October 05, 2011

Harold Levinson Comment on Report and Recommendations - Center for Professional Responsibility

Comment on Report and Recommendations of
ABA Commission on Multidisciplinary Practice

Submitted by L. Harold Levinson, July 29, 1999

Professor of Law Emeritus, Vanderbilt University Law School; Member, ABA, American Institute of Certified Public Accountants, American Association of Attorney-Certified Public Accountants

The views expressed here are solely those of the author, and should not be attributed to any organization. Copyright C by author, 1999.

The Preamble to the Model Rules of Professional Conduct describes a lawyer as "a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice."

The Commission's Report quotes this language with approval, and requires non-lawyer-controlled MDPs to "respect the unique role of the lawyer in society" as described in the Preamble. Yet the mechanism recommended by the Report creates serious risks that lawyers will in fact be unable to maintain the level of independence needed for the proper performance of their "unique role."

The Report observes that the ABA Canon prohibiting MDPs goes back only to the 1920s, and was transformed into an enforceable rule only in 1969. The Report fails to note, however, that the concept underlying the rule has a much deeper history in the centuries of the common law. Surely the creation of a non-lawyer-controlled MDP, combining an American law firm with a global provider of various other professional services, would have been unthinkable long before the ABA formulated the rule prohibiting MDPs.

The underlying concept, I submit, is that the rule makes an essential contribution to the independence of lawyers, law firms and the legal profession, thereby enabling them to perform their "unique role" in the public interest. This concept was recognized in Lawline v. American Bar Association, 956 F.2d 1378 (7th Cir. 1992), cert. denied, 510 U.S. 992 (1993) (not mentioned in the Report). In upholding the rule prohibiting non-lawyer partners in law firms, against challenges on antitrust and constitutional grounds, the court held:

The partnership rule limitation [prohibiting non-lawyer partners in law firms] promotes the independence of lawyers by preventing non-lawyers from controlling how lawyers practice law. . . . The state's interest in preserving the professional independence of lawyers is an adequate justification for the partnership rule and is within the legitimate interest of the state in governing the legal profession. 956 F.2d at 1385.

The remainder of the present comment addresses (I) some of the risks created by the Commission's proposals, (II) the absence of any demonstration that MDPs are either needed or inevitable, and (III) some optional approaches to the MDP issue.

I. Risks created by Commission's proposals

(A) Risk of creative interpretations

The proposed system is open to numerous creative interpretations, some of which may subvert the policy apparently intended by the Commission. For example, the Report could be interpreted to permit the following scenarios:

(1) Virtually passive investment

Professional Service Firm (PSF), with no attorneys, enters into a profit-sharing alliance with Law Firm (LF), qualifying as a non-lawyer-controlled MDP. The firms make no attempt to offer legal and non-legal services to the same clients. PSF invests capital into LF, and periodically collects its share of the profits. Result -- PSF is virtually a passive investor. The Report prohibits passive investment in general, but apparently allows it in the context of an MDP.

(2) Virtual control through non-lawyer employees

Professional Service Firm (PSF) arranges that some of its non-lawyer partners or employees will become employees of Law Firm (LF). If the "control" test is based on the number of partners in each discipline, the non-lawyers clearly do not control LF because they are only employees. But they -- or PSF through them -- may exercise virtual control if, for example: (a) they outnumber the partners in LF, or (b) they bring substantial new clients or visibility to LF.

Further, if there is a side agreement between the non-lawyers and PSF, under which their compensation from PSF is variable, depending on their compensation from LF, PSF may be a virtual partner of LF.

(3) Intentional conflicts to protect PSF's non-law clients

PSF (Professional Service Firm), with no attorneys, provides non-legal services to numerous clients. Law Firm (LF) represents parties who are adverse to some of PSF's clients. LF does such an excellent job that PSF's clients would like to disqualify LF.

Solution -- PSF enters into a strategic alliance with LF, so as to create an MDP. The agreement creating the alliance provides that, in the event of conflicts, LF rather than PSF will withdraw from (or decline) representation. Upon the effective date of the MDP, LF therefore withdraws from representing any parties adverse to PSF's clients. Result -- PSF, by entering into an alliance with LF, has disqualified LF from opposing any of PSF's clients. If the clients hire substitute counsel who turns out to be as effective as LF used to be, PSF may enter into an alliance with substitute counsel as well.

Variation 3-a -- Instead of entering into an alliance with the whole of LF, PSF makes an offer to the group of lawyers in LF who were so effective in opposing PSF's clients. The offer invites these lawyers to leave LF and establish their own new law firm, which will then enter into a strategic alliance with PSF. Result -- PSF, by entering into a strategic alliance with the breakaway law firm, has disqualified its members from opposing their former clients in the same or substantially related matters.

Variation 3-b -- Instead of entering into an alliance with LF or a breakaway group of its lawyers, PSF hires individual lawyers from LF. Result -- these lawyers are disqualified from opposing their former clients in the same or related matters.

Variation 3-c -- Once PSF has demonstrated its ability to force the disqualification of law firms or lawyers, PSF can offer to try to force the disqualification of any law firm or lawyer that poses a serious threat to any of PSF's major clients.

Variation 3-d -- If PSF is able to attract clients away from other PSFs, by forcing the disqualification of law firms or lawyers who oppose non-law clients of PSF, other PSFs are likely to compete or cooperate. Multiple PSFs may enter into alliances with the same one or more law firms, and PSFs may trade among themselves to enter into alliances with lawyers or law firms.

The attempt by one or more PSFs to exercise any of these options would be extremely distracting and destabilizing to lawyers and law firms, would threaten to impair their professional independence, and over time would diminish access to legal representation.

(B) Risk of troublesome interpretations of "disciplines" qualifying for inclusion in MDP

The Report provides examples of the non-law "disciplines" which could be included in an MDP. These examples include types of services which cannot reasonably called "disciplines," such as tax preparation and lobbying. (A more accurate term to identify the type of practice envisioned by the Commission may therefore be "MSP" -- multiservice practice, rather than multidisciplinary practice.)

The Commission's examples could encourage even more troublesome interpretations of the "disciplines" that qualify for inclusion in MDPs, extending to a wide variety of relatively uneducated, unlicensed, unregulated and uncontrollable occupations. Members of these occupations might be unwilling or unable to respect the "unique role" of the legal profession.

(C) Risk of ambiguity regarding "control" and "influence"

The Report does not define "control," although the Report proposes fundamental differences in the regulatory regime, depending on whether lawyers or non-lawyers "control" an MDP. The absence of a definition of "control" may lead to creative interpretations and difficulties in enforcement.

The Report ignores the risk of influence by those who are not in "control." (It is remarkable how much influence the professional service industry has apparently exerted on the Commission, without being in control.)

(D) Risk of series of future changes

Further, the Report ignores the risk that its proposals, if adopted, may be only the first of a series of changes which will reflect the increasing control or influence of non-lawyers, and will likely lead to increasing concentration within the professional services industry (including law). In the long run, this concentration may not be in the best interests of the specific professions within the professional service industry.

(E) Risk of breakdown in regulation of non-lawyer-controlled MDPs due to managerial or state constitutional problems

The Report assumes that the state courts will be willing and able to undertake the regulation of non-lawyer-controlled MDPs. The Report does not indicate that any state judges advised the Commission on this issue.

(1) Managerial burden, especially in multijurisdictional practice

First, I am concerned about the managerial burden imposed on the state courts, especially if they are called upon to regulate multijurisdictional MDPs. The Report mentions multijurisdictional practice but does not discuss how its recommendations could be implemented in multijurisdictional settings. Assume, for example, that a non-lawyer-controlled MDP maintains offices around the world, and renders legal services in State A of the United States. The Report does not clearly indicate whether the court of State A would perform an administrative audit of the world-wide operations of the MDP, in order to verify compliance with the applicable rules on conflicts, confidentiality, and other matters. Thus the Report creates a risk of confusion, uncertainty, and managerial problems.

(2) State constitutional problem

Second, I perceive a serious issue of state constitutional law in the proposed mechanism for regulating non-lawyer-controlled MDPs. I agree that a state court could be authorized, by court rule, to discipline a lawyer for associating with a noncompliant non-lawyer-controlled MDP. I question, however, whether a state court could also be authorized, by statute or court rule, to regulate the MDP directly, as proposed in the Report.

As regards the regulation of lawyers, state courts generally derive their jurisdiction from the judicial power, conferred by their respective state constitutions. (The courts' power over lawyers is shared, to some extent, with the state legislatures, as demonstrated by overlapping provisions in the statutes of many states. The state courts' power is also subject to federal preemption.)

In contrast, the regulation of other businesses and professions has traditionally been exclusively within the domain of the state legislatures and administrative agencies (subject to federal preemption). Accordingly, any assertion of judicial power to regulate non-lawyers -- whether this assertion comes from a state court rule or a state statute
-- would apparently run afoul of the separation of powers under the state constitution.

A state constitutional amendment could obviously empower a state court to regulate non-lawyer-controlled MDPs. The Commission does not propose the adoption of constitutional amendments in order to implement its recommendations. The possibility of seeking state constitutional amendments merits serious study because of the delays and risks connected with the process.

In summary, the proposed system of regulating non-lawyer-owned MDPs creates a high risk of breakdown. If this occurs, the states may find it virtually impossible to regulate the MDPs then in existence, and the only feasible remedy may be federal preemption.

II. Absence of demonstration that MDPs are needed or inevitable

(A) Report reflects questionable assumptions about one-stop shopping

The Report appears to assume:

That a member of an MDP will be more readily available to the client than would be an independent professional;

That services rendered by a member of an MDP will be at least as competent as those rendered by an independent professional;

That the client will save time and money by one-stop shopping.

Each of these assumptions should be critically evaluated.

(B) Report does not adequately explore other optional means of providing clients with multiple professional services

The Report does not explore other possible means of providing clients with multiple professional services, such as: ancillary businesses of law firms; networks including law firms and other professional firms; referrals to members of non-law professions; and expanded roles of in-house professionals in non-law professions.

(C) Report assumes inevitability of MDPs

The Report appears to assume that the coming of MDPs is inevitable. While some witnesses advised the Commission to this effect, their testimony was purely speculative.

III. No exploration of optional responses to the pro-MDP movement

The report fails to explore other possible means of responding to the pro-MDP movement. The other options could include, for example:

(A) Treat the pro-MDP movement as a wake-up call for the legal profession to compete in the market for professional services by taking measures such as:

(1) Upgrade the quality and value of service rendered by law firms;

(2) Study methods of professional service firms regarding client service, billing, staffing, supervision, in-house training, client relations, etc., adapt those that suit law practice, and be prepared to explain to clients why the others do not suit;

(3) Explain, to clients and in the public forum, the benefits of independent professional firms, both to clients and to society in general.

(B) Clarify and enforce the existing rules (or make more limited amendments, see (C), infra).

(C) Make limited amendments to the rules, such as:

(1) Allow law firms to share fees and profits with non-lawyer employees, provided (a) the non-lawyers are not conduits for non-law firms, and (b) the influence of the non-lawyers is limited;

(2) Allow MDPs, if at all, only between attorneys and CPAs, and only if the influence of the CPAs is limited. There is at least some affinity between the legal and CPA professions -- including licensing, regulation, rigorous examination, good moral character requirement, and overlapping areas of expertise -- and the main impetus for creating the MDP Commission was to address the expansionist moves of the Big Five;

(3) Allow lawyers to put their licenses on inactive status for as long as they practice in non-law firms.