The State Bar Of California Report With Recommendation To The House Of Delegates - Center for Professional Responsibility

AMERICAN BAR ASSOCIATION

THE STATE BAR OF CALIFORNIA
REPORT WITH RECOMMENDATION TO
THE HOUSE OF DELEGATES

RECOMMENDATION

WHEREAS, the American Bar Association's ("ABA's") Commission on Multidisciplinary Practice ("MDP Commission") was appointed to determine what changes, if any, should be made to the ABA Model Rules of Professional Conduct governing the delivery of legal services by professional service entities comprised of attorneys and non-attorneys; and

WHEREAS, the MDP Commission has presented its report to the ABA's House of Delegates for consideration at the ABA's August 1999 meeting in Atlanta; and

WHEREAS, the Board of Governors of the State Bar of California requested its Standing Committee on Professional Responsibility and Conduct ("COPRAC") to study the ABA MDP Commission Report and make comments upon and recommendations regarding the Report; and

WHEREAS, COPRAC has provided its comments and recommendations to the Board; and

WHEREAS, the MDP Commission is recommending that the ABA adopt changes to its Model Rules of Professional Conduct which would allow the delivery of legal services through MDP entities comprised of attorneys and non-attorneys finding that appropriate safeguards can be developed and adopted to adequately protect the client protection concerns that are the basis for the core values of the profession while providing broader and improved access to legal services by the public; and

WHEREAS, it is widely accepted that the MDP Commission recommendations involve complex and difficult issues with profound implications for the legal profession and the protection of the public interest; and

WHEREAS, although the MDP Commission Report reflects a substantial consideration of the issues, the MDP Commission recommendations have far reaching implications for the legal profession and the public, which vary from state to state, and which require focused consideration by the profession and the public at the state and local level; and

WHEREAS, the governing "principles" articulated by the MDP Commission in its report do not provide adequate safeguards to address client protection concerns while providing broader and improved access to legal services by the public; and

WHEREAS, although it is legitimate to consider modifications to the professional rules governing the traditional forms of practice by which consumers of legal services are served by the legal profession as we enter the new millennium, any such changes must be carefully and thoroughly considered to assure that a firm infrastructure exists to support the success of any such changes;

NOW, THEREFORE, IT IS RESOLVED, that the Board of Governors of the State Bar of California, upon the recommendation of its Board Committee on Regulation and Discipline, approves and adopts the comments of COPRAC, in the form attached as Attachment 1, as those of the State Bar of California on the substance of the MDP Commission Report; and it is

FURTHER RESOLVED that, the Board of Governors recommends that the ABA House of Delegates defer any final action on the MDP Commission Report to allow the Commission to more fully develop its recommendations and to allow the profession and the public to more fully understand the need for and meaning of the proposed changes; and it is

FURTHER RESOLVED that, the Board of Governors recommends that the ABA House of Delegates return this matter to the MDP Commission, which, having now issued its Report and Recommendations, may now work with the states, the organized bar, and the public to make its recommendation more fully understood and to refine and develop its recommendations to more fully reflect the concerns being articulated regarding the effect these recommendations will have upon state regulation of the unauthorized practice of law, the interests of clients, and the traditional core values of the legal profession in serving clients; and it is

FURTHER RESOLVED that, the position of the Board of Governors on this issue be forwarded in writing to the ABA and the MDP Commission prior to the ABA's August 1999 meeting, that the State Bar of California's delegates to the ABA House of Delegates work to achieve these goals, and that this position of the State Bar of California be presented to the ABA and its MDP Commission at the August ABA meeting is Atlanta by State Bar representatives designated by the President of the State Bar.

 


REPORT

The Board of Governors of the State Bar of California met on July 23, 1999 and adopted the following report of its Standing Committee on Professional Responsibility and Conduct.

  

REPORT AND RECOMMENDATION OF THE STATE BAR OF CALIFORNIA
COMMITTEE ON PROFESSIONAL RESPONSIBILITY AND CONDUCT
ON THE AMERICAN BAR ASSOCIATION’S MULTIDISCIPLINARY
PRACTICE COMMISSION REPORT *

Conclusion

We urge the Board to instruct the Bar's representatives at the ABA House of Delegates to vote to reject the principles, in their present form, which underlie the recommendation that the ABA Model Rules of Professional Conduct be amended to allow Multidisciplinary Practice organizations ("MDPs") to provide legal services to clients where the organizations are not controlled by lawyers. In voting to reject these principles, the Bar’s representatives could contend that the House of Delegates should consider referring the matter back to the MDP Commission for continued study.

We also urge the Board to instruct the delegates to reject the principles, in their present form, which underlie that part of the proposal that would change the Model Rules prohibiting lawyers' splitting fees with nonlawyers and entering into partnerships with nonlawyers without further restrictions that would protect clients against their attorneys' loss of independence of judgment and against interference with the attorneys' undivided loyalty to the clients. The rejection of these principles also could include a House of Delegates referral back to the MDP Commission for continued study.

In the view of this Committee, the ABA proposal relates to a form of legal practice which deserves further consideration. This Committee would welcome proposals for new forms of legal practice designed to foster benefits for clients. But the principles recommended by the ABA lack the clarity and specificity necessary to ascertain the types of legal practice that will result from these principles. To the extent that these can be ascertained, it is apparent that the public will be harmed, rather than provided with more efficient and better legal representation.

The State Bar's experience in administering the regulation of certified lawyer referral services (Cal. Bus. & Prof. Code §6155-6156) teaches that activities targeted for regulation must be clearly defined. Absent a clear definition, public protection enforcement is likely to be problematic and ineffective. The State Bar found that the original statutory definition of "lawyer referral service" required subsequent clarifying amendments, as well as development of additional State Bar drafted guidelines and standards, to make the statutory scheme workable and to prevent abuse. This experience demonstrates that the regulation of lawyer conduct can be effective only with principles that are clearly expressed so as to be capable of effective enforcement. Only then will we know precisely what is permitted and prohibited and what the effect will be on clients and on lawyers.

It appears to COPRAC that the principles recommended by the ABA were prepared in undue haste. The Report itself explains the haste as due in part to organizations such as the Big 5 Accounting firms that have hired great numbers of lawyers who may currently be violating the ethical strictures against fee splitting and forming partnerships with nonlawyers while engaged in the practice of law. The proposal has all the earmarks of an attempted "quick fix" to a problem created by these organizations, rather than a measured response to client demand for a better way to deliver legal services. The Commission needs to be more precise in the drafting of its principles so that they focus on the needs of clients and lawyers' duties to clients. Clarification is necessary before any decision ought to be made whether to adopt principles of the type proposed. As written, the proposal raises hundreds of questions. If it were more complete and defined, we could no doubt see the answers or suggest improvements. But it is not our responsibility to define the proposal.

This is not to say that this Committee has not had sufficient time to absorb and reflect on the details of the proposal as currently presented. We have. We think the principles, in their present form, are poorly conceived. They will not solve the Big 5's problems. And, despite the Commission's endorsement of the "core values" of the legal profession, the principles, in their present form, fail to recognize that by sanctioning the provision of legal services to the public by corporations and others that are not controlled by lawyers, the independence of judgment of the lawyers so engaged will be a chimeric dream. Among other things, we are concerned that MDPs will provide legal services like the medical services provided by HMOs, whose doctors are outspoken about interference with professional judgment.

Our nationwide experience with the medical profession has demonstrated the harm that is done to the public when professional services for the public are controlled by nonprofessionals whose obligations are not to the public but to some organization not controlled by the professionals.

Mere "undertakings," certification and occasional auditing will not adequately protect the public, unless the details of the enforcement system, including the funding thereof, are specified in the principles which are to be adopted.

Even the creation of MDPs controlled by lawyers will have unintended consequences and will lead to abuses unless the principles are further refined. Though the type of MDP that receives most attention is a combination of lawyers and accountants or investment bankers, given the text of the principles it will be commonplace for lawyers to form MDPs with nonlawyers whose only contribution to the enterprise is as a source of referral business. There is no limitation on who can be a "partner" in an MDP or the nature of the "partners'" contribution to the enterprise. Personal injury lawyers will benefit from MDPs that include chiropractors, tow truck operators and insurance adjustors. The same would be true for real estate lawyers in MDPs with brokers, agents and appraisers and for family lawyers in partnership with family counselors. The principles permit MDPs that provide non-legal services that are not related to the contribution of the nonlawyer members; thus, the nonlawyer member might participate only as a source of mutual referrals.

In permitting this, the proposal completely ignores the power of referral and fee sharing incentives to break down independence of judgment and loyalty. Firms will not be able to resist joining referral sources in MDPs. Indeed, efforts by personal injury attorneys in California to combine their services with others involved in assisting members of the public who suffer losses when injured in automobile accidents demonstrate the need to adequately define exactly what protections will be provided to prevent abuses when services are combined. While large conglomerates may sometimes be able to make their corporate clients whole, who will account for the misuse of client funds for the smaller sized practitioners who may be associated with others who, unknown to the practitioners, are dishonest or simply disloyal?

Though the principles purport to be designed to permit teams of professionals to provide "one stop shopping" for professional services, nothing in the statement of principles limits MDPs to providing professional services.

Discussion

There are good sentiments expressed in the proposal: a recognition of the core values (and other values) of the legal profession and a strong statement that they should not be compromised. Unfortunately, the proposal fails to live up to its promise.

An appraisal of the proposal requires attention to the details. We have considered the merits both overall and in detail, that is, upon a review of the impact of the proposal upon the provision of legal services in general and upon a review of each of the statements of principle underlying the recommendation.

Principle No. 1:

The legal profession should adopt and maintain rules of professional conduct that protect its core values, independence of professional judgment, protection of confidential client information, and loyalty to the client through avoidance of conflicts of interest, but should not permit existing rules to unnecessarily inhibit the development of new structures for the more effective delivery of services and better public access to the legal system.

We have no problem with the identification of "core values," though there are other values. But the principle erroneously implies that the existing rules are unnecessary to protection of the "core values" and that eliminating some of the rules would provide for "more effective delivery of services" and "better public access to the legal system." This is a fallacy that runs through the entire recommendation. A rule that has substantially enhanced preservation of the lawyer's independence of judgment, the rule against splitting fees and forming partnerships with nonlawyers, is deemed unnecessary and in its place will be nothing but hope. What kind of professional independence would an employee-lawyer have in an enterprise owned and controlled by nonlawyers? How will access to the legal system be improved by putting nonlawyers (accountants, investment bankers, merchants) in charge of firms that deliver legal service?

Principle No. 2:

A lawyer should be permitted to share legal fees with a nonlawyer, subject to certain safeguards that prevent erosion of the core values of the legal profession.

Elimination of the fee sharing restrictions will as a practical matter put an end to referral fee restrictions and, for that matter, the prohibitions in California's Penal Code on runners and cappers. A nonlawyer partner in an MDP will not need to take a referral fee for bringing business to the MDP. He or she will be able to obtain part of the legal fees as a sharing of fees.

The proposal does not explain why sharing of fees is necessary or desirable in order to have an MDP. Indeed, the Reporter's Notes (Appendix C) states that only Switzerland permits the establishment of a fully integrated MDP. In all other countries, the Big 5 have limited their activities to contractual arrangements with law firms, whereby the firm agrees to collaborate with the professional services firm in various ways, but "remains an independent entity controlled and managed by lawyers." Appx. C at 7-8. Thus, in these countries one stop shopping is permitted while having lawyers remain in control of, and billing for, the legal service separately from the non-legal services. In spite of the European models, so heavily relied upon by the Commission, the MDP as defined in the proposal includes "direct or indirect sharing of profits as part of the arrangement." See Principle No. 3.

The impact of ending the prohibition against fee splitting is clear from an example: there will be MDPs with lawyers, chiropractors, tow service operators and auto repair operators. Why should the lawyer share his fee with the tow service operator? Will sharing the fee assure more effective delivery of legal services to the client? Or provide better public access to the legal system?

Principle No. 3:

A lawyer should be permitted to deliver legal services through a Multidisciplinary Practice (MDP), defined as a partnership, professional corporation, or other association or entity that includes lawyers and nonlawyers and has as one, but not all, of its purposes the delivery of legal services to a client(s) other than the MDP itself or that holds itself out to the public as providing nonlegal, as well as legal, services. It includes an arrangement by which a law firm joins with one or more other professional firms to provide services, including legal services, and there is a direct or indirect sharing of profits as part of the arrangement.

This principle is the guts of the proposal. It eliminates the rule that a lawyer may not form a partnership with a nonlawyer if any of the activities of the partnership consist in the practice of law. On its face, such a rule change in some circumstances might not be an altogether bad thing. That is, it is hard to see why a law firm could not have a CPA as one of its partners to assist in clients' tax or estate planning matters. Many firms employ accountants for this purpose now. But the organization is owned and controlled by lawyers. Even in this situation, there may be conflicts between the CPA's professional obligations, and the lawyer's, particularly as to maintaining client confidences. It is our understanding that CPA's insist that their firms be controlled by CPA's. Unfortunately, the ABA proposal does not insist that the firms of lawyers in private practice remain in control of lawyers.

Beyond the matter of partnership makeup, the proposal opens the door to lawyers' providing services to the public through any kind of for profit organization that chooses to provide legal services to the public, provided only that it hold itself out as providing some nonlegal service. There is not even a limitation that the entity's activities be limited to professional services. Internet companies such as Amazon.com and large retail chains such as Wal-Mart or Home Depot could hire staffs of lawyers and offer access to the legal system. The only protection against dilution of professional independence is that the entity (through its nonlawyers) will file with the highest court of each state where it does business an undertaking not to interfere with a lawyer's exercise of professional judgment on behalf of a client, that the lawyer will comply with the rules, etc., and will establish procedures to that end. Assuming the courts have jurisdiction, is it reasonable to expect that they will actually police the activities of the nonlawyer-controlled MDPs?

Principle No. 4:

Nonlawyers in an MDP, or otherwise, should not be permitted to deliver legal services.

This recommendation simply reiterates the long-standing proscription against the practice of law by non-attorneys. Standing alone it does not appear to alter existing rules in any way.

But what is not stated here is the impact on California Rule of Professional Conduct 1-300, and similar rules elsewhere, that a lawyer shall not "aid any person or entity in the unauthorized practice of law." While the laws of California (and many other jurisdictions) allow law corporations to practice law, no consideration is given to whether the MDP is engaged in the practice of law. The issue seems deliberately hedged in the report and the recommendations, as if only lawyers may "practice law," but entities may "provide legal services." This is another poorly considered aspect of the proposal.

Principle No. 5:

A lawyer in an MDP who delivers legal services to the MDP's clients should be bound by the rules of professional conduct.

On its face, this statement is unremarkable and is to be expected. There is a serious question if it is realistic.

Principle No. 6:

A lawyer acting in accordance with a nonlawyer supervisor's resolution of a question of professional duty should not be thereby be [sic] excused from failing to observe the rules of professional conduct.

Model Rule 5.2(b) provides that a subordinate attorney, such as an associate in a law firm or a junior attorney in government service, may rely on "a supervisory lawyer's reasonable resolution of an arguable question of professional duty." Principle No. 6 of the MDP recommendations says that a lawyer may not rely on a nonlawyer supervisor's resolution of a question of professional duty. Again, this is unremarkable.

Principle No. 7:

All rules of professional conduct that apply to a law firm should also apply to an MDP.

There is an inherent ambiguity here. While on its face this statement seems reasonable, as a practical matter it is poorly thought out. If the proposal is approved by the House of Delegates, this will be the first part of it to be scrapped. Can anyone seriously imagine PricewaterhouseCoopers checking for conflicts between its non-legal clients and an employee-lawyer's legal client? Further, there is no consideration given to possibly inconsistent professional obligations, such as between a lawyer's obligations of loyalty and to protect the confidentiality of client information and the CPA's obligations to the public.

The whole concept of paragraph 7 may be illusory at best. In California, for example, very few of the Rules of Professional Conduct are directed at law firms as distinct from "members." Is it the intention of the Commission that Principle No. 7 be limited to the rules in Part V of the ABA Model Rules? The scope of the principle that rules applying to a law firm should also apply to an MDP is uncertain at present.

Principle No. 8:

In connection with the delivery of legal services, all clients of an MDP should be treated as the lawyer's clients for purposes of conflicts of interest and imputation in the same manner as if the MDP were a law firm and all employees, partners, shareholders or the like were lawyers.

Perhaps the foremost purpose of the conflict of interest rules is to prevent use of a client's confidential information against the client. In a law firm, knowledge held by any lawyer of the confidential information of the lawyer's past or present clients is imputed to all of the firm's lawyers. Principle No. 8 says that there will be imputation for conflicts purposes as if the MDP were a law firm and as if all of the MDP's personnel were lawyers. It is not apparent that the Commission has considered what this means for the purpose of analyzing the imputation of knowledge of non-attorneys to the attorneys in the MDP. Nor does the principle address whether there is imputation of knowledge concerning non-legal clients of the MDP for conflicts purposes. Is it reasonable to expect that an MDP will conduct itself for purposes of conflicts of interest and imputation as if each employee, even those having nothing to do with the provision of legal services, were a lawyer in a law firm?

Further, though it may be possible to sense how the conflict analysis would work if the MDP is owned by professionals, such as accountants, who are used to engagement letters and therefore can designate someone as a client, how will this work when the MDP is American Express (which has bought many accounting firms all over the country to use them as feeders for the sale of insurance, annuity, and other financial products)? Who are the "clients"?

Throughout the proposal there is ambiguity as to what is meant by the term "all clients" of the MDP. Are these "clients" only those persons who engage the MDP for legal services? If so, does a customer who initially receives only non-legal services become a "client" for legal services upon learning that a lawyer within the MDP is assisting the nonlawyers? Is there an automatic transformance? Is there "delivery of legal services" if the lawyer's work is internal only? If a lawyer is assisting nonlawyers, or works only behind the scenes, is the customer a "client?" There are no answers.

The reference in this principle to "imputation in the same manner as if the MDP were a law firm and all employees, partners, shareholders or the like were lawyers" raises an apparently insoluble problem where the client has disclosed information to the MDP that the MDP is obliged, under a professional rule applying to nonlawyers, to report to a third party.

Proposed new comment 25 to proposed rule 1.6 appears to assume that ethics screening may be used to avoid disqualification based on an MDP's possession of confidential information of an adverse party that is a former client. This is contrary to current California law.

Principle No. 9:

To the extent that the delivery of non-legal services to a client is compatible with the delivery of legal services to the same client and with the rules of professional conduct, a lawyer should be required to make reasonable efforts to ensure that the client sufficiently understands that the lawyer and nonlawyer may have different obligations with respect to disclosure of client information and that the courts may treat the client's communications to the lawyer and nonlawyer differently.

This raises a question what are "reasonable efforts?" Would not the lawyer's disclosure obligation require disclosure to the client that a law firm is better able to maintain client secrecy than an MDP?

Principle No. 10

A lawyer in an MDP who delivers legal services to a client of the MDP and who works with, or is assisted by, a nonlawyer who is delivering nonlegal services in connection with the delivery of legal services to the client should be required to make reasonable efforts to ensure that the MDP has in effect measures to ensure that the nonlawyer's conduct is compatible with the professional obligations of the lawyer.

Model Rule 5.3 currently requires lawyers to ensure that their nonlawyer employees act consistently with the rules of professional conduct. Principle No. 10 attempts to express an analogous obligation on a lawyer employed by an MDP, but only with respect to nonlawyers who "work with" or "assist" the lawyer and who are delivering "nonlegal services in connection with the delivery of legal services to the client." The lawyer then is to "make reasonable efforts" to ensure that the MDP "has in effect measures to ensure that the nonlawyer's conduct is compatible with the professional obligations of the lawyer."

This is a very convoluted and confusing paragraph that raises more questions than it answers. If the nonlawyer professionals are "assisting" the lawyer, then they are analogous to the non-attorney staff in a law firm or to outside professionals hired by the attorney. In that situation, a lawyer should be able to abide by this paragraph's requirements unless the nonlawyer professional's own professional duties conflict with legal ethics.

However, when a non-attorney professional "works with" the attorney, then the relationship is much more ambiguous. Is the attorney directing the non-attorney or vice-versa? Courts have struggled with in-house lawyers on privilege issues, holding that in-house lawyers who act predominantly as business advisors do not enjoy the attorney-client privilege. Here, the ambiguity of the lawyer's role in working "with" nonlawyers will create substantial uncertainty concerning the scope of the privilege and of the work product doctrine.

This principle also fails to address the fact that other professionals, such as accountants, may have professional obligations that are inconsistent with those of lawyers. The Commission has clearly not resolved the implications inherent in this part of the proposal--whether and how lawyers can function properly in an MDP. The Commission's report does not adequately address this issue. The report assumes that lawyers practicing law at MDPs will restrict themselves to asking other professionals to "assist" the lawyer. The report does not grapple with the difficulties of how lawyers and nonlawyers can "work with" each other without jeopardizing the core values identified by the Commission. Furthermore, as noted in regard to Principle No. 3, MDPs are not limited to professionals who "work with" lawyers but may include any occupation in society.

Principle No. 11

A lawyer in an MDP should not represent to the public generally or to a specific client that services the lawyer provides are not legal services if those same services would constitute the practice of law if provided by a lawyer in a law firm. Such a representation would presumptively constitute a material misrepresentation of fact.

This provision, that lawyer employees of MDP's should not represent that they are not engaged in the practice of law, is anomalous, to say the least. It is likewise unusual to create a presumption in a principle underlying proposed changes to rules of ethics.

[Note: The Board may wish to comment to the Commission on the unauthorized practice of law, which COPRAC is unauthorized to do.]

Principles Nos. 12 and 13:

[12.] A lawyer should not share legal fees with a nonlawyer or form a partnership or other entity with a nonlawyer if any of the activities of the partnership or other entity consist of the practice of law except that a lawyer in an MDP controlled by lawyers should be permitted to do so and a lawyer in an MDP not controlled by lawyers should be permitted to do so subject to safeguards similar to those identified in paragraph 14.

[13.] Allowing fee-sharing and ownership interest in an MDP does not change the rules of professional conduct prohibiting fee-sharing and partnership in any other respect, including the current provisions limiting the holding of equity investments in any entity or organization providing legal services.

Principle No. 12 effectively abolishes the prohibitions against fee sharing and forming a partnership with a nonlawyer. Once abolished, this prohibition will never be revived. The prohibition appears to remain in existence ("A lawyer should not share legal fees with a nonlawyer or form a partnership . . . with a nonlawyer if any of the activities of the partnership . . . consist of the practice of law except"). But the "except" swallows the rule. The lawyer is free to share fees with a nonlawyer and to form a law partnership with a nonlawyer in two circumstances: (1) where the resulting entity is controlled by lawyers, and (2) where the resulting entity is not controlled by lawyers. The meaning of "controlled" is never defined.

A primary purpose of the rule against sharing fees with nonlawyers has been protection of the independence of judgment of the lawyer and assurance of the lawyer's loyalty to the client. As indicated in the Conclusion, the proposal completely ignores the power of referral and fee sharing incentives to break down independence of judgment and loyalty. Firms will not be able to resist joining referral sources in MDPs. It is the clients who will suffer. In abolishing the fee splitting rule, no effective substitute is proposed. The last sentence of Principle No. 12, referring to safeguards "similar" to those identified in paragraph 14, makes further uncertain just what is proposed.

Principle 13 does continue restrictions on nonlawyers' passive "equity investments" in law firms and possibly in MDPs. That could have important consequences, especially for large MDP organizations. But if the MDP is structured so that the legal fee generating component does not generate equity, then the restriction might not be meaningful for MDPs.

Also while the referral fee restrictions may continue to be applicable to MDP's, given the elimination of the prohibition on fee sharing, the referral fee restrictions will be inconsequential. A nonlawyer partner in an MDP will not need a referral fee for bringing business to the MDP.

Principles No. 14, 14(A), 14(B) and 14(F):

[14.] As a condition of permitting a lawyer to engage in the practice of law in an MDP, the MDP should be required to give to the highest court with the authority to regulate the legal profession in each jurisdiction in which the MDP is engaged in the delivery of legal services (the "court"), a written undertaking, signed by the chief executive officer (or similar official) and the board of directors (or similar body), that:

[A.] it will not directly or indirectly interfere with a lawyer's exercise of independent professional judgment on behalf of a client;

[B.] it will establish, maintain and enforce procedures designed to protect a lawyer's exercise of independent professional judgment on behalf of a client from interference by the MDP, any member of the MDP, or any person or entity controlled by the MDP;

[F.] it will annually review the procedures established in subsection (B) and amend them as needed to ensure their effectiveness; and annually certify its compliance with subsections (A)-(F) and provide a copy of the certification to each lawyer in the MDP;

The Commission implicitly recognizes the threat to lawyer independence in an MDP that is not controlled by lawyers. The Commission does so by imposing on such MDPs the undertaking and other requirements of Principle No. 14. The proposed content of the undertaking is modeled somewhat after concepts extant in California's Rule of Professional Conduct 1-600(A) and 3-310(F) and to some extent upon ABA Model Rule 5.4(c)(d)(3). There is an important distinction: here the undertaking comes from a nonlawyer who may not understand the concept of a lawyer's independence of judgment. Moreover, the Commission makes no suggestion as to what kind of "procedures" might protect independent judgment.

More important, the Commission implies that a mere statement of the conclusion that procedures are in place is all that is necessary to protect independence of judgment. During the past two decades, we have seen many disputes under California Rule of Professional Conduct 1-600(A) between practicing lawyers and organizations providing legal services, both governed by lawyers and nonlawyers, concerning lawyers' "core" values. Even in organizations whose only purpose is to provide legal services (as opposed to a variety of professional or business services) there is a tension between independence of lawyers and matters of confidentiality and the bottom line business and financial concerns of the organization's managers and directors. These tensions will increase exponentially when different businesses and professions are combined in MDPs. While the written undertaking on behalf of the MDP as an entity to preserve the "core values" of the MDP lawyers who deliver legal services to clients is laudable, it provides no meaningful protection to the public.

Principle No. 14 raises serious questions of practicality. The nonlawyer is to give the undertaking to the highest court of the jurisdiction that the entity has "procedures" designed to protect the lawyers' professional obligations and exercise of professional judgment on behalf of a client. The proponents assume that the courts have jurisdiction to take on the regulation of MDPs not controlled by lawyers and that they will have the necessary resources to do so.

In addition, this Committee believes it is naive in the extreme to suggest that a lawyer in an MDP controlled by nonlawyers will have independence of judgment, regardless of what is stated in a written undertaking, when his promotions, budgets and very employment status are controlled by nonlawyers who have no obligation of loyalty or otherwise to the client. The Commission seems to regard a lawyer in a MDP as if he or she were in-house counsel for a corporation. But in-house counsel have one client--the employer. They are paid by that client. There is no divided loyalty.

The legal profession already has substantial experience with protocols and procedures used in certain practices to ensure lawyer's independence ( e.g., the insurance industry, unions that provide legal services to their membership or legal services organizations). The Commission should study, report and make recommendations as to the minimum required procedures which are necessary for implementation as an MDP. Without detailed procedures specifically designed to protect independence, the undertaking or certification is meaningless.

Paragraph No. 14(C):

it will establish, maintain and enforce procedures to protect a lawyer's professional obligation to segregate client funds;

This paragraph requires an assurance of procedures in place to protect a lawyer's professional obligation to segregate client funds. But the duties of lawyers as to client property greatly exceed the "obligation to segregate funds." For decades, mishandling of entrusted funds and property has been one of the most frequent causes of complaint and discipline. Millions of dollars are lost because of lawyers' mishandling of client property. A very large portion of this loss is due to misfeasance of other professionals retained by lawyers to assist in performing their services. Current regulation and remedies are insufficient to make some consumers whole.

If the profession is expanding the access of nonlawyers to entrusted funds and property by constituents of MDPs, more regulation and financial responsibility is needed, not less. At a minimum, the procedures required under disciplinary and civil law for safeguarding funds and properties, for notice upon receipt, for accounting and recordkeeping, for repayment or delivery on demand should be required of an MDP in addition to the duty to segregate funds. Further, as a prerequisite to entering the legal services field, MDP's should make additional contributions to Client Security Funds above the individual contributions included in the Bar dues of their lawyer members.

Paragraph No. 14(D):

the members of the MDP delivering or assisting in the delivery of legal services will abide by the rules of professional conduct;

This paragraph requires that the undertaking that each MDP filing must include a statement that the MDP members delivering or assisting in the delivery of legal services will abide by the rules of professional conduct. This is a laudable goal, but insufficient to protect the public from the untrained or intentional wrongdoer. California's experience with nonlawyer interference in personal injury practices resulting in theft of funds, fraudulent staged accidents, fraudulent insurance and other claims, settlement of client cases without authority or for less than the minimal worth of the claim provide countless horror stories regarding the dangers that can occur when nonlawyers have some control over the business of the practice of law. The Commission should study, report and recommend minimal procedural safeguards which must be implemented by MDPs, including training and education for nonlawyer staff.

  Principle No. 14(E):

it will respect the unique role of the lawyer in society as an officer of the legal system, a representative of clients and a public citizen having special responsibility for the administration of justice. This undertaking should acknowledge that lawyers in an MDP have the same special obligation to render voluntary pro bono publico legal service as lawyers practicing solo or in law firms;

California law does not require attorneys to provide pro bono services. This Committee cannot see how any undertaking by an MDP in California, assuming it were valid, would create any practical duty on the part of an attorney employed by MDP to provide pro bono services.

Principle No. 14(G):

it will annually file a signed and verified copy of the certificate described in subsection (F) with the court, along with relevant information about each lawyer who is a member of the MDP;

Paragraph 14(F) requires an annual "certification" on behalf of the MDP of compliance with the undertakings not to interfere with lawyers' independence of judgment, to establish procedures to protect the lawyers' obligations, that the lawyers will abide by the rules, etc. Subparagraph (G) then requires the certificate be filed with "the court." This requirement appears simply as an attempt to place an official "stamp of approval" on the MDP. The principle does not answer who will be "certifying" compliance or the form of the certification. Is the certificate "under penalty of perjury?" How will the "high court" make use of the certificate? The certificate itself does nothing to ensure the MDP lawyer members will meet their ethical responsibilities.

Subparagraph 14(G) likewise does not answer what is included in the "relevant information about each lawyer who is a member of the MDP" that must be included in the certification. Do the proponents contemplate that the certificate disclose whether each lawyer who is a member of the MDP has complied with the rules of professional conduct?

Principle No. 14(H):

it will permit the court to review and conduct an administrative audit of the MDP, as each such authority deems appropriate, to determine and assure compliance with subsections (A)-(G);

This proposal allows each state to decide on the nature and extent of a "review" and "administrative audit" of the MDP. No guidance is provided in this recommendation, which means uneven application of this review and audit provision through the United States. In California, the obvious question is funding for such a new program. Who will establish the parameters of "review"? What will be the scope of the "audit? Is it realistic to believe that the "high court" can effectively determine not only whether appropriate procedures are in place, but also whether the procedures are being adhered to?

Omitted from this section is any discussion of sanctions in the event the MDP does not meet the standards contemplated in the principles. Is the MDP revoked? Does the high court have jurisdiction to prevent members of the MDP from conducting all business? Is the high court limited to disciplining the lawyers members of the MDP? Subsection(H) is vaguely written and prone to uneven application. In most circumstances, there will be no real review and audit of any MDPs.

 Principle No. 14(I):

it will bear the cost of the administrative audit of MDPs described in subparagraph (H) through the payment of an annual certification fee.

This subsection suggests that the MDP proposal is primarily intended to allow large corporations to practice law and share fees with nonlawyers. Notwithstanding the preliminary comments of the ABA Report ("For example, a lawyer, a social worker, and a certified financial planner might form an MDP to provide legal and nonlegal services."), in reality only large businesses will have the financial means to support this new administrative audit if the audit is to be meaningful.

Principle No. 15:

An MDP that fails to comply with its written undertaking shall be subject to withdrawal of its permission to deliver legal services or to other appropriate remedial measures ordered by the court.

The enforcement provisions have not been thought out. They may require significant administrative and financial efforts by the disciplinary arm of the Bar, as well as law changes, to be made workable.

Apart from the practical problems involved in having the highest court of each state be prepared to take on the policing of the conduct of MDPs controlled by nonlawyers, there are ambiguities in the phrasing of Principle No. 15 as to circumstances that could result in a finding of failure to"comply with its written undertaking."

Further, there are enforcement concerns: There are no procedures spelled out for discipline that could result in loss of the privilege to "deliver legal services," i.e., practice law. Is the construction of such procedures, which would have to provide a measure of due process to the MDPs, to be left to already over-burdened State Bar trial counsel? Who pays for constructing the procedures? Who pays for the disciplinary proceedings?

Further, how will local courts police the use by MDPs of lawyers not admitted in the jurisdiction where the courts are located giving legal advice to residents of that jurisdiction? Are each state's laws/rules to be changed to impose on lawyers the additional obligation to police the conduct of the MDPs with which they are associated, which they do not control, and possibly to inform on conduct of other lawyers employed by the MDP? This would be a significant change. Is it realistic to expect the Bar would support the change?

What professional discipline would the court system impose on an MDP that does not comply with the rule, other than loss of license to "deliver legal services."? If the MDP loses its license to deliver legal services, what happens to the lawyers who were delivering legal services? Innocent lawyer employees may in effect be punished for conduct of nonlawyer employers, without the employers suffering any inconvenience in their provision of non-legal service.

 


GENERAL INFORMATION FORM

 

Submitting Entity: The State Bar of California

Submitted By: Raymond C. Marshall, President

1. Summary of Recommendation.

The recommendation urges that the American Bar Association ("ABA"): (1) take no action to adopt the recommendation of the ABA Commission on Multidisciplinary Practice ("MDP Commission") at this time; and (2) return the matter to MDP Commission for further study and refinement, following thorough consideration of the comments submitted by the states, the organized bar and the public on the MDP Commission recommendation.

2. Approval by Submitting Entity.

This recommendation was approved by the State Bar of California Board of Governors at its meeting on July 22, 1999.

3. Has this or a similar recommendation been submitted to the House or Board previously?

No.

4. What existing Association policies are relevant to this recommendation and how would they be affected by its adoption?

The MDP Commission has recommended policy changes concerning the law of lawyering that directly implicate the ABA Model Rules of Professional Conduct. The affected Model Rules include: 1.6, 1.10, 5.1, 5.2, 5.3 and 5.4. ABA policies regarding the regulation of the unauthorized practice of law may also be affected.

5. What urgency exists which requires action at this meeting of the House?

The recommendation of the MDP Commission will be heard at this meeting of the House. The State Bar of California believes that the recommendation to be considered by the House is unclear and cannot be debated until further refinement and explanation is accomplished. The fifteen "principles" stated in the recommendation pose a threat to the public protection activities of state agencies involved in the regulation of lawyers and the practice of law.

6. Status of Legislation. (If applicable)

Not applicable.

7. Cost to the Association.

None.

8. Disclosure of Interest. (If applicable)

None.

9. Referrals.

None.

10. Contact Person. (Prior to the meeting)

Robert A. Hawley, Chief Assistant General Counsel (415) 538-2277
or Randall Difuntorum, Staff Attorney (415) 538-2161

The State Bar of California
180 Howard Street
San Francisco, CA 94105
(415) 538-2277

11. Contact Person. (Who will present the report to the House)

Edward E. Kallgren, State Bar of California Delegate
or Kurt W. Melchior, State Bar of California Delegate

The State Bar of California
180 Howard Street
San Francisco, CA 94105
(415) 538-2277

Advertisement