Business Group Will Keep Fighting Ban on Corporate Law Firms

By Samson Habte

A North Carolina business association has told Bloomberg BNA that it will likely appeal a federal judge’s Sept. 19 dismissal of a well-funded lawsuit that seeks to overturn state bans on for-profit law practice by corporate entities ( Capital Associated Indus., Inc v. Stein , 2017 BL 329888, M.D.N.C., No. 1:15cv83, 9/19/17 ).

The lawsuit pits the North Carolina State Bar Assocation (NCSBA) against Capital Associated Industries Inc. (CAI), a nonprofit entity that lobbies for employer-friendly policies and provides HR-related advice to companies across North Carolina. Ultimately, CAI wants to offer paid legal services, through licensed in-house lawyers, to the roughly 1,200 companies on its membership rolls.

CAI filed the suit to challenge the constitutionality of North Carolina’s unauthorized practice of law statutes—which, like similar regulations in states across the country, generally forbid corporations from delivering general legal services that are unrelated to their business.

The CAI suit is not the first legal challenge to UPL laws. But interviews with the parties and outside observers, and a close look at the docket—including a series of little-noticed, aggressive discovery motions—suggest that the CAI action might be a landmark case, even if it is never revived on appeal.

“This almost looks like a test case to me,” said University of Tennessee law professor Ben Barton, who studies the legal profession and the legal services market.

In a series of discovery motions, CAI demanded—and was ultimately granted—the right to depose state bar officials about a range of antitrust-related issues.

In March, a magistrate judge largely granted CAI’s request to compel the bar to turn over all documents reflecting legal advice that bar staffers and lawyers have received “regarding liability of the bar, its officers or its counselors for antitrust violations.”

In that same order the magistrate judge refused to issue a protective order that would have prohibited CAI from deposing two state bar executives about “the effect of the UPL statutes on competition in the legal marketplace” by corporate entities that the statutes prohibit from providing legal services.

This Isn’t an Antitrust Case

In N.C. State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101, 2015 BL 48206, 31 Law. Man. Prof. Conduct 108 (2015), the U.S. Supreme Court held that the Federal Trade Commission could pursue antitrust enforcement action against the North Carolina State Board of Dental Examiners for its allegedly protectionist efforts to keep nondentists out of the teeth-whitening business.

Some experts predicted the Dental Examiners ruling could trigger lawsuits accusing other professional regulatory boards—including state bar associations—of monopolistic behavior.

CAI accused the North Carolina bar of engaging in monopolistic behavior during this litigation, but that accusation didn’t come in the form of an antitrust complaint.

Rather, it came in the form of six claims that asserted violations of CAI’s rights of speech and association under the First Amendment, and violations of CAI’s rights to substantive due process under the Fourteenth Amendment.

Because North Carolina’s UPL statutes classify unauthorized practice as a crime, CAI filed this suit against state prosecutors—seeking to enjoin application of the UPL statutes—and not against the state bar, which intervened in the suit on its own.

But once the state bar joined the fray, CAI didn’t amend its complaint to assert a federal antitrust claims based on Dental Examiners.

That surprised some observers.

“The fact that they would spend all the money on this [litigation] but not bring the strongest claim is somewhat puzzling,” said Barton, who co-authored a recent law review article that addressed how Dental Examiners might affect the “anticompetitive practices” reflected in state UPL regulations.

Bruce Clarke, CAI’s president and CEO, demurred when asked whether his organization had considered bringing an antitrust claim in this litigation—or whether its discovery requests were made with an eye toward a future potential antitrust suit.

Speech and Profit

Clarke said “the core” of CAI’s arguments in this case were based on a line of First Amendment cases that struck down bar regulations that were applied to prohibit NAACP lawyers from soliciting plaintiffs in civil rights cases, and that limited the ability of labor unions to provide low-cost legal services to their members.

Judge Loretta C. Biggs, who dismissed all of CAI’s claims in her Sept. 19 order, said the First Amendment principles that compelled those decisions in favor of civil rights groups and labor unions did not support CAI’s arguments for overturning North Carolina’s UPL statutes.

“CAI alleges in its Complaint that it is being precluded from ‘earning revenues by employing licensed attorneys to provide [this] legal advice and services to its members,’” Biggs wrote. “Unlike the clear constitutional objectives advanced by Button and its progeny, CAI has failed to provide evidence that any activity for which it claims a right to associate is deserving of First Amendment protection.”

Lawyers are Different

CAI also asserted that the UPL statutes, which make unauthorized practice a misdemeanor crime, are “not rationally related to any legitimate governmental interest,” and thus violated the group’s right to substantive due process under the Fourteenth Amendment.

Biggs wasn’t convinced. She said the state bar “identified two legitimate state interests” that the UPL statutes further: avoiding “conflicts of interest” and “impairment of attorney independence.”

“North Carolina could rationally decide that non-lawyers would be more likely than lawyers to encourage the attorneys whom they supervise to violate the ethical canons that govern the legal profession,” Biggs wrote.

Do Lawyers Have Souls?

“Nothing is better settled than the proposition that a corporation cannot practice law,” H.H. Walker Lewis, a lawyer for one of the nation’s largest telephone companies, wrote in a 1938 law review article.

Lewis said one of the most oft-cited justifications for the ban on corporate practice was the assertion “that a corporation has no soul.”

Thomas D. Morgan, a George Washington University law professor emeritus who taught competition, antitrust and legal ethics, made a similar observation when asked to assess the reasons for the dismissal of this case.

“The argument that the judge makes in this case—to reach a result that I think is consistent with current case law, but not necessarily wise—is that lawyers work for the client, and businesses work for themselves,” Morgan said. Proponents of that view, Morgan said, simply believe that “we can’t trust businesses to exercise fiduciary duties.”

In his 1938 law review article, Lewis said the “corporation has no soul” argument was “flattering” to lawyers, who are pleased “to know that we are by definition possessed of souls.” But that proposition “has been doubted,” Lewis wrote, tongue only slightly in cheek.

Morgan made a similar point. “The reality is that, particularly over the last 30 years or more, we’ve gone to a system where we measure success in law firms by partner profits, take-home pay, hourly rates,” he told Bloomberg BNA.

“We’re very much in a business model,” Morgan said. “I think it is way oversimplified to say workers are working for their clients and are indifferent to the profit motive.”

Harbinger of Things to Come?

Morgan said that CAI’s proposal to begin providing legal services to its members—through lawyers staffed with the trade association—may be a harbinger of things to come in a legal services marketplace that is undergoing creative destruction.

“The organization strikes me as typical of the kinds of things we are likely to see over the next decade or so, as people try to deliver services—including legal services—to clients who may have been under-represented in the past,” Morgan said.

CAI’s president said that is exactly what his group is trying to do with the proposal that sparked this litigation against North Carolina’s UPL regulations.

In its complaint, CAI says it wants to provide “employment-related legal advice and services to its members through licensed North Carolina attorneys” that the group will employ.

Members will receive those services as part of their dues, the complaint says. For a separate fee of $195 per hour, they could buy additional services—such as assistance in drafting employment and noncompete agreements, reviewing employment policies and handbooks, and representation before the Equal Employment Opportunity Commission.

CAI says the services would not extend to “extremely specialized areas of workplace law,” such as tax matters.

“What we’re really trying to fill is a gap that [the legal industry] is not filling today,” Clark told Bloomberg BNA. He said CAI wants to use its own lawyers to help the companies it serves answer “routine, regulatory questions” that they simply aren’t willing to pay a law firm to answer.

“In that gap people just aren’t willing to pay the $500 or $1,500 or $2,500 fee that it would take to engage an outside firm,” Clark said. “There is not going to be much change in what employers are willing and ready to pay for in terms of legal services.”

The North Carolina bar was represented by Mullins Duncan Harrell & Russell PLLC.

The North Carolina Department of Justice represented the state Attorney General and district prosecutors.

CAI was represented by Brooks, Pierce, McLendon, Humphrey & Leonard LLP.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bna.com

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