October 05, 2011

Written Testimony of Professor John Dzienkowski, February 1999 - Center for Professional Responsibility

Written Testimony of Professor John Dzienkowski,
University of Texas Law School

February 5, 1999

Professor John Dzienkowski of the University of Texas Law School, who teaches in the areas of professional responsibility, taxation and oil and gas transactions and was a researcher for the latest version of Wolfman & Holden Ethical Problems in Federal Tax Practice, was the first witness of the afternoon. He suggested three alternative proposals for MDPs: 1) the D.C. version of Model Rule 5.4 that would allow nonlawyer partners, shareholders and managers and have lawyers supervising the delivery of legal services through nonlawyers. This approach would be limited to a few nonlaw disciplines and would not address some of the purposes to which MDPs are targeted. 2) affiliated professional services entity contractually connected to the law firm so that the law firm and nonlawyer entity provide integrated services for a fee. Although the entities are separate, the lawyers could share fees from MDP work with the nonlawyers. Joint venture arrangement is explained to the client and if client consents the joint venture would check for conflicts. The lawyers practicing law would follow the Model Rules. 3) fully integrated MDP with a carve out for litigation as lawyers as officers of the court have different responsibilities and there doesn't seem to be a great demand in the MDP structure for federal and state court litigation.

Lawyers holding themselves out as lawyers would be in a separate legal department and would be supervised by lawyers. This construct provides transparency, gives the client the reasonable expectation that he or she is receiving legal services and goes a long way toward maintaining the attorney/client privilege in the representation. No passive investors would be allowed and only professionals could partner. This proposal doesn't mean to eliminate prepaid legal plans regulated by state insurance laws. Changes necessary in the Model Rules include MR 5.4 (amendments would be determined by whether MDP was affiliated entity or single entity) and there should be no requirement that legal services be the sole purpose of the entity or that lawyers control the entity as such restrictions defeat the purpose of the MDP as long as total fee is reasonable and client is informed and consents to the fee agreement. Conforming changes would be necessary in MR 1.5 (reasonable fees), MR 1.6 (confidentiality), MR 5.7 (law-related services), MR 7.2 (cooperative advertising and referral fees) and MR 7.3 (referrals between law firm and affiliated MDP entity). The most difficult issues are conflicts and imputation, imputation of confidences and imputation of conflicts. Speaking to imputation of confidences he referenced Ms. Oberly's testimony that AICPA rules restrict sharing of client confidences to individuals working on an engagement and the team keeps confidences within a firewall. Regarding imputation of conflicts whereby conflicts are imputed to all members of a law firm he doesn't think the large law firm problem the rule creates should be extended to MDPs. He proposes the following rule.

The directly adverse conflict of MR 1.7(a) would be imputed to all members of the MDP so that a conflicts check and, if necessary, disclosure and waiver would determine whether the firm could continue both engagements.  The more common situation is MR 1.7(b), materially limited conflicts, and he advocates that 1.7(b) conflicts not be imputed to the entire firm. He referenced as an example the approach taken by the Texas Bar in its rule permitting a law firm to sue a present client on an unrelated matter. In such cases, each client is told of the other engagement that materially impacts and the client decides whether to continue with the firm or choose another - the rules require disclosure to both clients but not client consent. The Texas state approach has worked very well although it has been disapproved by the Fifth Circuit and in the American Airline case. With disclosure so the client has transparency, imputation is not necessary, and Professor Dzienkowski pointed to the bar rules that currently use firewalls for government attorneys and lateral hires. He argued firewalls should work in an MDP involving lawyers and nonlawyers because 1) the market will make them work - MDPs will be concerned with the liability aspects of failure to maintain a firewall, 2) there will be a competitive disadvantage for a MDP if failure to strictly adhere to firewalls causes confidences to be lost, and 3) lawyers who fail to honor the firewall continue to be regulated by the bar and have a duty to report professional misconduct to the bar under MR 8.3 as well as the fiduciary duty in most states to report negligence to the client. He has seen a demand for MDPs from small businesses and individuals - a family dispute resolution or estate planning practice - and thinks that flexible rules will allow different forms of MDPs to evolve over time.

Professor Dzienkowski responded to Professor Daly that the bigger problems of a MDP did not require a national bar, that decentralized state control of the profession works and that the states can be convinced to cooperate when they see the benefits of a MDP construct. The separation of the lawyers within a MDP would be a functional one, lawyers would follow the Model Rules when they were lawyering (albeit bar discipline controls lawyer misconduct whenever occurring) and when lawyers are driving the deal they would be supervising nonlawyers. An ad that includes legal services would have to comply with the Model Rules because of the lawyer involvement. The head of a MDP, however, need not be a lawyer. Professor Dzienkowski explained to Ms. Lamm that he intentionally did not include arbitration litigation in front of administrative agency tribunals in his litigation carve out for MR 1.7(a) direct adversity because he feels MDPs have something to offer in the ADR services arena. Asked about a national admission test with states retaining disciplinary authority over lawyers he said he'd have to think about it as a federal approach is so contrary to U.S. legal history and a state by state regulatory system has allowed for a lot of experimentation and percolation. He was very dubious of the federal licensing approach to regulating MDPs. In the context of a joint venture MDP, he would allow an affiliated law firm to practice in court but not an integrated MDP.

In response to Ms. Garvey's query whether litigation support services in the affiliated MDP with the lawyers in the law firm taking the issue to court wasn't the British system he said the American lawyer would not need to choose between being a litigator or a business lawyer. He was unable to answer whether a lawyer partnering in a MDP with the removal of litigation could have an economically viable practice, whether business type planning and litigation might not both be necessary.

Mr. Nelson pondered whether the demand for MDPs might not be supplier driven. He asked how in a MDP one distinguishes between those who are holding themselves out as lawyers and those who are not and, thus, who is providing legal services, because the whole organization is saying it can do everything. Professor Dzienkowski said the client's informed choice to select legal services should be set forth, at the outset, in the engagement letter to safeguard client confidentiality and privilege, to direct nonlawyer supervision and to manage firm liability. The preliminary advertising issue was not addressed. Mr. Mundheim thought this response, as it had the effect of segregating lawyers legal division vs. nonlegal division per transaction, was counter the professor's general hypothesis and did not address the problem of making the gross choices. Mr. Mundheim raised the example of creation of a derivative to ask how the law vs. nonlaw decisionmaking would be done pre-client input, that is, in the product arena. Professor Dzienkowski would classify the function of drafting financial products as a legal service. He would adopt the functional approach to determining whether a lawyer in an MDP was practicing law. He is also more comfortable separating lawyers into a separate entity. The Chair commented on the difficulty with defining a professional (the professor listed state licensure and standards and codes of ethics) and thought that a no passive investment approach would avoid the Sears or video store affiliation problem. Asked about pro bono and client protection fund responsibilities of lawyers in MDPs the professor answered that lawyers in MDPs should be subject to the bar's recommendations regarding performance of pro bono work and if they provide legal services should be required to contribute to the client protection fund.