Private Practitioner Problems With Multijurisdictional Law Practice in Transactional and Other Non-Litigation Matters - Center for Professional Responsibility

Private Practitioner Problems With Multijurisdictional Law Practice in
Transactional and Other Non-Litigation Matters

Prepared by Joseph R. Lundy
Vice President and Associate Loss Prevention Counsel
Attorneys' Liability Assurance Society, Inc., A Risk Retention Group
Chicago, Illinois

for the

American Bar Association
Symposium on the Multijurisdictional Practice of Law
March 10-11, 2000
Fordham University School of Law
New York, NY

I. The ALAS Perspective

The Attorneys' Liability Assurance Society, Inc. (ALAS), based in Chicago, Illinois, is a risk retention group composed of almost 300 large law firms throughout the United States. ALAS furnishes professional liability coverage for almost 50,000 lawyers practicing in its member firms. For more than twenty years, ALAS has provided loss prevention services to its insured lawyers through publications, loss prevention audits, in-firm presentations, and telephone consultation services. ALAS' six full-time Loss Prevention Counsel (LPC), all former lawyers in ALAS member firms, estimate that they receive and respond to over 2,000 inquiries from member firms each year.

In recent years, a number of the telephone, e-mail and other inquiries received by ALAS LPC have related to problems encountered by lawyers in ALAS firms because of state unauthorized practice of law (UPL) statutes and rules. These inquiries are the principal basis for the observations contained in this paper.

II. Scope of This Paper

This paper is written from the perspective of the transactional lawyer working in a private law firm. Typically, such a lawyer lives and works primarily in one jurisdiction, but is often called upon to travel to, and negotiate, advise clients and render other legal services in, other jurisdictions in which the lawyer may not be admitted to practice. As the scope of commerce continues to become increasingly interstate and even international, the transactional lawyer is increasingly expected by clients and required by considerations of efficiency and economy to practice law in jurisdictions in which the lawyer is not licensed. Private lawyers engaged in such conduct are frequently concerned that they may be violating the UPL laws or rules of the foreign jurisdictions in which, or with respect to which, they are rendering legal services.

For purposes of this paper, the term "transactional" legal work refers to legal services relating to mergers and acquisitions, securities registrations and sales, private placements, lending matters, bond work, real estate matters, intellectual property advice and counseling including patent prosecution, international commercial practice, health care law, and trusts and estates or "wealth preservation" practice.

III. UPL Problems for Transactional Lawyers General

For private transactional lawyers, state UPL laws and rules pose four general kinds of problems. The first is exposure to criminal penalties, contempt or disciplinary sanctions in the foreign jurisdiction, or in the lawyer's home jurisdiction under the home state's version of Model Rule 5.5(a), or its Model Code predecessor, DR 3-101(B), if the lawyer's out-of-state conduct is prosecuted or becomes the subject of a complaint to a court or UPL enforcement authority. Although such penalties appear to be rarely imposed for occasional or incidental practice in a foreign jurisdiction, only two states make express exceptions in their UPL regulations for such incidental practice by out-of-state lawyers. See Michigan Compiled Laws Annotated, 600.916 (legal services rendered in Michigan by lawyers admitted in another jurisdiction "while temporarily in this state and engaged in a particular matter" do not constitute UPL); and Part 6, Section 1(C) of the Virginia State Bar Rules (a "non-lawyer," who is prohibited from practice in Virginia, does not include a lawyer (1) licensed in another state (2) who renders services in Virginia "on an occasional basis only and incidental to representation of a client whom the attorney represents elsewhere," and (3) who informs the client that the lawyer is not admitted in Virginia). In other states, even occasional or incidental transactional practice by an out-of-state lawyer exposes the lawyer to the risk of such sanctions.

Second, private transactional lawyers are usually under pressure from clients to keep transactional legal costs to a minimum. This consideration militates against retaining local counsel in every jurisdiction in which a particular transaction may require the lawyer to render legal services, or in which property or other parties involved in the transaction may be located. While some transactions are large enough to justify the retention of local counsel to deal with particular foreign law issues, many transactions will not bear such additional costs. Often, the transactional lawyer will conclude, after consultation with the client or otherwise, that the benefits of retaining local counsel for the transaction are outweighed by the extra cost and the inefficiency of piecemeal legal work. When the foreign law issues are highly specialized ( e.g., tax, land use, environmental, state securities law, as opposed to, e.g., general corporate issues), the lawyer and client may have no choice but to retain local counsel to advise on these issues regardless of the resulting inefficiency and additional cost.

Third, transactional lawyers worry that rendering legal opinions about the law of jurisdictions involved in the transaction, but in which they are not licensed, may increase their exposure to legal malpractice claims. If the legal issues that are the subject of the opinion are obscure or difficult, but the client insists that the cost of local counsel is not justified, the foreign lawyer faces a dilemma. Many will opt to keep the client happy in the short term and risk increased future exposure if the legal opinion has consequences that adversely affect the client's interests.

Finally, the most common UPL problem for transactional lawyers in ALAS firms is a client's UPL defense to the lawyer's efforts to collect legal fees for work performed for the client in a foreign jurisdiction. Often, such defenses originate with the client's unhappiness about the cost or quality lawyer's services that is unrelated to UPL. The deal cratered or turned out to be far less attractive than the client had originally expected. If the client has lost money or been otherwise disappointed with the result obtained by the lawyer, it may be reluctant to pay the lawyer's fee. When the lawyer presses the claim, the response will often be that the lawyer is not entitled to a fee because the legal work constituted UPL. In some cases these defenses succeed. See, e.g., Birbrower, Montalbano, Condon & Frank, P.C. v. Superior Court, 17 Cal 4th 119, 949 P.2d 1, 70 Cal Rptr. 2d 304 (1998); Perlah v. S.E.I. Corp., 29 Conn. App. 43, 612 A.2d 806, 808 (1992); Lozoff v. Shore Heights, Ltd., 66 Ill. 2d 398, 362 N.E.2d 1047 (1977); Spivak v. Sachs, 263 N.Y.S. 2d 953, 211 N.E.2d 329 (1965). In other cases they don't. See, e.g., In the Matter of the Estate of Waring, 47 N.J. 367, 221 A.2d 193 (1966); Lamb v. Jones, 202 So. 2d 810 (Fla. 3d Dist. Ct. App. 1967).

The remainder of this paper describes these UPL problems for transactional lawyers in more detail, and suggests some possible solutions to them.

IV. Particular MJP Problems for Private Transactional Lawyers

A. Rendering legal opinions as to foreign law. Mergers, acquisitions and lending work often require the lawyers involved to render legal opinions to their own clients or for the benefit of other parties about the applicability or interpretation of laws or regulations in states in which the opining lawyer is not licensed. If the outcome of the transaction is unsatisfactory from the client's point of view (the deal never closes or proves less profitable than the client anticipated), clients sometimes look to their lawyers for compensation. In these situations, lawyers worry that opining on a foreign state's law may increase their exposure to claims by disappointed clients, particularly if the unsatisfactory outcome can be tied in some way to the lawyer's legal opinion.

In this era when foreign state law is almost as readily available on line to out-of-state lawyers as to lawyers licensed in that state, state of licensure should arguably be of little or no significance in the context of a malpractice claim. However, the existence of state UPL laws causes transactional lawyers concern about their exposure when opining about foreign state law.

B. Negotiating and/or closing transactions in foreign state. It is common for transactional lawyers to represent clients in multiple transactions. Often these transactions have identical or similar terms although the locations of parties and property involved may change from one transaction to the next. Because the lawyers handling these transactions become familiar with the client's personnel, procedures, and negotiating styles, it would be enormously costly, time-consuming and disruptive for the client to have to change lawyers simply because the location of negotiations, the closing or other aspects of the deal occur in a jurisdiction in which the client's counsel of choice is not licensed. In addition, many of the significant legal issues in large, multistate transactions involve federal antitrust, securities, tax, environmental, banking, bankruptcy, patent, trademark, employment or other federal law issues that are not state-specific. For these reasons it is commonplace in modern transactional practice for out-of-state lawyers to handle most if not all of the legal work on such transactions. In such transactions, out-of-state lawyers are frequently expected or required by their clients to spend weeks or months at a time rendering legal services in locations where they are not licensed. To require local admission of the lawyers involved, or even retention of local counsel in every jurisdiction involved in such transactions would be unduly costly, burdensome and disruptive to the parties, and might render the negotiation and consummation of such multistate and miltinational transactions impractical. And yet, this is what literal interpretation of most state UPL statutes and rules would seem to require. These multistate transactions pose significant UPL risk for lawyers because they require the lawyer's physical presence in a foreign jurisdiction while rendering legal services.

C. Soliciting legal business from out-of-state clients. Because lawyer advertising rules have rarely been a basis for legal malpractice claims against ALAS member firms, ALAS LPC have not devoted much attention to the effect of these rules on the practice of law. A number of states, however, include in their general UPL regulations a prohibition on holding one's self out as qualified to practice law in the state if the lawyer concerned is not licensed in that state. Such a prohibition raises the question of whether lawyer solicitations of potential clients in national legal or general circulation publications, on radio or television, through nationwide or more narrowly targeted mailings, or via the Internet may violate particular state UPL prohibitions.

D. Providing legal services to out-of-state clients. If physical presence of a lawyer in a foreign jurisdiction while rendering legal services is the number one UPL risk factor (see IV.B above), representing a client based in a foreign jurisdiction is a close second. In such a situation, the foreign jurisdiction can assert the most persuasive rationale for UPL, protection of a home state client. If the out-of-state client is a large, sophisticated, multistate or multinational corporation, the client protection argument is less persuasive. But if the client is a small local business or an individual, whose activities are mostly or entirely limited to the state in which they are located, the home client protection rationale becomes much more plausible. When the client is located in a foreign jurisdiction, it is likely that the lawyer serving that client will be expected or required to visit that client on a frequent, regular or even continuous basis, at least while the transaction is being negotiated and closed. If the lawyer's services relate entirely or principally to federal law or the law of other states, it can be argued that local licensure should not be required. However, if a significant portion of the legal work involves the law of the client's home state, the foreign lawyer probably has substantial UPL exposure, unless he or she is associated in the representation with a locally admitted lawyer. The more foreign state factors are involved in the legal work, such as other foreign state parties, foreign state property or significant or difficult foreign state legal issues (see IV.E below), the greater the out-of-state lawyer's UPL exposure.

E. Transactions involving property, non-client parties or legal issues in foreign state. If the out-of-state lawyer must spend substantial time in a foreign jurisdiction on a particular transaction because the client is based in that state, other factors can significantly increase the lawyer's exposure to UPL claims. If other parties involved in the transaction are based in the foreign jurisdiction, the transaction involves property in that jurisdiction, or the deal involves unusual or difficult legal issues of the foreign jurisdiction law, the transaction begins to look like a foreign state matter. In such situations the out-of-state lawyer may have no choice but to advise the client to engage local counsel to handle, or at least to review, issues relating to local parties, local property or local law. This would be particularly true if the transaction involves the title to real estate and the state has a statute requiring instruments affecting title to local real estate to be prepared or supervised by locally admitted lawyers.

F. Operating out-of-state law offices. As more and more law firms open out-of-state offices, many of which will service out-of-state clients and some of which will, at least from time to time, be staffed by lawyers not licensed in the state where the office is located, state UPL laws and rules create uncertainties for lawyers about how such offices should be staffed. It seems obvious that if a lawyer permanently resides and regularly practices in a firm's branch office in State A, the firm should consider having the lawyer become licensed in that state. But must the partner or other lawyer in charge of an out-of-state office be licensed where the office is located, even if that lawyer does not reside or practice full time in that state. Must the lawyer in charge of the office be a partner, or can the office be headed by an associate admitted in the state where the office is located? Can such an associate credibly claim to be "supervising" the work of non-admitted partners and other non-admitted lawyers with more experience or more specialized expertise than the admitted associate? What about lawyers who practice in the out-of-state office only occasionally, or practice only federal law specialties, or who are assigned to work in that office only on particular issues that relate to the law of other states? If non-admitted lawyers are assigned temporarily to that office to do work for residents of the foreign state, must their work be supervised, reviewed or otherwise monitored by a lawyer admitted in the foreign state? Must clients resident in the state be notified in advance that a lawyer working on their matters in the foreign office is not licensed there? Must such clients consent in advance to having their matters worked on by a non-admitted lawyer? There is very little guidance available on these questions in state ethics opinions, rules or court decisions. One reported case, Florida Bar v. Savitt, 363 So.2d 559 (Fla. 1978), reflects the terms of a consent decree negotiated between the Florida Bar and a New York City law firmthat opened a Miami branch office initially headed by a partner who was not licensed in Florida. Because Florida was at the time (and may still be) one of the most aggressive states in enforcing its UPL restrictions against out-of-state lawyers, the guidance provided by that case may be more conservative than might obtain in other states.

G. Telepracticing by lawyers from out-of-state. In today's world of highly mobile lawyers and instantaneous communication by telephone, fax and e-mail, the following scenario (a hypothetical based on several actual situations about which ALAS LPCs have been consulted) may become increasingly common. An associate is hired by the law firm of AB&C located in State 1, takes and passes the State 1 bar exam, and is licensed there. Over several years of practicing at AB&C the associate develops great expertise in all aspects of lending work for several State 1- based banks that specialize in commercial loans to Latin American trading companies located outside the United States. Recently, the associate has learned that he will have to relocate his residence to State 2 to accompany his spouse who has just begun a multi-year residency in neurosurgery at State 2's largest teaching hospital. The associate wishes to continue to do his specialized lending work for AB&C's bank clients in State 1, the clients are anxious to have him do so, and so is the firm. From his residence in State 2, the associate can do everything he formerly did at his office in State 1, communicating regularly with supervising partners in AB&C's office and with the State 1 clients by telephone, fax and e-mail. The problems are (1) AB&C has no partners with relevant experience who are licensed in State 2, and (2) State 2 has no procedure for admission by waiver, so the associate would have to study for, take and pass the State 2 bar exam, and then wait for the State 2 bar's character and fitness committee to act on his application (a process estimated to take at least 12 months) in order to obtain a State 2 license. Can the associate continue to provide legal services to AB&C's State 1 bank clients through AB&C's State 1 office, under the supervision of AB&C partners, from his home in State 2? Put another way, what interest does State 2 have in preventing the associate from providing legal services from his home in State 2 through a State 1 law firm to clients in State 1 that badly want those services?

H. Preparing wills, trusts and other estate planning documents for out-of-state clients. It is common for estate planning clients who develop close relationships with their trusts and estates counsel while residing in "snow belt"states to ask these lawyers to continue to represent and advise them and to prepare estate planning documents after the clients retire to sun belt states. Not entirely by coincidence, the sun belt states to which these clients retire are often the most aggressive enforcers of UPL prohibitions against out-of-state lawyers. This common fact pattern presents some difficult choices to the T&E lawyers involved. They can consult with their retired, sun belt-dwelling clients by telephone, fax and e-mail, but when it comes to in-person consultations or to execution of newly drafted codicils and trust amendments, how should the lawyers proceed? If the retired clients return to their former home state, there is no UPL risk to the lawyers, but considerable inconvenience and cost, perhaps amounting to hardship, to the retired clients. If the clients are in poor health, they may be unable to travel. Yet a lawyer who travels to the clients' new domicile, where he or she is not admitted, to consult with, or supervise execution of documents by, those clients may be violating the domicile state's general UPL prohibitions. The Florida bar has apparently warned at least one non-Florida-admitted lawyer who traveled to Florida for these purposes that he did violate Florida's UPL prohibitions. The situation is even more complicated for the visiting T&E lawyer if the clients' new domicile has a statute like Texas Government Code 83.001 providing that a lawyer not admitted in Texas may not collect a fee for preparing documents affecting title to real property located in Texas. Unless T&E lawyers in these situations are willing to subject themselves to the risks of a UPL disciplinary complaint or prosecution, a UPL based malpractice claim, and a UPL defense to the lawyers' fee claim, the clients may have the unhappy choice of losing their long time lawyers or traveling back to the snow belt jurisdiction where their lawyer is licensed in order to obtain legal services. Alternatively, the clients' original lawyers can consult by telephone, prepare the documents in his home state, and send them to local counsel in the clients' new domicile for execution, thus requiring the clients to retain and pay a second set of lawyers.

I. Estate administration activities in a foreign state. State UPL statutes and rules may create other problems for T&E practitioners. When a lawyer represents an executor or trustee who resides in one state but has duties that require the fiduciary to act in another state, in which the lawyer is not admitted, the lawyer must decide whether to advise the fiduciary about his or her duties under the law of the foreign state, retain foreign state counsel to do so, or some combination. See, e.g., Estate of Condon v. McHenry, 65 Cal. App.4th 1138, 76 Cal. Rptr. 2d 922 (1st Dist. 1998); In the Matter of the Estate of Waring, 47 N.J. 367, 221 A.2d 193 (1966). A similar but even more difficult problem is presented when the lawyer him- or herself is named as executor or trustee and is required to act as a fiduciary in a state in which the lawyer is not admitted. Predictably, family members who feel aggrieved by the executor's or trustee's conduct may use UPL as a basis for attacking that conduct or the lawyer-fiduciary's right to fees. Lindsay v. Ogden, 10 Mass. App. Ct. 142, 406 N.E.2d 701 (1980). In Lindsay, the court had no trouble finding that the Massachusetts UPL statute did not apply to the activities of a New York lawyer while performing his duties as an executor in Massachusetts for a deceased Massachusetts resident. Other courts might not agree.

J. Unauthorized practice of law (UPL) defenses to claims for fees. As noted in Section III above, the context in which lawyers in ALAS firms most often encounter UPL allegations are situations like Birbrower where a lawyer has rendered services in a foreign jurisdiction to a client based in that jurisdiction, almost always at the client's request and with the client's knowledge that the lawyer is not licensed there, and a fee dispute develops. A new lawyer for the client recognizes that the client's best chance of defeating the first lawyer's fee claim is to assert a UPL defense. Such a defense often makes it unnecessary for the client to plead or prove that the first lawyer's services constituted malpractice or a breach of fiduciary duty, or were otherwise improper or caused any harm to the client. The UPL defense alone will often prevent the lawyer from collecting a fee either because the state's UPL statute itself so provides, or because the state's common law holds that legal services rendered in violation of the state's UPL prohibitions do not entitle the unlicensed lawyer to compensation. Sometimes, as in Birbrower, the court disallows the unlicensed lawyer a fee only on a contract theory, but permits the lawyer to proceed on an alternative theory such as quantum meruit. In other cases, the court will permit the unlicensed lawyer to recover on the ground that the alleged UPL involved only "isolated instances" of conduct in the state, In the Matter of the Estate of Waring, 47 N.J. 367, 221 A.2d 193 (1966), or that the out-of-state lawyer's services related primarily to matters based elsewhere, Appell v. Reiner 43 N.J. 313, 204 A.2d 146 (1964). Often, however, the unlicensed lawyer must run the risk that the client or former client will escape liability for the lawyer's fees even though the client has received the benefit of the lawyer's services and can prove no harm from the fact that those services were rendered by a lawyer not licensed in the state where the work was done.

V. Reasons for State UPL Restrictions on MJP in the 21st Century

Most state UPL statutes and rules originated at a time when commerce and law practice were mostly local, legal education was often accomplished through apprentice arrangements, admission to practice was far less rigorous and standardized than today, and regulation of the legal profession was sometimes sporadic and might differ markedly from state to state. These statutes and rules for the most part make no distinction between law practice by persons never trained in the law and lawyers admitted in another jurisdiction. They accord no weight to the preference of a client to be represented by a particular lawyer admitted elsewhere, no matter how close and long standing the lawyer-client relationship, how experienced the out-of-state lawyer, or how closely related the current matter is to other matters on which the out-of-state lawyer has previously represented or is currently representing the client.

States surely have legitimate interests in protecting their citizens from unqualified non-lawyers who purport to offer "legal services" without having the education or experience to do so competently. They also have a legitimate interest in assuring that out-of-state lawyers who render legal services within the state are accountable to courts and lawyer regulators and are, where appropriate, subject to professional discipline within the state if they violate legal and ethical standards applicable to lawyer conduct. Unfortunately, much UPL enforcement activity directed against lawyers admitted in other jurisdictions appears to be motivated not by these interests, but by a desire on the part of local lawyers to protect their franchise, whatever the cost, burden, inconvenience and disruption to clients who may be denied their counsel of choice.

VI . Possible Solutions to the MJP Problems of Private Transactional Lawyers

A. Amend state UPL statutes and rules to distinguish between UPL by non-lawyers, and UPL by lawyers admitted and in good standing in another state. A start on mitigating the problems for transactional lawyers and their clients caused by state UPL limitations would be the modification of such limitations to distinguish between UPL by non-lawyers, and by lawyers licensed in other states. The states of Michigan and Virginia have pointed the way by including in their UPL limitations an exception for occasional practice within the state by lawyers licensed elsewhere who are present in the state working on particular matters. Just this change, simple in concept but perhaps difficult to accomplish, would go a long way toward aligning state UPL regulation with the realities of 21st century transactional law practice.

B. Amend state UPL statutes and rules to provide "safe harbors" and disciplinary jurisdiction for lawyers licensed elsewhere. Another possible change in state UPL statutes and regulations would be the define "safe harbors" that describe legal services that may be rendered within the state by foreign licensed lawyers without running afoul of the state's UPL prohibitions. Examples would be legal services rendered jointly or while associated with a locally admitted lawyer, and services "arising out of or reasonably related to" the foreign lawyer's practice in his home state. The latter formulation reflects Section 3 of the soon to be published Restatement of the Law Governing Lawyers, entitled "Jurisdictional Scope of the Practice of Law by a Lawyer."

C. Amend Model Rule 5.5 to define "safe harbors." Even if state legislative action such as that described above is too difficult to accomplish, somewhat the same effect might be achieved by amending Model Rule of Professional Conduct 5.5 to provide for UPL "safe harbors" along the lines described above. While ethics rules cannot change statutory law, adoption by a state's supreme court of an ethics rule on UPL that defines "safe harbors" would be a useful policy statement to lower courts and UPL enforcement authorities about what kind of conduct the state's highest judicial authority considers shouldand should notbe prosecuted, enjoined or otherwise penalized or discouraged on UPL grounds. (The author, who has followed closely deliberations of the ABA Commission on Evaluation of the Rules of Professional Conduct, the "Ethics 2000 Commission," is aware that the Commission has such a modification of Model Rule 5.5 under active consideration.)

D. Encourage state supreme courts to adopt uniform rules or an interstate agreement on UPL. The ABA might draft and recommend to the Conference of Chief Justices a uniform set of rules on the scope of, and preconditions for, permissible legal work within the state by lawyers licensed in another state. As suggested by Professor Stephen Gillers last year, these rules could be embodied in a proposed interstate agreement among the highest courts of the several states specifying conditions under which foreign admitted lawyers would be permitted to render limited legal services to clients within a state in which the lawyer is not licensed. Such conditions might include, for example, written agreement by the lawyer (1) to be subject to the jurisdiction of the courts and disciplinary authorities in the foreign state, (2) to provide advance written notice to clients located in that state that the lawyer is not licensed there, (3) not to engage in advertising of legal services specifically directed to residents of the state, and (4) not to open an office in the foreign jurisdiction unless and until the lawyer is admitted to regular practice there.