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Ethics 20/20 Commission Approves Release Of Draft to Allow Nonlawyer Owners in Firms

Wednesday, August 17, 2011

TORONTO—The ABA's Commission on Ethics 20/20, meeting Aug. 5-6, voted to circulate a proposed rule change that would allow law firms to include nonlawyers in minority ownership roles.

These types of “alternative business structures” for law firms, or ABS in the vernacular, have long been forbidden by the ABA rules and by every U.S. jurisdiction except the District of Columbia, which for two decades has allowed partial nonlawyer ownership of law firms.

The commission's proposal originated in its working groups on ABS and on uniformity, choice of law, and conflicts.

By the end of the second day, the commission directed both its chief reporter, law professor Andrew M. Perlman of Suffolk University, and law professor Paul D. Paton of the University of the Pacific, reporter for the commission's ABS working group, to prepare and publish for public comment next month a draft proposal to amend Model Rule of Professional Conduct 5.4, which governs lawyers' professional independence.

In addition to limiting nonlawyer ownership to a minority share, the proposal states that any nonlawyer owner must have demonstrable good character and be otherwise fit to hold a stake in an entity that provides legal services.

According to the commission's timetable, its final proposals will be submitted for consideration by the House of Delegates at the ABA Annual Meeting in August 2012. The ABS draft proposals, as with all other preliminary actions by the commission, are subject to change or withdrawal by the commission until that time.

ABS, Not MDP

Commissioners from both working groups stressed the importance of the suggested requirement that any firm with nonlawyer owners must have “as its sole purpose providing legal services to clients.”

Commissioner Theodore J. Schneyer, professor of law at the University of Arizona, said that this part of the proposal distinguishes the 20/20 Commission's approach from the recommendations in the 2000 Final Report of the ABA's Commission on Multidisciplinary Practice. That year, the MDP Commission explicitly recommended that the ABA endorse rules allowing nonlawyer partnership in “a practice that delivers both legal and nonlegal professional services.” The House of Delegates disagreed, and disbanded the commission. See 16 Law. Man. Prof. Conduct 250, 367.

The 20/20 group's proposals, Schneyer said, are not a reprise of the MDP ideas that generated so much controversy a decade ago and were never adopted by the ABA. The perceived bogeymen of that debate, Schneyer recalled, were the large accounting and consulting firms who, opponents argued, would be enabled to take over large swathes of the legal market if nonlawyer ownership of entities offering legal services were permitted.

Because the new proposals will limit nonlawyer ownership to firms that provide legal services exclusively, Schneyer said, that problem has been solved.

Another commission member, George W. Jones Jr. of Sidley Austin in Washington, D.C., was more direct: “This is not, NOT MDP,” he declared. If the Ethics 20/20 Commission ends up formally endorsing this or a similar proposal, he said, each commissioner should make a point of explaining that this is not multidisciplinary practice all over again.

Some Trepidation

Despite Schneyer's and Jones's endorsements, some on the panel saw potential problems with the commission's ABS proposal.

While commending the working groups for their study and carefully circumscribed ABS recommendations, commission co-chairs Jamie S. Gorelick and Michael Traynor expressed concern about how they may be received.

Gorelick, of WilmerHale in Washington, wondered aloud if the proposals would still be seen as “the camel's nose under the tent,” the first step toward a de facto recognition of business considerations at a law firm trumping considerations of ethics and public service. Traynor, chair of the American Law Institute Council, queried whether the proposal might be deemed just a small step away from threatening the profession's values of independence and public service.

Philip H. Schaeffer, general counsel at White & Case in New York and the commission's liaison to the ABA Standing Committee on Ethics and Professional Responsibility, criticized the ABS proposal on a more micro level.

Schaeffer said that trying to preempt nonlawyer control of a law firm's decisions by mandating, as the commission's recommendations would do, that nonlawyer ownership be limited to a minority share is misguided. The concern is real and needs to be addressed, he said, but minority ownership isn't the way to accomplish it.

“Everyone here knows,” Schaeffer said, “that if a law firm of, say, 10 to 15 lawyers takes on a high-powered nonlawyer”—an ex-politician lobbyist, for instance—and gives him a 25 percent stake in the firm while each lawyer individually holds less than 10 percent, that nonlawyer is a rainmaker and “is going to dominate the decision-making of that firm.”

According to Schaeffer, the way to ensure that the profession's core values are always observed in an alternative business structure is to require that one of the firm's lawyers serve as a professional responsibility compliance officer and be accountable for any breaches.

Sharing Fees With Nonlawyers

The commission also approved for publication and comment a working group's proposal to add a choice-of-law provision to Model Rule 5.4 on sharing legal fees with nonlawyers.

The proposal would allow a nonlawyer working for a law firm to receive a share of legal fees if the lawyer conduct rules of the jurisdiction where the nonlawyer “is principally based” so allow.

As ABS reporter Paton pointed out to the commission, this provision is intended to address two choice-of-law problems: those that will arise if some form of approved alternative business structure is added to the Model Rules but not universally adopted, and those problems faced by multijurisdictional firms employing nonlawyers in jurisdictions that already allow sharing of legal fees with nonlawyers—which include the District of Columbia, the United Kingdom, and Australia.

Public Testimony on ABS

On Aug. 5, prior to its consideration of the ABS and fee-sharing proposals and approval of their public dissemination, the commission heard from several witnesses on the subject of alternative business structures.

John Wotton, who just became president of the Law Society of England and Wales, testified about the regulatory status of alternative business structures in the United Kingdom. Wotton said that currently no outside ownership of English and Welsh firms is allowed—that is, any nonlawyers having a stake in a firm must be a part of that firm—but that outside ownership, even by corporate entities, will soon be permitted to an extent.

Wotton pointed out that before any nonlawyer, whether a natural person or corporate entity, is allowed an ownership share of a U.K. firm, that individual or entity must be given a license to do so by the Solicitors Regulation Authority, and must demonstrate that the nonlawyer is “fit to own.”

Commissioner Elizabeth B. Lacy, a senior justice of the Virginia Supreme Court, asked Wotton whether the licensing requirement, and particularly the “fit to own” element, was analogous to the character and fitness requirements for bar admission. Wotton responded that the analogy may be a bit strained once outside ownership is permitted by corporations. Wotton also pointed out that although the Solicitors Regulation Authority “is nominally part of the Law Society,” its board is not composed solely of lawyers. Currently lawyers are a majority of the SRA's board but, he said, that is anticipated to change shortly.

Another witness testified about what he perceived to be a missing piece in the Model Rules. Michael Downey, of Armstrong Teasdale in St. Louis, pointed out that many of the professionals who work for law firms—he mentioned accountants and social workers as examples—have their own professional responsibility standards that sometimes may conflict with an obligation imposed by the legal ethics rules. Under what circumstances confidential information may, or must, be disclosed, and to whom, is a likely source of such conflict, Downey suggested.

Downey said the ABA rules should include something like a supremacy clause mandating that when a professional nonlawyer member or employee of a law firm is required by his own profession's standards to do something forbidden by the lawyer conduct rules, the latter rules control.

That point was picked up the next day in the commission's consideration of the working groups' ABS proposal. Commissioner Stephen Gillers, professor of law at New York University, suggested that requiring nonlawyers to conform to (or “abide by,” in the words of Rule 5.4(b)(2) in the District of Columbia) the legal ethics rules may not be enough.

Gillers proposed an explicit statement that in case of conflict with other professional rules the legal ethics rules take precedence, or else a provision requiring the law firm itself to avoid creating such situations.

By Martin Whittaker

 The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and BNA

Copyright 2011 the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.

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