New York County Lawyers' Association
Special Committee on MDP
Response to Report of the ABA Commission on Multi-Disciplinary Practice
This Report was approved at a regular meeting of the Board of Directors of the New York County Lawyers' Association on June 14, 1999.
Limiting MDP to Lawyer Controlled Entities
CHANGE AND THE PROFESSION
As lawyers we serve a society that is changing rapidly. We must make certain that the profession changes sufficiently to remain relevant. Thus we need to welcome proposals for change as an occasion for reevaluation and an opportunity for revalidation of who we are and what we do.
MDP ISSUE AND APPOINTMENT OF THIS COMMITTEE
In April, 1999 the President of NYCLA appointed this Special Committee to consider proposals to permit Multi-Disciplinary Practice ("MDP") and to respond to the then anticipated Report of the ABA Commission on Multi-Disciplinary Practice (the "ABA Commission Report").
The Committee has reviewed various materials including the
ABA Commission Report as released on June 8, 1999 and certain of the materials submitted to the ABA Commission as well as the Report by a Task Force of the New York State Bar Association dated January 8, 1999.
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MDP refers to entities that practice more than one profession, one of which is law. The most obvious example of an MDP is a professional firm that offers both accounting and legal services. The accounting-law firm model is used in certain European countries and has made the international accounting firms the largest factor in the practice of law in continental Europe. At present various restrictions (e.g. fee splitting with non-lawyers) prevent lawyers from practicing in partnership with non-lawyers. (Any MDP proposal must define the professions that would be permitted as law firm partners and any non-law professional firms in which lawyers could practice law as partners.)
THE ABA COMMISSION PROPOSAL
The Committee believes that MDP presents an issue of extraordinary importance to the profession. It merits the attention of all lawyers. The ABA Commission Report and the hearings that preceded it were both intelligent and timely. We recognize the significant contribution it makes to the profession.
The ABA Commission Report would permit the practice of law by lawyers in MDPs controlled by non-lawyers. The ABA Report asserts that the safeguards it suggests will avoid "erosion of the core values of the legal profession". Those safeguards are that:
(1) the rules of professional conduct applicable to law firms will apply to the MDP.
(2) a new court administered system will regulate MDPs, including annual compliance reports as well as compliance audits as to professional conduct requirements.
The ABA Commission Report requires that judgments be made and action taken by the Bar in a relatively brief period of time. The ABA House of Delegates may consider the Commission Report as early as August of this year. It is important now to consider whether the ABA Commission approach is appropriate and, if not, what approach is right for this time.
PROPOSAL BY THIS COMMITTEE
We agree with the ABA Commission proposal to the extent that it recommends permitting lawyer controlled MDPs. We strongly disagree with the ABA Commission proposal to permit MDPs that are not controlled by lawyers.
We propose that lawyers be permitted to utilize MDPs but only if lawyers retain full control including 66 % lawyer ownership and vote. Non-lawyers involved in MDPs as well as the MDPs would be bound by legal ethical rules.
PROPOSED NEXT STEPS
It is the view of the Committee that a carefully crafted alternative to the ABA Commission proposal should be available for discussion by all lawyers well before any consideration of the Commission proposal by the ABA. In that connection, the Committee proposes that the Association take action to sponsor such an alternate proposal with other interested Bar groups and that it invite other bar associations to meet in July, 1999 at the Association to consider how to join together in such a proposal, using our recommendations as a basis for discussions. We believe that consideration of a proposal of this importance by the ABA House of Delegates in August, 1999 would not allow time for the Bar to fully understand the issues involved.
CHANGE IS ONGOING AND INEVITABLE
Change comes to the profession whether we seek it or not. Fifty years ago only a few law firms had offices outside their home jurisdiction. A firm of 100 lawyers was a behemoth. Cross- border commerce was relatively limited.
Today the legal profession is more numerous, more specialized, more employed by entities other than law firms, more mobile and often, it seems, less self-confident. The profession and society seem less aware than in the past of the unique contribution of lawyers to life in a society based upon the rule of law. Along with other professionals, lawyers seem to be out of societal favor. While some legal organizations are larger and lawyers much more specialized than 50 years ago, most lawyers still practice in relatively small law firms, as they did then.
Some business concerns with operations in many states may today regard the idea of lawyers and accountants acting together in a national or international firm as attractive. Under such a system a single firm, perhaps an accounting firm, that has offices in every state could be used for business law, tax as well as litigation matters. Such an arrangement may be seen by some as a way to control costs and to reduce the internal costs of monitoring the efforts of outside professionals. Similarly, individuals may believe that legal services can be packaged with investment, tax and other services, at lower prices than are now available.
The question is, will providing diverse professional service in a single firm be better for the clients, the public or the profession? One can only speculate about whether any current preferences for "one stop shopping" will be replaced in time by a feeling that "multiple-sourcing" is a better answer.
PLANNED CHANGE VS. IMPOSED CHANGE
Planning for change ourselves seems better than having it imposed by outsiders. However change does not avoid further change. Whether the legal profession attempts the radical "rationalization" that results from MDPs not controlled by lawyers, (now largely sponsored by the accounting profession) or not, other forces such as insurers may be in a position to force further radical change in time. Professional fees are under pressure generally. Graduation rates at law schools may create a glut of lawyers seeking work. The profession can gain no protection from competitive pressures in the future, however it reacts to the ABA Commission proposals.
LACK OF EVIDENCE OF PROFESSIONAL OR SOCIETAL ADVANTAGE
Change answers the cry to "do something" in a period of anxiety. Any change by the profession needs to respond to the needs of the profession and of society. What do we know about those needs?
This Committee sees no evidence that either the profession or society feels a need for a radical change to MDPs that are not controlled by lawyers as suggested by the ABA Commission Report. Further study is unlikely to uncover such evidence. As we discuss MDP with members of the profession and the community, we find it is necessary to explain MDP. It is hard to reconcile that experience with the idea that there is a professional or public demand for MDPs that are not controlled by lawyers. The appearance of those interested in MDPs that mix accountants and lawyers under accountant control before the ABA Commission hardly establishes that those testifying are representative of the views of others. It is simply not apparent that conglomeration of the professions under non-lawyer control will have any significant advantage to clients. The only advantage may be to a few professional firms and clients of enormous size.
THE DANGERS OF RATIONALIZING PROFESSIONAL SERVICES
Any "rationalization" of professional services suggests a comparison with the rationalization of medical services in recent years under the aegis of insurers. Neither the insurers nor the physicians view the result as a success. We need to keep in mind that the medical "rationalization" did not involve the principal MDP complexity, the mixing of professionals.
By its nature, radical change risks unintended results. We, as a profession, will have been badly mistaken, if looking back 50 years from now we see a legal profession homogenized in a common culture with other so-called "knowledge workers". There is much more to lawyering than the Code of Professional Responsibility. Lawyers have a unique role as advocates. They have a high level of loyalty and fiduciary obligation, neither of which is fully defined by the Code.
THIS IS A TIME FOR SENSIBLE LIMITED CHANGE
As a profession we need to put the client first. We also need to preserve our professional role and identity as advocates. To compromise on either of these issues endangers our professional identity.
Modest extensions of current practice may be of assistance to the Bar in an era of increased competition. We are in favor of such limited changes because they do not threaten the lawyer's traditional advocacy role or the lawyer's fiduciary obligations. Thus, we support lawyer controlled MDPs.
The foremost task for the professional is to do competent work for clients. As we have seen, that is an increasingly demanding task for lawyers. Each year more legal assignments seem to require specialized knowledge. Maintaining competence is a particularly difficult task for solo practitioners and smaller law firms, the vast bulk of our profession.
MDP which is not subject to lawyer control adds significantly to the competence burden. How will the law partners know that what the accounting partners are doing is professionally appropriate? In mego-firms professional standards can be maintained by special committees and educational efforts. Smaller law firms will have no resources for such an effort.
PRESERVING THE CULTURE OF THE PROFESSION
Today, many lawyers never go to court. Some advise only on taxation, or patents, others specialize in immigration or real estate. But we are held together as a single profession by a common culture. In or out of court we are defined by our role as advocates for our clients. Clients have confidence that when they hire a lawyer they have someone who will be not just an advisor but will be an advocate for their view, even if it does not accord with the advice the lawyer has given.
Does it make sense to advocate when the law is against you? Ask those who argued for so long against "separate but equal". Ask those who lost again and again in tobacco liability cases. And ask those who litigate death penalty cases whether they should accept the state of the law today. Our society depends on the ability to change the law in the courts. There is only one profession that is trained to effect change through advocacy.
It is fair for those proposing MDP not controlled by lawyers to ask, why does the mere opportunity to mix professions without lawyer control undermine the advocacy commitment of the legal profession? We believe that the risk that it would do so is simply too great to take. One need only consider the problems inherent in the relationship of the treating physician and the HMO and the insurer and the insurer - paid lawyer for a defendant. Who determines how far to go in protecting the patient or the insured? We believe that non-lawyer control of MDP's will threaten to undermine the advocacy role. The fact that the profession struggles with some of these issues even now hardly justifies an extension of them.
The advocates of MDPs not controlled by lawyers maintain that those who do not wish to partake can simply refrain from doing so. Consider the situation of doctors who believed that they could maintain their practices without subjecting themselves to health insurance or HMO payment rules. Except for the largest cities, when nationwide MDPs target a locality there are likely to be limited options for lawyers practicing there.
Changes in the Disciplinary Rules can be made to implement any form of MDP. The NY State Bar Report establishes that. The ability to change the Rules does not, of course, justify the change. Consider the change in the prohibition on splitting legal fees with non-lawyers (DR 3-102). The rule is aimed at non-lawyers who might interfere with professional judgment if they had a stake in a case. Are we suddenly unconcerned with this risk that has for so long shaped how lawyers think? The concept long predates the Disciplinary Rules. Cf. ABA Commission Report at p.2. There is clearly more to the culture of the profession than we find in the Disciplinary Rules.
A fair reading of both the ABA Commission Report and the NY State Bar Association Report indicates that none of us have or can expect to develop evidence of the benefits of MDP not controlled by lawyers. Thus we find it curious that the ABA Commission advocates MDP not controlled by lawyers. If our clients needed to react in a situation of uncertainty, we would ask them how they could recover if their judgment now turned out to be wrong. We need to observe the same caution ourselves. We act as trustees for our fellow lawyers in our Bar activities. Full speed ahead to MDP without lawyer control hardly seems like a conservative approach that is appropriate for trustees.
What, after all, has brought this peripheral issue to the center of the Bar's agenda? Is it anticipated economic pressure? We see law firm partners defecting to accounting firms on a regular basis. Is the concern that this pattern of defection will grow? If so, why will MDPs not subject to lawyer control be a better approach than facing defection directly? Is it that the profession will somehow be overwhelmed by the political clout and expertise of the accounting profession? What about the danger that the legal profession will lose its identity by becoming too much like other "knowledge workers"?
This issue is one that presents great risk to the profession. The response to it needs to be measured and thoughtful, if our culture is to survive. We believe that it is in the public interest, as well as the interest of the profession that we act to protect that culture.
The public, the judiciary, the legislature as well as those who seek to compete with the Bar will all have a role in the future of the Bar. The role of the Bar itself in molding the future is to define its own goals and to try to match these to the marketplace which in a free economy can opt to support or turn away from the services of the Bar.
The most important voice should be that of the Bar itself. We have the most at stake and should be able to view the situation and alternatives realistically, as we are trained to do. Having done so, we need to be our own best advocates.
In our judgment we should be prompt and loud and clear in opposition to the ABA Commission proposal for MDPs not controlled by lawyers. We urge the NYSBA and ABA House of Delegates to reject the ABA Commission Report approach and to adopt a position in accord with this Report permitting lawyer controlled MDPs.
There has been much talk of the power and political clout of the international accounting firms in any struggle over MDP. It seems obvious that in any struggle there is a chance of losing. The Bar has a strong case that merits public and client support. That case needs to be made now.
Lawyers and accountants are an odd couple. However hard one tries to reconcile the rules governing the two professions, their outlook and traditions could not be more different - the independent reporter vs. the advocate. We believe that, if there are to be MDPs, they need to have a clear personality. Lawyer control is central. We believe that the proposal for MDPs that are not lawyer controlled is likely to diminish the legal profession by obscuring its role. We do not believe this is an intelligent risk to take, for the profession, for our clients or for the public.
Those who find it advantageous to work more closely with other professionals will find that our proposal for lawyer controlled MDPs will meet their needs.
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In considering this important question we have had the great privilege to work with Sydney M. Cone, III who has followed MDP proposals from the outset. At our request Prof. Cone has prepared the
attached analysis of the ABA Report. We are pleased to both endorse it and to present it as an integral part of our Report.
This Report represents the unanimous view of the Committee.
Arthur Norman Field
M. Barry Levy
Stephen J. Blauner
H. Richard Schumacher
Robert S. Fink
Multi-Disciplinary Practice AMDP"
Comments on ABA Commission Report Released June 8, 1999 (the "Report")
Sydney M. Cone, III
Counsel, Cleary, Gottlieb, Steen & Hamilton
C.V. Starr Professor of Law, New York Law School
Summary of the Report
General: Two Categories of MDP
As a general matter, the Report, while endorsing the principle of protecting the core values of the legal profession, advances policy reasons for, and seems to favor, permitting lawyers to practice in MDPs. The Report divides MDPs into two categories-those controlled by lawyers, and those controlled by non-lawyers-and would subject the latter category to special requirements.
The Report does not define "control" for the purpose of determining whether an MDP is controlled by lawyers or by non-lawyers. For this purpose, a state that decides to permit lawyers to practice in MDPs might adopt a black-letter definition of "control," or might leave the concept of "control" to common law definition by the courts. A conventional definition would require an MDP controlled by lawyers to be majority-owned by, and to be effectively managed by, lawyers actively practicing law in the MDP, would define ownership in terms of both capital and profits, and would forbid management or ownership arrangements with individuals or entities outside the MDP. Such a definition would exclude the possibility that an appearance of control by lawyers could be used to mask effective control of an MDP by non-lawyers without triggering the Report's special requirements that apply to the MDP controlled by non-lawyers.
The MDP Controlled by Lawyers
As regards the MDP controlled by lawyers, the Report is essentially permissive. In effect, it would permit an MDP controlled by lawyers to operate as though it were a firm of lawyers engaged not only in legal practice but also in other professional activities. Thus, it would broaden the activities in which a firm owned and controlled by lawyers may engage. At the same time, this approach would require the lawyer owner-managers of such an MDP to enforce rules of legal ethics throughout the MDP (including on non-lawyers within the MDP).
On the other hand, the Report would continue the prohibition against passive investment in law firms. By extension, the only investment that would be permitted in an MDP controlled by lawyers would be investment made by the lawyer and non-lawyer professionals active in the MDP.
The MDP Controlled by Non-Lawyers
As regards the MDP that is controlled by non-lawyers and that owns a legal practice, the Report, as a condition to permitting such an MDP, would subject it to the disciplinary authority of the courts. To achieve this objective, the Report would require such an MDP to submit to the jurisdiction of the relevant state court, periodically to provide the court with a certification to the effect that it~ legal practice had been conducted in compliance with the rules of ethics of the legal profession, and to be subject to possible "administrative audit" by the court.
Under the Report, professionals in an MDP controlled by non-lawyers, including its non-lawyer professionals, could invest in the legal practice of the MDP.
The following comments relate principally to the Report's proposed MDP controlled by non-lawyers. Because such an MDP would be required to file periodic certifications with a state judicial authority, it is sometimes referred to below as a "reporting MDP."
1. Benefit Analysis. While the Report seems to favor the creation of the reporting MDP, it does not provide an analysis weighing the benefits to be derived from reporting MDPs against possible harm that they might cause to the core values of the legal profession. Rather, the Report seems to assume that the expected benefits are self-evident, and that the protection of core values is essentially a matter of adopting a program of judicial administration. The specific assumption seems to be that the integrity of those core values will be ensured by the Report's proposed certifications to be submitted by reporting MDPs, together with the Report's proposal concerning possible administrative audits of reporting MDPs. The Report does not examine the validity of this assumption which (as indicated below) seems open to question.
2. The Role of the Courts. Control (ultimate ownership and management) of the reporting MDP would lie outside the legal profession; yet the reporting MDP would be permitted to engage in the practice of law as though it were controlled by legal professionals. This is the essential conundrum that the Report was expected to address. It essentially fails to do so. Instead, the Report would convert the problem into one of judicial administration. It would turn the problem over to the courts, and leave to them the formulation of appropriate guidelines for ensuring that a legal practice ultimately controlled by non-lawyers was conducted as though it were ultimately controlled by members of the legal profession. As a consequence, in each state the judiciary and the legislature would be called upon to decide whether they think it advisable for the courts to accept this novel assignment by taking jurisdiction over, and by accepting supervisory responsibility for, reporting MDPs.
3. Certifications and Administrative Audits. According to the Report, the reporting MDP would provide the relevant state court with certifications as to the MDP's compliance with that state's rules of professional ethics for lawyers, and would permit the court to "conduct an administrative audit" of the reporting MDP to "assure compliance" with those rules. Thus, in the first instance, it would be up to the MDP (owned and managed by non-lawyers) to determine whether it had maintained the core values of the legal profession; and the administrative burden would then fall on the courts to decide whether to verify the certification, whether to conduct an audit and, in the affirmative, to do so.
a. Maintenance of Core Values. Legal disciplinary rules are subject to interpretation. The core values of the legal profession rest on interpretations made in the best interest of the client. In an MDP controlled by non-lawyers, ultimate management would be in the hands of non-lawyers more likely to be concerned with economic performance by the MDP than with interpretations of legal professional rules made in the best interest of the client. It therefore would be surprising, as these rules were interpreted from time to time by lawyers in the MDP, if the lawyers were uninfluenced by the economic concerns of the non-lawyers in positions of ultimate management. Accordingly, it seems reasonable to suggest that there would be an incentive for the lawyers in an MDP to interpret the legal rules of professional ethics in a manner most consistent with the interests of a management comprising non-lawyers, as contrasted with the best interests of the client. For this reason, there seems to be a substantial risk that, over time, the operation of MDPs controlled by non-lawyers would lead to the erosion of the core values of the legal profession.
b. Certifications. The Report's response to the risk described in the preceding paragraph is purely administrative, and consists of the periodic filings of certifications by the reporting MDP to the relevant court. These certifications would not seem designed, however, to encourage interpretations of legal ethical rules made in the best interests of the client. Rather, this administrative approach to legal ethics would seem designed to encourage minimalist interpretations not inconsistent with the periodic filing of clean certifications. In this connection, the reporting MDP could be witness to a novel dynamic involving the non-lawyer owner-managers, responsible for filing clean certifications, and the MDP's practicing lawyers, charged with observing legal rules of professional ethics that are designed to protect the best interests of the lawyers' clients.
c. Administrative Audits. A state that adopts the Report and thereby assumes responsibility for conducting administrative audits of reporting MDPs can be expected to find it necessary to create and fund administrative support for the relevant court. If, however, the state does not create a judicial office of MDP administration (or its equivalent), the Report's recommendations may prove ineffectual in respect of reporting MDPs in that state.
Were a judicial office of MDP administration to decide to carry out an audit, it would get scant guidance from the Report, which is altogether silent on difficult questions that could arise in the course of an audit. How would the auditors be expected to go about verifying compliance with various disciplinary rules? How would they deal with client confidences and secrets? It would seem appropriate for the Report to have dealt with these questions in some detail in evaluating the efficacy of its proposal.
d. Discipline of Non-Lawyer Owner-Managers. The Report is also silent on the question of whether the non-lawyer owner-managers of MDPs would be subject to discipline and, if so, in what form. Unlike the lawyers in the MDP, the non-lawyer owner-managers could not be suspended or disbarred from the practice of law. The matter of disciplining them is left entirely to the states adopting the Report. By failing to address the subject of whether legislation or judicial rules should create disciplinary measures for non-lawyer owner-managers and, in this connection, by failing to consider whether disciplinary measures for non-lawyer owner-managers could be adequate to ensure that the legal profession's core values would not be eroded, the Report does not add credibility to its recommendations for reporting MDPs.
4. The Big Five Firms. The Report expressly recognizes the interest of firms known as the Big Five in practicing law. The Report's proposed program of judicial administration, based on certifications and audits, seems at bottom to be a response to problems inherent in permitting the Big Five to acquire and operate law firms and at the same time maintaining the core values of the legal profession. Conceptually, at least, the Report might have examined whether lawyer-controlled MDPs would not adequately meet the perceived need for MDPs. A system limited to lawyer-controlled MDPs would alleviate the Report's concerns over the maintenance of the core values of the legal profession.
5. Capitalization of Legal Practice. Under the terms of the Report, a Big Five firm would be able to acquire a hitherto independent law firm, thereby adding the substantial capital of the Big Five firm to the legal practice thus acquired. On the other hand, the Report would not permit independent law firms to acquire passive capital. Viewed from the perspective of the capitalization of legal practice, these features of the Report seem to present an anomaly.
A reluctant court might paraphrase the 1995 case, Trustco Bank New York v. Melino, 625 N.Y.S.2d 803,808, as follows: "[T]he maintenance of [the ethics of reporting MDPs] would require periodic [judicial audits] to assure [that their ethics were] not being breached. In effect, what this means is that the parapets of [reporting MDP ethics] would have to be manned by the judiciary, and the judiciary does not have sufficient resources to take on this added duty."