Reporter's Notes 1
In 1998, the American Bar Association established a twelve-person Commission on Multidisciplinary Practice for the purpose of examining recent developments in the delivery of legal services, both in the United States and abroad. The Commission also included two Board of Governors Liaisons. The Commission's mandate was to study and report on the extent to which and the manner in which professional service firms operated by accountants and others who are not lawyers are seeking to provide legal services to the public. Other issues committed to the Commission's attention included: (1) the experience of clients, foreign and domestic, who have received legal services from professional services firms, and relevant international trade developments; (2) existing state and federal legislative framework within which professional services firms may be providing legal services and any modifications to that framework that would be in the public interest; (3) the impact of receiving legal services from professional services firms on a client's ability to protect privileged communications and to have the benefit of advice free from conflicts of interest; and (4) the application of current ethical rules and principles to the provision of legal services by professional services firms and any modifications or additions that would serve the public interest.
Commission Hearings and Deliberations
The Commission strove to obtain the maximum participation by members of the public, bar regulators, and lawyers, both in the United States and abroad. Between September, 1998 and June 1999, the Commission conducted seven days of open hearings and met in executive session on six occasions. Fifty-six witnesses testified before the Commission, and other interested persons submitted written comments. 2 The Commission also maintained a comprehensive web site on which it posted summaries of the testimony, significant background material, and the comments it received. ( See http://www.abanet.org/cpr/mdp/home.html) Recognizing the significance of the issues entrusted to its examination, the Commission submitted a study entitled "Background Paper on Multidisciplinary Practice: Issues and Developments" to the ABA House of Delegates in February 1999 and forwarded a second paper describing possible models of multidisciplinary practice and related hypotheticals to the members of the House of Delegates in February 1999. Both documents are available on the Commission's web site. The Commission's efforts to publicize its charge and to solicit responses have resulted in its receipt of a wide-range of comments.
The Recommendation, Report and Reporter's Notes 3
After careful consideration of the witnesses' testimony and the comments of other interested persons, the Commission has submitted a Report with Recommendation to the House of Delegates in which it recommends a limited relaxation of the prohibitions against sharing legal fees and forming a partnership or other association with a nonlawyer when one of the activities is the practice of law. Central to the Recommendation are (i) a series of specific undertakings in which the MDP commits to acknowledging and respecting the lawyer's obligation to exercise independence of professional judgment and (ii) review and oversight 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. (These undertakings are discussed more fully in Part II). The proposed changes to the Model Rules of Professional Conduct have the added benefit of making it clear that lawyers who currently work in accounting or professional services firms and who offer services that would be considered legal services if offered by a law firm are subject to professional regulation and discipline. Nothing in the Commission's Recommendation would permit a nonlawyer to offer legal services.
The Commission is asking the ABA House of Delegates to approve only the Recommendation. As a complement to the Report supporting the Recommendation, Appendix A offers for illustrative purposes a draft Model Rule 8.5 specifically intended to govern an MDP and the lawyers who deliver legal services to clients on its behalf. It also suggests corresponding amendments to other Model Rules consistent with the Recommendation. These illustrations are provided as examples of how the principles in the Commission's Recommendation might be implemented. They are not intended to bind the Standing Committee on Ethics and Professional Responsibility or the Commission on the Evaluation of the Rules of Professional Conduct to specific language. The Reporter's Notes are intended to provide a legislative history of the Commission's hearings and deliberations and to further document its reasoning.
Terminology and Models
An MDP is defined for the purposes of this report as a partnership, professional corporation, or other association or entity that includes lawyers and nonlawyers and has as one, but not all, of its purposes the delivery of legal services to a client(s) other than the organization itself or that holds itself out to the public as providing nonlegal, as well as legal, services. It includes an arrangement by which a law firm joins with one or more other professional firms to provide services, and there is a direct or indirect sharing of profits as part of the arrangement.
In order to aid the Commission in its deliberations it developed five practice models as described below.
Model 1: The Cooperative Model. In this model, lawyers either employ nonlawyer professionals on their staffs to assist them in advising clients 4 or work cooperatively with nonlawyer professionals whom they directly retain or who are retained by a client. To the extent that the nonlawyer professionals are employed, retained, or associated with a lawyer, the partners in a law firm and any lawyer having direct supervisory authority over a nonlawyer professional must take steps "to ensure that the person's conduct is compatible with the professional obligations of the lawyer,"( See Model Rule 5.3) especially with respect to the obligation not to disclose information relating to the representation This model reflects the current state of affairs in the United States and is not a multidisciplinary practice under the definition adopted by the Commission.
Model 2: The Command and Control Model.
This model permits a lawyer to form a partnership with a nonlawyer and to share legal fees subject to certain clearly defined restrictions. For example, 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 "undertake 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.
5 This model also is not a multidisciplinary practice under the definition adopted by the Commission because of the "sole purpose" restriction and would therefore not be subject to the certification requirements of the proposed Model Rule 5.8.
Model 3: The Law-Related Services/Ancillary Business Model. In this model, a law firm operates an ancillary business that provides professional services to clients. 6 It takes great care to assure that its clients understand that the ancillary business is distinct from the law firm and does not offer legal services. Lawyers and nonlawyer professionals are partners in the ancillary business, sharing fees and jointly making management decisions. The lawyer-partners provide consulting services not legal services to the clients of the ancillary business. Some but not all of the clients of the ancillary business are also clients of the law firm, and correspondingly, some but not all clients of the law firm are also clients of the ancillary business. This type of arrangement is permitted under Model Rule 5.7 (Responsibilities Regarding Law-Related Services). Because the nonlawyer professionals are not sharing legal fees and are not partners in the law firm, this arrangement does not fall under the Commission's definition of a multidisciplinary practice and would not be subject to the certification requirements of proposed Model Rule 5.8.
Model 4: The Contract Model. In this model, a professional services firm contracts with an independent law firm. A typical contract might include terms such as (1) the law firm agreeing to identify its affiliation with the professional services firm on its letterhead and business cards, and in its advertising ( e.g., A & B, P.C., a member of XYZ Professional Services, LLP); (2) the law firm and the professional services firm agreeing to refer clients to each other on a nonexclusive basis; and (3) the law firm agreeing to purchase goods and services from the professional services firm such as staff management, communications technology, and rent for the leasing of office space and equipment. The law firm remains an independent entity controlled and managed by lawyers and accepts clients who have no connection with the professional services firm. The Contract Model is used extensively by the Big Five accounting firms outside the United States to deliver legal services to the firms' clients. 7
The contract model might take different forms. In one model, the professional services firm might contract with a single law firm with only one office. In another, it might contract with a single law firm with several branch offices. And in still another, it might contract with separate, independent law firms, some of which might have only a single office; others of which might have several branch offices. This model would fall under the Commission's definition of a multidisciplinary practice as being either an association that includes lawyers and nonlawyers and holds itself out to the public as providing legal services or an arrangement by which a law firm joins with one or more other professional firms to provide services, and there is a direct or indirect sharing of profits as part of the arrangement.
Model 5: The Fully Integrated Model. In this model, there is no free-standing law firm. There is a single professional services firm, XYZ Integrated, with organizational units, such as accounting, business consulting, and legal services. It is the "classic" multidisciplinary practice. It advertises that it provides "a seamless web" of services, including legal services. The legal services unit may represent clients who either (1) retain its services but not those of any other unit of the firm or (2) retain its services as well as the services of other units in the firm. In the case of (2), the legal and nonlegal services may be provided in connection with the same matter or different matters.
The Commission begins its findings in Section A by examining developments in the delivery of legal services by accounting firms outside the United States. Section B explores the ethical and regulatory barriers to the establishment of multidisciplinary practices in the United States. It analyzes the history of the prohibitions against sharing legal fees with a nonlawyer and entering into a partnership or other association with a nonlawyer if any of the activities of the partnership or association consist of the practice of law. It also briefly touches upon the entwinement of the prohibitions and the adoption and enforcement of the ethical and statutory prohibitions against the unauthorized practice of law (UPL). Part C discusses the unique rules of lawyer conduct in Washington, D.C. that permit fee sharing and partnership or other association with nonlawyers. Part D examines the relationship among the current prohibitions, the Washington, D.C. rule, and the establishment of ancillary businesses by law firms.
A. Developments in the delivery of legal services by accounting firms outside the United States.
While many foreign jurisdictions have adopted rules of professional conduct similar to those in the United States prohibiting lawyers from sharing legal fees or entering into a partnership or other association with a nonlawyer, those rules do not necessarily carry the same force nor are they interpreted in the same manner as their U.S. counterparts. The ethical rules and statutory bars to UPL in foreign jurisdictions also vary significantly. Consequently, the Big Five accounting firms and other entities have been able to create legal services units within their own business organizations or affiliate with foreign law firms in ways that are inconsistent with rules of lawyer conduct or UPL statutes in this country. 8 While precise data on the extent to which the Big Five are offering legal services outside the United States is not available, the evidence of their emergence as alternative providers is overwhelming. 9
U.S. and foreign representatives of four out of five of the Big Five testified before the Commission that the most efficient way to provide a seamless web of services to clients was through an integrated services entity. 10 Only Switzerland permits the establishment of a fully integrated MDP. 11 In all other countries, the Big Five have limited their activities to contractual arrangements with law firms, whereby the law firm agrees to identify its affiliation with the professional services firm on its letterhead and business cards, and in its advertising ( e.g., A & B, P.C., a member of XYZ Professional Services, LLP); (2) the law firm and the professional services firm agree to refer clients to each other on a nonexclusive basis; and (3) the law firm agrees to purchase goods and services from the professional services firm such as staff management, communications technology, and rent for the leasing of office space and equipment. The law firm remains an independent entity controlled and managed by lawyers and accepts clients who have no connection with the professional services firm.
Gerard Nicolay, the managing partner of Coopers & Lybrand Juridique et Fiscal, a "captive" law firm in France, provided a unique window into these arrangements. He testified that while the avocats own his law firm, they share the same client base with the accounting firm, work closely with it, and benefit financially from the PricewaterhouseCoopers network in terms of leasing space, bulk buying, the common use of telephone and computer systems, etc. 12
Issues relating to multidisciplinary practice have not escaped the attention of regulators and bar associations in other parts of the world. Witnesses before the Commission described on-going studies in Canada, the U.K., and Australia 13 and the present extent of regulation in France and Germany. 14 From a global perspective, it appears that the Law Society of New South Wales, Australia is the only regulator that has adopted ethics rules specifically directed to multidisciplinary practice. The rules require that multidisciplinary partnerships remain in the effective control of the law firm's lawyers. 15
Two international bar associations have addressed multidisciplinary practice. The Resolution on Multi-disciplinary Practices adopted by the International Bar Association Council in September 1998 neither approves nor disapproves of multidisciplinary practices, but rather identifies the principles that should govern if a jurisdiction permits their establishment. These principles include transparency, avoidance of conflicts of interest, special protection for confidential client information, and submission of the entire multidisciplinary practice organization to the regulatory and disciplinary authorities of the legal profession. 16
In 1996, the Council of the Bars and Law Societies of the European Union (CCBE) adopted a position strongly opposed to multidisciplinary partnerships between lawyers and nonlawyers. 17 In 1998, a subsequent proposal to soften that position received a majority of votes cast but failed to pass because it did not meet a supermajority requirement.
B. The ethical and regulatory barriers to the establishment of MDPs in the United States.
The prohibitions of Model Rule 5.4 against the sharing of legal fees with a nonlawyer and forming a partnership or other association with a nonlawyer if any of the activities of the partnership or association consist of the practice of law 18 were not adopted until 1928 and did not appear as mandatory prohibitions until 1969 when the ABA adopted the Model Code of Professional Responsibility. 19
The members of the ABA Commission on Evaluation of Professional Standards (the Kutak Commission) directly confronted MDP-type issues when developing the Model Rules. Assessing the prohibitions as "only tenuously related to substantial ethical concerns about [lawyer-nonlawyer] relationships," the Kutak Commission concluded that rescinding them was in the best interests of clients and would not undermine professional values such as independence of professional judgment. It criticized the prohibitions as a form of "economic protectionism" for traditional legal service organizations, and for "imped[ing] development of new methods of providing legal services." 20 However, the ABA House of Delegates disagreed and the prohibition was continued into the Model Rules. Critics of Rule 5.4 argue that it impedes the development of "full-service" or "one-stop" practices that would benefit clients with an efficient and economic network of professionals. The Rule's defenders express concern about the impairment of the attorney-client privilege, the dilution of confidentiality and the loss of undivided loyalty to the client. 21 Critics of the Rule respond that removal of the Rule's prohibitions need not result in a loss of protection in the areas of independence of judgment, conflicts, confidentiality and the attorney-client privilege and emphasize the economic protectionism and market monopoly flowing from the Rule's enforcement. They deny the claims of the Rule's defenders who argue that a client can achieve the benefits of a full-service or one-stop practice by hiring professionals from different disciplines to work with a lawyer. 22
Finally, note should be taken that from an historical perspective the prohibitions against a lawyer sharing legal fees or entering into a partnership with a nonlawyer are inextricably linked with the adoption and enforcement of UPL statutes. The widely articulated bases for the regulation of UPL are the protection of the public against incompentency and the preservation of the lawyer's professional independence. Generally speaking, UPL statutes have had two primary effects: to keep nonlawyers from offering legal services; and to keep lawyers from offering legal services to the clients of the lawyers' corporate employers. With respect to the enforcement of the latter category, there appears to have been a general decline over the course of recent years except in clear instances where there was demonstrable harm to the public. 23 The Commission is aware of only two recent enforcement actions against Big Five accounting firms. In 1997, a complaint was filed with the UPL Committee of the Supreme Court of Texas against Arthur Andersen and Deloitte & Touche. 24 The complaint against Arthur Andersen was dismissed after an eleven month investigation. 25 The status of the second investigation is unclear. The Commission understands that a UPL charge against Ernst & Young is being investigated in Virginia. 26
The paucity of enforcement actions may be partially attributed to the inability of the courts and regulatory authorities to formulate a workable definition of the practice of law. Defining "the practice of law" has turned out to be exceedingly difficult. 27 The Model Rules do not define the practice of law, treating it as a matter of state law. Recognizing that the highest court with the authority to regulate the legal professional in each jurisdiction may wish to consider whether and to what extent it might be appropriate to include a definition of the practice of law in amending lawyer codes of conduct to permit MDPs, the Commission included in Appendix A to the Report a model definition based on Rule 49 of the Washington D.C. Court Rules. 28 The Commission acknowledges, however, that other models exist and that there may be no compelling reason to include a practice of law definition in a lawyer code of conduct. 29
C. Rule 5.4 of the Washington, D.C. Rules of Professional Conduct
The District of Columbia is the only jurisdiction in the United States that has modified Rule 5.4 to permit fee-sharing and partnership or other organization with nonlawyers for the purposes of delivering legal services. 30 That modified rule, however, is unavailable to any law firm and Big Five accounting firm or other entity that might wish to enter into MDP arrangements of the type most commonly found outside the United States. The District of Columbia rule explicitly confines lawyer and nonlawyer partnerships and the sharing of legal fees to organizations that solely provide legal services. The Comments to the rule specifically refer with approval to "certified public accountants . . work[ing] in conjunction with tax lawyers or others who use accountants' services in performing legal services." 31 Other cited examples include 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.
The practical impact of the Washington, D.C. rule is that accountants and other professionals may become partners in a law firm while lawyers may not become partners in an accounting firm or other professional services firm on whose behalf they deliver legal services to clients. The Comments explicitly state that the rule does not permit partnership for the purpose of investment, undoubtedly a passing nod to the fears expressed by the members of the House of Delegates during the debate on the original Kutak Commission proposal. 32
Susan Gilbert, the Ethics Counsel for the District of Columbia, testified that very few firms appear to have nonlawyer partners. According to Ms. Gilbert, two factors contributed significantly to the absence of law firm interest: first, the requirement that the law firm have as its "sole purpose" providing legal service to clients, and second, the limitations imposed by ABA Formal Opinion 91-360, which concluded that a law firm with offices in more than one jurisdiction could not have a nonlawyer partner in its Washington, D.C. office. 33
D. The relationship among the current prohibitions, the Washington, D.C. rule, and the establishment of ancillary businesses by law firms
Unlike lawyers in many other parts of the world, lawyers in the United States have often engaged in commercial activities in addition to practicing law. 34 While bar regulators and ethics committees have been sensitive to the ethical implications of such activities, neither the Model Code nor the Model Rules flatly bars a lawyer from conducting a separate, nonlegal business. For generations, thousands of lawyers, especially those in small and solo-firm practices who deliver legal services to individual clients, have engaged in some form of dual practice. 35 They might, for example, offer accounting services, sell insurance, or be a real estate broker, either individually or in partnership with a nonlawyer. 36
The testimony before the Commission by consumer groups offered overwhelming support for the proposition that individual clients need integrated professional advice in any number of areas, including estate planning, small business counseling, accounting, and regulatory compliance. In the consumer groups' collective opinion, a dual practice model cannot meet these pressing needs. 37 There are not enough lawyers with the requisite skills in the other disciplines. Given the demands of modern law practice and the ever growing complexity of all subject matter areas, it is difficult for lawyers to keep abreast of developments in more than one discipline.
In the 1980's and 1990's, a number of large firms, especially in the Washington, D.C. area, established ancillary business subsidiaries in fields such as health care, real estate, and lobbying. Because their purpose was to provide consulting services not legal services, the prohibitions in the lawyer codes of conduct against fee sharing and partnership with nonlawyers did not apply. Ancillary businesses became a lightning rod for the legal profession, however. 38 Critics feared that they were designed simply to circumvent the prohibitions and argued that if law-firm clients also purchased consulting services from the firm's ancillary business, the clients would jeopardize the protections afforded by the attorney-client privilege and the ethics rules on confidentiality of client information and the avoidance of conflicts of interest. Defenders of the concept argued just as vigorously that the critics were exaggerating the risks and praised the ancillary business model for its ability to deliver interdisciplinary services in a complex and changing world.
The House of Delegates visited the subject on three occasions, coming to final resolution in 1994 when the House adopted the current version of Model Rule 5.7. 39 One principle above all drives Rule 5.7, namely, that a lawyer who provides law-related services to a client is subject to the rules of professional conduct. To withdraw from the Rule's application a lawyer must either (1) offer those services in circumstances "distinct" from the lawyer's provision of legal services to clients or (2) if the services are offered through an entity controlled by the lawyer or with others, take reasonable measures to assure that the purchasers of the law-related services understand that they "are not legal services and that the protection of the client-lawyer relationship do not exist." 40 Even if a lawyer carefully structures an ancillary business to conform to these strictures, common law principles of agency and fiduciary duty remain applicable. 41
While the ancillary business model can facilitate the delivery of interdisciplinary advice to clients, the testimony before the Commission revealed unanticipated impediments that have thwarted the development of its potential. For example, one witness testified that access to capital was more limited. Lenders were reluctant to extend credit to an ancillary business, particularly if the law firm had, in an excess of caution, required the ancillary business to conform to the rules of the lawyer code of conduct that limit in-person solicitation, certain forms of advertising, and participation in the businesses of clients. This impediment to the raising of capital obviously puts ancillary businesses at a competitive disadvantage. Nonlawyer professionals are hesitant to join an ancillary business in which the ethical rules of another discipline replace their own. 42 It is interesting to note that while ancillary businesses and multidisciplinary practice are often popularly portrayed as issues of great concern to larger, corporate law firms, there is a substantial interest in forming MDPs by lawyers in solo and small firm practices. 43
Finally, in considering the interest of the public in having the option to purchase legal services from an MDP, the Commission searched for empirical evidence of harm to clients in analogous situations, looking, for example, for reports of actions alleging malpractice or breach of fiduciary duty against a law firm and a related ancillary business. It discovered none; moreover, none of the witnesses, including those opposed to a relaxation of the prohibitions in Model Rule 5.4, were able to identify any such reports. 44 Furthermore, the Commission was assured that MDPs would be able to obtain malpractice insurance coverage to compensate clients for any negligence in the delivery of legal services. 45
II. Analysis, Conclusions and Recommendations
A. It is in the Best Interest of the Public That Clients Be Given the Opportunity to Purchase Legal Services from an MDP.
The Commission heard strong testimony from business clients, representatives of consumer groups, and ABA entities that amending the Model Rules to permit fee sharing and partnership and other association with a nonlawyer is in the best interest of the public. Of particular significance to the Commission was the view of the Council of the ABA General Practice, Solo and Small Firm Section, noting the need for multidisciplinary counseling of individual and business clients and the inefficiencies in attempting to satisfy that need through the coordinated advice of professionals in nonaffiliated firms. 46 The ethics counsel to the Arizona State Bar told the Commission that she has received a substantial number of inquiries from lawyers in Arizona expressing an interest in forming a partnership with a nonlawyer. 47 An informal survey of the opinions of state bar association ethics committees issued over the course of the past ten years indicates that the overwhelming majority of the inquiries on this subject appear to have been submitted by lawyers in solo or small firms. 48 A survey by the Law Society of Upper Canada of its members in connection with the Law Society's review of issues relating to multidisciplinary practice also revealed a significant interest on the part of lawyers in solo and small law firms in the possibility of entering into partnerships with nonlawyers. 49
The Executive Director of the Consumers Alliance of the Southeast pointed out the benefits flowing from obtaining legal, financial, and other services from a single provider. 50 The representative of the American Association of Retired Persons was in complete agreement. 51 The Vice President of the Electric Consumers Alliance, noted that "many problems have only a legal component, and that other professionals may be needed to bring their expertise to bear on the other components of a particular problem" 52 and also remarked that more clients might actually use the services of a lawyer if that lawyer were practicing in a multidisciplinary professional services firm. Such services would be more user-friendly. 53 The President of Consumers First cited several examples of how an integrated professional services firm could best meet the needs of individuals and small businesses for multidisciplinary advice. 54 Consumer advocates and lawyers pointed out the particular need for such services in the area of family and juvenile law. 55 In addition to the testimony, the Commission also received comments from other consumer groups urging changes in the Model Rules to facilitate the delivery of legal services by MDPs. 56 Finally, representatives of consumer groups indicated that many middle-income individuals with legal needs do not go to lawyers due to unfamiliarity, discontent or even fear. In the view of these witnesses, a large number of these individuals would have easier access to legal services provided by a lawyer in an MDP that was already providing them with other services. 57
Also endorsing changes were the representatives of the corporate bar. The American Corporate Counsel Association has recently adopted a resolution urging that the ethical barriers to the establishment of multidisciplinary partnerships be dismantled. 58 In addition, the Commission heard supporting testimony from witnesses with respect to the desire of corporate counsel to have the option of purchasing legal services from alternative service providers. 59
B. The Commission's Recommendation Protects the Interests of Clients and the Public and Safeguards the Core Values of the Legal Profession
Having heard the persuasive testimony from business clients, representatives of consumer groups, and ABA entities in support of a relaxation of Model Rule 5.4, the Commission proceeded to examine how to preserve the core values of the legal profession - independence of professional judgment, the protection of confidential client information, and loyalty to the client through the avoidance of conflict of interests - in an MDP setting. 60 The Commission decided that these core values were best protected by recommending a special set of regulatory undertakings to govern the MDP and the conduct of lawyers in MDPs. 61 This decision is consistent with the House of Delegates's adoption of Model Rule 5.7, Responsibilities Regarding Law-Related Services.
These undertakings are set forth in items (A)-(I) of paragraph 12 in the Recommendation. 62 The undertakings serve a number of valuable purposes. They affirmatively remind the MDP of its duty to respect and honor the ethical obligations of the lawyers who are delivering legal services to its clients, specifically including the obligation to render pro bono publico legal service. ( See Recommendation 12(E) & Report at 6). The Commission concluded that the undertaking should make special mention of the pro bono obligation because it is central to the profession's identity. 63 Witness-representatives of four of the Big Five accounting firms unequivocally testified that if the rules of lawyer conduct were amended to permit the sharing of legal fees and partnership with nonlawyers, they would not interfere with the ethical obligations of the MDP's lawyers. Moreover, they expressed an affirmative willingness to have the MDP assist the lawyers in fulfilling their pro bono obligations including, for example, devoting significant expenditures to resource-intensive matters, such as appeals in death penalty cases. 64
The Recommendation calls for an annual review of the undertakings and related procedures and to amend the procedures as needed. ( Id. 12(F)). It requires the MDP to provide a copy of its certificate of compliance to the lawyers in the MDP and to 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. ( Id. 12(F-G)). The certification requirement thus provides a timely reminder to lawyers of their own ethical obligations. Even more significantly, it expands the "regulatory tent" by making clear that lawyers in MDPs who deliver legal services to clients are subject to the same regulatory scheme as lawyers in other practice settings. 65
Because allowing lawyers and nonlawyers to share legal fees and form a partnership or other association, one purpose of which is the delivery of legal services, is a sharp departure from the current prohibitions against such activities, the Commission believes that it is important to provide a scheme for oversight and review by the courts. Thus, it recommends not only that MDPs be required to file the certification with the courts but also that the courts have the right at their discretion to review and conduct an administrative audit of MDPs to ensure compliance with the undertakings. The cost of the audit would be borne by the MDPs through the payment of an annual certification fee. ( Id. 12(I)). 66 There are regulatory "teeth" in the oversight and review by the courts, moreover. To emphasize the importance of the certification being submitted to the courts, the Commission proposes that it be signed by the chief executive officer (or similar official) and by the board of directors (or similar body. ( Id. 12). Furthermore, it has specifically recommended that an MDP that fails to comply with its written undertaking be subject to withdrawal of the court's permission to deliver legal services or to other appropriate remedial measures. 67
The Commission considers that the certification process, the filing procedures, and the payment of the annual fee are reasonable measures designed to protect the MDP's clients and the public from possible interference with the client-lawyer relationship by nonlawyers in an MDP. Because the likelihood of such interference is significantly diminished if lawyers control the MDP, the undertakings set forth in Recommendation (A)-(I) are not required of an MDP in which control is exercised by lawyers. For example, a law firm with five lawyer-partners that adds an accountant-partner and a certified-financial-planner partner would be exempted from compliance. The Commission recognizes that the concept of "control" is multifaceted and acknowledges that the courts may wish to adopt different measurements.
C. Protecting Professional Independence of Judgment in an MDP 68
To protect professional independence of judgment, the Commission has recommended that fee sharing and partnership be permitted only within an MDP. "Finder's fees" to third parties, "ambulance chasing," and the like would remain barred. Ownership of an MDP would be limited to its individual members. Equity investment by individual or entity nonmembers would be prohibited. (Recommendation 12 & Report at 4).
The Commission does not take a position on whether it would be appropriate to limit nonlawyer membership in MDPs to other professionals, although it does note in Comment 2 to the draft Model Rule 5.8 that
[e]xamples of professional services that are related to the practice of law and therefore appropriately included in MDPs are accountancy, economic forecasting, financial planning, lobbying, psychological counseling, social work, consulting, architecture and design and tax return preparation. 69
The Commission believes that the regulatory authorities in each state should be free to determine whether or to what extent it is in the public interest to limit nonlawyer membership in MDPs.
The Commission recognizes that from time to time a lawyer in an MDP, just as a lawyer in a traditional law firm, may have to resolve issues of professional conduct. In the Commission's view, professional independence of judgment would be weakened if a lawyer in an MDP abrogated the responsibility to resolve such issues, choosing to defer to a nonlawyer's interpretation of a lawyer code of conduct. Accordingly, the Commission has recommended that the fact that a lawyer acted in accordance with a nonlawyer supervisor's resolution of a question of professional duty should not excuse the lawyer's failure to observe the rules of professional conduct. ( See Recommendation 6 & Report at 3) To the same end, it has also recommended that all rules of professional conduct that apply to a law firm should also apply to an MDP. ( See Recommendation 7 & Report at 2). 70 The Commission considers these recommendations particularly important since it concluded after hearing extensive testimony on the issue that significant differences exist between the rules of professional conduct that govern lawyers and those that govern certified public accountants. 71 Even the witnesses from the accounting firms acknowledged these differences, although they disputed the differences' significance. 72
D. Protecting Loyalty to the Client in an MDP
To protect the core value of loyalty to the client, the Commission recommends that the rules of lawyer conduct relating to imputation and conflicts of interest apply to lawyers in MDPs to the same extent that they apply to lawyers in a private law firm, lawyers employed in the legal departments of a corporation or other organization, and lawyers employed in a legal services organization. The Commission firmly believes that all clients who receive legal services deserve the same degree of loyalty regardless of the practice setting. Thus, the Commission specifically recommends that in connection with the delivery of legal services, each client of an MDP be treated as the lawyer's client for purposes of conflicts of interest and imputation. ( See Recommendation 8 & Report at 5).
E. Protecting Confidential Client Information and the Attorney-Client Privilege in an MDP
Several witnesses before the Commission expressed the concern that permitting lawyers to practice in an MDP would endanger confidential client information and threaten the maintenance of the attorney-client privilege. 73 Other witnesses disagreed. 74 In their view, a clear statement that the rules of professional conduct apply to individual lawyers practicing in an MDP and a strict adherence to the notions of transparency and informed client consent would alleviate any such concerns. 75 After carefully considering these conflicting positions, the Commission is persuaded that confidentiality of client information and the attorney-client privilege can be maintained in an MDP. It is unpersuaded that lawyers in an MDP would be any more likely to break the rules of lawyer conduct than those who practice in a traditional law firm. Because it is to be expected that MDPs will vary significantly in size, structure, and purpose, the Commission has not included specific, detailed recommendations on how best to protect these core values. However, in the Report and Comment to draft Model Rule 5.8, the Commission does offer some pointed observations. 76 It suggests the addition of three paragraphs to the Comment to Model Rule 1.6: the first alerting a lawyer in an MDP to confidentiality problems that might arise (Appendix A cmt. 23 at A2); the second reminding the lawyer that if a nonlawyer member or nonlawyer employee of an MDP is assisting the lawyer in providing legal services to the MDP's clients the lawyer must give reasonable assurances that the nonlawyer member or nonlawyer member of the MDP understands the obligation to maintain confidential client information. ( Id. cmt. 24 at A2); and the third admonishing the lawyer to avoid endangering the attorney-client privilege by the lawyer's own conduct, that of the MDP, or its nonlawyer members. ( Id. cmt. 25 at A2).
Several witnesses testified to their concern that in certain practice settings the disclosure obligation of a nonlawyer in an MDP might be inconsistent with a lawyer's obligation of confidentiality. Frequent references were made to disclosure obligations of auditors in connection with the attest function. 77 The Commission acknowledges that such inconsistencies exist. However, it is not persuaded that this possibility is sufficient to justify the current ban on fee sharing and partnership with nonlawyers. Furthermore, 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. 78 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.
As for other instances in which inconsistent disclosure obligations may exist between lawyers and nonlawyers in an MDP such as the disclosure obligations of mental health care workers in cases of suspected child abuse, the Commission believes that careful instruction about the obligation of confidentiality by a lawyer in an MDP to nonlawyers who are assisting the lawyer in the delivery of legal services will adequately protect the interests of clients. Similar instructions are regularly given by lawyers in law firm settings. Moreover, the Recommendation requires a lawyer in an MDP to ensure that a client understands that the attorney-client privilege does not protect the client's communications to nonlawyers in the MDP if those communications relate to the provision of nonlegal services. (Recommendation 9 & Report at 5).
The issues committed to the charge of the Commission by the President of the ABA in August 1998 were difficult ones and the Commission is deeply indebted to the witnesses who testified before it and to the lawyers, judges, and members of the public who filed written comments expressing their views. After an exhaustive review of the testimony, written statements, and articles in the popular and legal press and scholarly journals published in the United States and abroad, the Commission has concluded that it is consistent with the public interest to permit lawyers to practice in MDPs provided that there are adequate safeguards in place to protect professional independence of judgement, the confidentiality of client information, and the loyalty owed by a lawyer to a client. The Commission's Recommendation does not permit a nonlawyer to practice law. It permits a lawyer to share legal fees and enter into a partnership or other association with a nonlawyer for the delivery of legal services only under limited circumstances and subject to the review and oversight of 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. In sum, the Commission's Recommendation offers clients an additional choice of legal service providers and lawyers an opportunity to structure a new vehicle for the delivery of legal services, while preserving the core values of the legal profession.
In the course of its study of the testimony and comments, the Commission was struck by a related issue that it believes should be examined in the near future. The Commission notes the need of clients and lawyers for greater flexibility in the delivery of legal services across state borders. It suggests that the ABA and the appropriate state licensing authorities consider modifying the current licensure scheme to provide that flexibility without endangering the interest of the public and clients in the provision of competent legal advice. 79
1. On behalf of herself as well as the entire Commission, the Reporter would like to acknowledge the deep debt of gratitude owed to Arthur Garwin, Professionalism Counsel, and Carol Weiss, Esq., staff members of the ABA Center on Professional Responsibility. Without their dedication, hard work, and enthusiasm, it is doubtful the Commission could have brought its mission to a successful completion.
2. Throughout the report, the comments made at the Commissions hearings are referred to as "testimony" and the speakers as "witnesses." For a complete list of the witnesses, the dates of their testimony, and their affiliations, see Appendix B. The witnesses were not under oath. Thus, the terms should be understood in their legislative sense and have no formal or legal significance. The Commission did not prepare a transcript of the witnesses testimony. However, with the individual permission of the witnesses, it did post a summary of the testimony on the Commissions web site and a copy of any written statement provided. Also published on the web site were written comments received from persons and organizations that did not testify.
3. The Reporter and the Commission would like to acknowledge the comprehensive and exceedingly helpful research that was provided by Professor Laurel S. Terry, Penn State Dickinson School of Law. See testimony of Laurel S. Terry (Mar. 12, 1999); written testimony dated Mar. 12, 1999. Professor Terry is the recipient of a Fulbright Grant to study MDPs in Germany.
"Recommendation" followed by a numerical designation refers to a specific Recommendation; "Report at" and "Appendix A at" followed by a numerical designation refer to a specific page of the Report and Appendix A, respectively.
4. This model reflects the status quo throughout the United States with the sole exception of the District of Columbia. See infra notes 18-19.
5. This model is based on the amended version of Rule 5.4 adopted in the District of Columbia. See infra notes 30-33 and accompanying text.
6. This model is based on Model Rule 5.7. See infra notes 38-41 and accompanying text.
7. See infra notes 8-17 and accompanying text. The "Big Five" are Arthur Anderson LLP, Deloitte & Touche, LLP, Ernest & Young LLP, PricewaterhouseCoopers LLP and KPMG Peat Marwick LL P. Representatives of the first four testified before the Commission. For reasons that it declined to share with the Commission, KPMG Peat Marwich LLP refused the Commissions several invitations to testify.
8. In 1996, the Standing Committee on MDPs of the International Bar Association (IBA) conducted a survey to determine the extent to which MDPs were providing legal services throughout the world and the regulatory framework within which the services were offered. While the survey results were not as complete as the IBA had hoped, its findings present a helpful snapshot of MDP activities. In seventy-two percent of the responding jurisdictions, organizations other than law firms were providing legal services, including accounting firms, consulting firms, banks, insurance companies, licensed conveyancers, trust companies, and trade unions. Given the high percentage, it is not surprising to learn that the survey also confirmed the existence of the well-known "blurring boundaries" phenomenon, evidencing the ever growing difficulty of separating legal from business, finance, and regulatory services. In only twenty percent of these jurisdictions, were the MDP organizations violating the rules of professional conduct that govern the conduct of lawyers. These arrangements included reciprocal referral agreements and payment of management fees or rent in exchange for legal referrals. See Ward Bower, Multidisciplinary Partnerships--The Future in Global Law Practice 158-60 (J. Ross Harper ed. 1997). See also testimony of Ward Bower (Nov. 12, 1998); testimony of Stephen McGarry (Nov. 13, 1998).
9. See e.g., Phillippa Cannon, The Big Six Move In, 50 Intl Fin. L. Rev., Nov. 1997 at 25; Phillippa Cannon & Adrian Preston, Europes Top Tax Advisors available under Topics/Legal Profession at Intl Fin. L. Rev. Home Page, http://lawmoney.com.; Paul Lee, Canadian Firms Prepare for foreign Invasion, Intl Fin. L. Rev., Jan. 1998, at 33; 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; Samantha Wigham, Norwegian Firms Await Inevitable Invasion, Intl Fin. L. Rev., July 1997, at 35; Arthur Andersens Trojan Horse, Legal Business, May 1994, at 27; Price Waterhouse Adds Polish and Belgian Law Firms, Intl Fin. L. Rev., April 1998, at 3; See also John Flood, The Cultures of Globalization: Professional Restructuring for the International Market in Professional Competition and Professional Power: Lawyers, Accountants and the Social Construction of Markets 139-69 (Yves Dezalay & David Sugerman eds. 1995).
10. See e.g., testimony of Gerard Nicolay (Nov. 12, 1998); written testimony of Gerard Nicolay dated Nov. 12, 1998; testimony of Neil Cochran (Feb. 4, 1999); written statement of Neil Cochran dated Feb. 4, 1999; testimony of Kathryn A. Oberly (Feb. 4, 1999); written statement of Kathyrn A. Oberly dated Feb. 4, 1999; testimony of Roger L. Page (Mar. 11, 1999); written statement of Roger L. Page dated Mar. 11, 1999; testimony of Sam DiPiazza, Jr. (Mar. 11, 1999); written statement of Sam DiPiazza, Jr. dated Mar. 11, 1999; testimony of Richard Spivak (Mar. 12, 1999); written remarks of Richard Spivak dated Mar. 31, 1999.
11. ATAG Ernest & Young, a fully integrated accounting firm, is the largest law firm in Switzerland.
ATAG handles everything. That includes corporate law, company formations, capital changes, mergers, spinoffs, registrations, employment law, drafting contracts, succession planning and estate work, and banking and financial matters.
See 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.
12. Testimony of Gerard Nicolay (Nov. 12, 1998); written testimony of Gerard Nicolay dated Nov. 12, 1998. For additional descriptions of similar arrangements, see testimony of J. Rob Collins (Nov. 12, 1998); testimony of Alison Crawley (Nov. 12, 1998); testimony of Andrew Scott (Nov. 13, 1998); testimony of Thomas O. Verhoeven (Nov. 13, 1998); testimony of Gerard Mazet (Feb. 6, 1999). See also testimony of Simon Potter (Feb. 6, 1999).
13. E.g., testimony of J. Rob Collins (Nov. 12, 1998); testimony of Alison Crawley (Nov. 12, 1998); testimony of Andrew Scott (Nov. 13, 1998).
14. E.g., testimony of Michel Gout (Nov. 12, 1998); testimony of Thomas O. Verhoeven (Nov. 13, 1998); testimony of Hans-Jurgen Hellwig (Feb. 4, 1999); written statement of Hans-Jurgen Hellwig dated Feb. 4, 1999; written statement of Ramon Mullerat dated April 1999. See also letter dated Feb. 1, 1999 from Steffan Juul on behalf of The Danish Bar and Law Society to the American Bar Association.
15. See testimony of J. Rob Collins (Nov. 12, 1998).
16. The Resolution states that "such rules [on the integrated co-operation between lawyers and non-lawyers] should contain:
(a) a requirement to clearly disclose to regulatory and disciplinary authorities and to the public the manner in which integrated co-operation with non lawyers is affected, and the interests represented in the organization concerned;
(b) a requirement for submission of the entire organization in question, including its non-lawyers, to the regulatory and disciplinary authorities of the legal profession;
(c) a requirement for giving of clear notice to clients as to the limitations inherent in forms of integrated co-operation and the risk attaching thereto;
(d) precise requirements on the avoidance of conflicting interests which exclude the possibility of combining auditing services with consulting services or legal representation;
(e) precise rules on restriction of access to confidential information;
(f) provisions setting out the minimum degree of ownership and/or voting control which lawyers must hold in MDPs and the maximum degree of ownership and/or voting control which non-lawyers may hold in MDPs.
Resolution on Multi-disciplinary Practices adopted by the Council of the International Bar Association, Sept. 13, 1998. "Transparency" is a legal concept frequently associated with expressions of civil law jurisprudence and is reflected in items (a)-(b).
17. Testimony of Michel Gout (Nov. 12, 1998).
Model Rule 5.4 provides:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;
(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price; and
(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.
(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.
(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:
(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;
(2) a nonlawyer is a corporate director or officer thereof; or
(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.
19. Model Rule 5.4 (a) is substantially identical to DR 3-102(A) and Model Rule 5.4(b) is substantially identical to DR 3-103(A). The prohibitions possess a distinguished pedigree, dating back to the 1928 addition of Canons 33-35 to the original 1908 Canons of Ethics. Canon 33 provided "[p]artnerships between lawyers and members of other professions or non-professional persons should not be formed or permitted where any part of the partnerships employment consists of the practice of law." Canon 34 prescribed fee splitting with nonlawyers. Canon 35 cautioned lawyers against being "controlled or exploited by any lay agency, personal or corporate, which intervenes between client and lawyer."
The Model Code of Professional Responsibility adopted in 1969 not only continued the prohibitions, but also strengthened them by expressing the bar against partnerships with nonlawyers in mandatory rather than precatory language. See DR 3-103; see also DR 3-102 & DR 5-107. See generally Thomas R. Andrews, Nonlawyers in the Business of Law: Doe the One Who Has the Gold Really Make the Rules?, 40 Hastings L.J. 577 (1989). See also Barlow Christensen, The Unauthorized Practice of Law: Do Good Fences Really Make Good Neighbors--or Even Good Sense, 1980 Am. B. Found. Res. J. 159 (1980); Deborah L. Rhode, Policing the Professional Monopoly: A Constitutional and Empirical Analysis of Unauthorized Practice Prohibition, 34 Stan. L. Rev. 1(1981).
20. Commission on Evaluation of Professional Standards, Proposed Final Draft: American Bar Association Model Rules of Professional Conduct 239 (1981).
21. See e.g., testimony of William Elliott (Nov. 13, 1998); testimony of Karen D. Petrillo (Nov. 12, 1998); testimony of Lawrence J. Fox (Feb. 4, 1999); letter (undated) from Lawrence J. Fox submitted following Feb. 4 testimony; e-mail from Lawrence J. Fox dated Apr. 8, 1999; testimony of Jay G. Foonberg (Feb. 6, 1999); testimony of Sidney M. Cone, III (Mar. 12, 1999); written statement of Sidney M. Cone, III dated Mar. 12, 1999; fax communication of Sidney M. Cone III dated Mar. 22, 1999; e-mail from American College of Tax Counsel dated May 11, 1999; written submission by Patrick F. McCartan dated Apr. 11, 1999; e-mail from Jim Calloway dated Mar. 3, 1999; e-mail dated Feb. 10, 1999 from Judge Frederick D. Pepple to Art.Garwin@americanbar.org.
22. See e.g., testimony of Kathryn A. Oberly (Feb. 4, 1999); written statement of Kathyrn A. Oberly dated Feb. 4, 1999; testimony of Roger L. Page (Mar. 11, 1999); written statement of Roger L. Page dated Mar. 11, 1999; testimony of Sam DiPiazza, Jr. (Mar. 11, 1999); written statement of Sam DiPiazza, Jr. dated Mar. 11, 1999; testimony of Richard Spivak (Mar. 12, 1999); written remarks of Richard Spivak dated Mar. 31, 1999.
23. See testimony of M. Peter Moser (Nov. 13, 1998); See ABA Commission on Nonlawyer Practice, Nonlawyer Activity in Law-Related Situations: A Report with Recommendations (1995).
24. See Elizabeth McDonald, Texas Probes Andersen, Deloitte On Charges of Practicing Law, Wall St.J., May 28, 1998, at B15.
25. Arthur S. Hayes, Accountants vs. Lawyers: Bean Counters Win, Natl L.J., Aug. 10, 1998, at A4; Tom Hermann , A Special Summary and Forecast of Federal and State Tax Law Developments, WALL ST. J., July 29, 1998; see also Lawyer Sues Big Six Firm Over Legal Practice, The Accountant, Oct. 1997, at 5. While one Commission witness strongly criticized the dismissal, the fact remains that the Committee concluded that Arthur Anderson had not engaged in the unauthorized practice of law. See testimony of William D. Elliott (Nov. 13, 1998); see William D. Elliott, Unauthorized Practice of Law: Failure of Proof or Failure of Will?, Tax Notes Today, Oct. 26, 1998, 98 TNT 208-23.
26. See Message posted on December 28, 1998 by James M. McCauley, Ethics Counsel, Virginia State Bar on the Legal Ethics List Serv. maintained by the Washburn University School of Law.
27. Standing Committee on Lawyers Responsibility for Client Protection, 1994 Survey and Related Materials on the Unauthorized Practice of Law/Nonlawyer Practice vii (1996). See written statement of Gregory A. Tselikis e-mailed Mar. 18, 1999, previously published in the Maine Lawyer Review.
28. The model provides:
"Practice of Law" means the provision of professional legal advice or services where there is a client relationship of trust or reliance. One is presumed to be practicing law when engaging in any of the following conduct on behalf of another:
(a) Preparing any legal document, including any deeds, mortgages, assignments, discharges, leases, trust instruments or any other instruments intended to affect interests in real or personal property, wills, codicils, instruments intended to affect the disposition of property of decedents' estates, documents relating to business and corporate transactions, other instruments intended to affect or secure legal rights, and contracts except routine agreements incidental to a regular course of business;
(b) Preparing or expressing legal opinions;
(c) Appearing or acting as an attorney in any tribunal;
(d) Preparing any claims, demands or pleadings of any kind, or any written documents containing legal argument or interpretation of law, for filing in any court, administrative agency or other tribunal;
(e) Providing advice or counsel as to how any of the activities described in subparagraph (a) through (d) might be done, or whether they were done, in accordance with applicable law;
(f) Furnishing an attorney or attorneys, or other persons, to render the services described in subparagraphs (a) through (e) above.
29. The Model Code, for example, preferred a much more open-ended definition:
Functionally, the practice of law relates to the rendition of services for others that call for the professional judgment of others that call for the professional judgment of a lawyer. The essence of professional judgment is his educated ability to relate the general body and philosophy of law to a specific legal problem of a client . . . .
30. See ABA/BNA Law. Man. Prof. Conduct 91:401. The Rule provides in relevant part:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (b).
(b) A lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients, but only if:
(1) The partnership or organization has as its sole purpose providing legal services to clients;
(2) All persons having such managerial authority or holding a financial interest undertake to abide by these rules of professional conduct;
(3) The lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1.
(4) The foregoing conditions are set forth in writing.
Washington, D.C. Rules of Professional Conduct, Rule 5.4.
31. Id. cmt.7. The Washington, D.C. Rules of Professional Conduct like the ABA Model Rules have adopted a format resembling that of the Restatements of Law, consisting of black letter rules followed by explanatory comments. The comments purpose is to "provide guidance for practicing in compliance with the Rules." Cf. Model Rules of Professional Conduct Scope (first paragraph).
32. The Comment to the Washington, D.C. version of Rule 5.4 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.
33. Testimony of Susan Gilbert (Nov. 12, 1998); written statement of Susan Gilbert dated Nov. 12, 1998. The opinion reasoned that to comply with the ethical rules in the other jurisdiction the law firm had to establish two partnerships, the lawyer/nonlawyer partnership in Washington, D.C. and an all lawyer partnership in the other jurisdiction(s). See ABA Comm. on Ethics and Professional Responsibility, Formal Op. 91-360 (1991).
34. For a helpful discussion of the doctrine of incompatible professions, a hallmark of many foreign codes of lawyer conduct, see Mary C. Daly, The Cultural, Ethical, and Legal Challenges in Lawyering for a Global Organization: The Role of the General Counsel, 46 Emory L.J. 1057, 1097-99 (1997).
35. See, e.g., ABA/BNA Law. Man. on Prof. Conduct, 91:601; 81:2001 & 3001. See also ABA Annotated Model Rules of Professional Conduct 462-63 (3d ed. 1996).
36. Geoffrey C. Hazard et. al., The Law and Ethics of Lawyering 893 (2d ed. 1994).
37. E.g., testimony of William A. Bolger (Mar. 11, 1999); testimony of Lora H. Weber (Mar. 11, 1999); testimony of Wayne Moore (Mar. 11, 1999). See also testimony of William A. Bolger (Feb. 6, 1999); testimony of James C. Turner (Feb. 5, 1999); written statement of James C. Turner (Feb. 5, 1999); letter from Mark Phigler dated Feb.3, 1999.
38. See e.g., Stephanie Goldberg, More than the Law: Ancillary Business Growth Continues, A.B.A.J., Mar. 1994, at 54; Ancillary Businesses of the Nation's 250 Largest Firms, Natl L.J., Dec. 21, 1992, at 32; Thom Weidlich, Ancillary Businesses Prospering Quietly: The Most Successful Subsidiaries Are Those That Play on Their Firms Strengths, Experts Say, Natl L.J., Dec. 21, 1992, at 1.
39. E.g., When Law Firms Start Their Own Businesses, Natl L.J., Oct. 21, 1985, at 1; At Issue: Law Firm Diversification-Is It the Wave of the Future?, A.B.A.J., Sept. 1989, at 53.
40. Rule 5.7 entitled "Responsibilities Regarding Law-Related Services" provides as follows:
(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:
(1) by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or
(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.
(b) The term "law-related services" denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.
Five states, Pennsylvania, Maine, North Dakota, Indiana, and Massachusetts, have adopted the new Rule 5.7. Pennsylvania has modified it slightly. See Laurel S. Terry, Pennsylvania Adopts Ancillary Business Rule, 8 Prof. Law. 10 (1996). For a brief, but helpful, description of the history of Rule 5.7, see Annotated Model Rules, supra note 35, at 461-63.
41. ABA Model Rules of Professional Conduct Rule 5.7 cmt..
42. See testimony of James W. Jones (Feb. 6, 1999); see also written statement of James W. Jones dated Feb. 6, 1999.
43. See infra notes 46-49 and accompanying text.
44. Minet Inc., an insurance broker, studied 610 insurance claims filed by the Big Six. It identified only three cases in which an accounting firms consultants were accused of asserting improper pressure on the firms auditors. See Elizabeth MacDonald, Levitt Says Wave of Accounting Mergers Could Affect Independence of Auditors, Wall St. J., Oct. 21, 1997, at A2.
45. Testimony of William Freivogel (Nov. 13, 1998); testimony of Joseph P. McMonigle (Mar. 12, 1999).
46. Testimony of Larry Ramirez (Feb.10, 1999). Support for relaxing the prohibitions in Model Rule 5.4 was also voiced by the ABA Section on Taxation ( see testimony of Stefan F. Tucker (Feb. 4, 1999); written statement of Stefan F. Tucker dated Feb. 4, 1999) and by the National Conference of Lawyers and Certified Public Accountants ( see testimony of Irwin L. Treiger & William J. Lipton (Mar. 11, 1999); written statement of Irwin L. Treiger & William J. Lipton dated Mar. 11, 1999). See also letter from Scott Hart dated Feb. 22, 1999; letter from Haydee Velazquez Tillotson dated Feb. 19, 1999; letter from Michael H. Horner dated Feb. 19, 1999.
47. Testimony of Lynda Shely (Feb. 5, 1999).
48. Many of them may share the lament of Charles F. Robinson, the former Chair of the ABA Law Practice Management Section, a member of a two-person law firm specializing in elder law. "I would like to form a consortium with a CPA and a money manager, and provide comprehensive services on a fee basis thats split among members of the consortium. I cant do that right now. Its not just a global fight with the Big Six." John Gibeaut, Squeeze, A.B.A.J., Feb. 1998, at 12, 46. See also Testimony of Charles F. Robinson, Feb. 5, 1999; written statement of Charles F. Robinson dated Feb. 5, 1999.
49. See Multi-Disciplinary Partnerships and Their Impact on the Future of the Legal Profession--A Request for Information from the Profession from The "Futures" Task Force--Final Report of the Working Group on Multi-Discipline Partnerships Report to the Convocation (Sept. 25, 1998).
50. Testimony of Lora Weber (Mar. 11, 1999); letter dated Mar. 31, 1999 from Lora Weber. See also letter from the Washington Legal Foundation dated Apr. 6, 1999.
51. See testimony of Wayne Moore (Mar. 11, 1999).
52. Written Comments of Al Sterman dated Mar. 26, 1999.
54. Written testimony of Jim Conran dated Feb. 1, 1999.
55. See e.g., letter from Marna S. Tucker, Esq. dated Mar.30, 1999.
56. See e.g., letter from David M. Swankin dated Mar.29, 1999; letter from Dorothy Garrick, James L. Brown & Louis S. Meyer dated Mar. 31, 1999; letter from James H. Brown dated Mar. 10, 1999. The Garrick et al. letter was also signed by Ms. Lora Weber and Mr. Don Rounds who personally testified before the Commission.
57. E.g., testimony of Wayne Moore (Mar. 11, 1999); testimony of Lora H. Weber (Mar. 11, 1999).
58. "The American Corporate Counsel Association supports a broader range of choice for clients to select from service providers capable of formulating comprehensive solutions which address not only the legal aspect of their problems but various other facets as well. Subject to resolving important issues of ethics and professionalism in the best interests of the client and the public, such a broader range of choice could include multidisciplinary practices wherein lawyers are affiliated with nonlawyers."
Adopted by the Board of Directors February 6, 1999.
59. Testimony of Steven A. Bennett (Nov. 13, 1998); written remarks of Steven Allan Bennett dated Nov. 13, 1998; testimony of James R. Silkenat (Nov. 13, 1998); testimony of Elizabeth Wall (Nov. 12, 1998). See also testimony of Simon Potter (Feb. 6, 1999); letter from Jose Marti dated May 12, 1999; letter from Damian Gisbert dated May 12, 1999.
60. The Commission has endeavored to pay close attention to the comments of the organized bar in formulating its recommendations. See letter from the Bar Association of San Francisco dated April 29, 1999; e-mail from the Los Angeles County Bar Association dated May 5, 1999; Report of the Special Commission on Multi-Disciplinary Practice and the Legal Profession, New York State Bar Association dated Jan. 8, 1999.
61. The Recommendation, Report, and draft Model Rule 5.8 emphasize that unless specifically noted otherwise, a lawyer in an MDP remains subject to all the rules of lawyer conduct. Thus, a lawyer in an MDP is subject to the same rules as a lawyer in a law firm with respect to advertising, solicitation, legal fees, and the maintenance of client trust accounts. (Appendix A cmt. 4 at 7; Report at 6). See also letter from the ABA Standing Committee on Specialization dated May 11, 1999.
62. Paragraph 12 provides in relevant part:
As a condition of permitting a lawyer to engage in the practice of law in an MDP, the MDP should be required to give to 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 a written undertaking, signed by the chief executive officer (or similar official) and the board of directors (or similar body) that:
(A) it will not directly or indirectly interfere with a lawyers exercise of independent professional judgment on behalf of a client;
(B) it will establish, maintain and enforce procedures designed to protect a lawyers exercise of independent professional judgment on behalf of a client from interference by the MDP, any member of the MDP, or any person or entity controlled with the MDP;
(C) it will establish, maintain and enforce procedures to protect a lawyers professional obligation to segregate client funds.
(D) the members of the MDP delivering or assisting in the delivery of legal services will abide by the rules of professional conduct;
(E) it will respect the unique role of the lawyer in society as an officer of the legal system, a representative of clients and a public citizen having special responsibility for the administration of justice. This undertaking should acknowledge that lawyers in an MDP have the same special obligation to render voluntary pro bono publico legal service as lawyers practicing solo or in law firms;
(F) it will annually review the procedures established in subsection (B) and amend them as needed to ensure their effectiveness; and annually certify its compliance with subsections (A)-(F) and provide each lawyer in the MDP a copy of the certification;
(G) it will annually file a signed and verified copy of the certificate described in subsection (F) with 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, along with relevant information about each lawyer who is a member of the MDP.
(H) it will permit the highest court with the authority to regulate the professional conduct of lawyers in each jurisdiction in which the MDP is engaged in the delivery of legal services to review and conduct an administrative audit of the MDP, as each such authority deems appropriate, to determine and assure compliance with subsections (A)-(G); and
(I) it will bear the cost of the administrative audit of MDPs described in subparagraph (H) through the payment of an annual certification fee.
63. Testimony of Judge Judith M. Billings, Chair, ABA Standing Committee on Pro Bono and Public Service (Feb. 6, 1999); statement of the ABA Standing Committee on Pro Bono and Public Service dated Jan. 1999.
64. Testimony of Kathryn A. Oberly (Feb. 4, 1999); testimony of Roger L. Page (Mar. 11, 1999); written statement of Roger L. Page dated Mar. 11, 1999; testimony of Samuel DiPiazza, Jr. (Mar. 11, 1999);written statement of Samuel DiPiazza dated Mar. 11, 1999); testimony of Richard Spivak (Mar. 12, 1999).
65. The draft Model Rule 5.8 defines "lawyer in an MDP" to mean "a person who is licensed to practice law and who holds himself out or is held out as providing legal services to the clients of MDP." (Appendix A at 7). In turn, a proposed amendment to the Terminology section of the Model Rules defines "legal services" as "those services which, if provided by a lawyer engaged n the practice of law, would be regarded as the part of such practice of law for the purposes of application of the rules of professional conduct." ( Id. at 1) Read together these two provisions prevent an individual who satisfies the definition of a "lawyer in an MDP" from arguing that he or she is providing consulting, business, or tax " advice" and consequently not subject to a lawyer code of conduct or to the jurisdiction of a lawyer disciplinary authority. ( See also "Holding Out as a Lawyer," Report at 5)
A number of witnesses testified to the complex regulatory issues relating (1) to the federally authorized right of accountants and others to offer tax related services and (2) the representation of clients in Tax Court by lawyer-employees or -partners of the Big Five accounting firms. E.g., Bernard Wolfman (Mar. 12, 1999); written statement of Bernard Wolfman dated Mar. 12, 1999; testimony of Lawrence Hill (Feb. 4, 1999); testimony of Samuel B. Sterrett (Feb. 4, 1999); written statement of Samuel B. Sterrett dated Feb. 4, 1999; testimony of Leslie S. Shapiro (Nov. 12, 1999); e-mail from Todd Gerber dated Feb. 5, 1999. The Commission wishes to acknowledge the considerable assistance it received from Professor Linda Galler of Hofstra University School of Law and Professor Harold Levinson of the Vanderbilt University School of Law with respect to these issues. Testimony of Linda Galler (Nov. 13, 1998); letter from Linda Galler to Sherwin Simmons dated Nov. 13, 1998; testimony of Harold Levinson (Nov. 13, 1998); see also written statement of the American Association of Attorney-Certified Public Accountant prepared by Professor Levinson. In light of the Recommendation, the Commission believes that it is unnecessary to address these issues.
66. There is ample regulatory precedent for such review and oversight by the courts. See e.g., Cal. Standards for Lawyer Referral Service, Rules 15-16 (1999); Rules of the Court of Appeals for the Licensing of Legal Consultants, 22 N.Y.C.R.R. § 521.8 (1999); Rules of the Supreme Court, Appellate Division, First Department, 22 N.Y.C.R.R. § 603.15 (1999).
67. Among such remedies might be the imposition of a significant fine and/or the forfeiture of all the legal fees earned by the MDP during the period of noncompliance. In all likelihood, the lawyers in the MDP would be subject to discipline as well. Depending upon the circumstances of the noncompliance, a client might be able to bring an action for malpractice or breech of fiduciary duty based on the underlying facts.
68. The Commission received an especially insightful letter from Professor Robert W. Gordon dated May 25, 1999, tracing the history of lawyer independence.
69. Appendix A at 7.
70. The remainder of the Reporters Notes will focus principally on the protection of confidential client information, the avoidance of conflicts of interest, and the preservation of independent professional judgment because these were the most difficult issues identified by the witnesses. It should be noted, however, that the Recommendations 5 and 7 reach other issues of professional responsibility as well. Recommendation 5 proposes that a lawyer in an MDP that delivers legal services to the MDP is bound by the rules of professional conduct and Recommendation 7 proposes that all rules of professional conduct that apply to a law firm should also apply to an MDP. (Recommendations 5& 7 & Report at 2). Consequently, the lawyers practicing in an MDP must observe the same rules that bind lawyers practicing in law firms with respect to legal fees and client trust accounts. For example, the fees must be reasonable and properly segregated from other funds of the MDP. (Report at 6).
71. See Testimony of Linda Galler (Nov. 13, 1998); letter from Linda Galler to Sherwin Simmons dated Nov. 13, 1998; testimony of Harold Levinson (Nov. 13, 1998); see also written statement of the American Association of Attorney-Certified Public Accountant prepared by Professor Levinson.
72. Testimony of Kathryn A. Oberly (Feb. 4, 1999); written statement of Kathyrn A. Oberly dated Feb. 4, 1999; testimony of Roger L. Page (Mar. 11, 1999); written statement of Roger L. Page dated Mar. 11, 1999; Samuel DiPiazza, Jr. (Mar. 11, 1999); written statement of Samuel DiPiazza, Jr. dated Mar. 11, 1999; testimony of Richard Spivak (Mar. 12, 1999); written remarks of Richard Spivak dated Mar. 31, 1999; testimony of Richard Miller (Mar. 12, 1999).
73. See e.g., testimony of William Elliott (Nov. 13, 1998); testimony of Lawrence J. Fox (Feb. 4, 1999); letter (undated) from Lawrence J. Fox submitted following Feb. 4 testimony; e-mail from Lawrence J. Fox dated Apr. 8, 1999; testimony of Sidney M. Cone (Mar. 12, 1999); written statement of Sidney M. Cone, III dated Mar. 12, 1999.
74. See testimony of Kathryn A. Oberly (Feb. 4, 1999); written statement of Kathyrn A. Oberly dated Feb. 4, 1999; testimony of Roger Page (Mar. 11, 1999); Samuel DiPiazza, Jr. (Mar. 11, 1999); written statement of Samuel DiPiazza, Jr. dated Mar. 11, 1999; testimony of Richard Spivak (Mar. 12, 1999); written remarks of Richard Spivak dated Mar. 31, 1999.
75. See e.g., testimony of John Dzienkowski (Feb. 5, 1999); written statement of John Dzienkowski dated April 15, 1999. The Commission carefully considered Professor Dzienkowskis suggestion that lawyers in MDPs should be prohibited from representing clients in state and federal courts. The Commission has rejected his suggestion concluding first, that the barrister/solicitor distinction is inconsistent with the firmly established unitary structure of the U.S. legal profession and second, that the unitary structure is a unique strength and should not be changed. Furthermore, in practical terms adopting the suggestion would work a particular hardship on lawyers in solo and small firm practices who offer both litigation and transactional services to clients.
76. For example, the Commission notes that "it may be necessary for an MDP to implement special procedures to protect confidential information such as building firewalls in the firms computer information system, restricting access to client files by the use of special passwords, and physically separating the lawyers and their nonlawyer assistants, paralegals, and secretaries from other service units within the MDP." (Appendix A cmt. 3 at 7).
77. E.g., testimony of Lawrence J. Fox (Feb. 4, 1999); letter (undated) from Lawrence J. Fox submitted following Feb. 4 testimony; e-mail from Lawrence J. Fox dated Apr. 8, 1999; testimony of Sidney M. Cone (Mar. 12, 1999); e-mail from Edward Lamar Taylor dated Mar. 19, 1999. Other witnesses took issue with these concerns. E.g., letter from Edward Summers dated Mar. 9, 1999.
78. See letter from Lynn E. Turner to Sherwin P. Simmons dated Jan. 22, 1999.
79. Two witnesses urged the study of a national licensure scheme of lawyer regulation. See testimony of James P. Holden (Nov. 12, 1998); written statement of James P. Holden dated Nov. 12, 1998; testimony of Samuel B. Sterrett (Feb. 4, 1999); written statement of Samuel B. Sterrett dated Feb. 4, 1999. The Commission is aware that various international treatises, such as the North American Free Trade Agreement and the General Agreement on Trade in Services, and the work of the World Trade Organization, aimed at opening up commerce among nations may have an impact on the delivery of legal services by MDPs. Nonetheless, the Commission does not believe that it is appropriate to alter its recommendations in anticipation of what that impact might be. See also testimony of William A. Hannay, III (Mar. 11, 1999); written statement of William A. Hannay, III dated Mar. 11, 1999.