Written Remarks of William Hannay, March 1999 - Center for Professional Responsibility

Written Remarks of William Hannay

Chair, Section Of International Law And Practice
To The
Commission On Multidisciplinary Practice
American Bar Association

March 11, 1999

Good afternoon, my name is William M. Hannay. I am a partner in the Chicago-based law firm of Schiff Hardin & Waite and currently serve as the Chair of the American Bar Association's Section of International Law and Practice (the "Section"). My practice is concentrated in litigation and counselling with respect to competition and trade regulation law at home and abroad, and I am the leader of my firm's Antitrust Practice Group. On behalf of the Section of International Law and Practice, I have had the opportunity to participate in trilateral negotiations among the NAFTA nations regarding legal services, bilateral discussions with the Paris Bar regarding foreign legal consultancy, and conferences with the Union Internationale des Avocats regarding multidisciplinary practice. From these experiences and from years of study and involvement by the Section leadership in transnational practice issues, I have gained a perspective that may be helpful to this Commission.

Introduction

The Section of International Law and Practice is vitally interested in the issues raised by multidisciplinary practice ("MDP"). We are pleased to see the American Bar Association taking a proactive approach to the subject by creating and supporting the work of this blue-ribbon Commission. Your hearings and the publicity they have engendered have brought this issue to the attention of thousands of American lawyers and made the sophisticated issues of professional ethics, international business, and new modes of competition come alive. Having paid that compliment, however, let me express a fundamental concern over the implications of this Commission's special mandate.

You have been asked to focus on the MDP issue, and, to my observation, you have done so in the best tradition of the American Bar, with intelligence, enthusiasm, and thoroughness. But because of the narrow focus of your assignment, you may unintentionally be falling into the error of making a mountain out of a molehill or, perhaps more aptly, mistaking a molehill for the mountain.

From the point of view of an internationalist, the question of whether or not to permit multidisciplinary practice in the United States is just one piece of a larger and more complex puzzle. That larger puzzle involves how to reduce barriers to cross-border trade in legal services around the world while at the same time allowing each country the freedom to establish and enforce ethical norms and standards of professionalism for lawyers licensed in that country. This puzzle is one that confronts American lawyers and their clients engaged in international business transactions on a daily basis. It has played a role in bilateral, trilateral, and multilateral trade negotiations, and it is one with which the Section of International Law and Practice has, on behalf of the larger ABA, been grappling for a number of years.

For this Commission to attempt to address the MDP issue without understanding and taking into account this broader international context would be unfortunate. Put more simply, in my view, it would be a mistake for you to deal with multi- disciplinary practice issues without also dealing with multi- national practice issues. Let me explain my reasoning.

Transnational Practice Issues

The last twenty years have witnessed an explosive growth in the volume of international economic activity, and more particularly in the transnational flow of goods, services, labor, and investment. It is a familiar cliche that the United States now finds itself in a relationship of global interdependence with the rest of the world. This has led to a corresponding increase in the volume of transnational legal issues and problems, resulting, in turn, in a need for more effective means of delivering legal services across national boundaries and for better means of integrating the services of lawyers trained in different legal systems to serve clients' interests.

Beginning in the early part of this century, a small number of American law firms, most of them based in New York, began to establish offices abroad, principally but not exclusively in London and Paris, with a view to providing better service to their clients carrying on business outside the United States. In so doing, they benefitted from relatively open systems of professional regulation which did not confer upon members of the bar, to use American terminology, a monopoly on the giving of legal advice. During the decades following the end of the Second World War, the number of American lawyers and law firms carrying on practice in foreign countries increased at a steady pace.

More recently, the ways in which U.S. law firms have sought to extend their reach and provide service to their clients all over the globe have proliferated. Going beyond the single law firm model, American firms have established "networks" such as TerraLex and Lex Mundi, joint-venture/co-counsel arrangements, referral arrangements of greater or lesser formality, and other types of alliances, associations, and liaisons. One of the challenges for the Bar has been -- and will continue to be -- how to structure ethical rules to address this myriad of business forms.

In the early 1970s, foreign lawyers began to call attention to the fact that, while American lawyers enjoyed broad rights of practice in their respective countries, the reverse was not true. Despite the 1973 decision of the United States Supreme Court in In re Griffiths, the only way in which a foreign lawyer could engage in the practice of law in the United States -- even if limited to the giving of advice on the law of his or her own country -- was, with certain limited exceptions, to attend an accredited American law school, sit for the bar examination, and become a full member of the bar.

As a result of these developments, and principally with a view to ensuring New York's position as an international legal center, the New York legislature authorized and the New York Court of Appeals adopted a rule in 1974 under which members of foreign legal professions could be licensed without examination to engage in the practice of law in New York, subject to certain restrictions. This is called the foreign legal consultant (or "FLC") rule.

Throughout the late 1970s and the 1980s, as the need for access to foreign legal expertise increased and became more widespread geographically, other American jurisdictions began to consider and adopt similar FLC rules. Unfortunately, with the proliferation of such rules came an increasing variety of conditions and restrictions that departed from the liberal spirit of the original New York Rule. Even more unfortunately, these restrictions were seized upon as justification for the inclusion of similar restrictions in foreign laws and rules. This "mirror image" phenomenon became increasingly evident as the importance of legal services to United States foreign trade came to be understood and as the United States government joined the United States legal profession itself in pushing for access to additional geographic markets.

For example, the United States government made legal services a priority in its negotiations with Japan over market access. This did not occur because the volume of trade in legal services was perceived as financially important in itself. Rather, it occurred because the availability in Japan of United States lawyers, who are also knowledgeable about the law and business culture of Japan, was considered critical in enabling United States providers of other kinds of goods and services, particularly in law-intensive sectors like financial services, to enter the Japanese market.

In 1986, Japan enacted a law which, for the first time, permitted practice by foreign legal consultants in Japan. The enactment of this statute resulted in large part from overtures by the United States government in the context of United States-Japan trade negotiations. The law required only, as a precondition for licensing foreign lawyers, that Japanese lawyers, or bengoshi, be accorded substantially similar treatment in the foreign country in which the applicant is admitted to practice. The licensing of foreign lawyers, however, did not eliminate other restrictions that effectively precluded Americans from practicing law in Japan in a meaningful fashion. The most intractable problem has been that American lawyers could not become partners with a Japanese lawyer, nor could American law firms employ a Japanese lawyer.

While 1998 legislative changes in Japan appear to represent a liberalization, neither the continued negotiations between the governments nor the occasional inter-bar discussions that have taken place have resulted in the complete removal of these restrictions. This resistance to change undoubtedly stems in part from a protectionist attitude among Japanese lawyers and government officials, but it also flows from deep-seated beliefs and conceptions about the role of lawyers in Japanese society and the need to protect their independence. Such beliefs and conceptions are not very different from those that infuse the current debate over MDPs before this Commission.

And it is not in Japan alone that American lawyers have come to encounter problems in practicing abroad:

-- in France, which once permitted American and other foreign lawyers to qualify as legal consultants with relative ease, the laws have been changed to require foreign lawyers who wish to practice in France to be admitted to full membership in the French bar, based upon a so-called Article 100 examination which is conducted entirely in French and which tests the foreign lawyer on every area of French law and procedure; and

-- in the negotiation of the North American Free Trade Agreement, where the Mexican government insisted that United States lawyers establishing in Mexico be subject to the same conditions and restrictions as would apply to Mexican lawyers qualifying as legal consultants under the rule of the United States jurisdiction in which such lawyers are admitted to practice.

In each case, elements of the indigenous legal profession that fear competition from American firms have used restrictive provisions in the rules of some American states as a justification for similar restrictions upon United States lawyers and law firms wishing to establish a practice in their countries. Since many, if not most, foreign jurisdictions do not permit law firms to incorporate, let alone permit the formation of partnerships with non-attorneys, a recommendation by this Committee to drop ethical rules such as those in ABA Model Rule 5.4 will likely be seized upon by those jurisdictions as one more reason not to permit American law firms and lawyers to freely practice there. The process of lowering barriers to trade in legal services is a slow, iterative process of meetings and painstaking negotiations, both abroad and at home.

The need to take steps to find ways to remedy the mirror-image problem overseas led the Section of International Law and Practice to propose a "Model Rule for the Licensing of Legal Consultants," which was approved by the House of Delegates at the Association's Annual Meeting in 1993. The resolution approved by the House also recommended that each State not presently having a rule for the licensing of foreign legal consultants adopt a rule conforming to the Model Rule and that those States and the District of Columbia having such rules conform them to the Model Rule.

In the six years since the House of Delegates approved the Model Rule, the ABA and the Section of International Law and Practice have not had as much success as they would have wished and have fallen short of their objective of persuading all 51 American jurisdictions to adopt the model rule on foreign legal consultants, but some progress has been made and we continue our efforts. Nor has the situation abroad become noticeably better for American lawyers. It remains difficult for an American to obtain foreign legal consultant status in most foreign countries, virtually impossible to become a member of the bar of a foreign country (because of inability to speak the foreign language with fluency and to learn the entire breadth of a foreign country's laws), and hard (and in some cases impossible) to form a partnership with foreign lawyers abroad. At the same time, ironically, there has been a substantial movement to open up the legal services markets of Europe, but only to Europeans.

European Union Establishment Directive

On November 18, 1997, the European Union, after fifteen years of debate, adopted a European Parliament and Council Directive ("Directive") to facilitate practice of the profession of lawyer on a permanent basis in a Member State other than that in which the qualification was obtained. By the end of 1999, EU Member states must conform their domestic laws to the Directive's requirements. In brief, a lawyer in any one of the fifteen EU countries will be able to practice under the lawyer's home title ( e.g., solicitor, avocat, abogado) in any other EU country and, after the passage of time, under host country title.

Precisely how the changes wrought by the Directive will work out for European lawyers is unclear. The legal systems throughout Europe, of course, differ significantly one from another, and one British bar leader has recently expressed her concern to an American audience, commenting that "Many leaders of the legal profession in Europe ... worry about how they are to maintain proper control and regulation when faced with the prospect of lawyers from other countries, brought up within a totally different culture, with very varying standards of education, who wish to practice within their jurisdiction."

Of relevance to this Commission's work is the Directive's careful avoidance of interference with any EU member-state's right to ban MDPs. While expressly authorizing various forms of EU-wide "joint practice," the Directive provides that:

... a host Member State, insofar as it prohibits lawyers practising under its own relevant professional title from practising the profession of lawyer within a grouping in which some persons are not members of the profession, may refuse to allow a lawyer registered under his home-country professional title to practise in its territory in his capacity as a member of his grouping.

The Directive deems a grouping to include persons who are not members of the profession if: (a) the capital of the grouping is held entirely or partly by, (b) the firm name is used by, or (c) the decision making is done by "persons who do not have the status of lawyers."

Taken as a whole, the Directive is really quite a remarkable breakthrough in loosening the restrictions on cross-border legal practice, but only for Europeans. From the Section's point of view, our only regret is that the Directive (or something comparable) is not applicable to American lawyers. Others in Europe expect significant benefits to flow from this compulsory liberalizing of rules that formerly restricted lawyers from one EU member state freely practicing in another, but it will certainly not have the effect of improving the ability of U.S. lawyers to practice abroad. Nor have U.S. efforts in other forums yielded better results. Despite some initial high hopes, for example, the situation confronting American lawyers practicing abroad has not been remedied by, or seriously addressed under, the General Agreement on Trade in Services.

WTO and Professional Services

One of the products of the Uruguay Round negotiations was the General Agreement on Trade in Services (referred to as "GATS"). During the negotiations, all the parties agreed that, in trying to lower trade barriers, they should focus on barriers to providers of both goods and services. Therefore, GATS became an essential component of the Uruguay Round negotiations. The dismantling of barriers in the services arena, however, has proven difficult both conceptually and practically.

The GATS agreement uses broad terms such as "most favored nation treatment," "national treatment," and "improved market access." Yet, under the agreement, each country was permitted a separate schedule of "commitments," specifying which services would actually be subject to the new rules and the extent to which it would be bound. Because of the inherent sensitivity regarding the regulation of the legal profession and the strong lobbies that the legal profession maintains, it is not surprising that many countries -- including the United States -- generally retained the right to restrict access to the legal profession.

Within the World Trade Organization ("WTO"), a Working Party on Professional Services ("WPPS") has been established which is formulating proposals for the liberalization of trade involving professional services, including but not limited to legal services. On December 14, 1998, for example, the WTO Council on Trade in Services, the parent of the WPPS, adopted the "Disciplines on Domestic Regulation in the Accountancy Sector" recommended by the WPPS. These "Disciplines" contain provisions designed to assure that regulatory requirements are based on objective and transparent criteria and are not more burdensome than necessary, in accordance with Article VI.4 of GATS. The Disciplines also establish guidelines for the recognition of professional qualifications for accountants. The document is of some interest to the legal profession because it could constitute a precedent for the WTO’s examination of restrictions on the ability of lawyers to practice abroad, although the International Bar Association and others have argued vigorously that this should not be the case.

The accounting "Disciplines" do not have immediate legal effect, but, before the end of the round of services negotiations which are to begin in January 2000, all the disciplines developed by the WPPS will be integrated into the GATS and will then be legally binding. Meanwhile, the Council decision contains a standstill provision under which all WTO members, whether or not they have made GATS commitments in the accountancy sector, agree not to take measures which would be inconsistent with the accountancy disciplines.

It is not clear how legal services will be dealt with in the Millennium Round negotiations. Some Latin American and Asian nations have urged that it is too great a strain on WTO human and financial services to examine each profession -- law, engineering, and architecture, in particular -- independently, after the pattern of the accountancy sector study, and that all of the professions should instead be dealt with "horizontally." Indeed, some have argued that all services, not just the professions, should be dealt with in this fashion. The structure of the 2000 negotiations will be determined at a WTO ministerial meeting in Seattle during November 1999.

To date, no "discipline" has been proposed that addresses the subject of legal services generally or the subject of MDPs in particular. Subject to several limitations and requirements, however, subparagraph 2(e) of Article XVI of the General Agreement on Trade in Services, which is entitled "Market Access," may be relevant to the subject of multidisciplinary practice. It provides that a WTO member state shall not maintain or adopt:

[M]easures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service.

It is conceivable -- though just barely -- that this provision might be used as a basis for arguing that the United States should rewrite Model Rule 5.4 on the ground that it "restrict[s] ... the types of legal entity ... through which a service supplier [ i.e., accountants and lawyers] may supply a service."

The point of this historical narrative is to emphasize that the context of this Commission's deliberations is not, and cannot be, limited to the United States or to MDPs in isolation. If this Commission were, for example, to recommend unilaterally changing American ethical rules such as Model Rule 5.4, it may make it more difficult to achieve a comprehensive solution to the larger puzzle of transnational legal practice and deprive American law firms and government negotiators of potential flexibility and leverage to obtain market access concessions from our trading partners. Put more bluntly, to allow accounting firms to practice law in the United States when American lawyers cannot practice abroad or form partnerships with foreign lawyers to serve the overseas needs of their clients would be foolishly inconsistent. It would -- to shift from my molehill metaphor -- be putting a small cart before a large horse. But let me come at this same point from a slightly different angle.

The View from the Client Community

Through your webpage on the Internet, I have endeavored to track the testimony presented to the Commission in the past few months. As I reviewed the papers reprinted there, I saw a good bit of testimony about what clients supposedly want or need, but I did not see much testimony from the client community itself. Let me offer a few thoughts on this point that may advance your deliberations.

A number of the witnesses appearing before the Commission have testified with assurance about what it is that "clients" want in the modern day. Only one witness, however, might actually be considered a "client," and he did not purport to speak as a representative of the community of consumers of professional services. Given this lacuna with respect to clients themselves, the Commission should be especially chary about making recommendations that are premised in whole or in part upon assumptions about client needs or desires.

To the extent that inside counsel at multinational corporations are or will remain responsible for the procurement of legal services for such enterprises, there is some evidence that the availability of multi-disciplinary services from a single firm ( i.e., so-called one-stop-shopping) plays little or no role in their decision-making process. Last Summer, for example, a survey published by the International Bar Association found that, for cross-border transactions, in-house counsel heavily preferred selecting law firms in each jurisdiction or using a one-stop multi-national law firm to using an international accounting firm that offered legal services.

Assuming this survey to be accurate (and I will say that it does conform to my own perceptions of inside counsels' desires) and to the extent that this Commission or the ABA as a whole is motivated by what clients want, I draw a conclusion that the most important recommendation this Commission could make would be for the ABA to redouble its efforts to work independently and with the U.S. government to help tear down barriers to multi-national practice by American lawyers and law firms.

Of course, whom you ask may be determinative of the answer to the question "what do clients want?" If the legal services procurement decision is made by a corporate officer other than the general counsel, the notion of one-stop-shopping may be more attractive. At the International Bar Association conference in Vancouver last September, for example, Chris Arnheim of Arnheim Tite & Lewis (Pricewaterhouse Coopers' captive law firm) is quoted as revealing that his firm had several times been instructed via a company's finance director or board without the knowledge of the in-house counsel. This anecdote is a sobering reminder that the practice of law as an independent profession suffers when it is treated as a mere commodity to be lumped together with other "professional services" and sold as part of a package arrangement.

Professionalism Issues

The central issue in the debate over MDPs is sometimes phrased as whether the role of a lawyer in society is fundamentally different from the role of an accountant, and, in turn, whether the performance of the lawyer’s role would be compromised through partnership with accountants. But this formulation oversimplifies the situation. The issue is certainly more complicated than asking whether an MDP firm should be permitted simultaneously to audit a client and to provide legal services to it. For one thing, the accounting profession has ethical rules and obligations of its own, dealing with such matters as independence and confidentiality. (Indeed, in the United States, independence rules prohibit a CPA from acting as a lawyer for a company and also being its independent auditor.)

For another, one must recognize the growing economic importance of nonattest services to accounting firms. (Indeed, more than half of the profits of the now-"Big Five" firms is said to come from the consulting side of their business.) Thus, when we talk about "multidisciplinary" practice, we are not talking solely about accountants and lawyers. When the modern-day accounting-consulting firm "owns" a law firm, the potential concerns become more complex.

There is perceived, for example, to be an unusually close relationship between management consultants and the senior executives whom they advise. Attorneys may , and I think do, fear that the accounting-consulting firms can leverage -- perhaps "unfairly" -- these relationships to sell the services of the law firms owned by them. In this sense, traditional law firms may see themselves unable to compete on a "level playing field."

Another fear is that consultants within these large firms are not restricted by the same ethical norms under which lawyers operate -- or even those under which accountants operate. Once again, there is a perception of an absence of a level playing field.

Spokesmen for the Big Five contend that all the talk about ethical problems in MDPs is exaggerated, that accounting firms have for years maintained confidences and acted ethically and without conflicts of interest, and that the Bar should be taking steps to eliminate outmoded and superfluous restrictions on the practice of law. It seems clear to me, however, that, in this age of instantaneous communication and complex global business networks, the need is for more ethical norms, not less. As explained below, the recent decision by Britain's House of Lords in a case involving one of the Big Five firms precisely illustrates this point.

Prince Jefri Bolkiah v. KPMG

In Prince Jefri Bolkiah v. KPMG (A Firm), the House of Lords confronted a question that is framed in the opinion given for the House by Lord Millett, as follows:

[W]hether, and if so in what circumstances, a firm of accountants which has provided litigation support services to a former client and in consequence has in its possession information which is confidential to him can undertake work for another client with an adverse interest.

Pertinently, Lord Millett observed that the question "has become of increased importance with the emergence of huge international firms with enormous resources that operate on a global scale and offer a comprehensive range of services to clients." The facts giving rise to the issue were these:

The defendant firm of accountants was employed as auditors of the core assets of the Brunei Investment Agency ("BIA") established to hold and manage the general reserve fund of the Government of Brunei and its external assets. KPMG also provided associated advisory and consultancy work, including money management services. Prince Jefri Bolkiah was the chairman of BIA until his removal in 1998.

Of central significance is that, for a period of 18 months between 1996 and 1998, Prince Jefri had retained KPMG to act for him personally (or one of his own companies) in private litigation in which he was then engaged. In the course of acting for Prince Jefri in that litigation, KPMG provided extensive litigation support services of the sort usually undertaken by solicitors. In so doing, KPMG was entrusted with or acquired extensive confidential information about the Prince's assets and financial affairs. KPMG had employed 168 personnel on the plaintiff's litigation, which was settled in March 1998, and was paid approximately 476,000 pounds for that work.

Early in 1998, the Prince was dismissed from his position as chairman of BIA, and, in June, the Brunei government commenced an investigation into the conduct of BIA's affairs, including the destination and present location of money which had been transferred from BIA's funds while he was the chairman. The government then sought to retain the accounting firm to assist in the new investigation.

KPMG took the view that they could accept the engagement because they had ceased to act for Prince Jefri more than two months previously and he was no longer a client. The firm was aware of the possibility of a conflict of interest because the investigation was likely to be adverse to his interests and because they possessed confidential information relating to his financial affairs, and accordingly erected an information barrier (a so-called "Chinese wall") around the department carrying out the BIA investigation on behalf of the Brunei government.

When he learned of KPMG's engagement, the Prince sued to restrain the defendants from continuing to work on the BIA investigation. The trial court granted an injunction, but a panel of the Court of Appeal (with one judge dissenting) reversed. The House of Lords unanimously reinstated the injunction, emphasizing the firm's conflict of interest and the risk of disclosing confidential information.

In this context, Lord Millett, writing for the House, noted that:

It must have been obvious ... that some at least of the confidential information obtained by or provided to KPMG in the course of [its work for the Prince] was or might be relevant to [the new engagement]. It must also have been obvious ... that ... the interests of the BIA were adverse to those of Prince Jefri. KPMG did not inform Prince Jefri of their new assignment, nor did they seek his consent to their acceptance of the project.

KPMG's reliance on a "Chinese Wall" proved insufficient. On this point, Lord Millett stated: "I am not satisfied on the evidence that KPMG have discharged the heavy burden of showing that there is no risk that information in their possession which is confidential to Prince Jefri and which they obtained in the course of a former client relationship may unwittingly or inadvertently come to the notice of those working on [the new engagement]."

What is striking and significant is not the decision (which would almost certainly be the same if the case involved U.S. lawyers and was decided in a U.S. court), but the fact that the House of Lords assumes that the same standards of confidentiality apply to KPMG's litigation support department as would apply to lawyers in the same position. Indeed, all the cases cited and discussed in Lord Millett's opinion relate to English solicitors. This treatment of accountants and lawyers in the same way resulted neither from inadvertence nor a failure to consider the issue. In a short concurring opinion, Lord Hope wrote:

I consider that the nature of the work which a firm of accountants undertakes in the provision of litigation support services requires the court to exercise the same jurisdiction to intervene on behalf of a former client of the firm as it exercises in the case of a solicitor. The basis of that jurisdiction is to be found in the principles which apply to all forms of employment where the relationship between the client and the person with whom he does business is a confidential one. A solicitor is under a duty not to communicate to others any information in his possession which is confidential to the former client. But the duty extends well beyond that of refraining from deliberate disclosure. It is the solicitor's duty to ensure that the former client is not put at risk that confidential information which the solicitor has obtained from that relationship may be used against him in any circumstances.

I am advised that, prior to the House of Lords' decision, senior officials at KPMG and at other accounting firms viewed the Prince Jefri case as a critical test of their arguments against the legal profession's resistance to MDPs. They believed that "Chinese Walls" trumped lawyers' criticisms that MDPs carried serious problems of conflict and breach of confidentiality. I am advised that accounting firm leaders believed that, if they could survive the challenge to their practices in Prince Jefri, the ethical arguments against MDPs would be severely weakened. The House of Lords decision has put an end to that sort of hope (at least temporarily) and highlighted the potential weaknesses of conflict screening procedures used by MDPs. Put differently, the decision suggests that there is no Chinese Wall that a grapevine cannot climb over.

Conclusion

In attempting to address the multidisciplinary practice issue, this Commission needs to understand and take into account the broader international context of transnational practice of law. To deal with multi-disciplinary practice issues without also dealing with multi-national practice issues -- and working to open up access to foreign legal markets to American lawyers -- would be a mistake and a disservice to lawyers everywhere.

At the same time, this Commission should take a strong position in favor of clear and broad ethical rules that would bind, in a uniform manner, all members of any multi-disciplinary practice that includes attorneys. I view the uniformity of imposition of such ethical rules as an absolute precondition if -- and, I repeat, if -- our Code of Professional Responsibility is to be changed to permit American attorneys to practice in such a context, a change I do not endorse.

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