Washington Legal Foundation Comments For Consideration - Center for Professional Responsibility

Washington Legal Foundation
2009 Massachusetts Avenue, N.W.
Washington, D.C. 20036

April 6, 1999

Arthur H. Garwin
Center for Professional Responsibility
Counsel to the ABA Commission on Multidisciplinary Practice
American Bar Association
541 North Fairbanks Court
Chicago, IL 60611-3314

Re: Comments to ABA Commission on Multidisciplinary Practice

Dear Mr. Garwin:

The Washington Legal Foundation (WLF) appreciates this opportunity to provide the following comments for consideration by the American Bar Association's Commission on Multidisciplinary Practice Commission (Commission) as it prepares its report on the subject to the American Bar Association at its 1999 Annual Meeting in Atlanta. In general, WLF strongly supports the concept of Multidisciplinary Practices (MDPs) whereby lawyers and non-lawyers, particularly accountants, are permitted to practice together in order to better serve the needs of their clients. Accordingly, WLF urges the Commission to recommend that the ABA endorse MDPs and that the ABA's Model Rules of Professional Conduct be revised as necessary, recognizing, of course, that the various professional rules of the state bars would be required to be revised accordingly to accomplish this objective.

INTERESTS OF THE WASHINGTON LEGAL FOUNDATION

WLF is a non-profit, public interest law and policy center, based in Washington, D.C., with supporters nationwide, including consumers, small businesses, lawyers, accountants, and other professionals, all of whom would benefit from MDPs. WLF devotes a substantial portion of its resources to reforming and improving the legal system. In particular, WLF initiated its SCALES project (an acronym for "Stop the Collapse of America's Legal Ethics"), a multi-state, multi-faceted effort to contain the litigation explosion and to improve the professional standards of America's lawyers.

As part of its SCALES project, WLF filed petitions with all the state bars to adopt changes to their professional rules to curtail abuses of attorney solicitation of clients and the charging of fixed contingency fees regardless of the risk of non-recovery. WLF attorneys have also testified in Washington, D.C., before an ABA committee which studied the issue of attorney advertising. WLF is currently petitioning the various states to open up their disciplinary proceedings along the lines of the Oregon model. WLF strongly believes that the current secretive system undermines the public's respect for the legal profession.

WLF has also participated in numerous cases dealing with the issue of legal and judicial reform. For example, WLF has filed court briefs supporting Rule 11 sanctions against attorneys who file groundless lawsuits. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384 (1990); Robeson Defense Committee v. Britt, 914 F.2d 505 (4th Cir. 1990), cert. denied, 499 U.S. 969 (1991). WLF has also been a strong proponent of keeping attorneys' fees reasonable. See King v. Palmer, 950 F.2d 771 (D.C. Cir. 1991)( en banc)(opposing vastly increased fees for attorneys in civil rights lawsuits); City of Burlington v. Dague, 505 U.S. 557 (1992) (same in environmental cases). WLF filed an amicus brief which opposed the American Bar Association and the National Association of Criminal Defense Lawyers, and supported the validity of a federal law requiring the disclosure of the identity of those paying more than $10,000 cash for goods and services, including attorney services. See United States v. Goldberger & Dubin, 935 F.2d 501 (2d Cir. 1991).

WLF has urged the courts to recognize lapses of the professional rules of conduct by counsel in particular circumstances. For example, WLF successfully argued in Phillips v. Washington Legal Foundation, 118 S. Ct. 1925 (1998), contrary to the position of the ABA, that the interest earned on clients' trust accounts in IOLTA programs is property belonging to the clients for purposes of the Fifth Amendment's Takings Clause. WLF argued in that case that attorneys breach their fiduciary duties to their clients by using their clients' funds in this manner, particularly where the client is not even informed about the practice. See also United States v. Dickerson, 166 F.3d 667, 682 (4th Cir. 1999) (noting WLF argument that professional rules of conduct require counsel to call relevant authority to the court's attention).

WLF's Legal Studies Division publishes timely and relevant articles and monographs on topical issues in the civil justice system, including punitive damages, product liability, tort reform, and attorney ethics. Of particular relevance to the issue of MDPs, WLF published a Legal Backgrounder on MDPs, " Time To Break Up the Lawyers' Monopoly On Legal Services" (Feb. 4, 1999) by Andrew Updegrove. A copy of that Backgrounder is attached hereto.

 

THE ABA SHOULD PERMIT MULTIDISCIPLINARY PRACTICES

Earlier this year, the ABA Commission issued a Background Paper on Multidisciplinary Practice: Issues and Developments and held several hearings around the country on the subject. Currently, the professional rules of conduct in all jurisdictions, except the District of Columbia, prohibit non-lawyers from owning an interest in a firm providing legal services. The District of Columbia does permit non-lawyers to own an interest in the law firm, but only if the firm provides legal services only. The basis for the prohibition of MDPs are various professional rules that prevent lawyers from sharing legal fees with non-lawyers, and rules requiring client confidentiality, and client loyalty.

Over the years, however, large accounting firms have acquired law firms in some European countries, which in turn, have been able to provide both legal and accounting services to clients in those countries. In America, however, clients have been unable to retain an integrated services firm which can be less expensive and more efficient than retaining two or more separate legal and accounting firms. There can be no doubt that there is a growing demand for such integrated services.

Several representatives of the major accounting firms have provided this Commission with clear evidence of the demand for such integrated services due to the growing globalization of our economy and the needs of businesses operating in many different countries. Bernard J. Shapiro of PricewaterhouseCoppers LLP stated at a recent conference that there is a strong demand for international, multidisciplinary, integrated services, including legal services. As Mr. Shapiro observed, a "new legal services paradigm is emerging strongly and quickly, based on the development of an integrated global network of law firms operating in a fully multidisciplinary environment, able to handle the most complex cross-border deals, transactions, reorganizations, and other issues on behalf of the world's largest business enterprises." Remarks of Bernard J. Shapiro before the Georgetown University Law Center's 3rd Corporate Counsel Institute's panel on "Globalization of the Corporate Law Department" (March 18-19, 1999), quoted in 13 BNA Corporate Counsel Weekly 8 (March 31, 1999).

WLF notes that the consumer interest in MDPs is not confined solely to large multinational businesses. WLF agrees with the views expounded by Lora H. Weber, Executive Director of the Consumers Alliance of the Southeast, who recently testified before the Commission. In her testimony, she indicated that individual consumers and small businesses would greatly benefit from a system that would allow them to obtain legal, financial, and other services from a single provider. For example, individuals could obtain financial counseling and estate planning that would include the drafting of a will or trust instruments. All too often, individuals receiving financial advice are told to see their attorney, and those provided legal advice are told to see their accountant with respect to related matters. Ms. Weber's views on MDPs were recently shared by some 15 other consumer organizations. See Letter of March 31, 1999 from Lora Weber, et al., to ABA Commission on Multidisciplinary Practice.

It would be more convenient, economical, and in the public interest to allow consumers to at least have the option of obtaining multiple services -- legal, financial, and consulting -- from the same firm. As the attached WLF Legal Backgrounder also notes, small privately held firms wishing to "go public" with an initial public offering (IPO) are forced to pay substantial separate legal and accounting fees that could be reduced if firms were able to offer combined or integrated services.

As noted, this arrangement would greatly benefit small businesses which would be able to receive legal, tax, technical, financial and other services from the same firm. It is difficult enough for the small business owner to navigate the myriad and complex regulatory system that seems to be designed to discourage economic development and entrepreneurship. New and small businesses should be able to have access to a firm that can provide comprehensive professional services at economical rates.

While the focus of the debate on MDPs has been primarily on the pros and cons of the Big Five accounting firms employing lawyers and providing the firms' clients with legal advice on tax issues, there is nothing inherent in the MDP structure that would prevent law firms from providing their clients with accounting advice or other professional services. In that regard, WLF notes that the American Corporate Counsel Association (ACCA) has endorsed the MDP concept to offer "a broader range of choice for clients" in handling their affairs. See ACCA Policy Statement, adopted February 6, 1999. ACCA President Frederick J. Krebs stated that MDPs "would allow law firms to expand in the multidisciplinary area themselves so they could become more full service." Mr. Krebs further noted that ""Everybody has conceptualized [MDPs] as if it were accountants owning lawyers, but there is no reason why that could not be the other way around." 67 U.S. Law Week 2500 (Legal News, March 2, 1999). In short, while some have suggested that the monopolistic practices of the Bar favor the current prohibition of MDPs, WLF believes that MDPs will provide law firms with new opportunities to work with accountants and other professionals.

In short, WLF believes that a compelling case has been made to allow the formation of MDPs in this country. Those who object to MDPs have done so primarily on the grounds that the ethical standards of lawyers would be compromised by the arrangement. WLF believes that MDPs and ethical rules are not mutually exclusive, and that ethical principles such as client confidentiality and loyalty can be and should be maintained. Testimony by many of the representatives from the large accounting firms addressed the confidentiality concerns, noting that the accounting professionals must comply with confidentiality rules that are similar to those applicable to lawyers. See, e.g., Statement of Kathryn A. Oberly, Vice Chair and General Counsel, Ernst & Young LLP (Feb. 4, 1999).

Another concern voiced during the Commission hearings was whether the lawyer in a MDP would be able to continue to exercise independent judgment in rendering advice to the client. While WLF does not believe that MDPs would lead to decline in professionalism, we believe rules could be devised to prevent this situation. Ms. Oberly, for example, suggested in her testimony that a rule allowing MDPs could provide that "all professionals in a multidisciplinary organization could be bound by a rule that required them to exercise their own professional judgment." This suggestion echoes one proffered by ABA Commission member U.S. District Judge Paul Friedman which would require members of the MDP to agree to be subjected to the same ethical rules. WLF believes that there may be a number of ways that the professional rules can be revised to ensure that MDPs maintain high ethical standards.

Objections to MDPs were also made because of concerns with conflicts of interest. Currently, if a lawyer in a law firm represents one client, the entire law firm is imputed with the knowledge of that lawyer, even in multi-city firms. Accordingly, the firm is faced with a conflict of interest in representing other clients with adverse interests, unless, under certain circumstances, the client waives the conflict and consents to the dual representation. Accounting firms, on the other hand, apparently do not have the "imputation" rule; accordingly, potentially adverse clients may be represented by the same firm if their respective interests are handled by separate independent teams within the firm which are separated by so-called "firewalls." WLF believes that these conflict concerns can be addressed by appropriate consents or waivers by the clients. In addition, WLF supports the suggestion made by Ms. Oberly that perhaps the imputation rule of the legal profession in this day and age of large multi-city megafirms may need to be revised.

As for the current prohibition against the sharing of legal fees with non-lawyers, WLF believes that the rules can be modified while providing a high standard of ethical behavior. For example, because the client is utilizing both legal and non-legal services with a MDP, the client can be billed in such a way that the invoice reflects the services attributable to pure legal services as opposed to the accounting or other services provided to the client. This can be done either by dollar amounts, or an agreed upon percentage reflecting the reasonable allocation between legal and non-legal services. That formula can then be used to determine the percentages of profits that may be shared with the non-lawyer partners. Just as some law firms today are broken down into profit centers, so too could MDPs for purposes of fee sharing.

Ultimately, the question of what professional rules may need to be revised and in what fashion comes down to the nature of the MDP to be adopted. As the Commission itself has recognized, the current rules do allow in one way or another for lawyers, accountants, and other professionals to work together on behalf of a single client:

There is nothing in those [professional] rules that prohibits a lawyer from working with a professional trained in another discipline if such cooperation is needed to solve the client's difficulties. A lawyer may directly employ such a professional who is separately retained by the client. A lawyer may also own a company employing a professional or offering certain products created by the nonlawyer professional. What is forbidden is an MDP, an integrated practice in which a lawyer shares fees with a nonlawyer or enters into a partnerships or analogous relationship with a nonlawyer to deliver legal services to clients.

ABA Commission Background Paper at 6 (emphasis in original).

The Commission has proposed five different models of MDPs ranging from the status quo where law firms work with accountants and other professionals on a case-by-case basis, to a fully integrated MDP where services are provided by a single organization owned by different professionals. WLF believes that the other three models in between may provide the desired flexibility of allowing different professionals to practice together without necessarily being co-owners of the firm.

 

CONCLUSION

WLF believes that MDPs would be in the public interest and would not compromise the ethical obligations attorneys owe their clients. Accordingly, WLF urges the Commission to take the lead in this challenging opportunity and to recommend to the ABA that MDPs be permitted.

Sincerely yours,

Daniel J. Popeo
Chairman and General Counsel

Paul D. Kamenar
Executive Legal Director

 

Attachment: WLF Legal Backgounder (Feb. 5, 1999)

ATTACHMENT TO WASHINGTON LEGAL FOUNDATION'S COMMENTS ON MDPs:
Washington Legal Foundation Legal Backgrounder
February 5, 1999

Volume 14, Number 5

TIME TO BREAK UP THE LAWYERS' MONOPOLY ON LEGAL SERVICES

by
Andrew Updegrove; Andrew Updegrove is a partner in the
Boston, Massachusetts law firm of Lucash, Gesmer & Updegrove.

It is increasingly true in Europe that the largest providers of legal services are not law firms, but accounting firms. In some
countries, professional rules limit the cooperation between accountants and lawyers to forming affiliations between their respective firms. But in others, entire law firms have been acquired by the Big Five accounting firms, which now have many hundreds of attorneys on their payrolls. This integrating process has proceeded so far and fast that in France and Spain, the legal departments of some of the Big Five accounting firms have more lawyers, providing more services, than their largest independent law firm competitors. And for Europe as a whole, the largest single law department now no longer practices as a law firm, but as a service group within an accounting firm.

With respect to some types of professional needs, it is arguable that clients will be able to receive more efficient, more inexpensive, and better integrated legal and accounting services from these Multi Discipline Practices (MDPs) than they could receive from separate firms; yet in the United States, such integrated services are currently unobtainable, due to rules enforced by the state bar associations.

Why is this so? Are the rules which prohibit MDPs in the United States defensible or against the public interest? It is the thesis of this Legal Backgrounder that the American professional rules today prohibit MDPs primarily to protect lawyers from competition, rather than to protect the best interests of modern clients. While reasonable objections exist for unregulated MDPs, those concerns may be easily addressed by adopting appropriate professional rules which guard against abuse. The History of Opposition to MDPs

Since 1928, the professional rules promulgated by the American Bar Association have prohibited non-lawyers from owning an interest in a firm providing legal services, and have prevented lawyers from practicing as such in any entity owned in whole or in part by non-lawyers. With minor variations, these rules have been adopted, and continue to be enforced, by the organized bar of every American state. Only the District of Columbia permits a degree of flexibility with respect to the conduct of MDPs.  Ostensibly, these rules were originally intended to restrict the practice of law to those who are properly trained to competently represent clients, and who are bound by appropriate rules ensuring that the public is protected from inappropriate conduct.   Significantly, various proposals and recommendations have been made over the years to loosen the grip of lawyers on the economic benefits of the practice of law. To date, however, each recommendation to reform the rules which has been tendered by a professional association committee or commission has been rejected.

At the same time that efforts to deregulate ownership of legal practices have failed, there has been a partial loosening of the rules which prohibit law firms from having an ownership interest in entities which provide "ancillary services" to their clients. Interestingly, virtually all of the hazards which are argued to threaten clients if non-lawyers (such as accountants) were permitted to have an economic interest in the provision of legal services could also arise where lawyers provide certain types of permitted ancillary services.

Why Should MDPs be Permitted?

There are a number of reasons to allow the public to benefit from receiving reasonably related professional services from a single provider. For example, in public securities work, accounting and securities issues are inextricably combined, yet the accountants and the lawyers work on parallel, but separate tracks. While this separation is necessary and healthy with respect to the individuals involved (e.g., those trained as accountants should still leave the legal issues to those trained as lawyers, and vice versa), enforcing the physical, billing, and administrative separation of these providers is inefficient.

This is particularly true with respect to initial public offerings, where the charges of law firms and accounting firms may range from $100,000 to more than double that amount for each firm. Any significant percentage savings in amounts of that magnitude would be important, particularly where an offering is abandoned before shares are sold, but after most of the professional fees have been incurred. Moreover, the higher bills in such situations are very often attributable to the issuing company's having paid poor attention to keeping its legal and/or accounting houses in order in the years preceding the offering. Closer coordination  between the legal and accounting advisors of a company can often bring such lapses to light before they become serious. As a result, the client may be saved from costly and distracting reconstructive efforts during the high stress of preparing to go public (and while still trying to run its business).

Similarly, in the area of intellectual property, even small companies must now address a global labyrinth of patent, trademark, and copyright laws. Even where separate countries have adopted common treaties, local filing requirements and practices vary, as do enforcement conventions. The larger individual companies grow, the more complex are the internal controls which they must institute to police the protection of their intellectual property. While many law firms now market "intellectual property audits" as a service product, the accounting firms, with their auditing expertise and their hundreds of offices around the world, are better equipped to effectively staff and efficiently provide such reviews than are United States-based law firms. In point of fact, few, if any, law firms can offer the combination of global offices, familiarity with local practices, and close attention to evaluating practices and compliance that any of the Big Five can provide.

Moreover, it has long been the case that numerically more companies look to Big Five accounting firms for international tax advice than look to their law firms. In fact, many law firms have been relieved by the fact that accounting firms offer this expertise, as few but the largest law firms find it cost effective to remain current on the tax laws of every nation on earth. In effect, a firm without international tax expertise may securely (for now, at least) refer its clients to the major accounting firms for international tax advice, without worrying that the new tax advisor will seek to persuade the client to send other legal work the accountant's way.

Notwithstanding the existing rules which apply in other situations, tax advice rendered by accounting firms is often provided by licensed lawyers. When accounting firm clients are called on the carpet by taxation authorities, even CPAs may represent these clients with respect to their alleged infringements. And yet, for some reason, all other types of legal services are presumed by the bar associations to present especially problematic quagmires from which clients must be protected from entering.

The Arguments Leveled Against MDPs Do Not Hold Up

Most of the issues which are raised against permitting MDPs are particularly disingenuous when applied to accounting firms. For example, concerns regarding the preservation of confidentiality are particularly groundless, given that accountants are bound by similar rules. Similarly, specific (although somewhat different) rules relating to conflicts of interest apply to accountants, and these rules are in many cases stricter than those which apply to lawyers. Accordingly, accountants already practice in a disciplined fashion where awareness of conflicts is high, and appropriate screening procedures are in place. Finally, arguments which assert that lawyers and accountants will feel constrained to recommend their partners rather than unaffiliated professionals are no more compelling than the potential for abuse in "cross selling" legal services within law firms. In point of fact, no law firm is equally strong in all departments. Assuming lawyers today feel morally strong enough to send a client elsewhere to secure a particular type of service from a superior provider when their own expertise in the area in question is weak, then presumably lawyers working for accounting firms will find the ethical courage to recommend a different accounting (or law) firm as well.

And, of course, it will also be true that the client will often have chosen the MDP because it wished to centralize more of its service purchases under one roof. This may be done to trade a small degree of skill in some areas in exchange for such demonstrable benefits as negotiating a fee agreement at a greater discount from an MDP in exchange for awarding a larger package of work to that provider.

Some have also claimed that permitting the Big Five and their smaller brethren to expand their services to the legal arena would be anticompetitive. But consider the following: while the accounting firms have brought broader knowledge, wider global coverage, a greater range of services, more integrated consulting packages, and intensively competitive rate bidding to their clients, law firms in the United States have continued to do almost exactly what they have done for the last hundred years. Although there certainly has been centralizing of more work in fewer firms with broader legal expertise, the number of firms which supply this range of services does not much exceed one hundred, and the global outreach of those firms is minimal. In a   recent survey of the fifty largest international law firms conducted by The American Lawyer, the largest number of foreign countries in which any American law firm maintained offices was thirty-five (Baker & MacKenzie).  However, the second highest number was only eleven, and the tenth largest number for any American firm was only five.

In short, while accounting firms have been innovating and expanding their services intensively, law firms have been largely stagnating, offering legal services (only) in ways that have changed marginally. At the same time, the hourly cost of legal services has exploded. It is difficult to argue, therefore, that opening the American legal market to competition from other types of  service providers could restrict or stifle competition. In point of fact, American law firms, protected by restrictive professional rules, have been ineffective at providing the sort of competition that leads to the provision of more, better, and cheaper legal services to the American business community.

Clients Want Business Advice, and Not "Professional" Advice

To a much greater extent than is the case with other professionals, lawyers have retained a purist, ivory tower approach to their profession, and in many cases have rebuffed requests for business advice. Yet increasingly, clients will choose savvy business/legal advice over purely technical answers. Why? Because the law firm which prides itself only on technically superior legal analysis will leave its clients at a commercial disadvantage in a fast-changing, increasingly competitive international marketplace. Particularly in the case of rapidly growing businesses, clients preferentially choose attorneys who provide  pragmatic, efficient solutions to real world problems. Permitting lawyers and accountants to draw on a wider range of expertise across a broader spectrum of disciplines within their own organizations will enable them to provide such advice more effectively to American business.

Professionalism Argues for Changing the Rules

The highest duty of any professional is to provide the greatest value, in an ethical fashion, to his or her clients. Where issues exist which stand between the status quo and providing higher value, and those issues can be resolved, then it is the duty of professionals to work towards such a resolution. The true conflict facing American lawyers today is the fact that defending the exclusivity of the practice of law at the rules barricades doesn't protect clients -- it only protects American law firms from a threatened wave of formidable competition.

But in the long run, even lawyers would benefit from a change. It is quite arguable that the lack of creativity and entrepreneurship of lawyers, in comparison to accountants, has limited commercial prospects of law firms and lawyers. After all, any change of rules would logically operate in both directions, and the most entrepreneurial and strongest law firms could expand in new directions into which they are currently barred from venturing. And with respect to smaller law firms, as has proven to be the case with the smaller accounting firms, there will continue to be a vast amount of work, regardless of what turmoil is experienced by the largest law firms following a liberalization in the rules.

It's Time to Meet with the "Enemy"

The way of the future, when seen from the clients' point of view, would seem to be clear. The time has come for the professional associations of the legal and accounting service industries to sit down and come up with a common set of model rules for adoption by their respective national and state representatives. These rules, if intelligently developed in a cooperative  fashion, would permit each type of licensed professional to work with and for the other. Properly conceived, these rules can  easily respect and protect the interests of all clients, and would permit a broader, more competitive service marketplace to evolve. Failing to do so, while the rest of the world moves towards permitting global companies to purchase comprehensive services from MDPs, will not only place American business at a competitive disadvantage, but ultimately American law firms as well.

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