Oral Testimony of Professor Laurel S. Terry,
Penn State Dickinson School of Law
Professor Laurel S. Terry of Penn State Dickinson School of Law, who had attended every Commission hearing, was the last speaker. She is spending academic year 1998-99 in Bremen, Germany, where she has a Fulbright Research grant to study Germany’s regulation of MDPs between lawyers and accountants (Germany is one of the few countries where such MDPs expressly are permitted). Her written remarks and charts set forth the issues surrounding MDPs and these were presented to the Commission.
Professor Daly started the questioning. Asked whether she considered an audit of an MDP, or the legal services division of an MDP, or a captive law firm, an effective regulatory tool Professor Terry said she liked the idea a lot but would have to do some homework about the systems that already exist (random audits for accountants and lawyers). She would probably look at Anthony Davis’ book and thought he would be a good advisor for the Commission on the topic. The Big Five might be told an audit requirement is a condition to changing the rule. Mr. Mundheim asked if her reference to transparency was dealing with Model 4 or Model 5 and she clarified it was Model 4 (Contract Model) and Model 5 (Fully Integrated Model) and that transparency might be pretty radical for the U.S. culture. If a financial relationship between the firm and the lawyer makes the lawyer’s judgment compromised then requiring the agreement be visible might provide an enforcement mechanism. The intra firm agreement was part of what the court wanted to see in the Netherlands case against Arthur Andersen and when it didn’t get all the agreements it thought existed, the court assumed facts against Arthur Andersen. The disclosure issue with an MDP could encompass two different kinds of disclosure: attorney/client and disclosure of intrafirm relationships. Judge Friedman commented that a better way to assess whether intra-firm structure compromised a lawyer’s judgment might be by a checklist mandate (in conjunction with an audit) of a separate law department or a requirement that a lawyer supervise and train lawyers. He joined with the Chair, the Reporter, Mr. Traynor, Mr. Nelson, Ms. Lamm and Ms. Garvey in lauding Professor Terry’s fabulous job in helping the Commission focus its thinking on the MDP subject. To Mr. Rosner’s question whether captive law firms affiliated with Big Five professional service firms in France were required to file their agreements in order to assure transparency, Professor Terry responded that Mr. Nikolai had said he had disclosed the agreements to every Bar President and they had come to his law offices to review them. She doesn’t know if the requirement is in the current rules, but it’s in the Paris Bar Council resolution and the latest CCBE resolution which received a majority of votes but not a super majority, so it’s not yet been adopted. Acknowledging that Professor Terry recommended that the Commission define firm broadly to include the entire MDP firm, Mr. Rosner asked how one regulates MDP firms. Professor Terry said since the firm includes the entire MDP the regular conflicts analysis applies - is it a MR 1.7 (a) or a MR 1.7 (b) conflict, is it consentable or nonconsentable, is a firewall one of the conditions of client consent. She commented that the Big Five had not been grilled in the area of conflicts, consents and firewalls so they did not articulate what their premises and assumptions have been, and she was concerned about what she thought she had heard. Professor Hazard chimed in that in the case of nondirect adversity, in an accounting firm context, one can have a firewall without client consent which is the reason speakers from the Big Five carefully distinguished between direct and indirect adversity. Professor Terry indicated she liked the idea of law firm discipline because firms have cultures and if there are repeat offenders it is appropriate to go after the firm. She asked what the law firm enforcement mechanism is in New York and was told a firm can be fined or censured publicly. Asked by Mr. Rosner about the authority of the regulatory group over an MDP, Professor Terry drew upon the German experience and the general U.S. approach (secretaries, paralegals) to say it’s the lawyer who has an obligation to deal only with nonlawyers who act properly, and if the nonlawyer acts improperly the lawyer is on the hook. Mr. Nelson offered as a response to the ‘authority over an entity’ question the approach taken in the Foreign Legal Consultant Rule whereby the foreign lawyer agrees to be subject to the rules and bound by discipline. Professor Terry said that mechanism is used in Europe to assure lawyers’ coverage by the CCBE Code of Conduct (Pan-European Ethics Code). In Austria when lawyers sign their identity card they are agreeing to bound by the lawyer rules. When asked by Ms. Lamm whether her constructs would set up a system where lawyers who are competing in firms are at a disadvantage in terms of lawyers who are competing in a multidisciplinary practice, Professor Terry said defining the MDP as the entire firm avoids the problem of traditional law firms being at a competitive disadvantage. If the MDP were defined as only the legal services unit the professional services firm would have the advantage of big size and the claims of seamlessness without paying the price of the extra conflicts of interest and confidentiality concerns. She thinks it’s appropriate that professional service firms be bound by firm-wide imputation. Nonlawyers in the firm would be obliged to comply with the legal ethics rules when necessary to ensure that the lawyer complies. Ms. Garvey picked up on the facts of the Prince Jefri case to ask about accountants doing litigation support, who contend they are not practicing law (and possibly might not be practicing law except to the extent the work is done under the direction of a lawyer in preparation for litigation). Referring to this issue on her charts (Appendix B1, page 5, C. Can a regulator effectively limit the UPL activities of nonlawyers?) Professor Terry said litigation support is likely to somehow be under the direction of a lawyer (for liability/ risk management reasons) and resolving the UPL situation is an area the Commission need not wade into. She considers the lawyers in the MDPs who are not being regulated as the bigger problem and recommends legitimizing the MDP in order to bring them under regulation. She answered the Chair that imputation should be applied on a firm-wide basis. Whether the current imputation rule is wise (including in the MDP context) should be referred to Ethics 2000. In response to Mr. Mundheim’s question whether for imputation purposes she would equate Model 4 with its pooling of funds with Model 5, she said her inclination, in deciding where to draw the line, is to include Model 4 unless the firm disgorges all its agreements (transparency) to show it’s in fact involved in a pure cost-sharing endeavor.