NATIONAL CONFERENCE OF LAWYERS AND
CERTIFIED PUBLIC ACCOUNTANTS
ANALYSIS OF ABA "MODELS" AND QUESTIONS
In the discussion that follows, certain changes to the ABA Model Rules are posited by the MDP Commission, to arrive at the hypothetical models. The National Conference of Lawyers and Certified Public Accountants notes that, to allow the models to work for other professions involved in combined activities with lawyers, it will be necessary to recognize the existence of analogous rules of the other profession (here, the Code of Conduct of the American Institute of Certified Public Accountants and the conduct rules of 54 CPA license-granting jurisdictions). Differences between conduct rules of the two professions will have to be reconciled and harmonized. In undertaking this analysis, the Conference notes that differences in the ABA Model Rules and the AICPA Code of Conduct are slight and can be reconciled in a manner that is consistent with the core values of each profession.
Model 1: Rules Remain Unchanged
Lawyers could continue to team with non-lawyers on an "ad hoc" basis. Lawyers would remain bound by prohibition on fee sharing and partnerships with non-lawyers.
Criticism of Model 1:
-- For years, many lawyers have recognized that they do not have all necessary skills to solve multi-faceted client problems.
-- Lawyers have reached out to other disciplines and created ad hoc teams, with individuals from different firms and with different training, to work together on client-specific projects. Client expectations and demands have forced lawyers to create multidisciplinary teams.
-- Today, lawyers work with individuals in regulated professions, such as accountants and engineers, and individuals in non-regulated professions, such as economists and environmental consultants.
--The investing and consuming public should have choices as to the provision of services. One alternative is the multidisciplinary firm. Multidisciplinary firms, rather than ad hoc teaming, permit efficient and effective integration, coordination, and delivery of services and competencies. Multidisciplinary firms allow the marketplace to assemble capable professionals rapidly and with well-defined project leadership and accountability to clients. Such firms facilitate the sharing of knowledge and intellectual capital necessary to provide the best solutions to clients. Finally, these firms also facilitate the communication networks and common methodologies that are important in commerce today.
Model 2: The "Command and Control" Model
ABA would adopt D.C. Rule 5.4, and permit lawyers and non-lawyers to partner together in one organization, provided the organization has as its sole purpose the provision of legal services and all persons with a financial interest in the firm are bound by the lawyer rules of professional conduct.
Criticism of Model 2:
-- ABA codification of the D.C. rule just gives flexibility to law firms, but eliminates the ability of clients to choose integrated services.
-- Virtually every area of practice involves elements in addition to simply "providing legal services" to clients. For example, services such as divorce and estate planning, that could be jointly provided by a lawyer, accountant, and financial planner, are not necessarily "solely legal services." Widespread adoption of this rule could cause confusion and lead to needless disciplinary charges against practitioners where no harm was being done to clients or the public.
ABA Hypothetical and Questions involving Model 2:
1. A law firm is created under this rule, with a lawyer, accountant, and financial planner as partners. The CPA also continues to practice as a partner in a separate CPA Firm. The financial planner also continues to practice as a partner in a separate financial planning firm.
The CPA, in his separate firm, audits a company owned by Husband (H).
Wife (W), married to H, asks the law firm to represent her in her divorce of H.
H’s financial net worth, including assets of his company, is at issue in the divorce.
Could the law firm represent W, given that one of its partners, in a separate firm, learned confidential information about the net worth of H? Does it matter if law firm representation of Wife is simultaneous, or consecutive with, CPA representation of Husband’s company? Should the law firm be required to disclose to H that it is representing W, and obtain consent of H before it can represent W? Should firewalls be used and, if so, how?
-- The law firm and the CPA firm are two separate legal organizations, with separate client rosters and different, and distinct, client service offerings. To impute clients of one firm to the other firm, and require disclosure and consent, would create one multidisciplinary firm for conflicts purposes, but does not allow professionals and clients to obtain the advantages of a multidisciplinary firm.
-- Under existing rules, matters handled by a lawyer in an ancillary business are not imputed to his partners in a law firm. There is no basis to "impute" the relationship of the CPA in his CPA firm to the law firm. Imputation rules are in place supposedly to assure that the client has the "loyalty" of the law firm. Business would not be practical if all matters were to be automatically imputed between law firms and other firms in which partners of the law firm held an interest.
-- Timing of the representation is not an issue because the concern is sharing of confidential information. The duty to preserve a client’s confidences does not end when representation ends.
-- That being said, the CPA cannot use the confidential information that he has obtained about H and H’s company against H’s interest, when H’s adversary is a client of the law firm. The CPA should not be able to participate in the representation of W against H.
-- The CPA must be walled off from representation of W. The CPA would learn of the representation of W from the conflicts check circulated within the law firm, and the law firm would need to establish a "firewall" to screen off the CPA from the engagement. Accounting firms have long established safeguards to prevent the transfer of confidential client information between engagement teams. These safeguards include restricted access to hard copy files, password protection of client files and client information on databases, and segregation of client teams.
-- In the event the CPA wrongly shared confidences with lawyers in the law firm handling matters for W, the CPA would be subject to discipline from the accounting profession, and the CPA firm would be subject to suit by H for violating its duties to its client.
Model 3: The "Ancillary Business" Model
Rules do not change, and fee sharing and partnerships between lawyers and non-lawyers in one firm is prohibited.
ABA recommends wholesale adoption of Model Rule 5.7, to allow ancillary businesses where lawyers in law firm can own and operate "ancillary business" and provide professional services to clients. Under this rule, a lawyer who offers services in the "ancillary business" would be subject to legal ethics rules, unless services that he performs could be performed by non-lawyer and client understands that he is not holding himself out as a lawyer.
Lawyer in ancillary business would offer consulting services, not legal services, to clients of ancillary business. Some clients of ancillary business would also be clients of law firm.
Criticism of Model 3:
-- Artificial distinctions to preserve the integrity of the law firm do not address the client’s ability to choose an integrated services approach.
-- See criticisms of Model 1.
ABA Hypotheticals and Questions involving Model 3:
1. A&B Law Firm owns a majority interest in C&D Consulting Firm. Economists employed by C&D provide services to Target, and have access to Target’s confidential financial information. A&B, and its partners, do not provide services to Target. Raider is a long-term client of A&B. Raider wants A&B to represent it in possible hostile takeover of Target. Should C&D’s relationship with Target be imputed to A&B? What if Target sought to retain C&D to provide economic services in connection with the defense against the takeover bid, and A&B represented Raider?
-- As a matter of law, A&B and C&D are separate legal entities. Imputation of clients between related entities, as a matter of law, is unnecessary and burdensome.
-- The Model Rules do not, and should not, address imputation from a law firm to an ancillary business. Otherwise, the Model Rules would effectively create a multidisciplinary firm for conflict purposes, but not for purposes of providing integrated client service teams with full knowledge sharing for the benefit of the client.
-- If the bar is considering imputation for clients of related entities, imputation should apply only where clients of related entities are directly adverse and related entities are on opposite sides of a dispute. That is, no imputation would be made where A&B advised Raider in the takeover and C&D advised Target in an unrelated matter. Where imputation is made because of representation in a directly adverse matter, the conflict could be waived if disclosure, under the circumstances, is appropriate and is fully made, and the clients both consent. It is recognized that in many of these cases disclosure is not possible and disqualification would result.
-- Of course, firewalls must be erected to wall off all lawyers in A&B from any information about Target. Similarly, no member of C&D could gain access to information about Raider or Raider’s strategy, from A&B.
2. A&B Law Firm owns majority interest in E&F Human Resources Firm. A&B provides labor relations advice to Shipline, and has access to its confidential commercial information. Boatline, a competitor of Shipline, seeks to retain E&F to provide advice on employment issues. Two lawyer partners of A&B are also partners in E&F. They have never worked on any Shipline matters at A&B. They will work for Boatline as E&F partners. Should A&B Law Firm’s representation of Shipline be imputed to E&F? What are the consequences of any imputation?
-- For the reasons explained above, imputation rules should not apply to related firms. If the bar nevertheless extends imputation rules to related firms, imputation should only occur where clients are directly adverse on a matter. Here, Shipline and Boatline are not directly adverse on the same matter, but are competitors in the same industry.
-- Of course, both Shipline and Boatline do not want their confidential information shared with the other. That situation can be easily remedied with firewalls between professionals working on each engagement.
Model 4: The "Contract" Model
Rules do not change, and fee sharing and partnerships between lawyers and non-lawyers in one firm is prohibited.
Bar rules would make it clear that law firms could contract with professional services firm. Under contract, professional services firm would provide goods and support services, including office space. Professional services firm could also team with law firm, on non-exclusive basis. Law firm could advertise its affiliation with professional services firm. Each professional would be subject to the ethical rules of his own profession.
Criticism of Model 4:
-- We believe this arrangement could be accomplished under current rules. The only difference between this model and the existing rules would be the express permission to advertise affiliation with a professional services firm that is not a law firm.
-- In almost every respect, this model follows the practice arrangements described by Mr. Cochran in his testimony before the MDP Commission. As he made clear, these arrangements do not permit the professionals to deliver integrated, seamless services to clients.
ABA Hypotheticals and Questions involving Model 4:
1. A&B law firm contracts with XYZ professional services firm. XYZ provides support services, and teams with law firm for specific client engagements, and both advertise relationship. XYZ audits company owned by Husband (H), and learns confidential financial information about H. Wife (W) asks the law firm to represent her in the divorce, where financial information of H may be relevant. Should XYZ’s relationship with H be imputed to A&B Law Firm? Are any disclosures to either H or W necessary? Is consent of both required? Should firewalls be used? Would it matter if professional services firm had provided litigation support in a trademark litigation commenced by H’s company?
-- This Hypothetical is similar to the Hypothetical in Model 2, except here the relationship is one step further removed. In Model 2, a partner in the law firm was also a partner in the CPA firm. Here, the law firm has a contractual relationship with the professional services firm for support and teaming on some client relationships. No teaming between the law firm and the professional services firm occurred with respect to H.
-- There is no basis to impute clients of XYZ to A&B. If this imputation were made, then all clients of every law firm in a network would be imputed to the other firms in the network. The ABA rejected this analysis in 1994. To impute here would be a step backwards, not forwards.
-- XYZ professionals could not share client information about any client with A&B, except when the firms teamed together and clients consented. In the event XYZ wrongly shared confidences of H with lawyers in A&B, professionals in XYZ would be subject to discipline from their profession, and XYZ would be subject to suit by H for violating its duties to its client. This Hypothetical does not involve use of firewalls; there is no need to screen off professionals in A&B, because none were involved in XYZ engagement.
-- It does not matter whether engagement of XYZ by H is simultaneous with, or prior to, A&B’s representation of W. Timing is not the issue -- the only concern is sharing of confidential information. The duty to preserve a client’s confidences does not end when representation ends.
-- The scope of the representation by XYZ is not relevant. Whether for audit or for litigation support, the engagement of XYZ was performed solely by XYZ and did not involve A&B or its personnel.
2. A&B Law Firm has a contract with XYZ firm. A&B is retained to advise Raider on possible hostile takeover of Target. Target asks XYZ for advice on a reorganization. Should A&B’s representation of Raider be imputed to XYZ? Can XYZ advise Target?
-- The contract between A&B and XYZ is for certain services and an agreement that the firms may team on specific engagements. No teaming between firms occurred for either Raider or Target. The affiliation between these firms for client matters is no different than affiliations between separate law firms linked in networks: it is non-exclusive and ad hoc, depending on the client. There is no basis for any imputation of clients between the firms.
3. XYZ contracts with A&B Law Firm and C&D Law Firm. XYZ and A&B jointly advise Raider regarding possible hostile takeover of Target. Target asks C&D to represent it in connection with possible reorganization. Should representation of Target by A&B and XYZ be imputed to C&D?
-- It does not matter that XYZ has teamed with A&B for purposes of a joint engagement by Raider. XYZ has not been asked to assist C&D in any representation of Target. The services contract between XYZ and C&D is not sufficient to impute clients of XYZ to other law firms with similar contracts.
Model 5: The "Fully Integrated" Model
Rules change to permit fee sharing and partnerships between lawyers and non-lawyers in one firm.
Lawyers in "legal services" unit may work with other professionals to provide integrated services or can provide stand-alone legal services.
Criticism of Model 5:
-- Optimal Model for integrated, seamless services to clients, assuming that the ethical rules of the professions involved are harmonized, the core values of each profession are retained, and the public interest is maintained.
ABA Hypotheticals and Questions involving Model 5:
1. Business consulting unit of the XYZ professional services firm advises Target on marketing and technology issues. Raider asks XYZ legal services unit to represent it in connection with possible hostile takeover of Target. Should consulting relationship with Target be imputed to XYZ legal? Can disclosure and consent waive conflict? What firewalls are needed? Does it matter if representation is simultaneous or consecutive?
-- In this Hypothetical, advice to Target is on matter not related to possible representation of Raider. XYZ firm would not be in position of being on "both sides" of takeover for Raider and Target. Further, as discussed under the Hypothetical for Model 3, even if imputation is required because of representation in directly adverse matters, the conflicts could be waived if disclosure, under the circumstances, is appropriate and is fully made, and the clients both consent. As with Model 3, if disclosure is not possible, it would be necessary to decline the engagement.
2. An integrated team from XYZ represents RC#1 in preparing bid for broadcast license. RC#2 asks another integrated team from XYZ to represent it in preparing bid for same license. Can XYZ represent both bidders? If so, what disclosure and consent is necessary? Should firewalls be used? Does it matter if lawyer is involved in one team but not another team? Does it matter if teams are in different offices?
-- In this Hypothetical, clients competing for the same license ask different professionals in the same firm for advice. This is a situation where two clients of same firm are directly adverse. In this situation, the conflict would be imputed to entire firm. However, the conflict should be fully waivable, provided both clients are informed and consent to representation. Firewalls could be used to insulate one professional team from the other team.
-- Physical proximity, and/or presence of lawyer on one team but not another, is not relevant to the analysis. The same result would obtain under AICPA rules, even if no lawyer participated on either of the teams.
3. Assume XYZ professional services firm advises Buyer in connection with real estate transaction with Seller. Seller is a long-standing client of the XYZ legal services unit, and seeks to retain XYZ for same real estate transaction. Can XYZ represent both Buyer and Seller? Is disclosure to and consent from both clients necessary? Does it matter if transaction is friendly or contentious? Does it matter whether clients are sophisticated or unsophisticated? Does it matter if team for one client is in separate office from team for the other client?
-- Again, this situation is one where the clients are directly adverse. Even if the clients believe that the transaction is friendly, it could turn contentious.
-- XYZ can advise both Buyer and Seller, provided that each client is separately informed of the other representation, understands the protections to be used to shield client confidences, and consents.
-- Sophistication of the client is only an issue respecting the disclosures that must be made. As is now the case for a law firm, the adequacy of the disclosure will turn on the client’s knowledge and sophistication. We do not now have separate rules for sophisticated and unsophisticated clients. Consideration should be given as to whether separate rules are appropriate for sophisticated and less sophisticated clients, and what definitional terms would apply to each category.
-- Again, physical proximity of the teams should not matter. At issue is, first, whether there has been full disclosure to the client and, second, the integrity of the firewalls used to protect confidences.
4. Assume XYZ integrated services firm creates a financial product that it sells to Bank. Bank sells product to commercial customers. Does the sale of product to Bank create a lawyer-client relationship between XYZ legal and Bank, if lawyers participate in creation of product?
-- It depends on nature and scope of engagement. If the product is "off the shelf" and not customized for the Bank, it is hard to see that a lawyer-client relationship is created. The fact that lawyers are involved in creating a product, by itself, does not create a lawyer-client relationship.