Hypothetical 4.2, a similar situation is presented whereby a Target company asks the law firm, A & B, to represent it in a potential hostile takeover and Raider is using the professional services firm, XYZ. In the contract model, if the law firm has done no work on XYZ’s representation of Raider, there should be no imputation to disqualify the law firm. Any other conclusion would remove all incentives for the law firm and non-law firm to affiliate. And, no policy reason is served by imputing the conflict. Given this conclusion, in Hypothetical 4.3, no imputation should result when XYZ affiliates with different law firms in different regions. If XYZ is actively representing Raider along with one law firm, there should be no active imputation of the conflict to other law firms with which XYZ is affiliated. However, if one of those firms accepts a representation of Target, and then approached XYZ to perform some non-law services on the takeover, XYZ would need to decline the representation.
- Model 4 Plus Fee Sharing: Joint Venture MDP Model
As stated above, the Contract Model described by the Commission does not include sharing of fees between the law firm and the non-law firm. As I outlined in my presentation before the Commission, I do believe that MDP services could be offered in a contractual Joint Venture model. Such a model would allow two separate firms to affiliate through a contract which allows: (1) the sharing of fees, (2) advertising of a joint entity which offered legal and non-legal services, and (3) no automatic imputation of conflicts because the entities remain separate.
One significant advantage of the Joint Venture Model is that such an arrangement can exist without major changes to the conflicts rules. For purposes of conflicts, this model would examine conflicts through three separate entities for conflicts checking: the law firm, the non-law firm, and the MDP venture. Conflicts would not be automatically imputed from one entity to the other for purposes of the former and present client conflict rules. Further, pure business competition conflicts would be significantly eliminated and conflicts would be limited to identical subject matter conflicts. If a client approaches the joint venture for MDP services or if the law firm or non-law firm referred a client to the joint venture, the persons in charge would examine whether the representation could be accepted. With respect to the law firm, the lawyers would need to determine if a conflict existed and whether the firm was able to accept the representation. With respect to the non-law service provider, the non-lawyer would need to determine whether it could accept the matter given its professional standards. If the law firm discovers a conflict, the non-law entity could accept the representation and affilliate with another law firm. If the non-law entity discovers a conflict, the law firm could similarly turn to another non-law service provider.
The Joint Venture MDP does have some disadvantages. First, the requirement that both entities remain separate imposes a fictional structure that may inhibit true teamwork and synergy with little apparent protection for the public. Second, although the joint venture MDP may work well for the large accounting firm and law firm, it will inhibit creation of small MDPs that focus on low and middle-income clients. It is difficult to imagine that a Family Law Mediation Clinic or a Gerontology Law Clinic would work well with a Joint Venture MDP because these often require the partnering and close working relationship that a single entity MDP provides. Finally, unless the relationship resulted in significant increases in profit to both the non-law and law entities, it is likely that the potential joint liability would operate to discourage the existence of such entities.
- Model 5: Fully Integrated Multidisciplinary Practice
The Commission’s Model 5 proposes a fully integrated partnership between lawyers and non-lawyers offering client services. In my view, it is Model 5 that permits the efficient and coordinated delivery of services from professionals in multiple competencies. Multidisciplinary firms can fully share knowledge and intellectual capital to provide the best solutions to clients. These firms can support the communication networks and common strategies that are vital to delivering client services. I believe that a fully integrated MDP allows the market to work to provide the most efficient delivery of law and non-law services to clients who demand such services.
I have studied with great care the materials presented to the Commission and I am mindful of the concerns expressed by some witnesses that integrated service firms offering legal services could threaten certain core values of the legal profession. In my view, these concerns should not lead the bar to categorically prohibit MDPs. Instead, the bar should deal forthrightly with admittedly tough issues, and fashion specific, narrow rules to address these issues.
In my presentation to the Commission, I made specific suggestions about how an integrated MDP should fit into the current regulation of the legal profession. First, all lawyers practicing law in a single entity MDP would be required to follow the Model Rules and be subject to the disciplinary authority of the local bar. Second, lawyers who are acting as lawyers and holding themselves out as practicing law to clients should be organized in a separate legal department. Third, I would prohibit MDPs from representing clients in federal and state courts; such litigation activity would remain with traditional law firms. Finally, I would prohibit passive investments in MDPs. Given my suggestions, I will now examine the manner in which a fully integrated MDP would potentially affect the core values of the legal profession.
1. Maintaining confidences . Some witnesses have expressed concern that client information from a joint engagement would be shared between the lawyers and the non-lawyers in the firm, destroying confidentiality and the attorney-client privilege. This concern rests, however, on the erroneous assumption that a lawyer can never share confidential client information with a non-lawyer. Lawyers, of course, share such information all the time – with secretaries, paralegals, experts, and others who assist them in rendering legal advice to a client. Confidentiality and the privilege are preserved because, under Model Rule 5.3, the lawyer must instruct the non-lawyers with whom he or she works of the duty not to disclose information relating to the representation of clients on legal matters. And this requirement has force because a lawyer can be disciplined if his non-lawyer associates reveal confidential client information.
The situation would be precisely the same if a lawyer worked on an engagement with non-lawyers in an integrated services firm. The key question that would need to be addressed, at the outset of the engagement, is whether the communication with the lawyer is made to obtain legal advice, or whether the communication was made to obtain law-related services, such as strategic financial advice. The key here is transparency: the client must be informed from the start that privilege may not attach to communications with non-lawyers on an engagement team. The client can then decide whether to use the lawyers in the MDP or whether to retain a separate law firm and maintain privilege.
2. Independent professional judgment. A number of witnesses have maintained that participation of non-lawyers in organizations offering legal services would impede the independence of lawyers. I have found that none of these witnesses have offered any evidence to support their concern. Nevertheless, I believe that lawyers in an integrated MDP who practice law and hold themselves out to clients and the public as offering legal services should be grouped together in a separate legal department, and should be governed by the applicable rules of professional conduct. Such a department would eliminate any lingering concern about interference with the professional independence of lawyers. And, it would serve the goal of maintaining a mentoring atmosphere where less experienced lawyers learn from senior attorneys through the mentoring process.
Grouping all practicing lawyers in a legal department would also avoid client confusion. A client would know that he is receiving legal services if a lawyer from the legal department works on his engagement. Lawyers in that department would report to, and be supervised by, lawyers. Delivery of services by any lawyer in the law department, even services that involve a combination of legal and business advice, would be governed by the rules of professional responsibility. Lawyers in the law department would be required to comply with the bar rules in the jurisdiction in which they are licensed, and would need to satisfy any continuing legal education and pro bono requirements imposed in the jurisdiction. As is the case today, lawyers in a law department would bear responsibility for the individuals that they supervised. And, a single law department would serve the goal of making it easier for a local disciplinary authority to regulate the practice of law in an MDP.
Of course, not all individuals trained and licensed as lawyers will elect to practice in a law department. As you are aware, accounting firms today hire individuals trained as lawyers to provide tax advice to clients, and these individuals do not hold out as lawyers and do not create client expectation that they are practicing as lawyers. These individuals should be able to continue to provide tax advice to clients without joining a law department because they would not hold out as lawyers and would not create any client expectation that the legal profession’s rules apply to the engagement. I would caution you that any effort to force them to join a law department and be regulated by the bar will necessarily lead to the assertion of the attorney-client privilege by the clients of these practitioners. Lawyers practicing tax in law firms may find that such a requirement ultimately puts them at a competitive disadvantage.
For the same reasons, I would prohibit passive investments in a legal practice. Where the non-lawyer is not providing services to clients, the non-lawyer conceivably could be less sensitive to the lawyer’s obligation to exercise independent judgment for the client, particularly where doing so will not advance the economic interests of the firm. This potential difficulty is avoided if ownership of the multidisciplinary firm is limited to individuals providing client services.
3. Rendering conflict-free advice. This Commission has spent a great deal of time addressing conflicts issues that might arise in a fully integrated multidisciplinary practice. Most of the hypotheticals pose questions of imputation and conflicts. In my view, many of these issues apply with equal force in a traditional law firm, and our conflicts and imputation rules are in need of revision. I do not propose that we abandon all notions of conflicts of interest and imputation so as to accommodate non-lawyers in an MDP. I am suggesting that we should reexamine the conflicts rules to tailor them so as to ensure protection of clients in receiving competent representation. However, those rules that go beyond the instrumental justification for limiting the effects of conflicts must be reevaluated. I will address these issues below.
I recognize, however, that litigation by an MDP may present difficult conflicts issues. To reduce these difficulties, I propose that the rules contain a bar on litigation in state and federal courts by the legal services department of an MDP. A litigation carve-out makes sense because of the unique role of lawyers who appear in federal and state court proceedings. Litigation is a public function of the judiciary and the judicial system needs to maintain full control over all professionals who appear before them. Further, it is important to maintain the role of lawyers as officers of the court. This would ensure that the litigation functions of discovery and duties of candor to the court are properly maintained. Ultimately, in litigation, the tasks and control of litigation should remain with the legal profession. This is justified by the special nature of litigation and the importance of protecting the public and the judicial system.
With these principles in mind, I would like to address the Commission’s hypotheticals relating to Model 5. The Commission asked whether the matters and clients of the business consulting unit of a professional services firm should be imputed to the entire firm. As I will explain more fully below, I believe that the firm-wide imputation rules are in need of revision. I propose that the imputation requirement be eliminated, except where the firm is asked to simultaneously advise two clients on the same matter taking adverse positions (violations of Rule 1.7(a)). With that principle in mind, I do not believe that hypothetical 5.1 requires the firm-wide imputation of clients. The marketing and technology consulting team has provided advice to Target. Raider approaches the legal team and seeks to hire it to pursue a hostile takeover of Target. Of course, the legal unit would need to perform a conflicts check. The conflicts check would identify the consulting team’s representation of Target. All professional services firms would make a business decision whether the clients would care about each other and whether it ought to accept the representation. I believe that given that the conflict presented is a materially limited conflict under Rule 1.7(b), the MDP could draw firewalls between the team that had represented Target and the team that was going to help Raider. I would require that, if the two representations are concurrent, the MDP should disclose the fact that one of its teams represents the other company. If the clients choose to fire the MDP, that is their decision. If the terms of the engagement prevent disclosure of the representation, then the MDP should decline the representation or wait until the initial representation has been completed.
Hypotheticals 5.2-5.5, however, present the situation where two clients of the same firm are directly adverse. Under both the existing conflict rules and my proposed modification to Rule 1.10, the conflict would be imputed to the entire firm. I believe that this conflict should be fully waivable, provided both clients are informed and consent to the simultaneous, adverse representation. Further, firewalls must be used to insulate the engagement teams from one another. The presence of a lawyer on one team but not another is not relevant to the analysis, since the presence of just one lawyer should trigger the legal profession’s conflict rules. The physical proximity of the two teams also does not matter, so long as appropriate firewalls are maintained. Of course, in most situations, one client would withhold its consent to the representation of both sides of a hostile matter.
NECESSARY CHANGES TO THE MODEL RULES
The ABA Model Rules must be amended in order to facilitate the formation of multidisciplinary practices as well as to allow lawyers in traditional law firms to better compete with other providers of professional services. In this section I discuss some of the changes that I view as necessary.
Model Rule 5.4. First, and most obviously, Model Rule 5.4 should be amended in order to allow fee sharing and partnerships between lawyers and non-lawyers. For the reasons discussed above in connection with the D.C. model, the new Rule 5.4 should not require that the entity be devoted solely to providing legal services nor that lawyers control the entity. Conforming changes would also have to be made to the comments to Model Rules 1.5 and 5.7 to allow fee sharing between lawyers and non-lawyers in an MDP.
Model Rule 7.2. Assuming that multidisciplinary arrangements are to be permitted, the advertising and referral fee rules also need amendment. Model Rule 7.2 should allow both multidisciplinary joint ventures and fully integrated MDPs to advertise their combined services. Further, non-lawyers participating in the arrangement should be permitted to advertise, without restriction by the bar, any non-legal services they may offer. And finally, Model Rule 7.2(c) should be amended to permit law firms and affiliated firms within a network to refer matters between one another, and also to permit referrals between lawyers and non-lawyers within an integrated MDP.
Model Rules 1.7 and 1.10. As quite a few witnesses have urged, the conflicts and imputation rules should be adjusted to reflect the realities of legal practice on the cusp of the 21 st century. As matters now stand, certain conflicts cannot be waived by clients, and all conflicts are imputed to the firm as a whole. Mr. Tucker criticized the scope of these rules, explaining that the "geographic reach and substantive breadth of law practice today has, as a practical matter, outgrown the Model Rules. * * * The notion of imputed knowledge of facts was developed during a time when law firms were small and self-contained, in one city or, at most, two cities in one state. We should not be governed by antiquated Rules." I agree.
In my view, firm-wide imputation of conflicts should be limited to the instance where the firm is asked to represent two clients in a matter who are directly adverse. For example, A wants to engage in a hostile takeover of B, or A and B are both bidding for the same broadcast license. The primary force behind the imputation rules is the duty of loyalty, and this duty is put at issue when one firm is asked to represent two clients who are adverse to each other in the same matter. However, I recognize that, in certain circumstances, both clients may want to have separate teams in the same firm representing their adverse interests, provided that the confidences of each client are maintained. Clients should be able to make the choice to waive such a conflict, upon a full understanding of the conflict and the risks and benefits to them of a waiver. In my view, the rules need to be revised to permit clients to waive direct conflicts, upon full disclosure.
But the vast majority of imputed conflicts that law firms face today are not directly adverse conflicts. Rather, conflicts more often arise when one lawyer in a firm seeks to represent a client in a matter, but another lawyer at the firm advises a second client who has interests generally adverse to the first. For example, the first client seeks assistance from the firm in its bid to acquire an asset held by the second client, but the second client looks elsewhere for representation in connection with the potential sale. Or perhaps the two clients are adversaries in unrelated litigation, in which the law firm has no involvement. Maybe the two are fierce business competitors who regularly do battle in the marketplace. Under the current version of Model Rule 1.10, a law firm could not undertake both representations in any of the situations just described, without consultation with and consent from both clients.
In this circumstance, the imputation rule is in most need of change. When two clients seek assistance from separate lawyers or teams from the same firm, and the two clients are adverse in matters where lawyers from the firm represent at most one of the clients, the rules should simply require full disclosure of the situation to both clients, and implementation of firewalls or other procedures to prevent the two engagement teams from sharing confidential information about either client. Each client can make an informed choice whether it wishes to retain the law firm or look elsewhere. But neither client can preclude the firm from representing the other client. And if both clients decide to retain the firm, they can be assured that their confidential information will not be used against them. Structuring the conflicts rule in this fashion allows a client to weigh the importance of using a firm that does not also represent one of its adversaries or competitors alongside all of the other factors that go into selecting a lawyer.
My suggested modifications to the conflicts and imputation rules rely in part on the mandated use of firewalls to protect client confidences. It is useful to spend a few moments reflecting on the efficacy of such procedures. Mr. Fox and a few other witnesses have urged the Commission to reject the use of firewalls as not trustworthy, because they purportedly are not an effective means for protecting confidential information. I am a bit puzzled by such contentions. First, the bar itself endorses the use of firewalls in Rule 1.11, with respect to government lawyers and this rule has been generally regarded as very successful in practice. The American Law Institute’s Law Governing Lawyers has endorsed screening as a method of removing imputation to the firm in the former client context and when information is learned from a prospective client who ultimately hires another law firm. And, as a number of witnesses have pointed out, firewalls are regularly used outside the legal profession to impede the flow of confidential information.
I would like to make a more fundamental point, however. Firewalls are, of course, only as good as the people who work on either side of them. Those who argue that firewalls can never work are essentially saying that lawyers cannot be trusted to preserve client confidences. I am deeply troubled and concerned by the ramifications of accepting such an argument, since it would tend to suggest that many of the ethical rules need to be adjusted. Further, the argument ignores that several overlapping mechanisms exist that work to ensure that firewalls are maintained and client confidences are not, in fact, revealed. The potential for malpractice lawsuits will have a large role, since firms will justifiably worry about the liability that would follow a breach in a firewall. Likewise, the market will pressure firms to maintain their firewalls, since the failure to do so will place them at a competitive disadvantage. And finally, the bar disciplinary system is also important, since a lawyer’s failure to honor a firewall would unquestionably be cause for discipline.
IV. RESPONSE TO SPECIFIC QUESTIONS FROM THE COMMISSION
I would finally like to turn to some of the questions the Commission asked following my testimony on February 5, 1999.
- Limits on Who May Practice in an Integrated MDP
In my presentation to the Commission, I suggested that the participants in an MDP be limited to what I called "non-legal professionals." During the question and answer session, I was asked by the Commission to define what I meant. Upon reflection, I have reached the conclusion that it would be inappropriate for the bar to limit the participants in an MDP in any such fashion.
As Chairman Simmons suggested, absent such limitations, a tow truck driver, undertaker, beautician, or the like could enter into practice with an attorney. There are many in the bar who find these prospects distasteful, and are fearful that such arrangements would demean the whole profession. Therefore, a temptation exists to craft a bright line rule that would clearly preclude these types of partnerships. Two obvious approaches are: (1) the rule I proposed – limiting the MDP to non-lawyer professionals; and (2) the rule I understand has been adopted in some states by the accounting profession – limiting the practice to individuals who offered services that were not "incompatible" with the practice of law.
Both of these approaches suffer from the same definitional flaw. Who qualifies as a professional? What about an economist? An appraiser? An MBA? An expert software designer who never graduated from college? Likewise, what services are "compatible" with the practice of law? The services offered by a private investigator are quite compatible with the practice of a criminal lawyer. But what about the practice of a divorce attorney? And who is the arbiter of these questions? If the state bars decide, I imagine there would be numerous and inconsistent answers. Further, just attempting to respond to these questions is fraught with peril, given that it puts the bar in the uncomfortable position of deciding with whom it is seemly for a lawyer to associate.
It is useful, perhaps, to take a step back and analyze whether these sorts of limits on the scope of the MDP serve any valuable function. What bothers us about a lawyer partnering with a tow truck driver? The concern, I believe, is that the tow truck driver will steer clients to his lawyer partner. But the ethical rules already forbid such conduct, and so the lawyer who sought to use his tow truck driver partner for such purposes would find himself forestalled by his professional obligations. The arrangements we fear, and that are held out as reasons for a prophylactic rule, would in all likelihood then not occur very often. A smart lawyer will only wish to partner with someone who can add value to his practice. And, absent the prohibited funneling of clients, what value would the tow truck driver or the beautician or the undertaker add?
- Sale of a Product By a MDP
The Commission also asked that I address in this paper whether the potential sale of a "product" by an MDP raises any problems. By "product" I assume that the Commission is referring to financial investments, tax shelter programs, and similar legal devices that an MDP might market and sell to multiple clients with similar needs.
The Big Five have apparently had quite a bit of success in providing their clients with these sorts of "products," and I have heard several concerns expressed about some of their tactics. First, the Big Five apparently have sought to cloak their products with the protections of intellectual property. They have been treating them as trade secrets, and have asked clients to sign non-disclosure agreements before providing them with the details of the product. I am not, however, troubled by such practices, and would not be concerned to learn that a lawyer at a law firm or an MDP similarly tried to protect his work product. Whether the law of intellectual property will ultimately offer legal protection to professional services is still an open question. However, the ethical rules of the legal profession do not preclude such conduct.
Second, some have argued that it is inappropriate for a firm to charge the tenth or hundredth client who purchases a product the same price that it charged the first client, given that substantially less time was spent on behalf of the tenth or hundredth client. Again, however, no ethics rules prohibit such a practice. Law firms do it all the time – sometimes they call it value billing, sometimes they call it a contingency fee. The only restriction is that a lawyer cannot misrepresent the number of hours he has spent on a matter. Lawyers must sell such services at a flat rate or contingent fee.
Third, it has been suggested by Harvard Professor Bernard Wolfman that the sale of such mass produced products may reflect a lack of competence. Professor Wolfman assumes that a firm that sells a product to a client will not tailor it to the specific and individual needs of the client. In a society of computer generated work product, this is a danger for all professionals. The law firm, accounting firm, or MDP that fails to take into account the individual needs of its clients will undoubtedly violate a duty of care to the specific client. Moreover, the use of "stock products," as Professor Wolfman calls them, is a tried and true practice in the legal profession. What lawyer doesn’t look back at old briefs or pleadings or contracts when drafting new ones? Who doesn’t rely on form books? Indeed, the lawyer with the largest stock bag is often the most valuable to his clients, because of his experience handling similar matters. Since I do not believe this is a problem unique to the accounting profession, I do not believe this should be a special concern for the regulation of MDPs.
- The Provision of Tax Services
The Commission asked where, in an integrated MDP, I would put lawyers who provided tax services. There are two possibilities – the legal department or the tax department. For reasons discussed above, I believe that individuals in an MDP who have legal training and wish to provide tax services to clients could appropriately be located in either department. The choice turns on whether the individual wishes to hold him or herself out to clients as a lawyer. If so, then the individual ought to be located in the legal department. But, if the individual opts not to hold him or herself out as a lawyer, then the individual should be located in the tax department. Note also that some services such as return preparation do not qualify as the practice of law regardless whether an attorney performs them.
- Tax Court Rule 24(g)
Finally, I was asked about the interaction of Tax Court Rule 24(g) and Tax Court Rule 201. Rule 24(g) addresses certain specific conflicts of interest that often arise in tax matters, and sets out a mechanism for handling such conflicts. Rule 201, on the other hand, adopts wholesale the ABA Model Rules, including, of course, those rules that govern conflicts of interest. As Chairman Simmons observed, the requirements of Rule 24(g) are not wholly consistent with the requirements of the ABA Model Rules.
I do not believe that this is an issue that should detain the Commission for long. First, the Tax Court has apparently decided not to enforce strictly its rules in this area. Although I agree that a court should not have a rule that it does not enforce, it is certainly not for the ABA to tell the Tax Court that it must enforce its rules. Further, whatever conflicts rules the Tax Court chooses to enforce will apply equally to all individuals who practice before it, whether they work at a law firm, an accounting firms, or an MDP.
The American Legal Profession has historically embraced the basic tenets of a profession: education, self-regulation, and a spirit of public service. The American Bar Association (ABA), as the self designated body to lead the regulation of American lawyers, has continued to insist on the importance of professionalism and the maintenance of the core values of the legal profession. These efforts are all made in the spirit of protecting the public who must use legal services to maintain and protect legal rights in society.
Although there have been many challenges for the ABA in the past two centuries, the global economy poses some of the most difficult problems for the regulation of American lawyers. The rise of the multinational corporation began this movement towards internationalization; and trade agreements among neighbors did relax barriers to a limited extent. However, the General Agreement on Tarriffs and Trade (GATT), the development of the European Union, and other trade agreements put in motion the basics for a trend towards free trade in goods and services across national borders.
The end to economic protectionism brings many benefits and costs to a nation. It opens markets for imports and exports and allows the market conditions to determine supply and demand. Ultimately, the public is viewed as the beneficiary of such free flow of goods and services. However, the costs include increased competition for national industries and a surrender of some of the sovereignty that nations traditionally enjoy in their status as sovereigns. The ABA and the state regulatory authorities are beginning to face the pressures of a global economy. Increased competition from foreign providers of legal services are imposing pressures on the way in which legal services are delivered in this country. The ABA can no longer regulate American lawyers apart from changes brought about in the global economy. If it insists on resisting change, American lawyers will no longer be competitive in delivering legal services to the world’s corporations.
Multidisciplinary services to corporations, partnerships, and individuals are certain to occupy a prominent role in the world economy. If the United States is to remain a center of global commerce, the legal profession must accommodate the demand for MDP services. And, the ABA has a unique opportunity to set forth a regulatory structure, which balances the accommodation of other disciplines alongside with the delivery of legal services and the protection of the core values of the profession. The decision to reinforce the status quo ultimately will lead to the legal profession’s subsequent inability to play a key role in shaping the delivery of MDP services.
The Commission’s Background Report does a great job of describing the benefits that clients may obtain from using multidisciplinary services. I would like to reinforce the reasons why I believe MDP practice brings benefits to serving the public.
The major benefit of MDP services is the delivery of an integrated team approach to serving client interests. When individuals work together on a regular basis, they provide a synergy that is simply not present when an individual works alone. The synergy is more likely to produce a higher quality representation for the client considering law and non-law facets of a representation in one unified team. Without MDP services, some clients will choose not to involve other non-law professionals even though it would benefit them to do so. And even when they do choose a quasi MDP approach, the coordination of several sources of services has the potential to affect the quality of services they receive.
The second major benefit of MDP services is the efficiency that translates into savings of time or money, and results in a higher quality product. Thus, a client with legal and non-legal problems does not need to schedule appointments with several service providers who may or may not have worked together before. The transaction costs include duplication of effort, need for the professionals to consult each other with costly conferences or meetings, and the need for each provider to bill a sufficient dollar amount to ensure that the transaction is viable from a business and liability perspective. After all, few service providers will want to undertake joint liability when the financial reward of the representation is likely to be small. MDPs are also likely to employ persons of varying skills and billing rates so that a person working a calculator is billed at a lower rate than a more skilled professional who happened to add up the numbers.
Third, an MDP is more likely to identify both legal and non-legal issues and problems by lawyers and non-lawyers. Working together in a team approach, lawyers and non-lawyers will be more sensitive to their respective issues. Clients will thereby be given a choice whether to undertake other related issues during the representation. The result is a higher quality product.
Fourth, the global economy and internet places demands on professionals that can be met only in a teaming approach. How can one law firm with offices in a dozen U.S. cities provide services to a company seeking to go abroad? Many international MDPs are likely to provide superior services to such a client on all of the facets of the decision to go abroad. A marketing study may be performed, different strategies may be employed in different regions of the world, and once a decision is made on the course of action, the MDP would be able to deliver the legal services. If the US decides to isolate the practice of law from multidisciplinary services, the world’s MDPs will surpass the quality of service that US citizens and companies receive in the United States.
Fifth, legal rules and constructs are increasingly relying on such non-law factors such as economics, quantitative studies, etc. For example, our own Internal Revenue Service employs economists to determine whether transactions have economic substance and to develop safe harbor rules for taxpayers. If the IRS employs economists to establish legal norms, taxpayers must similarly employ such non-law professionals to inform their legal advice. Thus, a tax practice that properly informed its clients on the safe harbor should include the delivery of services from an economist to ensure that the client receives the highest quality representation.
Finally, the demand for MDP services exists and many clients will continue to seek such services elsewhere abroad and domestically if the ABA does not permit them. I know of cases where multinational corporations have sent international legal business abroad because they find that the European MDP firm delivers higher quality services. That trend will continue. If the ABA refuses to accommodate this client demand, I predict that one or more European cities will emerge as centers of international legal commerce for international transactions. If this occurs, I suspect that the law firms whose lawyers have testified before you that MDP practice threatens the core values of the profession will open offices in those cities and offer MDP services abroad. Domestically, the situation may lead to more and more legal work being done in non-law firms. Those entities would simply tell clients that the final stages of memorialization of the legal documents require the use of an outside lawyer. Thus, technically, the non-law entity would not offer legal services and the outside lawyer would be a captive legal provider for that non-law professional. This form of silent disobedience would significantly undercut the regulatory system that we have developed for protecting the public in the delivery of legal services.
Although I believe that the large corporations will seek out and obtain MDP services internationally and domestically, I do think there is one other significant cost to society if the ABA does not accommodate MDP services. Low and middle income individuals and small businesses, who are excellent targets for receiving MDP services, are likely not to obtain the professional law and non-law services in the ordering of their personal and business matters. The family mediation clinics, the small business consulting practices, the environmental services firms, the gerontological services firms are all casualties of a failure to adopt Model 5. The public deserves the opportunity to receive services from such providers and society is likely to be worse off if these clients do not receive MDP services.
I hope that these insights are useful to the Commission as it continues to study these issues. I am of course available to discuss any of the topics that I have raised.
John Dzienkowski, Austin, Texas