Hypotheticals and Models

Hypotheticals and Models

Introduction

Over the course of the past five months, the Commission on Multidisciplinary Practice (Commission) has conducted five days of open hearings and met in executive session on three occasions. Forty-two witnesses have testified and other interested persons have submitted written comments. Both the ABA Taxation Section and the ABA General Practice, Solo and Small Firm Section have formally endorsed the concept of multidisciplinary practices.

It is clear from the testimony and comments that many different models for the delivery of multidisciplinary services exist. While the Commission has not yet reached a decision on whether the prohibitions in Rule 5.4 (a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;

(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price; and

(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.

(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.

(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:

(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;

(2) a nonlawyer is a corporate director or officer thereof; or

(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.

Model Rules of Professional Conduct Rule 5.4. against the sharing of legal fees with nonlawyers and entering into partnerships with nonlawyers should be relaxed, it nonetheless would like to invite the public, the members of the ABA Board of Governors, the ABA House of Delegates, and the association generally, and all other interested parties to comment on the following models for the delivery of such services. The models and the hypotheticals are based on the testimony and comments received to date and, in some designated instances, the hypotheticals are based on the Restatement of the Law Governing Lawyers (Proposed Final Draft No. 1, 1996) (Restatement). For the most part, the hypotheticals raise issues of conflict of interest and imputation. The Commission acknowledges that in the event it decides to recommend amendment of Rule 5.4 it will also need to address ancillary issues such as solicitation and supervision of nonlawyer personnel. Finally, we note that for ease of reference the models and hypotheticals speak in terms of "nonlawyer professionals." It is not at all clear to the Commission at this point that any relaxation of Rule 5.4 should be limited to nonlawyer professionals. Such a limitation would create significant definitional and enforcement issues. Comments on these ancillary and scope issues are welcome as well.

Please direct submissions to Arthur Garwin, Center for Professional Responsibility, American Bar Association, 541 North Fairbanks Court, Chicago, IL. 60611-3314, Art.Garwin@americanbar.org.

Alternative Proposals: An Overview

1. Leave the rules alone. A lawyer can be a partner in some kind of other professional service (e.g., accounting or financial services), other professionals can be employed by a law firm, but other professionals cannot be principals (partners in a partnership or shareholders in a professional corporation) in a firm holding itself out as rendering legal services. Under this regime, "MDP services" will be rendered as coordinated services of separate organizations.

2. Amend Rule 5.4 to allow nonlawyer principals in a law firm, but require that the lawyer rules of conflict of interest (including imputation) apply.

3. Amend Rules 5.4 and 1.10(a). An amended Rule 1.10(a) could provide either (1) that there is no imputation, only disqualification by personal participation, or (2) that imputation exists among the professionals in any service firm holding itself out as providing legal services. Under the second arrangement, the MDP firm would, as a practical matter, be required to departmentalize with departments separated by "insulation walls." The MDP "law" department would be subject to lawyer conflicts, confidentiality, and imputation rules, but those rules would not apply in or extend to the nonlawyer departments.

Model 1: The Cooperative Model

This model retains the status quo. There would be no changes to Model Rule 5.4. The prohibitions against fee sharing and partnerships with nonlawyers would continue. Lawyers would be free to employ nonlawyer professionals on their staffs to assist them in advising clients. Lawyers could work with nonlawyer professionals whom they directly retain or who are retained by the client. To the extent that the nonlawyer professionals are employed, retained, or associated with a lawyer, the partners in a law firm and any lawyer having direct supervisory authority over a nonlawyer professional would have to take steps "to ensure that the person’s conduct is compatible with the professional obligations of the lawyer," especially with respect to the obligation not to disclose information relating to the representation and the protection of work product. See Rule 5.3 & Cmt.

Model 2: The Command and Control Model

This model is based on the amended version of Rule 5.4 adopted in the District of Columbia.

(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1) Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (b).

(b) A lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients, but only if:

(1) The partnership or organization has as its sole purpose providing legal services to clients;

(2) All persons having such managerial authority or holding a financial interest undertake to abide by these rules of professional conduct;

(3) The lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1.

(4) The foregoing conditions are set forth in writing.

Washington, D.C. Rules of Professional Conduct, Rule 5.4. It permits a lawyer to form a partnership with a nonlawyer and to share legal fees subject to certain clearly defined restrictions. For example, the law firm or organization must have "as its sole purpose" the provision of legal services to others;" the nonlawyer must agree "to abide by these rules of professional conduct;" the lawyers with a financial interest or managerial authority must "undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1; and these conditions must be set forth in writing.

Hypothetical 2.1: A lawyer, an accountant, and a financial planner form a multidisciplinary partnership (MDP). If a client comes to the MDP for estate planning advice, all three professionals would be able to offer their services to the client provided that the MDP has "as its sole purpose" the provision of legal services. The accountant and the financial planner would be subject to the same rules of professional conduct as the lawyer. Thus, they would be subject to Rule 1.6 on confidentiality of information and Rules 1.7-1.10 on conflict of interest. As members of the MDP, they could not provide accounting or financial planning services other than in connection with the provision of legal services.

To the extent that the accountant or the financial planner maintain separate, independent practices, they would be subject to the ethical rules of their respective professions. Whether and to what extent the MDP and the independent practices should be treated as a single entity for conflict of interest and imputation purposes is an open issue. For example, what should be the result if the accountant in his independent practice had audited the books of a company operated by Husband, thereby obtaining access to confidential financial information about the Husband, and Wife asked the MDP to represent her in a divorce in which the husband’s financial worth would be an issue? Should the representation of Husband be imputed to the MDP? What disclosures are necessary? Is the consent of the Husband necessary? Does it make a difference if the accountant’s services are simultaneous with or completed prior to the Wife’s representation?

If the firm had many lawyers, accountants and financial planners, would screens help? How should they be constructed?

Model 3: The Ancillary Business Model

In this model, a law firm operates an ancillary business that provides professional services to clients. The ancillary business conforms its conduct to Rule 5.7 (a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:

(1) by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or

(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

(b) The term "law-related services" denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

Model Rule of Professional Conduct Rule 5.7. and takes great care to assure that its clients understand that the ancillary business is distinct from the law firm and does not offer legal services. Lawyers and nonlawyer professionals are partners in the ancillary business, sharing fees and jointly making management decisions. The lawyer-partners provide consulting services not legal services to the clients of the ancillary business. Some but not all of the clients of the ancillary business are also clients of the law firm, and correspondingly, some but not all clients of the law firm are also clients of the ancillary business.

Hypothetical 3.1: A&B, a law firm, owns a majority interest in C&D, an ancillary business that engages in sophisticated economic forecasting and offers consulting services to Fortune 500 companies with respect to long-term planning and growth strategies. The nonlawyer partners in C&D are economists. Two economists have been providing such services to Target Company and have had access to Target Company’s confidential financial information. No lawyer-partners have been involved in any aspect of the economists’ work. Raider Company asks A&B, its longstanding outside counsel, to represent it in connection with Raider Company’s possible hostile takeover of Target Company. Should the ancillary business’s sale of services to Target Company be imputed to A&B? If it is imputed, should the imputation operate preclusively to prevent A&B from accepting the proposed representation of Raider Company under all circumstances? What disclosures are necessary? Is the consent of the Target Company necessary? Are screens appropriate? How should they be constructed?

How would the analysis differ if A & B were representing Raider and then C&D were asked to help Target, with only the economists working on the Target defense project?

Hypothetical 3.2: A&B, a law firm that concentrates in maritime law, owns a majority interest in E&F, an ancillary business that provides human resources services. For over a decade, A&B has counseled Shipline in a broad range of labor relations and corporate matters. In connection with these matters, A&B has had access to substantial confidential commercial information about Shipline. Boatline seeks to retain E&F to advise it on Boatline’s employment policies and upcoming negotiations with the union that represents the seamen employed by Boatline. Boatline and Shipline are competitors and information concerning labor matters are considered highly confidential within the shipping industry. E&F proposes to enter into a services contract with Boatline; two lawyer-partners of E&F who are also partners at A&B will work on the Boatline matter along with nonlawyer-partners who are labor specialists. The two lawyers have never worked on any Shipline matters. Should the legal services that A&B has performed for Shipline be imputed to the two lawyer-partners of E&F who are also partners at A&B? If so, how should that imputation affect E&F? Should the Model Rules be amended to address imputation from a law firm to an ancillary business?

Model 4: The Contract Model

In this model, a professional services firm would contract with an independent law firm. A typical contract might include terms such as (1) the law firm agreeing to identify its affiliation with the professional services firm on its letterhead and business cards, and in its advertising ( e.g., A & B, P.C., a member of XYZ Professional Services, LLP); (2) the law firm and the professional services firm agreeing to refer clients to each other on a nonexclusive basis; and (3) the law firm agreeing to purchase goods and services from the professional services firm such as staff management, communications technology, and rent for the leasing of office space and equipment. The law firm remains an independent entity controlled and managed by lawyers and accepts clients who have no connection with the professional services firm.

The contract model might take different forms. In one model, the professional services firm might contract with a single law firm with only one office. In another, it might contract with a single law firm with several branch offices. And in still another, it might contract with separate, independent law firms, some of which might have only a single office; others of which might have several branch offices.

Hypothetical 4.1: A&B, a law firm, enters into a contract with XYZ Professional Services, LLP (XYZ). The terms of the contract are similar to items (1)-(3) described in the first paragraph under the heading "Model 4.1: The Contract Model," supra. The conduct of A&B and its lawyers would be governed by the Model Rules of Professional Conduct. The conduct of the professionals in XYZ would be subject to the ethical rules of their respective professions.

Whether A&B and XYZ should be treated as a single entity for conflict of interest and imputation purposes is an open issue. For example, if the accounting division of XYZ had reviewed the books of a company operated by Husband, thereby obtaining access to confidential financial information about the Husband, and Wife asked A&B to represent her in a divorce in which the Husband’s financial worth would be contested, should the sale of accounting services to Husband’s company by XYZ’s accounting division be imputed to A&B? What disclosures are necessary? Is the consent of the Husband necessary? Does it make a difference if the accounting division’s services are simultaneous with or subsequent to the Wife’s retention of A&B? Are screens appropriate? How should they be constructed?

Would the analysis be different if XYZ had provided litigation support in a trademark litigation commenced by the Husband’s company?

Hypothetical 4.2: The same contractual arrangement exists between A&B and XYZ as described above. A&B is advising Raider Company on a possible hostile takeover of Target Company. Target Company asks the business consulting division of XYZ to advise it on reorganization that might include a spinoff of certain businesses. Should A&B’s representation of Raider Company be imputed to the consulting division? If it is imputed, should the imputation operate preclusively to prevent the consulting division from selling its services to the Target Company under all circumstances? What disclosures are necessary? Is the consent of Raider Company necessary? Are screens appropriate? How should they be constructed?

Hypothetical 4.3: A law firm with several branch offices is treated as a single entity for conflict of interest purposes. Thus, it should make no difference in the analysis of Hypothetical 4.2 if a branch office of A&B is advising Raider Company rather than the main office. What happens, however, if XYZ has entered into a series of separate contractual arrangements with independent, unaffiliated law firms ( e.g., A&B, a New York law firm; C&D, a California law firm; and E&F, a Texas law firm)? What role, if any, should their common affiliation play in resolving conflicts of interest?

Assume that a separate agreement along the lines described in items (1)-(3) in the first paragraph under the heading "Model 4: The Contract Model," exists between A&B and XYZ, on the one hand, and C&D and XYZ, on the other. The business consulting division of XYZ and A&B are jointly advising Raider Company on a possible hostile takeover of Target Company. Target Company asks C&D to represent it in connection with a reorganization that might include a spinoff of certain businesses. Should A&B and XYZ’s representation of Raider Company be imputed to C&D? If it is imputed, should the imputation operate preclusively to prevent C&D from accepting the representation of Target Company under all circumstances? What disclosures are necessary? Is the consent of the Raider Company necessary? Are screens appropriate? How should they be constructed?

Model 5: The Fully Integrated Model

In this model, there is no free-standing law firm. There is a single professional services firm, XYZ Integrated, with organizational units, such as accounting, business consulting, and legal services. It advertises that it provides "a seamless web" of services, including legal services. The legal services unit may represent clients who either (1) retain its services but not those of any other unit of the firm or (2) retain its services as well as the services of other units in the firm. In the case of (2), the legal and nonlegal services may be provided in connection with the same matter or different matters.

Hypothetical 5.1: The business consulting unit of XYZ Integrated is advising Target Company on a variety of marketing and technology issues. Raider Company asks the legal services unit of XYZ Integrated to represent it in connection with Raider Company’s possible hostile takeover of Target Company. Should the business consulting unit’s sale of services to Target Company be imputed to the legal services unit? If it is imputed, should the imputation operate preclusively to prevent the legal services unit from accepting the proposed representation of Raider Company under all circumstances? What disclosures are necessary? Is the consent of the Target Company necessary? Are screens appropriate? How should they be constructed?

How would the analysis differ if the legal services unit was representing Raider before the business consulting unit was asked to advise Target?

Hypothetical 5.2: The New York office of XYZ Integrated is representing Radio Company #1 in preparing a bid for submission to the FCC in connection with the auction of a broadcast license. The team working on the matter consists of a lawyer, a media consultant, and an investment advisor. The Chicago office of XYZ Integrated is asked to represent Radio Company #2 in preparing a bid for the same license. It too would put together a team consisting of a lawyer, a media consultant, and an investment advisor. Should the New York office’s representation of Radio Company #1 be imputed to the Chicago office? If it is imputed, should the imputation operate preclusively to prevent the Chicago office from accepting the representation of Radio Company #2 under all circumstances? Are screens appropriate? How should they be constructed? What disclosures are necessary? Is the consent of Radio Company # 1 necessary?

Hypothetical 5.3: Assume the same facts as in Hypothetical 5.2. Would the analysis change if the New York office’s team did not include a lawyer, but consisted solely of a media consultant and an investment advisor? Would it change if neither team included a lawyer?

Hypothetical 5.4: The New York office of XYZ Integrated is providing Buyer, Inc. (Buyer) with a variety of services. Some of these services are being provided separately by the business consulting unit, the technology unit, and the legal services unit. Other services are being provided by teams consisting of lawyers and business and technology consultants. Buyer asks the legal services unit to represent it in connection with a complex real-estate transaction. The legal services unit of the Chicago office of XYZ Integrated is asked by its long-standing client, Seller, Inc. (Seller) to put together a team of lawyers and business consultants to represent it in connection with the sale of the real estate to Buyer. Buyer and Seller both describe the deal as "friendly." Both Buyer and Seller are represented by sophisticated general counsel. If XYZ Integrated were a single law firm, the clients could consent to adverse representations by the two offices.

Should the analysis differ from that used for a law firm, as opposed to an integrated service firm, with two offices? Should the New York office’s representation of Buyer be imputed to the Chicago office? If it is imputed, should the imputation operate preclusively to prevent the Chicago office from accepting the representation of Seller under all circumstances? What disclosures are necessary? Is the consent of both Buyer and Seller necessary? Are screens appropriate? How should they be constructed?

Hypothetical 5.5: The same facts as Hypothetical 5.4. Would the analysis change if (1) the negotiations are expected to be contentious or (2) either Buyer or Seller is unsophisticated in comparison to the other? If yes to number (2), how should "sophistication" be defined?

Hypothetical 5.6: The same facts as in the paragraph directly under the heading "Model 5: The Fully Integrated Model." The legal services unit creates a financial product that it sells to banks that in turn sell it to their commercial customers. Does the sale of the product create a lawyer-client relationship between the lawyers in the legal services unit and the banks? How would the analysis change if the legal services unit created the financial product, but it was sold by XYZ Integrated’s finance unit to the banks?

How would the analysis change if the product was created by lawyers who work solely within the XYZ Integrated’s finance unit (not within the legal services unit) and the finance unit sold it to the banks?

Comments and Suggestions

We welcome your comments regarding the hypotheticals and models in this document, your suggestions as to any alternative models, and your comments regarding the work of the Commission.

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