October 05, 2011

Written Testimony of Gary T. Johnson, October 1999 - Center for Professional Responsibility

Gary T. Johnson
to General Practice, Solo and Small Firm Section
of the American Bar Association
Cleveland, Ohio
October 8, 1999


Submitted as Written Testimony in Connection with the Commission's Hearing on October 9, 1999, in Cleveland, Ohio

I am pleased to share the platform with Sherwin Simmons, Chairman of the American Bar Association's Commission on Multidisciplinary Practice. Sherwin and the Commission have worked tirelessly to serve the bar, both before and after the House of Delegates meeting in Atlanta. We all owe them a vote of thanks for their hard work and for their dedication. ABA President Phil Anderson was right to appoint a commission now, and maybe it should have come five years sooner. We all have learned much because of their work.

I was one of the floor leaders in Atlanta among the opposition forces to the MDP Commission's original proposal. And a funny thing has happened since that meeting. I have read story after story to the effect that the House of Delegates "postponed" consideration of the Commission's report. Wrong. The House of Delegates did nothing of the kind. In fact, it rejected the motion to defer consideration and instead adopted the following substitute motion from the Florida Bar. Let me read it word-for-word:

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 further 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.

You don't hear a word about postponement, but instead the new standard for evaluating future proposals is this: Will such a proposal "further the public interest without sacrificing or compromising lawyer independence and the legal profession's tradition of loyalty to clients"?

Let's focus on that standard, because I believe it also is the key to the most fundamental difficulty with the Commission's work. The Commission never identified what the problem was that we needed to address, and I think it is for that reason that, in the words of one of the speakers during the debate, the report "overshot the runway."

Using the Florida resolution as our guide, let us restate the task. With all respect, this is how I would charge the Commission in its next phase, and this is how I would charge your section and the other ABA entities and all the state and local bar associations who have been asked to study the issues:

Global multidisciplinary partnerships are consolidating services across professional boundaries. In addition, on the Main Streets of America, various services firms are doing work that lawyers used to do exclusively. Meanwhile, law firms of all kinds face new financial challenges in order to serve clients efficiently and to survive economically, such as the need to invest in expensive technology. Given these modern economic conditions, how do we equip the American bar to remain the source of uncompromising, independent advice?

Equipping us to give uncompromising, independent advice during this period of rapid change is the charge. Nothing is more important than this; certainly, no consideration of "convenience." Clients want straight advice. They want advice that is free from conflicts. They don't want the lawyer to hold back. It has been the ability of the profession to give independent advice that has served our Republic and has served the clients so well, and it must not be compromised.

Uncompromised advice is of paramount importance to clients, both big and small. In Illinois, I have heard Mary Robinson, who is the head of our Attorney Registration and Disciplinary Commission, say that many complaints involve lawyers crossing a fundamental line: they breach confidentiality, they are careless about the attorney-client privilege, they have a conflict of interest. The public has strongly-held views of what these concepts mean, they feel them in their gut, and they feel betrayed when they think their lawyers have crossed the line. These are the core values of the profession, as all participants in the debate agreed, and this is what the public expects from its lawyers.

What about "one-stop-shopping"? Certainly this is an economic trend and a convenience, but where does it rank in importance? There is very little empirical data, but one study from Britain is revealing. The London publication, Commercial Lawyer, in January 1998 surveyed the top UK FTSE 350 companies. Responses came from the 96 heads of legal departments and 34 finance directors. Of the 96 legal heads, 84 were against using "captive" law firms, nine were neutral and two were in favor. Of the 34 finance directors, 29 were against using the captive law firms, four were neutral and only one was in favor. One of the finance directors said, "I see no logic in the merger of law and accounting firms. There are no obvious synergies between most legal work and most accounting work." In this financial center and common law country, we learn, even the finance directors choose independent law firms, if they have a choice.

So one-stop-shopping is a convenience, to be sure, but let's not get carried away with how important that convenience may be, even for large corporations. And, I know you will agree, overriding any factor of convenience is the requirement for lawyers to deliver straight advice. So again I turn to the charge:

Given modern economic conditions, how do we equip the American bar to remain the source of uncompromising, independent advice?

One thing I know is that the independence of practicing lawyers is the key and that we should not countenance any reform that permits lawyers to report to superiors who are not lawyers. It should not be a startling proposition that the most fundamental safeguard for core values should be independence. I happen to be a partner in one of the largest law firms in the world, but no matter how large we may be, the head of the firm is an officer of the court, just as I am, just as all of us are. We owe duties to our clients, but sometimes those duties conflict with our duties as officers of the court, and in those cases, our duties to the court win out. And I don't need to explain this to any boss who is not an officer of the court.

Not so, in the Commission's original report, which would have permitted MDPs headed by non-lawyers to offer legal services. To be sure, there was some focus on the MDP as an organization, but the Commission's primary approach was to focus ethical concern on individuals. Lawyers in the MDP would be answerable to their own codes, accountants to another, and so forth.

Individuals, of course, are the ultimate objects of disciplinary concern, but the proposed shift in focus overlooked the insights the bar has gained from defining and enforcing professional standards. For example, Model Rule 5.1, which holds supervisory attorneys and partners accountable for the work of subordinates, was adopted in the 1980s. It, and its companion rules, arose from the realization that individuals work in organizations, that organizations offer incentives and disincentives for professionalism and that therefore organizations are a key to compliance. Even professionals do not work in splendid isolation; ethical compliance turns on organizational guidance C or neglect. This is consistent with regulatory developments in general. "Failure to supervise" and "inadequate procedures" are common charges made by regulators today when they identify misconduct in industries such as banking and securities. The proposed narrowing focus overlooked what we know about organizational behavior.

I cannot speak for other professions, but I doubt that lawyers would function at their ethical best in an MDP in which individual professionals march to the beat of their own ethical drummers. Compliance requires mutual reinforcement, peer support and clear institutional messages. Nor, of course, is it inevitable that the MDPs will be controlled by individuals whose specialties are governed by formalized code. Certified public accountants have their own rules, but many of the specialties included in today's professional services firms are not directly subject to professional codes or standards of any kind.

This distinction, by the way was not lost on the Commission. Its report distinguished between its treatment of MDPs controlled by lawyers and those not controlled by lawyers. In addition, the accounting profession recognizes the critical role of independence and control, by requiring that auditing can be performed only by firms controlled at least fifty percent by CPAs. Any reform must not lose sight of independence as the bedrock for preserving the core values of the profession.

I also question whether the profession's interest in offering competent services with adequate preparation will be maximized in an MDP. Preparation is not only an individualized responsibility; we all know that practicing in teams and in firms can elicit a sense of collective responsibility, heightened performance and pride in the result. We remain a learned profession, and I doubt that the formalized programs and written guidelines that would be the necessary benchmarks of competence in a large multiprofessional organization could fully substitute for these factors.

Of course, we know that temptations exist today for lawyers to cross ethical lines and to sell out to financial interests. Every time a lawyer says "no" to a client, every time a lawyer sends out a bill, temptations can arise. This is human nature. But we also know that the setting can make a difference. Structures can encourage or discourage compliance. I submit that the best structure is one in which each lawyer answers only to other lawyers within a firm controlled by lawyers.

Let me be clear about one issue concerned with independence: the role of the in-house lawyer. I am not for a moment saying that these lawyers ever compromise their professional standards simply because they report to non-lawyers. In-house members are respected members of our profession, and they play an indispensable role. I would venture to say, however, that the existence of independent law firms to back them up, to buttress their opinions and to offer support, is a critical factor in their own ability to offer straight advice to their companies. Allowing independent law firms to blend into MDPs could weaken this role and lessen the outside support for in-house lawyers.

I happen to be a securities lawyer, and I have tremendous respect for the insights gained by the Securities and Exchange Commission. Its job is to protect the investing public by regulating market participants and by safeguarding the quality of disclosure about securities. Every new trend in the market literally comes across its desk. This gives the SEC one of the best informed perspectives on market developments.

Here is what SEC officials have been saying about the problems inherent in combining auditing and legal services. SEC Commissioner Norman S. Johnson said on March 6, 1999:

"Of all the varied independence problems, there is one that I personally find especially troubling: the efforts by accounting firms to expand into the legal services area.... Attorneys have an ethical duty to represent zealously the interests of their private clients, and it is impossible to reconcile this role as private advocate with the duty accountants and auditors owe to the investing public."

On December 17, 1998, the SEC's Director of Enforcement Richard H. Walker, emphasized the same point:

"What do we say (i) when lawyers in one part of a firm are ethically bound to advocate a client's interest and hold information obtained from the client in the strictest confidence; (ii) while accountants in another part of the firm are ethically bound to exercise skepticism in dealing with the client's management and must show primary allegiance to the public by disclosing damaging confidential information about the client; (iii) while consultants in another part of the firm are giving the client management advice, the results of which may be reviewed during the audit; and (iv) while others in the firm are trying to sell expensive new goods and services to the client?"

I give great weight to these insights. The message is loud and clear: the combination of auditing and advocacy simply should not be permitted. This is where the market trends of one-stop convenience and consolidation run into a brick wall. Too much is at stake to permit this particular combination.

So I go back to the charge:

How do we equip the American bar to remain the source of uncompromising, independent advice?

If we see the challenge as equipping law firms for the future, then what do they need? This is an important question, and one that the Commission and all the other bar entities, and the state and local bars should ask. This is a broader and more challenging question than the question of how to respond to the existence of MDPs. That has been the Commission's concern to date, but if uncompromising, independent advice is the goal, then MDPs may not be the solution. What will law firms need for the twenty-first century? Now is the time to address that question and to broaden the scope of investigation.

In answer to the charge, then, I offer three suggestions, not the end of analysis, but the beginning:

Leave unchanged the rules dealing with the core values of the profession

Retain lawyer control of law firms because independence is the best safeguard of core values

Consider whether anything else might be necessary to equip law firms to serve their clients and to remain independent

Where does that leave the many lawyers who now work for professional services firms in the United States, those thousands of lawyers, who today offer tax, employee benefits and other services? These are the very people whose existence, I believe, convinced the Commission that something far-reaching needed to be done to pull them back into the legal profession and into the ambit of professional regulation.

The answer is that it is time for the American bar to draw some lines and to defend them. So long as these individuals do not practice law, then they are of no concern to our profession. In other cases, we should enforce prohibitions against the unauthorized practice of law. If it takes some tough thinking about where the practice of law ends and where the offering of other services begins, then it is time to think long and hard. Let's not succumb to the facile belief that these lines are just anti-competitive vestiges of a by-gone era. No, these are policies that affirm the value to the public of an independent legal profession, one whose identity to the public is unmistakable. Commissions may offer guidance in this area, but, I am afraid, it may take the old-fashioned common law approach of one test case after another before the law is settled in this field.

Is it already too late to equip the American bar to remain the source of uncompromising, independent advice under today's changing economic conditions? Not at all. The action by the House of Delegates was a serious setback to the belief that MDPs controlled by non-lawyers are inevitable and that it is futile to oppose them. The future of the American bar lies in your hands: the practicing lawyers, the bar associations and the courts.

And it also lies in the hands of the Commission that has worked so hard and has done so much to bring these issues to our attention. I would hope that the Commission, itself, will think creatively about how to equip law firms to survive independently in today's economy so that they can continue to offer their indispensable services to our clients and to our nation. I hope that the Commission will take a fresh look at this broader question and offer a new report.

But independence is the key. In the words of one of our speakers in the House of Delegates, Jack Dunbar of Mississippi:

"[L]awyers are special people. We're not like accountants. We're not like MBAs and deal-doers and investment bankers. We're fiduciaries. We're in the Constitution. We're officers of the court. And we hold in trust the very fabric of this society. It has been lawyers who have kept the playing fields level, who have kept people honest in the marketplace, and who have stood between the individual and the abuse of authority for 200 years and contributed to the success of this great American experiment.... And so I get real nervous when somebody suggests that we blend this profession into a business unit as a profit center for a company controlled by non-lawyers."

I am confident that this captures the sense of the American bar and the House of Delegates. There is good reason for us to stand firm against certain trends, such as one-stop-shopping convenience, when more important considerations are at stake. Let's hold our heads high and figure out what we need to do to remain a profession that offers uncompromising, independent counsel.