Updated Background And Informational Report And Request For Comments
In August 1999, the Commission on Multidisciplinary Practice (Commission) recommended that the Model Rules of Professional Conduct be amended, subject to certain restrictions, to permit a lawyer to partner with a nonlawyer even if the activities of the enterprise consisted of the practice of law and to share legal fees with a nonlawyer. 1 After conducting more than sixty hours of public hearings, listening to the testimony of fifty-six witnesses, and receiving written comments from interested individuals and organizations, the Commission concluded that such a change was in the best interest of the public, would expand the availability of legal services, and would facilitate the development of a new business structure enabling lawyers to reconfigure their practices to assist clients in resolving multidisciplinary problems. However, in recognition of the differences between the legal profession and other professions and so to ensure that the core values of the legal profession, which exist for the protection of the public, were adequately safeguarded, the Commission recommended the adoption of a certification-and-audit regulatory regime. See Commission on Multidisciplinary Practice, Report to the House of Delegates, <http:www.abanet.org/cpr/mdprecommendation.html>
The Commission presented its Recommendation to the House for debate on August 10, but in recognition of the many requests by state and local bar associations for more time to consider the issues, moved to defer the vote. The House subsequently voted to substitute and adopt a resolution of The Florida Bar that reads as follows:
Resolved, that the American Bar Association make no change, addition or amendment to the Model Rules of Professional Conduct which permits a lawyer to offer legal services through a multidisciplinary practice unless and until additional study demonstrates that such changes will further the public interest without sacrificing or compromising lawyer independence and the legal profession's tradition of loyalty to clients.
Exchanges on the floor of the House in connection with the Resolution made it clear that the Commission could continue to study issues related to MDPs and report back to the House when it determined such action was appropriate. In response to the concerns expressed in the Resolution, Commission members have made themselves available to discuss the issues raised by the Commission's Report and receive comments directed toward possible changes to the Commission's position. In particular, Commission members have endeavored to work with state and local bar associations in advancing the discussion. 2 The Commission has invited state and local bar associations that have been studying the issues to participate in an open discussion at the ABA Midyear Meeting in Dallas on Saturday, February 12. In addition, ABA President William Paul has announced a town hall meeting on multidisciplinary practice in Dallas on Sunday, February 13.
The Commission is issuing this Updated Background and Informational Report in order to (1) provide an overview of pertinent developments that have occurred since the August 10 vote; (2) summarize and reply to the comments and criticisms that have been made in response to the Commission's Recommendation and Report; and (3) encourage further dialog. Part I of this Report describes the pertinent developments both in the United States and abroad since August 10. Part II identifies the major criticisms directed to the Recommendation, explains the Commission's rationale for the Recommendation, and suggests some possible accommodations. Part III presents alternatives to the Commission's Recommendation, raises specific questions that would need to be answered with respect to each alternative and provides an analysis of the different types of affiliations in the MDP context. The alternatives are designed to encourage comment and reflections from state and local bar associations, regulatory authorities, clients, and other interested groups and individuals. At this point in its deliberative process, the Commission especially wishes to receive reasoned input from state and local Bars and emphasizes that it has not reached a conclusion on the scope of revisions to its Recommendation.
Pertinent Post-August 1999 Developments in the United States and Abroad
As the Commission noted in its Report and Recommendation and the Reporter described in more detail in the accompanying Reporter's Notes, the delivery of tax advice and law-related services by professional services firms has grown rapidly over the course of the past five years. The Big Five accounting firms have significantly expanded their tax practices in the United States and abroad. The expansion is not simply a matter of the employment of more lawyers. While the quantitative growth in the number of lawyers is impressive, 3 even more impressive is the firms' success in recruiting tax partners from leading law firms and prominent government lawyers to join the Big Five 4 and in persuading law students to join their staffs directly after graduation rather than following the more traditional law-firm career path. 5
Strategic and other alliances between law firms and Big Five accounting firms are becoming increasingly popular. This development was the subject of extended commentary in the legal press beginning in 1997 with the announcement of a strategic alliance between PwC and Miller & Chevalier, a Washington, D.C. law firm with a highly specialized practice representing domestic and international clients involved in high stakes, complex tax controversies in the United States. 6 The popular press characterized the alliance as a "significant step on the path the big six firms are taking towards offering comprehensive legal services. 7 " Other alliances have followed this past year. For example,
in August, KPMG announced the creation of a strategic alliance with certain law firms that are members of Saltnet, a network of state and local tax lawyers. Among the law firms that have entered into the alliance with KPMG are Morrison & Foerster 8 and Horwood Marcus & Berk.
in November, five partners from the Atlanta and Washington D.C. offices of King & Spalding broke away from the firm and formed a separate law firm in Washington D.C. 9 Based on the press release issued by Ernst & Young and articles in the legal press it would appear that the law firm has entered into a highly unusual relationship with Ernst & Young. Ernst & Young has agreed to furnish a significant amount of start up capital to the firm and to lease it space in a building it owns. In exchange, the law firm has agreed to be known as McKee Nelson Ernst & Young. 10 The two firms have stated that they are separate entities, but many commentators regard the affiliation as a major step by the accounting firms toward the eventual establishment of a multidisciplinary partnership that includes legal services.
Other new and unique relationships between professional services firms and lawyers and law firms also deserve comment.
in October, Bingham Dana, LLP merged its money-management practice with Legg Mason, Inc., an investment firm. Their affiliation is reported to be the first partnership between a law firm and an asset management firm in the United States. The new entity has become a registered investment advisor and is intended to be a vehicle for offering wealthy clients more sophisticated investment advice. 11 In January, Bingham Dana formed a consulting entity to provide advice on state-specific concerns. The firm's managing partner has observed, "Our philosophy is that delivering a variety of integrated products makes sense for law firms. The accounting firms have proven that. 12 "
in October, the ABA Section on Litigation and PwC announced that the Section had selected PwC as its "litigation consulting sponsor," an arrangement in which PwC will provide enhanced benefits and resources to the Section's members. 13
between June and the present, several mergers of U.S. and foreign law firms were announced. 14 In part, such mergers are a reflection of the changes in the global marketplace for legal services and an acknowledgment of the competition traditional law firms are facing from MDPs in countries outside the United States. 15
In addition to the foregoing developments, the Commission also notes that the Supreme Court of Indiana in October rejected the proposition that the use of in-house counsel by an insurance company to defend its insureds constituted the unauthorized practice of law by the employer-insurer. Of the thirteen states that have considered this issue, only two have condemned it. 16
The legal landscape outside the United States is also undergoing rapid change. 17
the Council of the Law Society of England and Wales has taken the first step to approve the establishment of MDPs in the United Kingdom. Since implementing legislation will be necessary, it has authorized as an interim measure the establishment of a "legal practice plus" and a "linked partnership" that will allow, respectively, a nonlawyer partner in a solicitor firm and certain alliances between accounting and solicitor firms. 18
the International Practice of Law Committee of the Canadian Bar Association has issued a Report on Multi-disciplinary Practices and the Legal Profession in which it recommends that lawyers be permitted to enter into partnership with nonlawyers and share fees with nonlawyers subject only to the rules of professional conduct that regulate lawyers in traditional practice structures. 19
the National Multi-Disciplinary Partnerships Committee of the Federation of Law Societies of Canada has recommended that the rules of professional conduct be relaxed to permit MDPs. 20
legislation has been introduced in New South Wales, Australia, that will allow law firms to incorporate, share profits with nonlawyers, and raise capital through passive investment. Shares in these law firms will float on the Australian Stock Exchange. 21
in furtherance of its publicly stated goal of being one of the world's five leading law firms by the year 2004, PwC announced in October that it had selected the name "Landwell" for its network of globally affiliated law firms. It now employs one thousand six hundred lawyers in forty-two different countries. 22
A survey conducted by the Financial Times (London) of one hundred senior executives at large companies and financial institutions in the United States and the United Kingdom showed a willingness by the executives to purchase legal services from MDPs, if they could offer such services. 23
the General Assembly of the Union Internationale Des Avocats has adopted a Resolution on Multidisciplinary Practice approving minimum standards for lawyers in MDPs in the jurisdictions in which MDPs are allowed. Those principles reflect core values of the legal profession similar to the ones identified in the Commission's Recommendation. 24
Preliminary Response to Post-Report Comments and Criticisms
Since its appointment in 1998, transparency of process and fostering of dialogue have been important to the Commission. Accordingly, the Commission would like to take this opportunity to respond to the major comments and criticisms directed towards the June 1999 Recommendation. An item-by-item commentary explaining the Commission's rationale is provided below and specific issues are flagged for further discussion.
1. Competence should be added as a core value.
The testimony of the witnesses and the written comments submitted to the Commission focused almost exclusively on loyalty, confidentiality and independence of judgment as the core values of the legal profession implicated in any proposal to authorize MDPs. Consequently, the discussion in the Recommendation and Report centered on these values. The Commission never intended to denigrate the importance of competence and assumed that competence as a core value was implicit in its Recommendation. It regrets that the Recommendation was not as clear as it should have been on this point. The Commission agrees that in any future Recommendation and Report competency should be listed as a core value.
2. Empirical evidence of need for legal services rendered through MDP's.
Though empirical evidence is always a plus, the Commission believes that this request is misdirected and does not take into account the full record. First, in a society where people are free to make choices about the goods and services they purchase, there is no sure way of accurately estimating whether the market will favor a new type of service until it is available. Second, the criticism ignores all the positive support for MDPs from general counsels, consumer groups, and two Sections of the ABA. 25 Third, the fact that lawyers now are working in various multidisciplinary settings, even though they may be in the shadow of the law, is some further empirical evidence of need. Development of this type of delivery mechanism is presently inhibited, not by the market forces for services, but by legal prohibition, notably Rule 5.4(a) against fee sharing. It will be possible to measure the extent of "need" only if the taint of illegality is removed from legal services provided through MDPs. If clients choose not to purchase these services from MDPs, then it will be the market B not the legal profession acting as a regulatory gatekeeper B that has found this delivery option wanting.
Finally, the Commission acknowledges the concern of some commentators that if MDPs are allowed, unforeseen ethical problems may arise. While the question, "How do you get the genie back in the bottle?" is a legitimate one, the Commission does not believe that the question carries enough weight to bar a relaxation of the present prohibitions on fee sharing and partnership with nonlawyers. If a similar concern had carried the day with respect to the provision of legal services by in-house counsel to corporate clients, by staff lawyers to union members, or by lawyers in legal services organization to needy clients, important innovations in the delivery of legal services would not have occurred. Moreover, the Commission realistically expects that some of the individual states will modify the Commission's Recommendation to protect the public interest in light of the particular conditions of the states' marketplace for legal services. These modifications will provide useful models for change if there is a need to address unforeseen ethical problems.
3. Should passive or equity investment continue to be prohibited?
Some commentators have criticized the Recommendation's ban on passive investment as having an unintended anti-competitive effect. They argue that if any form of MDP practice is ultimately authorized the ban will put traditional law firms at an economic disadvantage because, as a practical matter, bank financing is their primary source of capital. In contrast, professional services firms and consolidators will be able to draw upon their substantial earnings to finance and even subsidize the operation of their legal services unit.
The Commission's decision to continue the present prohibition on equity investments rested primarily on two considerations. First, the Commission was concerned that equity investment could pose a particular threat to lawyer independence of professional judgment. The Commission was concerned that equity investors would be more interested in the bottom line rather than in service. Second, the Commission was well aware that the House of Delegates had previously rejected a proposal to permit passive investment and agreed with that decision. The Commission did not consider lifting the ban at this time to be a necessary step to accomplish the goal of best serving the public through the relaxation of the rules that currently prevent multidisciplinary practice.
The Commission invites those who believe that a departure from the current ban is warranted to bring to its attention supporting information about law firm financing. Some members of the Commission have expressed the strong view that lawyers who practice in law firms should not be placed at a competitive disadvantage, if MDPs are allowed, and are willing to consider well documented comments, especially from the state and local Bars, indicating that the continuation of the ban would have a deleterious economic impact and putting forward alternative proposals.
4. The segregation of fees and client funds.
The Commission on IOLTA has requested that any future Recommendation more explicitly address the issue of client funds. A client who deposits trust funds with an MDP may seek the services both of a lawyer and a nonlawyer on a given matter or may first seek the services of a lawyer and later a nonlawyer on related matters. In the IOLTA Commission's view, it is important to have a single set of rules and the highest available standards to govern the MDP's handling of client trust funds. The Commission on IOLTA has proposed the following specific language to amend the Recommendation:
It [the MDP] will establish, maintain and enforce procedures to
protect a lawyer's professional obligation to segregate fundsassure that the rules of professional conduct governing a lawyer's receipt, safeguarding and distribution of client funds, including the Interest on Lawyers' Trust Account (IOLTA) Rules are strictly applied to all client funds received by the MDP. For these purposes, a "client" is a client of the MDP, whether seeking legal services, non-legal services or a combination of the two.
The Commission specifically invites comment on whether this amendment will be sufficient to protect client funds and whether it can be practically implemented.
5. Should the certification and audit procedures be reaffirmed, modified, or withdrawn?
The Commission's Recommendation essentially treats the consent to practice law given to an MDP by 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 as a quid pro quo for the court's granting the MDP an exception to the present rule barring fee sharing and partnership with a nonlawyer. If a court concludes that the MDP has failed to comply with the quid pro quo safeguards it has mandated, it could enter an injunction barring all lawyers licensed in the jurisdiction from practicing in the MDP. Depending on the circumstances of the noncompliance, it might also enter an order disciplining the lawyers in the MDP for their own noncompliance or their failure to report the MDP's noncompliance. Furthermore, lawyer and nonlawyer members of an MDP that continued to provide legal services after an injunction had been entered could be prosecuted for the unauthorized practice of law.
The Commission anticipates that the funding to support the supervision of MDPs by the court will not be a problem in many jurisdictions because the MDPs' annual certification fee will be adequate. The Commission acknowledges, however, that in some jurisdictions where the number of MDPs is relatively small this may not be the case. The Commission has not suggested whether the annual certification fee should be uniform or vary with the size of the MDP or whether the fee should include a reserve for unforeseen emergencies. The Commission believes that in almost all instances the details of any funding mechanism should be left to the individual states for determination in response to local needs and practices.
The Commission has been criticized for not defining in specific enough terms the way in which the certification and regulatory process for MDPs would operate. The Commission was confident that its proposal was feasible. Furthermore, it deliberately did not want its initial "conceptual" approach to be too detailed, fearing that such details would interfere with the discussion of the more important general principles. These details, moreover, would have to be worked out within each jurisdiction in response to local needs, practices, and concerns. The Commission is considering whether and to what extent it can contribute any guidance to the states to assist them in structuring the regulatory and certification procedures. Finally, the Commission notes that it is in contact with the Conference of Chief Justices which has a committee studying issues related to MDPs. The Commission welcomes comments on how the certification and audit requirements might be modified or, if withdrawn, what regulatory structures, if any, it should recommend. It specifically invites comments directed to peer review as an alternative.
6. How can independence of judgment be best safeguarded?
The most common concern expressed about MDPs is that working in such a practice setting will inevitably lead to the erosion of a lawyer's professional independence. This concern is highly selective, however. It ignores other practice settings in which the problem is more frequent and may be more severe. Among these settings are full time employment by a single client ( e.g., in-house corporate counsel, lawyers employed by a union providing services directly to union members, and lawyers employed by a legal services organization under the direction of a nonlawyer board), employment as an associate under the direction of a partner ( see Rule 5.2, allowing a subordinate lawyer to take direction from a supervisory lawyer regarding difficult ethical issues), and membership in a partnership in which difficult ethical issues are frequently resolved by a managing partner or an executive committee and in which compensation is dependent on billings ( e.g., whether to take a new matter in the face of a possible conflict of interest or to disclose alleged client fraud) .
The Commission invites comment on whether it should suggest that a separate rule addressing professional independence be adopted to apply to all lawyers in all practice settings regardless of the manner in which they are compensated.
Part of the concern regarding professional independence arises from the perceptions that a nonlawyer in a management position in an MDP will not appreciate the legal profession's concept of professional independence and that a nonlawyer who has not been trained in legal ethics cannot properly supervise the delivery of legal services. The Commission invites comment on how it should address this concern, including: (1) permitting only lawyer-controlled MDPs; (2) requiring that the lawyers in fully integrated MDPs who provide legal services to third parties be segregated in a separate legal division headed by a lawyer; or (3) mandating specific procedures to safeguard lawyer independence. Finally, it acknowledges the view expressed by some commentators that the rules governing MDPs may need to vary according to the size of the MDP and invites comments on the advisability of the Commission's drawing such a distinction, what the content of such rules should be, and where the dividing line among MDP firms should be located.
7. Is a definition of the term "the practice of law" an essential component of a rule of professional conduct permitting a lawyer to work in an MDP? And if so, how should the term be defined?
The Commission has been criticized for suggesting a definition of the practice of law that some regard as too inclusive. The Commission may have erred by failing to attach the commentary from the original D.C. rule that the Commission used as its illustrative example, and in so doing may have omitted information that, in the words of one of the drafters of that rule, "is essential . . . to illustrate the subtlety of the issue." (The Commentary is posted at <http://www.abanet.org/cpr/schaller.html>.) The Commission's intent was to leave the definition to the individual jurisdictions. Accordingly, it did not include the definition in the Recommendation, but rather provided it as an example of one possible definition. The Commission did not intend to use the term in an exclusive sense to limit non-lawyer activity. Unfortunately, the Commission's intent was not sufficiently clear. The Commission invites comment on whether it should include a definition in any subsequent Recommendation.
8. Should the control of an MDP be limited to lawyers?
Many comments related to the concerns about independence of judgment have suggested that any move toward MDPs should include a requirement of lawyer control of the entity. Such a change would result in the elimination of the need, as perceived by the Commission in its Recommendation, to treat lawyer controlled and nonlawyer controlled MDPs differently, a stance that also has been criticized by some.
The Commission's Recommendation rested upon the conviction that the ABA should expand the opportunities for client choice as much as possible, consistent with the protection of the legal profession's core values. The Recommendation endeavored to assure that clients would be informed of the differences in the services and protections offered, thereby reducing client confusion. In addition, the Commission viewed allowing nonlawyer controlled MDPs as the most effective way of properly bringing those lawyers currently working at professional service firms under the legal profession's regulatory umbrella.
9. Should an MDP be allowed to provide audit and legal services to the same client?
In Recommendation 9, the Commission stated:
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 the 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.
In footnote 3 to the Report accompanying the Recommendation the Commission specifically addressed the question of the simultaneous provision of legal and audit services:
In a letter from the Office of the Chief Accountant (OCA) of the Securities and Exchange Commission (SEC), this Commission was advised that the SEC has asked the Independence Standards Board (ISB) to place the topic of legal advisory services on its agenda. The SEC intends to look to the ISB for leadership in establishing auditor independence regulations applicable to the audits of the financial statements of SEC registrants. According to the letter, the SEC auditor independence regulations specifically state that the roles of auditors and attorneys under federal securities laws are incompatible. The OCA would consider an auditing firm's independence from an SEC registrant to be impaired if that firm also provides legal advice to the registrant or its affiliates. The Commission believes that this issue is correctly initially discussed in those fora. When the ISB completes its study, appropriate ABA entities will wish to comment on its recommendations and, possibly, to take formal positions.
In essence, the substance of the footnote reflected a letter from the SEC dated January 15, 1999 to the Commission. In a second letter dated July 12, 1999 after the Report's publication, the SEC confirmed its view that the roles of auditor and attorney are incompatible under federal securities law.
The Commission shares the SEC's position and regrets that it did not make this point sufficiently clear. Finally, the Commission notes the concerns expressed by SEC Commissioner Norman S. Johnson, who views the expansion of accounting firms into legal services as problematic. 26 Commissioner Johnson's concerns focused on many of the same issues as did this Commission's Report and Recommendation, such as the preservation of a lawyer's independent professional judgment and the lawyer's duty to preserve a client's confidences and avoid conflicts of interest. 27
More enforcement of UPL rules
Some critics of the Commission's Recommendation strongly support the status quo, urging that no changes be made to the rules of professional conduct that prohibit partnership and fee sharing with a nonlawyer. They call for stepped up enforcement of (1) the ethics rules prohibiting a lawyer from assisting a nonlawyer in the practice of law and (2) unauthorized practice of law (UPL) statutes prohibiting the delivery of legal services by corporations and other business entities controlled by nonlawyers. 28
The Commission notes that despite the considerable publicity about the alleged delivery of legal services by the Big Five and other consulting-type firms, regulatory initiatives have rarely occurred and where they have, the process has been terminated before any presentation to a court. For example, in 1998, the UPL Committee of the Texas Supreme Court announced that it would not file a complaint against Arthur Andersen after an eleven-month investigation. 29 In 1999, Virginia bar counsel made a similar statement with respect to the compliance law services offered by an unnamed professional services firm. 30
Professional services and consulting firms are employing more and more lawyers to provide law-related advice to their clients. No reason exists to assume that this trend will not continue. Those lawyers are operating outside the "regulatory tent," vigorously maintaining that they are providing nonlegal consulting services and thus are not subject to the rules of professional conduct or bar discipline. In many instances, it is seemingly impossible to distinguish the consulting services they render to the firms' clients from those rendered to clients by lawyers in traditional law firms. As noted above, however, no fact finder has yet determined that such consulting services constitute the practice of law.
The Commission invites comments on 1) whether stepped-up enforcement of UPL and related code of conduct provisions is in the public interest and/or an achievable objective; and 2) assuming arguendo that such enforcement is unlikely, whether the public interest would be served by continuing the status quo in which the lawyers working for the Big Five and other professional and consulting firms are essentially unregulated by the bar.
The D.C. Model with or without modification
This model permits a lawyer to form a partnership and share legal fees with a nonlawyer subject to certain clearly defined restrictions. Washington, D.C. is the only jurisdiction in the United States to have adopted this model. The Washington, D.C. version of Rule 5.4 requires that the law firm or organization must have "as its sole purpose" the provision of legal services to others; the nonlawyer must agree "to abide by these rules of professional conduct;" the lawyers with a financial interest or managerial authority must Aundertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1; and these conditions must be set forth in writing. 31
The text of the Rule does not define or limit the vocation of the nonlawyer partner. However, the Comment refers to certified public accountants working in conjunction with tax lawyers or others who use accountants' services in performing legal services, economists working in a firm with antitrust or public utility practitioners, psychologists or psychiatric social workers working with family law practitioners to assist in counseling clients, and nonlawyer lobbyists working with lawyers who perform legislative services. 32 Finally, the Comment specifies that the rule does not permit partnership for the purpose of investment. 33
The Commission invites comments on 1) whether it should recommend replacing the current version of Model Rule 5.4 with one modeled on the Washington, D.C. version; 2) whether the "sole purpose" language should be changed to "a principal purpose" and if so, how principal purpose should be measured; 3) whether any restrictions should be placed on the vocation of a nonlawyer partner such as permitting partnership with a nonlawyer professional only; and 4) assuming arguendo that partnership with only a nonlawyer professional is in the public interest,
a) how "nonlawyer professional" should be defined;
b) whether the public's interest would be adequately protected by defining a nonlawyer professional as "a member of a recognized profession whose conduct is governed by ethical standards;"
c) whether the definition in item b) should be supplemented in the text or accompanying commentary by an illustrative recitation of nonlawyer professionals similar to that found in the comments to the Model Rule 5.7 and the Washington, D.C. version of Rule 5.4 or should be left to the states. 34
d) what measurements should be used to determine that the lawyer-principals of the MDP actually possess the power to resolve issues relating to the firm's finances, management, operations, and ethical responsibilities. Is it sufficient simply to require that fifty-one percent of the firm's principals be lawyers? Should supra-majority requirements for all or certain types of decisions be required in MDPs?
e) what specific practices and policies capable of expression in a rule of professional conduct exist to create and foster an institutional culture conducive to the observance of ethical norms?
The Contract or Affiliation Model
In this model, a professional services firm and an independent law firm contractually enter into a close working relationship. Typical terms might include the following: an agreement to refer clients to one another on a non-exclusive basis and/or to work together on related matters for clients, 35 a loan of working capital from the professional services firm to the law firm for start-up purposes or expansion, the law firm's leasing of office space in a building housing the professional services firm, the law firm's purchase of administrative and support services from the professional services firm, including technology assistance and staffing, and the firms' sharing of library and computer services. 36
Provided that the contractual arrangement is not a sham masking fee sharing or papering over what is really a partnership relationship with respect to the control and management of the law firm, it does not appear that the Contract or Affiliation Model violates the Model Rules of Professional Conduct. To some degree the relationship between the law firm and the professional services firm may be analogized to the relationship that exists among independent lawyers in a shared office suite who are not partners but refer clients to one another, use common facilities, and contribute proportionately to the costs and expenses of the suite. Such exchanges do not automatically transform the lawyer members of the suite into partners.
On the other hand, the Commission recognizes that at some point even if there is no formal fee sharing, economic interdependence may so entwine the firms that they become a single entity. Evidence of such interdependence might include, for example, brand naming, concessions or other economic benefits to offshore affiliates, and benefits to each other's clients. A law firm's economic dependence on a professional services firm may threaten the exercise of independent professional judgment by the firm's lawyers. (Of course, a similar danger can arise in any instance in which a law firm is dependent on a single client for a substantial portion of its revenue. Fear of antagonizing the client may interfere with the exercise of independent professional judgment by the firm's lawyers.)
The Commission invites comments on 1) what criteria should be used to determine whether a professional services firm and a law firm have become so economically entwined that they should no longer be viewed as separate firms; 2) what weight should be given to each criterion; and 3) whether, as some foreign bar regulators have urged, each contract between a law firm and a professional services firm should be reviewed by the highest court with the authority to regulate the legal profession in each jurisdiction in which the law firm and the professional services firm jointly offer services pursuant to the contractual agreement between them.
The Fully Integrated Model
In this model, there is no free-standing law firm. There is a single professional services firm, whose ownership, management, and profits are shared by lawyers and nonlawyers. The Fully Integrated Model permits a nonlawyer to have ultimate managerial authority over all aspects of the MDP's provision of legal services to the clients of the MDP. In its Recommendation, the Commission urged that the Model Rules be amended to permit fully integrated MDPs. The Commission did not require a separate legal department or division. The Commission specifically invites comment on
a) whether it should recommend that the lawyers in an MDP who are delivering legal services to the MDP's clients be organizationally housed in a separate unit of the MDP, which would be subject to oversight by a supervisory lawyer whose responsibilities would resemble those of a general counsel of a corporation or other organization who supervises the professional work of the in-house lawyers. The supervisory lawyer would have ultimate managerial authority with respect to the lawyers in the unit, for example, deciding the number of lawyers and support personnel necessary to staff a matter and which lawyers to assign to a matter, and fixing the terms and conditions of the compensation of the lawyers in the unit.
This proposal would apply to all MDPs delivering legal services, regardless of size. The precise organizational features of the legal services unit would be left to the discretion of the MDP, just as the organizational features of a legal department and law firm are left, respectively, to the corporate or business client and the lawyers in a law firm. It is likely, however, that the legal services unit of a large MDP would require a more elaborate structure than that of a smaller MDP. 37 In a smaller MDP, such structures might constitute needless formalism and impose unnecessary costs.
b) whether it should recommend that only those lawyers practicing in the separate legal services unit described in a) supra be allowed to deliver legal services to the MDP's clients. Thus, a person admitted to practice law would not be permitted to hold him or herself out as a "lawyer," competent to deliver legal services to a client of the MDP, if that person were assigned to another unit of the MDP and the person's professional work involving legal services was not subject to supervision by the supervisory lawyer in the legal services unit of the MDP. Furthermore, it would be the responsibility of the MDP and each such person to make reasonable efforts to ensure that the MDP's clients understand that the person is not acting as a lawyer even though that person is licensed to practice law.
c) whether it should recommend that all MDPs ( i.e., those controlled by lawyers as well as nonlawyers) should be subject to the audit and certification procedures proposed in the Recommendation.
d) whether it should amend the audit and certification procedures proposed in the Recommendation by extending their application to a "firm" (as defined in the Terminology Section of the Model Rules) and each lawyer in a firm.
e) whether it should recommend peer review as an alternative to audit and certification and if so, how such peer review would operate.
f) whether it should recommend specific practices and procedures to preserve the attorney-client and work product privileges; and if so, what those practices and procedures should be.
1 The Commission employs the terms "partner,"and "partnership" throughout this Report, conforming its discussion to the language used in the Model Rules. The reader should interpret these terms broadly to include, respectively, a shareholder in a law firm organized as a professional corporation or similar association, and a professional corporation or similar association by means of which lawyers structure their relationship inter se for the delivery of legal services to clients. See generally Terminology, Model Rules of Professional Conduct (1983) (defining "partner").
3 In 1997,The Wall Street Journal reported that
Ernst & Young has 800 tax attorneys on its U.S. staff, double the 400 it had several years ago. Price Waterhouse has around 500 tax lawyers in the U.S. up from 250 three years ago. Arthur Andersen has 1,000 tax attorneys, 20% more than it had in 1994.
See Elizabeth MacDonald, Accounting Firms Hire Lawyers and Other Attorneys Cry Foul, Wall St. J., Aug. 22, 1997, at B8. Subsequent to the publication of this article, Price Waterhouse and Coopers & Lybrand merged, forming PricewaterhouseCoopers (PwC). "PwC" will be used throughout the Report to refer to the merged entity and its predecessor, Price Waterhouse.
4 Bruce Balestier, Under One Roof: ABA Faces Arrival of Lawyer-Accountant Pairings, N.Y.L.J., Nov. 19, 1998, at 5 (referring to a "high profile coup" by an accounting firm in hiring a noted tax partner); Tom Herman, A Special Summary and Forecast of Federal and State Tax Developments, Wall St. J., June 18, 1997, at A1 (reporting the departure of a well-known law firm tax partner to an accounting firm); Jeffrey L. Jacobs, Multidisciplinary Recruiting War. . . The Tax Brain Drain to Accounting Firms Intensifies, 17 Of Counsel 7 (1998) (same); MacDonald, Accounting Firms Hire Lawyers and Other Attorneys Cry Foul, supra note 1, at B8 (same).
5 Mark Schauerte, Big Five Use Stock Options, Usable Hours to Woo Law Students, Chicago Law., Nov. 1999; Anna Snider, Taking a Look Inside the Big Five, N.Y.L.J., Sept. 7, 1999, at S11. The senior vice president and general counsel at Hildebrand, Inc. has commented:
The Big Six are recruiting at the major law schools, and not only tax lawyers. They are telling students that if they come with them, they will be doing M&A, litigation and other kinds of work that goes well beyond tax counseling.
David Rubenstein, Accounting Firm Legal Practices Expand Rapidly. How the Big Six Firms Are Practicing Law in Europe: Europe First, Then the World?, Corp. Leg. Times, Nov. 1997, at 1.
6 See; Sheryl Stratton, Practice of Law by CPA Firm Members Raises Legal and Ethical Questions, Tax Notes Today, April 25, 1997, 97 TNT 80-6; Big Six Firm Forms Strategic Alliance With Law Firm, Tax Notes Today, April 16, 1997, 97 TNT 73-53.
7 The Big Six Move In, Intl Fin. L. Rev., Nov. 1997, at 25. According to the two firms, the alliance allowed them to offer their clients a seamless web of services:
US tax controversy work goes from the pre-examination stage to litigation. Up to the litigation stage [Price Waterhouse] can do the work, but sometimes a case cannot be settled and it has to go to court.
Sometimes clients like to have the stage set, with attorneys involved. Because we do not litigate, we cannot give the IRS the impression that we are ready to go to court. With Miller & Chevalier as part of a team, we are in a position to go to court if we need to.
Id.; see also supra note 4.
8 See;Arian Campo-Flores, Dream Team Tax Team, Am. Law., Sept., 1999, at 18; Brenda Sandburg, MOFO Allies with Accounting Giant, N.Y.L.J., Aug. 9, 1999, at 2; Ritchenya A. Shepherd, Why MOFO Teams with KPMG, Natl L.J., Aug,. 23, 1999, at A12; KPMG Joins Forces with a group of state and local lawyers, Wall St. J., Aug. 4, 1999, at A1.
9 The Washington, D.C. version of Rule 5.4 permits a lawyer to form a partnership with a nonlawyer and to share legal fees with a nonlawyer. The "sole purpose" of the partnership must be the delivery of legal services, however. In the press release announcing the establishment of McKee Nelson Ernst & Young, the firm did not indicate how if at all it would take advantage of the Rule. Ernst & Young, News Release (Nov. 3, 1999).
10 News Release, supra note 9; Siobhan Roth, Inside the Ernst & Young Deal: Law Firm is launched with Big 5 loan; lawyers say that they remain independent, The Recorder/Cal, Law., Nov. 10, 1999; Jonathan Gronerand & Siobhan Roth, Envisioning A Big 5 Law Firm: Ernst & Young Positioning to Offer Full Legal Services, Legal Times, Oct. 25, 1999.
11 Ritchenya A. Shepherd, Law and finance under one roof, Natl L.J., Nov. 15, 1999, at A21; Todays News Update, N.Y.L.J., Oct. 5, 1999, at 1. See also Mark Schauerte, Law Firms Eye New Ventures As Big Five Encroach on Legal Turf, Chicago Law., Nov. 1999, at 6.
12 Ritchenya Shepard, Legal and Financial Advice Under One Roof, Natl L.J., Nov. 9, 1999, at 5. The law firm of Fredikson & Byron, the fifth largest firm in Minnesota, expressed a similar sentiment in announcing the establishment of a consulting service for physicians and medical organizations. See http://www.pioneerplanet.com/business/biz_docs/016107.html.
13 Sheryl Stratton, Pricewaterhouse Coopers to Sponsor ABA Litigators, Highlights & Documents, Tax Notes, Oct. 19, 1999, at 589.
14 John E. Morris, The New World Order: Clifford Chance and Rogers & Wells Are about to Pull Off the First Large-Scale Transatlantic Merger. Did the Eat-What-You-Kill Americans Ever Come to Terms with the Lockstep Brits? And, More Importantly, What Will It Mean for the Competition?, Am. Law., Aug. 1999 (describing the three-way merger of Rogers & Wells, Clifford Chance, and Punder, Volhard, Weber & Aster. They are respectively, a U.S., U.K. and German law firm); Todays Update, N.Y.L.J. , Sept. 28, 1999, at 1 (describing the two recent, separate mergers of Coudert Brothers with an Australian and a Belgian law firm). See also Anna Snider, Paris-New York Merger Breaks New Ground, N.Y.L.J., Sept. 18, 1998, at 1 (describing the merger of Christy & Viener in New York and Salans Hertzfeld & Heilbronn in Paris); Todays News Update, N.Y.L.J., June 17, 1999, at 1 (describing the "strategic affiliation" between Holland & Knight and Haim Samet, Steinmetz Haring & Co., an Israeli law firm, noting that the two firms did not formally merge because Israeli law prohibits profit-sharing between Israeli and foreign law firms, and that the Haim firm was being treated "as part of Holland & Knight.").
15 Ward Bower, The Future Structure of the Global Legal Marketplace, Metropolitan Corp. Couns., Oct. 1999, at 45.
16 Cincinnati v. Wills, 717 N.E.2d 151 (Ind. 1999). See also infra note 26; John Council, Allstate Goes on the Offensive Against UPL Committee, Tex. Law., Jan. 18, 1999, at 5; Darryl Van Duch, Insurance Counsel Under Attack: Suits Say Use of Company-Owned Law Firms to Defend Policy Holders is Fraud, Natl L.J., Dec. 14, 1998, at A1.
17 See generally Bower, supra note 15.
18 Lucy Hickman, LawSoc votes for MDPs after 10-year wait, The Lawyer, Oct. 18, 1999, at 2.
19 Canadian Bar Association International Practice of Law Committee, Striking A Balance: The Report of the International Practice of Law Committee on Multidisciplinary Practices and the Legal Profession (1999); see Breaking Barriers, Intl Acc. Bull., Sept. 30, 1999, at 9.
20 Federation of Law Societies of Canada, National Multi-Disciplinary Partnership Comm., Multi-Disciplinary Partnerships: Report to the Delegates (Aug. 1999).
21 Shaw Should Watch the Society He Keeps, ABIX, Sept. 3, 1999, 1999 WL 26582433; Andrew Burrell, Shackles removed for law firms, Austl. Fin. Rev., Sept. 1999.
22 Jean Eagleshaw, PwC reorganizes global network of legal firms, Fin. Times (London), Oct. 11, 1999, at 8; Konstantin Richeter, Managers & Managing: Pricewaterhouse Renames Legal Unit, Adopting Landwell as Brand, Wall St. J. Eur., Oct. 12, 1999, at 30, 1999 WL-WSJE 27641212.
23 Long arm of the law: The Big Five may be right that clients want them to move into legal services, Fin. Times (London), Sept. 9, 1999, at 29. While approximately two-thirds of the surveyed respondents indicated that they still preferred to purchase legal services from a traditional law firm, the Financial Times survey affirms the general proposition that corporate clients want the option to purchase legal services from alternative providers. In this respect, the survey offers additional evidence for the resolution adopted by the Board of Directors of the American Corporate Counsel Association "support[ing] a broader range of choice for clients to select from service providers . . . ." See Reporters Notes at C23, n.58. But see Michael Chambers & Richard Parnham, Accountants in the Legal Market: Has the strategy failed?, 21Commercial Law. 40 (1998).
24 See Union Internationale des Avocats, Resolution on Multidisciplinary Practices (Nov. 3, 1999).
25 See Reporters Notes at C9-10.
26 See SEC Commissioner Johnson Addresses Auditor Independence, SEC Today, Oct. 13, 1999, at 5-6.
28 The Ohio State Bar Association (OSBA) has submitted a Recommendation and Report for consideration by the House of Delegates at the upcoming ABA Midyear Meeting calling for each jurisdiction "to establish and implement effective procedures for the discovery and investigation" of violations of UPL statutes and "to pursue active enforcement of those laws." See letter from Thomas J. Bonasera, President, OSBA, to "Fellow Bar President" (Dec. 3, 1999).
29 Arthur S. Hayes, Accountants vs. Lawyers: Bean Counters Win, Natl L.J., Aug. 10, 1998, at A4; Tom Herman , A Special Summary and Forecast of Federal and State Tax Law Developments, Wall St. J., July 29, 1998 at A1.
30 Comment posted on the Washburn Legal Ethics Listserv., Nov. 4, 1999 by James McCauley, Ethics Counsel, Virginia State Bar. See also, Perkins v. CTX Mortgage Co., 969 P.2d 93 (Wa. 1999) (declining to find that the activities of a mortgagee in connection with the completion of financing documents constituted the practice of law); In re Florida Bar Advisory Opinion-Nonlawyer Preparation of Pension Plans, 571 So. 2d 430 (Fl. 1990) (declining to find that the law-related activities of ERISA consultants constituted the unauthorized practice of law); in re Unauthorized Practice of Law Rules Proposed by the South Carolina Bar, 422 S.E.2d 123 (1992) (concluding that CPAs may represent clients before agencies and the Probate Court without violating the states UPL prohibition).
31 Washington, D.C. Rules of Professional Conduct Rule 5.4(b)(1)-(4) (1999).
32 Id. [cmt.7]. In the same vein, the Comment to Model Rule 5.7, Responsibilities Regarding Law-Related Services, lists the following activities as examples of law-related services:
providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax return preparation and patent, medical or environmental consulting.
Model Rule 5.7 [cmt. 8].
33 Comment  states:
Paragraph (b) does not permit an individual or entity to acquire all or any part of the ownership of a law partnership or other form of law practice organization for investment or other purposes. It thus does not permit a corporation, an investment banking firm, investor, or any other person or entity to entitle itself to all or any portion of the income or profits of a law firm or other similar organization. Since such an investor would not be an individual performing professional services within the law firm or other organization, the requirements of paragraph (b) would not be met.
Id. [cmt. 8].
34 See supra note 32 and accompanying text.
35 See supra notes 6-8 (describing the strategic alliance between Miller & Chevalier and PwC and the Saltnet network).
36 See e.g., supra note 10.
37 See Rule 5.1 cmt.  (distinguishing between the measures that might be needed by "a small firm" and "a large firm" to fulfill the responsibilities the Rule prescribes).