Introduction

The Mission, Process and Report of the Special Committee

In June 1999 the American Bar Association Commission on Multidisciplinary Practice recommended numerous changes to the law governing lawyers, one of which would have permitted lawyers to participate with nonlawyers in the creation of business entities owned or controlled by nonlawyers to engage in multidisciplinary practice.

On June 26, 1999, the New York State Bar Association’s House of Delegates adopted a resolution

(1) opposing any changes in existing regulations prohibiting attorneys from practicing law in MDPs in the absence of a sufficient demonstration that such changes are in the best interest of clients and society and do not undermine or dilute the integrity of the delivery of legal services by the legal profession; and

(2) urging further studies of the matter.

1. The Mission of the Committee

Pursuant to the NYSBA House of Delegates resolution, President Thomas O. Rice, on July 28, 1999, created this Special Committee on the Law Governing Firm Structure and Operation, charging it to consider the present law and its effectiveness, whether there is a need for any changes in the law, the evidence in support of such changes, and whether potential advantages from such changes outweigh potential detrimental effects.

On August 10, 1999 the ABA House of Delegates adopted the following resolution by a vote of 304 in favor to 98 opposed:

RESOLVED, that the American Bar Association make no change, addition or amendment to the Model Rules of Professional Conduct which permits a lawyer to offer legal services through a multidisciplinary practice unless and until additional study demonstrates that such changes will further the public interest without sacrificing or compromising lawyer independence and the legal profession’s tradition of loyalty to clients.

2. The Committee’s Process

At its organizational meeting on September 8, 1999, this committee identified six subject areas for concentrated study and established working groups of committee members to whom initial responsibility for carrying forward each project was assigned. Over the ensuing six months, the Committee examined in depth each of the following subject areas:

A. the changes since World War II in the American legal profession;

B. the articulation and enforcement of professional values;

C. the work of lawyers with other professionals;

D. nonlawyer involvement in the practice of law;

E. developments abroad in relation to multidisciplinary practice; and

F. factors that look toward change in the existing law governing lawyers.

In the first two parts of this three part report, the Committee sets forth the results of its six study projects.

3. The Committee’s Report

Part One, comprised of six chapters, provides an appraisal of the American legal profession in the Year 2000, summarizing the product of study projects A, B and C.

Part Two, comprised of four chapters, examines the challenges to maintaining a single public profession of law that arise from the developments chronicled in study projects D, E and F.

Part Three of the Report analyzes, against the background of Parts One and Two, the principal issues raised with respect to the law governing lawyers and law firms in the debate over MDP. Against this analysis the Committee’s recommendations are set forth as to:

(1) what should be changed in the law to clarify the place of multidisciplinary practice while preserving the core values of the American legal profession; and

(2) what in the public interest should remain unchanged in the law.

PART ONE

APPRAISAL OF THE AMERICAN LEGAL PROFESSION IN THE YEAR 2000

Chapter 1

The Salient Changes in the Demography

1. Explosion in Numbers and in Use of Legal Services

2. Change in the Profession’s Gender Make-up

3. Opening the Profession to Minorities

1. Explosion in Numbers and in Use of Legal Services

The phenomenal growth in the number of lawyers since World War II has been accompanied by an unprecedented increase in demand for legal work, both from business clients and on behalf of previously unrepresented individuals.

The growth has affected the manner in which law is practiced, how law firms are structured, and how lawyers organize their work. It has permitted greater specialization in law practice and an increased division of labor among lawyers.

The explosive growth in the number of lawyers began in the law schools. By 1963-64 enrollments matched the post-World War II bulge and there began a yearly increase in the number of law school enrollments that fueled the profession’s remarkable expansion between 1965 and 1991.[n1] The number of ABA-approved schools grew from 112 in 1948 to 176 in 1991. The following table shows for selected academic years the number of law schools, total J.D. enrollments (first, second and third years) and first admissions to the bar:[n2]

Academic Year

ABA-Approved

Law Schools

J.D. Enrollments

First Admissions to the Bar

1965-66

136

56,510

13,109

1970-71

146

78,018

17,922

1975-76

163

111,047

34,930

1980-81

171

119,501

41,997

1985-86

175

118,700

42,450 [n3]

1991-92

176

129,580

54,577

1997-98

178

125,886

56,184


The great growth in the number of lawyers has been matched by the growth in demand for all kinds of legal services, particularly from the business community. New areas of law and regulation, largely designed by lawyers, have created whole new fields for legal services: the environment, occupational health and safety, nuclear energy, discrimination and individual rights, health and mental health care, biotechnology, computers and the Internet. At the same time, economic activity vastly expanded, new business enterprises multiplied and the number of transactions in every segment of the economy proliferated.

Significantly, individuals who had never before sought legal assistance began seeking help from lawyers, while the courts pronounced the rights of persons charged with serious crime to have counsel and of classes of people collectively to seek legal redress in the courts.

In sum, while the total number of lawyers increased from 221,605 in 1950 to 857,931 in 1995, the practice of law grew from a service activity estimated at $4.2 billion-a-year in 1965 to an estimated $148 billion-a-year in 1999.[n4]

2. Change in the Profession’s Gender Make-up

Perhaps the most significant change during the last three decades, first among law students and thereafter in the legal profession as a whole, was the growth in the number of women choosing the law as a career vocation. The number of women applicants and students in ABA-approved law schools increased from 4 percent in the mid-1960s to more than 46 percent in the late 1990s:[n5]

Academic

Year

Women

J.D. Enrollments

Percent of Total

Enrollments

1965-66

2,374

4.2%

1970-71

6,682

8.6%

1980-81

40,834

34.2%

1991-92

55,110

42.5%

1998-99

57,952

46.1%


With this rising tide of women admittees, the percentage of all lawyers who are women has risen sharply in the past two decades as the following table reflects:

Year

Women lawyers as a percentage of total lawyer population[n6]

1950-51

2.5%

1960-61

2.6%

1970-71

2.8%

1980-81

8.1%

1990-91

22.0%


Since the rate of growth of the number of women in the profession substantially exceeded that of men, by 1995 women lawyers were, as a group, substantially younger than men, with a median age of 37, contrasted to a median age for men lawyers of 45.

In what segments of the profession has this growing number of women lawyers found employment? A slightly smaller percentage of women lawyers (70.9%) than of men (74.9%) are in private practice. On the other hand, a higher percentage of women than men have legal employment in government, in private associations,[n7] and in legal aid and public defender offices. Women lawyers in 1995, while comprising only 22.6 percent of the lawyers in private practice, were estimated to comprise 32.2 percent of federal government lawyers, 21.1 percent of state and local government lawyers, 39.7 percent of private association lawyers and 41.9 percent of the lawyers working in legal aid offices and as public defenders.[n8]

The statistics for the Classes of 1997 and 1998 indicate that the legal employment patterns of women and men graduates are now tending to converge, but that in judicial clerkships, government and public interest positions, the percentages of women consistently exceed those of men, while the percentage of men entering law firms exceeds that of women.[n9]

Despite the problems women lawyers continue to encounter, their presence and growing role in the profession have placed on the agenda, matters of particular concern to women which previously were ignored and have provoked serious reexamination of the legal workplace. These include matters relating to pregnancy; rape; sexual harassment in the workplace; judicial treatment of domestic violence; sexual relations between attorney and client; sexual stereotyping and other forms of bias and discrimination in both the courts and the other practice settings which are part of a lawyer’s professional life.[n10]

The expressed concerns of women lawyers have also raised consciousness on a broad range of issues pertaining to the established structure of the practice of law: the work/family conflict, the rigidity of the established practice-model, pregnancy and parenting leaves, day-care, flexible work schedules, including working part-time, temporary hiring of lawyers and alternative tracks for career advancement.

Legal scholars debate the issues as to women’s "different voice" and the "sameness" and "difference" between women and men. At the center of this discourse lies the practical imperative of how the legal profession will adapt to the gender change. Equal opportunity for women and freedom from gender bias are goals toward which the profession as a whole continues to struggle.

3. Opening the Profession to Minorities

Another significant change in the legal profession during the decades of the 1970s, ‘80s and ‘90s has been its gradual and belated opening to minority lawyers. It was not until 1950 that the first African-American lawyer was knowingly admitted to the American Bar Association.

Legal education was equally exclusionary. Although Howard University Law School in Washington, D.C., received its charter from the Federal Government as early as 1869, it remained the only substantial source of legal education for black Americans in the entire country from 1877 to 1939. In 1939, North Carolina Central University Law School was established and, in 1947, two other predominately black law schools were founded, Texas Southern University Law School in Houston and Southern University Law School in Baton Rouge. As late as 1983, Howard and these three other predominately black law schools had trained the majority of black lawyers in the nation.[n11]

Beginning in the middle 1930s black American advocates brought suit to gain admission for African Americans to all-white law schools.[n12] Nevertheless, not until the Supreme Court’s decision in Brown v. Board of Education[n13] overruling the "separate but equal" doctrine, and the later passage of civil rights legislation in the early 1960s, did the academic legal community begin to give serious attention to the problem of the exclusion of African-Americans and other racial minorities.

It was not until 1964 that the Association of American Law Schools’ Committee on Racial Discrimination could state for the first time that no member school reported denying admission to any applicant on grounds of race or color.[n14] Notwithstanding this AALS report, there were only 433 African-American students of the more than 50,000 law students enrolled during the 1964-65 academic year in the nation’s predominately white law schools.[n15]

Ultimately, with the coordinated efforts and support of the law schools and the organized bar, the federal Office of Economic Opportunity initiated programs of increased financial aid and remedial study in the late 1960s which soon began to show results. The number of black American law students in accredited law schools rose from 700, or approximately one percent, in 1965; to 4,423, or 4.3%, in 1972; and to 8,149, or 6.3% of JD enrollments in 1991-92. The Black American JD enrollments in 1998-99 totaled 9,271.[n16]

For racial minorities other than African Americans, there is little historical data. However, since the early 1970s, the office of the ABA Consultant on Legal Education has published a survey of minority group students enrolled in JD programs in approved law schools. In addition to "Black American Enrollment," the groups included have been "Mexican American," "Puerto Rican," "Other Hispanic American," "American Indian or Alaska Native," and "Asian or Pacific Islander." Over that period, the total minority enrollment grew from 5,568 in 1971-72 to 25,266 in 1998-99.

These figures confirm that significant progress has been made since the 1970s in enrolling increased numbers of minority law students, but there remains substantial under-representation of minority groups in the legal profession when compared with total minority populations.

Today, a growing number of minority lawyers are engaged in virtually every field of legal endeavor -- in private practice in a variety of specialties; as attorneys in corporations and government offices; as prosecutors and defense attorneys; in the judiciary, as federal, state and local judges; in law schools as teachers, administrators and deans, and as leaders of the organized bar.

Chapter 2

The Profound Effects of Specialization, Information Technology, Advertising and Law Practice Management

1. The Spread of Specialization

2. Information Technology in the Law

3. Advertising and Marketing Legal Services

4. Managing the Business of Lawyering

Paralleling in significance the change in the demography of the profession has been the change in how legal services are provided and offered to the public: specialists abound in all segments of practice; the technology of cybernetics has become an integral part of virtually every law office; advertising and marketing of legal services are found in every medium; and the new discipline of law office management increasingly guides the business of lawyering in all practice settings.

1. The Spread of Specialization

Told that the law was "a seamless web,"[n1] lawyers traditionally regarded themselves as generalists, prepared to deal with whatever problems prospective clients brought to their offices. However, as the general body of law grew in complexity and the law relating to commerce and industry vastly expanded, an increasing premium was put on specialization to maintain competence and to keep abreast of subject matter.

The lawyers in larger law firms serving predominantly business clients developed competence in particular areas of regulatory law better to serve their corporate clientele, while the great majority of sole and small-firm practitioners, serving predominantly individual clients, increasingly identified themselves as specializing by legal topic, lawyering skill or type of client.

The growth of specialization presented the legal profession with a dilemma. The profession’s ethical rules forbade lawyers to hold themselves out as specialists except in patent, trademark or admiralty law. Yet it became increasingly clear that every lawyer was obliged, as a practical matter, to limit the subjects in which he or she would keep abreast and develop particular competence. Consumer surveys confirmed that the public felt the need to look for lawyers with specific competencies and wanted more information on lawyers’ qualifications and the special services that particular lawyers provided.

Yet, self-selection by a lawyer of an announced speciality is no assurance of any special competence in the chosen area of law or type of work. Some choices of specialty are not so much a conscious division of labor as they are an identification of the clientele whom the lawyer seeks to serve.[n2]

Proposals to regulate specialization have generally been opposed by sole and small-firm practitioners who look upon regulation of specialties as just more red tape, increasing the costs of practice, further deprecating the "general practitioner" and erecting another hurdle for the beginning lawyer. Lawyers in larger firms that have essentially been built upon the efficiencies and cost-effectiveness of de facto specialization generally see nothing to be gained by having specialization regulated.

On the other hand, proponents of regulation of specialization argue that it provides greater access by the public to appropriate legal services, that it helps identify and improve the quality and competence of legal services, and that it leads to the rendering of appropriate services at a reasonable cost. They argue that the public’s lack of knowledge and sophistication about legal services magnifies the harm of inherently or potentially misleading advertising and that regulation of specialization establishes a uniform definition of what is a speciality and who is a specialist. They further urge that the "certifying" of specialists educates the public on the qualifications and competence level they should seek and that enforcement agencies have a standard against which to judge advertisements and a standard of care against which to judge performance.[n3]

The ABA Standing Committee on Specialization has promulgated Model Standards for Specialization in some 24 specialties (in stunning contrast to the 2 or 3 specialties that the profession traditionally sanctioned -- patents, trademarks and admiralty).[n4]

As of 1998, 12 states sponsored certification plans for specialists in specific practice areas, and the ABA accredited 11 private certification programs. The ABA has accredited the following certifying organizations: the American Board of Professional Liability Attorneys, the American Bankruptcy Board of Certification, the Commercial Law League of America, the National Elder Law Foundation, the National Association of Estate Planners & Counsels, the Estate Law Specialists Board, Inc., and the National Board of Trial Advocacy.[n5] Today, the national total of certified specialists is less than 3% of the lawyer population, although the number continues to grow modestly each year, but only in a small minority of the states.[n6]

While the New York State Bar Association’s House of Delegates in the past 20 years had twice defeated proposed specialization certification plans, it recently approved an amendment to DR 2-105 that permits lawyers to identify themselves as specialists provided they have been certified by an organization accredited by the ABA and employ a specified disclaimer. In 1999, the New York Courts approved this amendment of the Disciplinary Rules.[n7]

2. Information Technology in the Law

Any appraisal of the legal profession today must take account of the profound effects of the explosion of information technology upon the practice of law. Similarly, any evaluation of the utility of permitting MDPs must factor in the role of cybernetics in the law in 1999 and in the future. In 1978, there were only 5,000 desk-top computers in the United States; by 1982, four years later, there were five million.[n8]

Writing in 1983, Michael Crichton predicted a future where there would be "a radical transformation in the professions, in which the exclusivity of information is denied," but in which "the professional person’s therapeutic role continues unchanged." Explaining his prediction, Crichton asked, "Why do we consult a doctor or a lawyer?" He answered, "Because the professional person possesses specialized knowledge we need," but since computers can easily store and manipulate formal information, professional knowledge will be "extremely vulnerable to computers."[n9] He concluded that the future consumers of legal services, then having access to the professional’s fund of information, would "gravitate for further advice toward those professionals who treat [them] as human beings and not merely as problems or sources of income."[n10]

Much of what Michael Crichton foresaw has transpired. More and more of the lawyers’ "professional fund of information" is now in the public domain, available on line to those seeking legal counsel. The part of a lawyer’s practice based on exclusive control of formal professional knowledge has been circumscribed and the therapeutic or problem-solving role of the practitioner has grown.

On the other hand, computers are indispensable today to lawyers to command that limitless professional fund of knowledge that permits them to remain expert in their individual fields and to summon such material promptly when needed. Indeed, the legal profession over the last 30 years has been a leader in putting information technology to work for those engaged in providing professional services.

It was less than 30 years ago, in 1971, that the New York State Bar Association entered into an agreement with Mead Data Central, Inc. for the development of computerized legal information retrieval services for lawyers in the State of New York. Mead thereafter vastly expanded its services under the trade names "Lexis" and "Nexis," and was joined in the mid-1970s by West Publishing’s "Westlaw," spreading across the country and around the world, and in later years with the aid of the Internet.

Recent technology surveys conducted by the ABA Legal Technology Resource Center document the extension throughout the profession of all manner of technology.[n11] In 1988, the vast majority of large firms provided computers for lawyers to use when away from the office as well as remote access to computers in firm offices. Approximately 78% of the firms surveyed reported use of computers in depositions and the courtroom; and more than 85% in client meetings. In the courtroom, computers were used for litigation support, presentation of charts, graphs and text, e-mail contact with the firm office, legal research on-line as well as computer animation. All of the law firms surveyed reported the use of word-processing software and virtually all reported use for accounting, time and billing, external e-mail, spreadsheets, databases and the WorldWideWeb.

Since the advent of the computerization of legal materials early in the 1970s, bar associations have played a central role in ensuring that the state of the art in technology is available to lawyers by providing training in its use. The American Bar Association’s Standing Committee on Technology and Information Systems has led this effort for many years and continues today with the support of the Legal Technology Resource Center in Chicago that cooperates with State and local bar organizations throughout the country.

3. Advertising and Marketing Legal Services

During the past three decades the provision of legal services has changed from a client "walk-in" service to a lawyer "seek-out" service; from clients coming to lawyers whom they knew or heard of for help with problems, to lawyers reaching out for clients by publicizing the need for legal services and offering to fill that need. In a sense, it has been a return to how lawyers conducted themselves a century ago.

In the 19th Century, lawyer advertising and solicitation of business were common and generally lawful. Frequently, attorneys wrote letters soliciting legal business from business clients.[n12]

When the ABA adopted the Canons of Professional Ethics in 1908, however, Canon 27 banned lawyer advertising and solicitation. Although directory listings and very limited advertising became acceptable over time, the bans generally continued for nearly 70 years until the Supreme Court in Bates[n13] ruled that it was unconstitutional to impose bans on advertising, applying the First Amendment-based doctrine of commercial free speech to lawyers. At the same time, the Court acknowledged that the states had the right to impose certain regulation to protect consumers.

Within six weeks of the Bates decision, the ABA adopted a set of regulations and amended the Model Code of Professional Responsibility. The initial Code provisions precluded television advertising, all targeted mail solicitation and any advertising not done in a dignified manner.[n14] None of these limitations continue today in national standards, but the ABA has retained the ban on in-person solicitation that the Supreme Court, the year after Bates, found to be an appropriate constitutional limit on commercial speech, observing in its written opinion[n15] that lawyers are trained in the art of persuasion and that clients in need of legal services may be vulnerable to such persuasion.

The ABA replaced the Code of Professional Responsibility in 1983 with the Model Rules of Professional Conduct at a time when the states were still in the process of reformulating their rules to govern lawyer advertising. The result has been that there is to this date substantial diversity among the states in the rules governing lawyer advertising[n16] and only a few states have adopted verbatim the Model Rules that govern lawyer advertising and solicitation.[n17]

In these circumstances, advertising by lawyers grew at first, not only hesitantly but amid a patchwork of state regulation that more often than not, when challenged, failed to pass constitutional muster. Most lawyers chose not to advertise in the first few years after 1977, holding a residual sense that advertising was unethical.[n18] Some lawyers, particularly those who began to advertise later, were waiting for the states to modify their ethical regulations.[n19]

Thereafter, participation in advertising grew slowly but steadily. By 1981, 10 percent of lawyers had advertised at some point. In 1987, nearly a third of all lawyers had advertised at some point, and a quarter were advertising actively at that time.[n20]

By 1987, 86 percent of the lawyers who had advertised had done so through the Yellow Pages Directory, which were used mainly by solo practitioners and small firms.[n21] The second most-used medium was the newspaper, employed by only 12 percent. Electronic media were used by three percent, while direct mail and billboards were used by only one percent.[n22]

Since 1987, advertising legal services on television increased steadily, and in 1993 $125.9 million was spent to air television commercials for legal services, ranking 16th among categories for local spot television advertising. However, the amount spent for advertising on television was less than a third of that spent by lawyers on Yellow Pages Directory advertising -- more than any other profession or business.[n23]

The expenditures for lawyer advertising appear to vary substantially from venue to venue. One survey of usage of Yellow Pages Directories in six metropolitan areas reported that only 5.8 percent of Boston’s practitioners were in law firms that had a paid Yellow Pages and, while 36.6 percent of Milwaukee’s practitioners were in such firms.[n24] Polls of lawyers have shown similar jurisdictional variations: 22 percent of Oregon’s lawyers had advertised in 1983, compared with less than one percent of Birmingham, Alabama’s, and only three percent of Jackson, Mississippi’s.[n25]

Responding to an increasingly competitive marketplace for legal services to businesses, law firms are marketing in a variety of ways, employing solicitation and advertising techniques. Marketing techniques commonly used by corporate firms today, which would not have been permissible prior to the Bates decision, include law firm brochures, client newsletters and other direct mail, client services and presentations, sponsorships of benevolent activities, press releases and even press conferences.[n26]

The ABA has reconstituted its Commission on Advertising as the Commission on Responsibility in Client Development, and it has begun to address the unique aspects of information technology when used for client development. Hundreds of thousands of lawyers have a presence on the Internet today through listings in directories, some with cross-listings of fields of practice.[n27]

The ethical rules that govern client development support the notion that the practice of law is a professional endeavor, serving to separate the legal profession from all other businesses. However, regulating the business-getting activities of lawyers in a way that recognizes the practice of law as a business, as the Supreme Court has directed, argues against the legal profession as a distinctive public service unless such regulation can be shown to be consonant with consumer protection and not limiting of an individual’s access to legal services.

4. Managing the Business of Lawyering

During and following the decade of the 1970s, the combined impact of specialization in law practice, developments in information technology, and lawyers’ advertising and marketing of their services put a new focus upon the business of lawyering and the increasing institutionalization of the provision of legal services.

Since the first legal aid society was formed in New York City in 1876, the principal means for providing legal assistance to the poor has been through corporate structures, generally with the blessing of the courts. Around the turn of the 20th century, student-run legal clinics and legal aid bureaus that were associated with law schools were organized and permitted by many courts to represent clients before them.[n28]

At the opposite end of the legal services spectrum, beginning in the late 19th century, a small number of large corporations, having found the law so pervasive to their operations, began to hire lawyers to work full time in the management of their businesses and called them "general counsel." As additional lawyers joined them on the corporate payrolls, they became legal departments for their corporations. Meanwhile, early in the 20th century a revolution in the structure and operation of law firms serving the business community took place in New York City. The system of firm operation adopted by these firms included a requirement that the lawyers work only for the firm. They were paid a salary and were provided training.[n29]

By the time of the great surge in the numbers of lawyers entering the profession in the 1970s, the institutionalization of law practice was in full flower.

Fueling the greater orientation of lawyering to the manner in which business is conducted were several decisions by the U.S. Supreme Court exposing law practice to the rules of commerce. The Court first ordered the elimination of mandatory minimum fee schedules in Goldfarb[n30] and later lifted the restraints on lawyer advertising in Bates.[n31]

Responding to the new focus upon the business of lawyering, the ABA in 1975 established a Section on the Economics of Law Practice to provide information on how to build and maintain a law practice of any size. The Section immediately became the fastest growing section of the Association. The name of the Section was subsequently changed to "Law Practice Management" and took as its mission to address such matters as "how to grow and maintain a healthy law practice;" "how to use the Internet and other technological advances within a law firm;" "compensation packages to motivate lawyers;" "traditional and alternative billing methods;" and "survival skills for solo and small firm practitioners."

Taking note of the changes in the profession, late in the 1970s a new legal press began publication with the National Law Journal and Legal Times of Washington first appearing in 1978 and The American Lawyer in 1979. "Heavy Hitters" were touted purportedly for their business-getting, regardless of their prowess at serving the legal needs of clients. Service to clients and the inherently client-centered nature of professional activity became obscured in a preoccupation with the size of law firms, their financial success and the so-called bottom line.

In this environment it was not surprising in 1984 to find the U.S. Department of Commerce adding to its industrial categories Standard Industrial Classification 81, "the legal services industry".

In 1987, the Department’s annual U.S. Industrial Outlook predicted the long-term prospect for Standard Industrial Classification 81 in this way:

The legal services industry will expand steadily through the 1990s and will be marked by varying methods of delivering legal services. Increased productivity through the growing use of new technology, legal assistants and promotional techniques will continue to affect the legal services industry. The prices charged for the least complicated legal services will remain stable (or possibly fall), while the price of more complex assistance will rise at or above the rate of the general price level. The effect will be an expanded market for legal services, since marginal users of basic legal services will be more able to afford the advice of a lawyer and users of more complex services have few, if any, alternatives.

The Commerce Department concluded:

Assuming continued growth in the economy, group legal service plans will continue to flourish as employers, labor unions, and other organizations seek to negotiate plans that provide greater benefits. Other types of low-cost legal services firms will also continue to grow as they attract low and middle-income consumers who have not used lawyers in the past. Consequently, the total market will grow, although the traditional law firm will remain the backbone of the legal services industry.

Looking at the legal profession alone and solely from a market and economic perspective, this appraisal of the future in 1987 generally accords with what in fact took place.

However, the very financial success of some segments of the practicing bar stimulated the entrepreneurial urge in other segments of the profession and invited those on the outside who used and paid for professional services to question the costs of legal services, while those who provided other kinds of professional service coveted and sought entry to the legal services market.

Chapter 3

The Differentiation in Practice Settings

1. The Variety of Practice Setting

2. The Core Sector of Traditional Practitioners

3. The Development of Legal Service Organizations

4. The Burgeoning of Entrepreneurial Practice

5. The Newly Pivotal In-house Counsel

6. Lawyers for Government

1. The Variety of Practice Setting

The great variety of practice settings and the highly differentiated work in which lawyers engage present today the greatest challenge to the profession in maintaining the unitary concept of being a lawyer. Historically the lawyer in America was an independent professional who was neither employed by another nor dependent on others to help the lawyer provide legal services. The vast majority of lawyers were solo practitioners, either as a full-time or a part-time occupation. Many supplemented their income and filled out their time in other activities -- real estate, banking or political office -- but employment of lawyers by private organizations or by public agencies was virtually non-existent until the late 19th century.

In urban centers, some lawyers shared office space or entered into loose partnership, arrangements, but this was not common. A study found that as late as 1872, only 14 law firms in the entire country had even four lawyers; three had as many as five lawyers; and only one had six.[n1] The gradual emergence of the law firm as the common mode of private practice began in the final decades of the 19th century to provide the legal services that were required by those leading the great expansion of industry, commerce and finance.

The makeup of the legal profession at the end of World War II was summarized in a U.S. Department of Commerce Survey of Current Business in this way: three-fourths of the lawyers in the United States were in private law practice and the remaining one-quarter were employed on a salaried basis by industrial firms, banks, labor organizations and other private agencies, and government. The latter quarter was disproportionately concentrated in the larger population centers.[n2]

The 1947 Commerce Department survey estimated that about 74% of those in private practice were solo practitioners and more than 98% either were in solo practice or were in firms of fewer than nine lawyers. Lawyers in firms of nine or more practitioners were less than 2% of those in private practice.[n3]

The major growth in the size of law firms did not come until the 1970s. Since 1970 there has been a steady movement of law firms of all sizes from smaller practice units into larger. Private practice has become a spectrum of different practice units, differentiated not only by size but by kind of client, by the kinds of legal work performed, by specialties, by the number of salaried associates and other support staff, and by the degree that the practice is institutionalized and bureaucratized.

In general, firm size and practice setting have had a direct relationship to the kind of client served, the type of law practiced and the financial rewards of practice. Community-oriented solo and small firm practitioners of the traditional model worked predominately for individuals.[n4] Lawyers in larger firms in urban centers worked predominately for business clients.[n5]

The financial rewards of legal work for individuals (except for personal injury claims or class-action suits) have in general been less than the rewards for representing business. Various studies of law practice in the past have shown a direct relationship between the size of a firm and the source of its income: as firm size increased the percentage of fees from business clients rose and the percentage of fees from individuals dropped. The larger the firm, the greater was the concentration of its work for business clients and the larger the average income of a firm’s lawyers.[n6] During the 1980s and 1990s, the incomes of partners and associates in major firms increased greatly, while the earnings of solo practitioners and lawyers in small firms declined.[n7]

The accompanying table tracks the movement in firm size from smaller practice units to larger in the customary manner. It shows at first the drop in the percentage of lawyers who were sole practitioners and then its rise as more women entered the profession, as well as the growth during the 1980s and 1990s in the size of the largest law firms:[n8]

 

1980

1985

1988

1995

Private

Practitioners

All

Lawyers

Private

Practitioners

All

Lawyers

Private

Practitioners

All

Lawyers

Private

Practitioners

All

Lawyers

N = 370,111

N = 542,205

N = 460,206

N = 655,191

N = 519,941

N = 723,189

N = 634,475

N = 857,931

Sole

Practitioner

48%

33.2%

47%

33%

46.2%

33.2%

46.9%

34.7%

297,702

2 to 10

lawyer firms

32%

21.5%

28.3%

19.9%

25.1%

18.0%

22.4%

16.8%

144,132

11 to 50

lawyer firms

12.6%

8.7%

13.6%

9.6%

14.1%

10.2%

14.1%

10.4%

89,225

51 or more

lawyer firms

7.3%

5%

11.2%

7.9%

14.6%

10.5%

16.6%

12.3%

105,526

Percentage of all lawyers in private practice:

68.3%

Percentage of all lawyers in private practice:

70.2%

Percentage of all lawyers in private practice:

71.9%

Percentage of all lawyers in private practice:

74.0%



The table reflects the steady movement toward larger and larger law firms in which a greater percentage of lawyers’ time is devoted to business clients and less to the representation of individual clients.

At the same time, new forms of organization have been developed for providing legal services to individuals of modest means and new methods for financing such services. A sector of "new providers" of legal services for individual clients and client groups emerged with further differentiation in practice settings. Increasing numbers of solo and small-firm practitioners are participating in these new delivery systems which together have been estimated to provide potential access to legal services for more than 105 million middle-income Americans.[n9] In addition, substantial new provision has been made for services to the poor.

There are, in addition, two other substantial segments of law practice outside the traditional setting of private practice. One is comprised of those providing in-house legal services to corporations and other private organizations, the other is comprised of the lawyers employed by government in all of its functions. The private bar historically provided legal services both to corporate clients and to governments, but since the late 19th century there has been a steady trend toward bringing law work "in-house," both for corporations and for governmental departments and agencies, and toward employing salaried lawyers to handle their clients’ legal matters instead of retaining individual lawyers and law firms on a fee basis.[n10]

The Lawyer Statistical Reports of the American Bar Foundation for 1988 and 1995 (based upon the Martindale-Hubbell data-bank) provided the following distribution of lawyer population by generic divisions of practice settings:

(1988 Lawyers)

(1995 Lawyers)

Private practice

519,941

71.9%

634,475

74.0%

Legal aid/public defender

7,369

1.0%

8,499

1.0%

Private industry and association

70,727

9.8%

76,842

9.0%

Federal/state/local government

57,742

8.0%

65,628

7.6%

Federal/state/local judiciary

19,071

2.6%

21,627

2.5%

Education

7,575

1.0%

8,186

1.0%

Retired/inactive

40,762

5.6%

42,673

5.0%


Possibly, obscured within the category of lawyers working in "Private industry and association" are a growing number of lawyers whose practice status is unclear, who may no longer be serving as in-house counsel to their employers, but who are part of a workforce that provides consulting or advisory services to their employers’ customers. So long as the name of an individual lawyer is listed in the Martindale-Hubbell directory it will be counted in the category ("private industry and association") regardless of whether or not the individual lawyer holds her- or himself out to third parties to be a lawyer or maintains active membership in the bar of any jurisdiction. The appropriate regulation and application of the law governing lawyers to this segment of lawyers who may or may not be practicing law is a critical issue for the profession to consider in connection with the discussion of multidisciplinary practice.

The next immediate sections of this report detail significant changes within the two hemispheres of private practice earlier identified by empirical scholars,[n11] as well as the changes in the various settings outside of private practice in which lawyers work today.

2. The Core Sector of Traditional Practitioners

The most numerous segment of the legal profession continues to be the solo and small-firm practitioners for whom the traditional community-based, general practitioner was the prototype. Such lawyers generally served a large number of individual clients for whom they handled a variety of discrete matters.[n12] The work of the community-oriented lawyer commonly included real estate transactions, intergenerational transfers of property (wills and trusts), personal injuries, matrimonial and family matters, some corporate and commercial law for small businesses, as well as occasional criminal cases.[n13] They have been traditionally the true general practitioners representing both plaintiffs and defendants, borrowers and lenders, buyers and sellers, public agencies and private parties.

While there has been a long-term decline in the proportion of lawyers in solo and small-firm practice, the latest statistical report confirmed that more than half of the nation’s lawyers are in solo-to-ten-lawyer units in private practice.[n14] Moreover, following a decline during the 1960s in the total number of sole practitioners (from 131,840 to 124,800), the record growth of the profession during the 1970s, 1980s and 1990s included a significant increase in the number of solo practitioners (from 124,800 to 297,724).[n15] Nationwide in 1995, of the lawyers in private practice 46.9% were in solo practice; and more than one out of every three of the approximately 858,000 lawyers in the United States was a solo practitioner.[n16]

The ABF’s survey of the profession in 1995 reported that 439,949 lawyers were engaged in private practice with 10 or fewer colleagues, and were distributed among practice settings as follows:[n17]

Firm Size

Number of Firms

Number of Practitioners

Solo

297,724

297,724

2 lawyers

17,806

35,926

3 lawyers

8,250

25,480

4 lawyers

4,562

18,970

5 lawyers

2,836

14,887

6-10 lawyers

5,929

46,962

439,949

 

This segment accounted for 69 percent of the 634,475 lawyers in private practice, and 51 percent of the national lawyer population of 857,931 in 1995.[n18]

Solo and small-firm practitioners are found in virtually every practice setting: rural counties, small cities, seaports, river ports, border towns, state capitals, suburban shopping malls, inner-city storefronts and center-city high-rises, with a diversity of clientele and legal problems to match. Many adhere to the modern day version of the general practitioner, deeply involved in their local communities and serving as friendly counselors and advisers to a variety of persons and organizations in their locales.[n19] However, the opportunities for traditional community-oriented solo and small-firm practitioners have diminished.

The increasing anonymity of urbanization and the enormous sprawl in recent decades of suburbanization mean that legal transactions and services are often with strangers.

Without established relationship to a local community or ethnic circle, some solo and small-firm practitioners seeking to develop new clients have enrolled as members of lawyer panels sponsored by the recently developed prepaid and group legal services plans.

Solo practice today takes many forms. It includes a growing number of those who work at home as well as those who share office space with one or more other lawyers. Solo practitioners include neophyte lawyers who have not yet found the association that they seek with a law firm, as well as veteran lawyers who have established clienteles and networks of linkage within the profession and who prize the independence of practicing alone. For the former, it may be the practice of last resort or the only way that they can accommodate the demands of a professional life with those of one’s personal life; for the latter, it can be the fulfillment of a professional life’s ambition.[n20]

Small firms of 2 to 10 lawyers have typically been formed by several lawyers, after some initial experience in practice, who have decided to pool their efforts and resources and have brought with them into the firm different practice skills and areas of concentration which permit the firm to provide a broader range of legal services for a larger clientele. Firms that remain small have no regular recruitment program and no continuing link to law school placement offices, but simply add a lawyer as their practice warrants. Nevertheless, about one of every 3 or 4 law graduates who have entered private practice in the last two years have found employment in a small firm of 2 to 10 lawyers.[n21]

Despite the continued vitality of the solo-small firm sector of private practice, the changes in law practice since the 1970s have impacted, perhaps most heavily, upon lawyers in this sector. Carroll Seron, in The Business of Practicing Law - The Work Lives of Solo and Small-Firm Attorneys, provides a penetrating account of the quite different ways in which lawyers in this segment of the profession have responded to the lawyer’s imperatives of "getting work," "organizing the work" and "serving clients."[n22] Attorneys in this setting are not organization men and women. They place an unusually high premium on feeling that they are in control of their workplace. Individually, they can and they do choose how they will conduct their practices.[n23]

However, many solo and small-firm lawyers no longer feel financially secure based on their professional status and community standing. Confronted by evermore competition, both from within and from outside the profession, they have been forced on an individual basis to draw a personally compatible boundary between the new commercialism and the old professionalism.[n24]

Changing law and new complexities have put an increasing premium on specialization to maintain competence and to keep abreast of subject matter. When asked, the great majority of lawyers now describe themselves as specializing by legal doctrine, lawyering skill or type of client.[n25] A 1991 survey of the State Bar of California found that three-quarters of the lawyers have spent at least 50 percent of their time in one area of concentration, and more than half the lawyers limited their practice to three or fewer areas of law.[n26]

A 1990 national survey conducted by the ABA Young Lawyers Division reached similar conclusions, finding that 55 percent of the sole practitioners who responded spent 50 percent or more of their time in one substantive area. For solos who spent three-fourths of their time in one area of practice, the most common specialties were real estate, probate and trust, family law, torts and insurance, patent/trademark/copyright, criminal law, and taxation.[n27] A 1989 study made for the Commission on the Legal Profession and the Economy of New England reported a similar pattern of the most frequently identified specialities by small firms in New England.[n28]

In the age of cybernetics, there have been increasing encroachments by non-lawyers on each of the traditional areas of practice common among solo and small-firm practitioners. The NYSBA’s Ostertag Committee reported developments in this way:[n29]

Nonlawyers now routinely represent clients in housing courts, in real estate tax certiorari cases, and in other administrative agency proceedings in New York, and before the United States Tax Court and various federal agencies including the Internal Revenue Service and the Social Security Administration.

Nonlawyer employees of title companies routinely provide services, as an adjunct to their traditional function.

Independent paralegal groups are forming throughout the country for the purposes, among others, of selling legal forms and assisting "clients" in completing them, of handling routine residential real estate closings and of drafting wills.

Computer programs and self-help books and forms are being marketed, and even touted, as a means by which the public may avoid having to call upon lawyers at all.

Indeed, an increasing number of potential clients are choosing to represent themselves in important legal matters in an effort to eliminate lawyers and the cost of legal services. This trend is supported by various initiatives such as "do-it-yourself" divorce kits now provided even by [New York] State’s own court system and other programs implemented by the courts and private organizations aimed at facilitating pro se litigation.

Recent press accounts describe the continuing conflict in the Metropolitan New York area over the preparation of residential real estate contracts by real estate agents. Four county bar associations are poised to press claims of the unlicenced practice of law to prevent the practice.[n30]

A principal function of most solo and small-firm practitioners has been to handle the resolution of disputes. Family disputes are a principal source of such work. More than a third of all civil cases in New York State courts are domestic relations cases.[n31] These "one-shot client" cases have bred a specialty bar[n32] that is now faced with the growing movement to transfer family matters to a less adversarial forum,[n33] as well as with "do-it-yourself" divorce kits and paralegal divorce firms.[n34]

The many challenges faced today by the majority of solo and small-firm practitioners who cling to tradition creates in them a sense of being besieged, both from within and without the profession. In the circumstances, it is not surprising that from this most numerous segment of the profession rises the insistent call not to sacrifice or compromise the traditional values of the profession to accommodate those who seek to promote multidisciplinary practice.[n35]

However, the challenges from within and without the profession have fostered the development of a significant subgroup of entrepreneurial practitioners among solo and small-firm attorneys.

Professor Seron describes the entrepreneurial subgroup in this way:[n36]

They stake out a commercial niche and create specialized businesses premised on the opportunities of a wider, service-based economy. Building on the ideological tension between commercialism and professionalism, they take the next logical step by incorporating ever more modern business techniques into the delivery of legal services.

The entrepreneurial practitioner proceeds on the premise that clients are more interested in price than quality and that matters involving personal plight are routine, standard and predictable. They seek to organize services for consumers rather than to counsel and advise individual clients. At the same time, the entrepreneurial attorney is service-oriented, but the concern with service emphasizes efficiency and cost rather than process and quality. Borrowing the language and symbols of the consumer movement, they rely on clients looking for cost, speed and lawyer-selection based on product-identity through advertising and thereby build large scale standardized practices.[n37]

Meanwhile, modern technology and improved practice management are making small practice units more cost effective than in the past. "Legal boutique" has been added to the lawyers’ lexicon and the referral practice developed by such speciality firms has actively grown alongside the larger law firms.

On the other hand, some see the role of the general practitioner in an age of specialization as evolving into that of the diagnostician who identifies and defines the client’s problem and then refers the client to the appropriate specialist. No doubt such referrals will increase with further specialization and many general advisers will play an important role in seeing that their clients get the legal services appropriate to their needs.

One growing technique for leveraging the practice of small firms is to join in formal and informal networks of firms in different parts of the country engaged in the same lines of practice. Some arrangements provide for no more than mutual referrals of clients who seek representation in another jurisdiction, while others seek some of the advantages of large firms by agreeing to share clients, training facilities, management know-how, practice-development strategies, support services and even experts for litigation.[n38]

A salient example of ad hoc networking through the use of modern information technology was the recent cooperative prosecution in New Jersey by some 30 plaintiffs’ lawyers around the country of a product liability case relating to diet pills. The Wall Street Journal reported that the absent lawyers every evening received updates of the day’s proceedings via electronic mail and, in turn, fired back comments and advice.[n39]

3. The Development of Legal Service Organizations

During the past 40 years traditional private practice serving individuals has been significantly supplemented by new organizations and methods for providing legal services to the poor and to persons of modest means and facilitating the public’s access to legal services. These organizations and methods have increased both the demand for and the supply of legal services.

The new organizations and methods include greatly expanded legal services to the poor, including publicly-funded civil legal assistance identified with the emergence of a new field of poverty law, and greatly expanded legal assistance in criminal proceedings furnished by legal aid, public defenders and programs of court-appointed defense counsel; bar-sponsored and privately operated lawyer referral and information services; law clinics or what have been referred to as "advertised" law offices; group legal service plans, free plans, prepaid plans, employee assistance plans and individual enrollment plans; as well as local, state and nationally organized programs of pro bono services by lawyer volunteers.

Public access to lawyers and the ready availability of legal services to all who need them have concerned thoughtful members of the profession for more than a century. It is a "basic tenet of the professional responsibility of lawyers . . . that every person in our society should have ready access to the independent professional services of a lawyer of integrity and competence."[n40]

The first organized effort to provide legal assistance to the poor was the formation in 1876 in New York City of what became The Legal Aid Society, created by an organization of German-American immigrants. By 1917, thirty-seven cities had a total of forty-one functioning legal aid organizations. Reginald Heber Smith, in his study for the Carnegie Foundation, reported that these organizations handled in one year a total of 117,201 cases. However, Smith found this in no way commensurate with the need and wrote a scathing indictment of the American legal system for its inaccessibility to the poor.[n41]

Following the model of the New York Legal Aid Society, the early focus of the legal aid organizations was predominantly upon civil legal services. Criminal defendants for many years received scant organized assistance other than from groups of private attorney volunteers.[n42]

The public defender movement, seeking to have government provide counsel to indigent defendants, was initiated in 1893 by Clara Shortridge Foltz, the first woman to be admitted to practice in California. There were five public defender offices in 1917 and only 28 by 1949.[n43] Significant implementation awaited the Supreme Court’s grant of the constitutional right to counsel to criminal defendants in federal courts in 1938,[n44] its extension to felony defendants in state courts in 1963[n45] and to all those at risk of imprisonment in 1972.[n46]

During the 1920s and 1930s, the twin problems confronted by many members of the public, of knowing when to seek legal assistance and of finding a lawyer competent to assist them, grew with the anonymity of urbanization and the pervasiveness of law in everyday life. It was not until the 1960s, however, that neighborhood law offices were opened with a new mission of providing legal services to the poor, funded first by private foundations as social experiments and later funded by the federal Office of Economic Opportunity as part of the War on Poverty.[n47]

Another initiative to make lawyers more accessible to the ordinary citizen was the establishment in 1937 of the first lawyer referral service by the Los Angeles County Bar Association. This marked the beginning of what became in the post-war period a nationwide program of bar-sponsored referral services to inform potential individual consumers of legal services about lawyers in their local communities.

Legal services of a different character are needed, and frequently not available from the private bar, when individuals find themselves in situations where they share with others substantially the same legal interest against some third person or the government, and they seek as a group to invoke their legal rights. Advocacy to advance and enforce "group legal rights" has been a part of the American scene for many years, but it has been commonly looked upon by the law with suspicion and restraint by rules such as those regulating class actions and standing to sue.

From the early decades of the 20th century, organizations were formed by lawyers and political activists such as those advocating women’s suffrage, the American Civil Liberties Union and the NAACP Legal Defense and Education Fund,[n48] but the development of a special segment of the legal profession, engaged in what came to be called "public interest" law, did not materialize until the activist decade of the 1960s.

The 1960s was a seminal period with respect to legal services for the poor. It was the time that important court decisions and legislative enactments made way for the great expansion in the delivery systems for civil and criminal legal services.

In the following subdivisions of this section, while recognizing the serious problem of unmet legal needs that continues, we look at today’s expanded practice settings for lawyers in non-traditional delivery systems which now provide legal services for the poor, legal services for those of modest means and advocacy for group legal rights in the "public interest."

a. Lawyers for the poor

(1) Civil legal assistance. By the 1960s, civil legal assistance, financed privately by community chests, bar associations, individual lawyers and special fund-raising campaigns, provided such organized legal assistance to the poor as was available.[n49] The earliest canons of ethics had recognized the professional obligation of individual lawyers to assist the poor,[n50] and in traditional practice settings lawyers in their local communities had always handled many legal matters for which they were not paid. Any organized programs were almost exclusively in large urban areas.

However, in the decade of the 1960s there was increasing public scrutiny of the legal profession and the adequacy of its performance in distributing legal services, including legal services to those unable to afford a lawyer.[n51] This was at a time when national policy was focused on the poor who were unable to break the cycle of poverty. It was urged that legal advocacy for the poor should be an integral part of any comprehensive "War on Poverty."[n52]

Thus in 1965, the Office of Legal Services was established within the federal Office of Economic Opportunity and the federal funding of local legal services programs began.[n53] It marked the beginning of the emergence of poverty advocacy and of the development of what is today known as poverty law, greatly supplementing and broadening the mission of legal assistance for the poor as previously provided by traditional, privately financed legal aid.

During the years 1965 to 1973, the federal Legal Services Program, with the strong support of the organized bar, created a presence of lawyers in poor urban neighborhoods and began the representation of organized groups of the poor. By 1973, the program comprised 250 community-based agencies staffed by more than 2,600 full-time lawyers manning 900 separate law offices. Program lawyers by 1973 had served over five million low-income clients and had argued a hundred appeals in the United States Supreme Court.[n54]

Following the establishment of the Legal Services Corporation ("LSC") in 1975, with the organized bar again playing a leading role, federal funding for civil legal services rose rapidly to its peak in 1981 with a budget of $321 million, which supported programs employing some 6,000 staff lawyers.[n55] The following year, the budget was cut by 25% and throughout the 1980s the challenge for proponents of publicly-supported legal services, including the American Bar Association, was to maintain at least the 1982 level of funding.[n56]

The National Legal Aid and Defender Association’s 1998/99 Directory lists a total of 2,506 main and branch offices in the United States and Territories which today provide civil legal assistance to persons unable to retain private counsel. This listing includes programs funded wholly or in part by the Legal Services Corporation as well as those funded by other sources.[n57] The offices range in size from offices with one or two staff attorneys to offices of a hundred or more attorneys, paralegals and investigators. The Legal Services Corporation reported that programs for civil legal services to the poor that it supported during 1997 employed 3,494 full-time staff attorneys and 1,439 paralegals working in local legal aid and legal services offices as well as in the Corporation’s state supported and regional training centers and its computer assisted legal research programs.[n58]

In recent years, the work of staff attorneys in legal services offices has been supplemented by the work of more than 100,000 private attorneys, working with staff attorneys and accepting referrals on a pro bono or reduced fee basis.

(2) Criminal defense. Thirty years elapsed between the Scottsboro case in 1932 and the sounding of Gideon’s Trumpet in 1963.[n59] During that period, modest advances were made in providing representation for indigent defendants, but it was only in the wake of Gideon and the passage of the Criminal Justice Act of 1964, with its provision for the compensation of defense counsel, that legal assistance for persons accused of crime became a publicly-acknowledged responsibility.

Thereafter, the traditional role of ad hoc court-assigned defense counsel greatly diminished and most jurisdictions created government-supported public defender offices staffed by salaried employees to satisfy the new constitutional requirements. In 1967, state governments spent $17 million, and the federal government $3 million, to provide legal representation for indigents charged with felonies.[n60] By 1977, the combined total reached $403 million,[n61] and by 1988, expenditures for criminal defense services reached $1.4 billion.[n62]

Public defender programs grew from 28 in 1949 to 163 in 1973, by which time state-subsidized counsel under programs for indigent defendants were representing 65% of all felony defendants (leading one commentator, with a measure of hyperbole, to characterize private defense counsel as a "dying breed").[n63] The 1998/99 Directory of Legal Aid and Defender Offices in the United States and Territories now lists a total of 1,566 main and branch offices providing criminal representation to persons unable to retain private counsel operated by public defender programs and by legal services programs which contain a public defender component.[n64] The largest publicly-supported program is the Criminal Defense Division of the New York City Legal Aid Society with an average complement of 451 supervising and staff attorneys who handled 194,000 cases in the 1998-99 fiscal year.[n65] In addition, special programs in a number of urban centers, both publicly and privately funded, now provide lawyers for juveniles in both criminal and family court proceedings, as well as for prisoners and other institutionalized persons.[n66]

Although state-subsidized public defenders predominate in the representation of felony defendants today, private practitioners in every jurisdiction continue to play a significant role in representing defendants on both a retainer and publicly-subsidized basis.[n67] Substantial representation continues to be on a pro bono basis, both court-appointed and volunteer (including post-conviction death-penalty representation).

Today the criminal justice system is confronted with record numbers of prosecutions. Providers of indigent defense services have in some jurisdictions been overwhelmed by the ravages of the drug epidemic and the federal "war on drugs." The National Center for State Courts in 1991 reported that 70-90% of defendants charged with drug and drug-related offenses were indigent and required appointed counsel. Many public defender offices are today overburdened and underpaid, with high turnover, and unprepared to handle their massive caseloads.[n68]

b. Services for persons of moderate means

Following World War II it became increasingly apparent that supply and demand in the legal services marketplace as traditionally structured operated no more effectively to provide equal access to legal assistance for persons of moderate means than for the poor.

In 1951, the ABA Standing Committee on Lawyer Referral Services prophetically reported that:

the requirements of the public for legal services at moderate fees are greatly in excess of its requirements for free legal aid.[n69]

Experience in later years confirmed the magnitude of this potential demand after the Supreme Court had lifted the ban on advertising[n70] and had struck down minimum fee schedules,[n71] and legal services came to be more or less freely marketed to middle income persons.

As the consumer movement gained momentum during the late 1950s, the need of middle-income consumers for improved access to legal representation received increasing attention. Some consumer groups, primarily those associated with organized labor, concluded that a way should be found to surmount the obstacles faced by the rank and file in accessing the justice system.

Some approaches were initiated by individual lawyers and were entrepreneurial in nature; others were sponsored by the organized bar and conceived as a means for fulfilling the bar’s responsibilities to the public; while still others, inspired by experience in delivering legal services to the poor, were developed in furtherance of public policy objectives and adapted to the needs of particular groups of consumers.

Basically, each of the mechanisms was aimed at the same three things:

helping people to know when to seek legal assistance;

letting them know that lawyers were available; and

making legal services affordable for persons of moderate income.[n72]

(1) Advertised legal services and clinics. The approach of enterprising individual lawyers, taking their cue from the medical profession, was to organize "legal clinics." A "legal clinic" has been defined as "a law firm that offers legal assistance at below-market rates for relatively routine types of...legal services [to individuals rather than to business] and that uses advertising, fixed-amount fees and standardized operating procedures and forms to increase volume and reduce costs."[n73]

Lawyers who organized their practice on the clinic model, following the Supreme Court’s decision in the Bates case, sought to reduce the cost of providing legal services by reducing the amount of lawyer time involved in rendering individualized legal assistance.[n74] This required high volume to justify setting up standard procedures. Standardization was more readily accomplished in highly specialized offices such as those for conveyancing, personal bankruptcies or workers’ compensation. It also required intensive use of paraprofessionals, under a lawyer’s direction, as interviewers, investigators and technical assistants. It called for word processors and computer software to generate standard forms and checklists, and to maintain practice controls and accounts, so that fees could be lower than those charged by traditional law firms.

A 1970 national survey of legal clinics indicated some difficulty in identifying true clinics, which by then had become a diverse group, not generally high-volume or streamlined in operations, but all advertising, at least in the Yellow Pages, and providing routine legal services for set fees.[n75] In 1980, it was estimated that there were between 475 and 583 private clinics across the country, mainly in metropolitan areas, run predominately by solo practitioners.[n76]

While it appears that the name "clinic" may be disappearing as connoting "poor people only" to many prospective clients, large numbers of firms are in fact using a "clinic" approach. A 1988 study reported that there were at least 15,000 to 16,000 lawyers nationally in law offices that had adopted the techniques of the clinic, advertised civil legal services for individuals on a basis other than contingent fees, and addressed their marketing primarily to middle income consumers.[n77]

(2) Franchised legal services. The experience of both Hyatt Legal Services and the Law Offices of Jacoby & Meyers may suggest limits upon the effectiveness of national organizations operating local law offices that use the "clinic" approach. Both Jacoby & Meyers and Hyatt grew into interstate chains of small law offices supported by heavy television advertising. They generally avoided head-to-head competition with each other by locating their offices primarily in different media markets.[n78] However, the subsequent history of both organizations illustrates the difficulty in maintaining such a multistate chain.

Hyatt Legal Services was established in 1977. It popularized the concept of providing inexpensive, flat-fee legal services. In the mid-1980s it had almost 200 offices nationwide. Since then, Joel Hyatt who was the co-founder, sold off the offices to lawyers employed in the individual offices and the company charter was canceled in September 1999.[n79] Meanwhile, Hyatt had established Hyatt Legal Plans that offered legal services at a flat-rate to consumers through their employers as part of benefits plans. In 1997, Hyatt and his partners sold Hyatt Legal Plans to MetLife. He is now a professor of entrepreneurship at Stanford University Graduate School of Business.[n80]

As of November, 1999, Jacoby & Meyers had 17 remaining offices in various metropolitan areas of New York, New Jersey, Pennsylvania, California and Arizona. Gail J. Koff, a New York lawyer, is the remaining founding partner and sole owner of the firm.[n81] In November, 1999, this firm launched Instant Interview, an interactive legal web site designed to sign up clients who log on and answer a page of questions to see if they have a case worth pursuing. In the same month, the firm announced that it would encourage all of its attorneys to use Cybersettle.com, an online claim resolution system.[n82]

No multi-state chains of law offices comparable to Hyatt Legal Services or Jacoby & Meyers have since emerged. However, various small firms around the country have established local chains and, while frequently not describing themselves as legal clinics, have targeted their practices toward persons of moderate means.[n83]

From the perspective of the individual lawyers engaged in these new methods of delivering legal service, there are marked differences between working in a local chain of storefront offices and in a local unit of an interstate firm, such as Jacoby & Meyers. In the small, entrepreneurial setting of the locally advertised, clinic-like operation, many of the aspects of traditional solo and small-firm practice survive, but are altered by the advertising which frequently draws a different clientele of single-matter drop-ins for whom the lawyer performs a standardized service at a fixed-fee with little opportunity for developing a client base.

As for the attorney working in a large multistate chain, the lawyer must adapt to working in a large organization that emphasizes managing the work of its lawyers and their fitting into the management scheme focused on the efficient, productive and cost-effective delivery of service. Within an otherwise structured context, Professor Seron found in her study that staff attorneys were expected to give special attention to self-promotion and the development of social skills among attorneys and staff alike. Moreover, quality service was equated with how consumers rated their treatment by an attorney on criteria deemed important by consumers: tidiness, returning telephone calls and politeness. However, the managers and the individual attorneys agreed that each attorney retained control over his or her own cases and clients, and that the relationships were private and personal between attorney and client without interference from management.[n84]

Professor Seron found a consensus as to what is required to be a successful attorney in a franchised legal service firm: One must be able to carry a high-volume practice of individual-client cases -- wills, bankruptcies, divorces -- while acting in an entrepreneurial fashion, bringing in new business, complying with a managed reporting system, working very long hours and building on the advertising provided by headquarters.[n85]

(3) Lawyer referral and information services. Bar-sponsored lawyer referral services are operated by state and local bar associations providing coverage for virtually every county in the United States; however, the services they provide vary considerably. In a basic system, a caller is simply given the name of the next lawyer on a rotating list who handles the kind of matter involved; an appointment is made, and the caller can then go to the lawyer’s office and receive a half-hour consultation at a fixed fee of $20 or $25.

However, among the more than 300 lawyer referral programs nationwide, a great variety of additional services are offered.[n86] Many programs are directed by staff attorneys with in-house staff available to furnish basic legal advice as well as suggestions as to where prospective clients may obtain help. Some programs conduct consumer education regarding lawyers and the law, and publish "legal check-up" materials and lists of community resources. A small number charge no fee for initial consultation.

Many referral services operate in conjunction with legal aid offices or have "no-fee" pro bono panels of lawyers. Bilingual staffs are common and a few accept credit cards for legal service.

To help ensure the competency of members of referral panels, a number of the services have screening procedures for would-be panelists or have CLE requirements or peer review as a condition of continued membership on panels. In some jurisdictions panels of specialists are available, for which qualifying education and experience are a prerequisite to membership.

It has been estimated that five to six million requests are handled each year by lawyer referral services nationwide.

Membership on a referral panel is seldom, if ever, the principal source of a lawyer’s practice, but tens of thousands of solo and small-firm practitioners are today members of bar-sponsored panels, which provide a useful channel of introduction to prospective clients, while helping members of the public locate lawyers who can serve their needs.

Recently, privately sponsored lawyer referral services have sprung up. These are operated and funded primarily by groups of law firms specializing in handling personal injury and professional and product liability claims on a contingent fee basis. These services are frequently more visible than bar-sponsored services because of the television and other advertising that they employ.[n87]

(4) Prepaid and group legal service plans. If legal clinics can be seen as arising from the entrepreneurial efforts of individual lawyers, and lawyer referral services as the bar’s program for increasing public access to legal services, then prepaid and group legal service plans may be looked upon, at least initially, as a consumer group-response to the problem of legal assistance for persons of moderate means.

Following a series of Supreme Court decisions between 1963 and 1971 holding that private associations may advise members on legal claims, and recognizing the right of people to associate to obtain legal assistance, legal service plans of a variety of types proliferated.[n88] Some of these arrangements were very simple: an agreement between a group of consumers and a law firm under which members of the group could receive certain free advice and receive fee discounts on routine legal services. Information about the arrangement would be provided by the group to its members. The endorsement of the firm by the group’s leadership seemed to provide a ready answer to the common question: "Where can I find a good lawyer?"

This type of legal service arrangement exists today between literally thousands of groups of consumers and individual lawyers and law firms. The largest and most elaborate of these plans is the Union Privilege Legal Services Plan sponsored by the AFL-CIO. Theoretically, some 17 million union members are eligible to receive free and discounted service under this plan from a nationwide panel of attorneys selected by the plan’s administrators. The panel members are primarily drawn from among solo practitioners and 23 three-lawyer firms. AARP now has a variation on this plan. Members of AARP can obtain limited access services through lawyers identified in the Yellow Pages as AARP participating attorneys.

Such "group discount" plans address consumer concerns as to the availability and price of legal services, by extending the existing framework for financing and delivering legal services. The group member is still on his or her own to determine whether a legal problem is present and is substantial enough to warrant getting a lawyer and coming up with the money to pay the fee.

In the early 1970s consumer groups and the organized bar, with the cooperation of the insurance industry, jointly developed the prepaid legal service plan. In one sense, a prepaid legal service plan is simply a way of financing the cost of legal services. In Europe, legal expense insurance, as it is called, has been performing this financing function for over 80 years.

One of the most popular prepaid legal service plan systems is a direct derivative of the "group discount" plan of the kind sponsored by consumers groups such as the AFL-CIO, the AARP and the National Education Association. Under such an access plan, the basic service is unlimited legal advice and consultation by telephone during normal business hours. Under the pure access plan, benefits are limited to this service only. In addition, service may include brief in-office consultations, the preparation and review of simple legal documents, such as wills, and short letters to be written or phone calls to be made to adverse parties. If more complex legal work is necessary, the plan member is referred to an attorney who has agreed in advance to furnish such service at a discount. The fees for these additional services are paid by the group member.

This type of prepaid legal service plan has been marketed directly to millions of American households by major credit card issuers at a cost of between $7 and $12 per month. Recently, the publicly-held Prepaid Legal Services, Inc., has offered a more comprehensive coverage package, through its sales network to individuals for about $25 per month; it claims to have some 600,000 subscribers.

The established comprehensive form of prepaid legal service is typically arranged in connection with employment. Either a labor union has negotiated a legal service benefit plan for all employees as an employer-paid fringe benefit, or an employer offers such a benefit to employees on a voluntary basis as part of a flexible benefits plan.

Comprehensive prepaid legal service plans are commonly designed to cover 80-90% of the average person’s legal needs in a given year. Benefits of the plan may include direct telephone access to services, as under an access plan, but, in addition, coverage for both in-office and court work in most areas of the law. Such plans cover the types of problems most often brought by individuals to lawyers: wills and estates, consumer problems, landlord-tenant, real estate transactions, domestic relations, bankruptcy, representation before administrative agencies, civil disputes, and certain limited types of criminal matters.

Hyatt Legal Plans, Inc. ("HLP"), now a subsidiary of the Metropolitan Life Insurance Company, serves more than 50 corporate and union sponsors with a variety of benefit packages. Plan participants call the HLP service center toll-free, it directs the callers to the nearest legal service providers. To support these plans, HLP maintains a network of private law firms.

The largest employer-funded prepaid legal service plan in the country is the UAW Legal Service Plan, which covers all hourly workers of Ford, Chrysler and GM and provides access to a comprehensive list of legal services to over 2 million people, counting employees and family members.[n89] The New York City Municipal Employees Legal Services plan, covering some 130,000 public employees of the city, is based on a pilot project funded in the 1970s by the Ford Foundation for District Council 37 of the American Federation of State, County & Municipal Employees (AFSCME) to learn how social workers and lawyers might work together, in a multidisciplinary setting, in the delivery of legal services.[n90]

Many plans have developed today into full-fledged legal service delivery systems with computerized referral systems, complaint mechanisms, quality control protocols, nationwide attorney networks, client information newsletters and cost-conscious administrative controls. Administration of plans by insurance companies and other service organizations has added the element of mass marketing designed to get consumers to enroll.

The type of arrangements entered into with lawyers under these plans has also evolved. Today, there are plans where staff attorneys service all members; others have a network of law firms under contract; while still others have a loose panel of general practitioners who have agreed with the plan’s administrator to accept cases under the plan. The network supporting some plans number as many as 12,000 lawyers, predominately solo and small-firm practitioners. Solo practitioners continue to serve as exclusive plan attorneys for small groups, as well as participating in many of the other arrangements.

From the perspective of solo and small-firm practitioners, the spread of legal service plans has presented new business opportunities for lawyers, most typically as legal service providers for plan members.[n91]

In 1989, an American Bar Foundation study indicated that 18% of U.S. households, representing some 43 million people, reported at least one person as a member of a prepaid or group legal service plan.[n92] The National Resource Center for Consumers of Legal Services in February, 1998, estimated that there were 105 million people eligible to use at least one legal service plan (including the armed services’ legal assistance plans), or 39% of the population.[n93]

Since legal service plans involve elements of insurance, marketing and employee benefits, their emergence has brought new forms of regulation into the legal-service-delivery equation. Initially, provisions of state codes of professional responsibility severely limited the extent to which lawyers could participate in prepaid legal service plans. The decade of the 1970s saw serious debates between the bar and sponsors of legal service plans regarding ethical rules prohibiting plans which limited the choice of lawyers that could be used by plan members. During the 1980s ethical restraints were eliminated and most states during the 1980s revised their professional codes to accord with the optional provisions in this respect of the ABA Model Rule of Professional Conduct.[n94]

The insurance codes of many states were amended to allow insurance companies and other commercial firms to market, underwrite and administer legal insurance plans. Both the Taft-Hartley Act and the Employee Retirement Income Security Act of 1974 (ERISA) were modified to contain provisions recognizing legal services as a legitimate employee benefit. Finally, the Internal Revenue Code was amended in 1976 to exempt the value of employer payments to legal service plans from employee taxable income, but this exemption expired in 1992 and attempts to have it reenacted have been unsuccessful.

There is evidence that all of these mechanisms, together with the spread of lawyer advertising and increased public awareness of the need for and availability of legal services, have significantly stimulated the use of legal services. The American Bar Foundation survey in 1989 found that the percentage of adults who have ever used legal services increased from 64% to 72% between 1974 and 1989. The proportion of adults having used legal services within three years of the 1989 survey was 39%, up from 27% during the same period prior to the 1974 survey. While the use of legal services increased for all income groups, it grew at the highest rate among the moderate income segment of the population.[n95]

c. Advocates for group legal rights

Private lawyers are frequently retained by groups of individual citizens who have a similar legal interest. Taxpayers, members of a profession, residents of a community, consumers of a particular product or service, members of a labor organization and stockholders of a corporation routinely employ private counsel to press their group legal rights.[n96] For the disadvantaged members of the community, their access to redress has been more problematic, but following the Supreme Court’s decision in NAACP Legal Defense Fund, Inc. v. Button[n97] in 1963, litigation to vindicate group legal rights became a favored avenue by which "public interest" advocates sought to redress what were perceived to be social and economic injustices.

While the public interest bar established its separate identity and enjoyed its broadest support during the 10 years, 1965-1975, it remains today an active and significant segment of the practicing profession working in three interrelated practice settings. The first setting is the so-called public interest law firm, a private entity funded by individuals, frequently by foundations, and sometimes by attorneys’ fees awarded in litigation. In 1988, there were reported to be 200 such firms employing 1000 lawyers and financed to the extent of $130 million a year.[n98]

Some public interest law firms are identified by the client group they represent: children, the disabled, industrial workers, women, the elderly, gays and lesbians, minorities or the poverty stricken.[n99] Other firms are known by the causes they advocate: the environment, natural resources, civil liberties, human rights or issues pertaining to the communication media. Still other firms take the names of organizations which support them: Pacific Legal Foundation, National Legal Center for the Public Interest, Mountain States Legal Foundation, Washington Legal Foundation or Moral Majority Legal Defense Fund. Public interest firms which comply with IRS regulations enjoy tax exempt status and today span the ideological spectrum from liberal to conservative.[n100]

The work of the public interest law firms is significantly augmented by a large number of private public-interest lawyers and law firms who devote a substantial segment of their practices to representing community groups, environmentalists and civil rights plaintiffs.

A further practice setting for public interest lawyers is in government. The agencies in which they work are frequently the product of prior successes by public interest advocates and have been established to serve disadvantaged groups.

The late Justice Thurgood Marshall summarized the contribution of public interest law in these words:

Public interest law seeks to fill some of the gaps in our legal system. Today’s public interest lawyers have built upon the earlier successes of civil rights, civil liberties, and legal aid lawyers, but have moved into new areas. Before courts, administrative agencies and legislatures, they provide representation for a broad range of relatively powerless minorities...

They also represent neglected interests that are widely shared by most of us as consumers, as workers, and as individuals in need of privacy and a healthy environment. These lawyers have, I believe, made an important contribution. They do not (nor should they) always prevail, but they have won many important victories for their clients. More fundamentally, perhaps, they have made our legal process work better. They have broadened the flow of information to decision makers. They have made it possible for administrators, legislators, and judges to assess the impact of their decisions in terms of all affected interests. And, by helping open doors to our legal system, they have moved us a little closer to the ideal of equal justice for all.[n101]

4. The Burgeoning of Entrepreneurial Practice

We turn from the segments of practice predominantly involved with the representation of individuals to the segments in which the representation of business predominates. Empirical studies indicate that business law predominates in firms of 11 lawyers or more. For purposes of analysis, based on the 1988 and 1995 American Bar Foundation surveys of the profession, we have arrayed by size of firm the following four segments, divided between "medium" and "large":

Number of Firms

Number of Lawyers

1988

1995

1988

1995

Medium:

11-20 lawyers

2,583

2,822

36,859

43,256

21-50 lawyers

1,201

1,397

36,563

45,954

Large:

51-100 lawyers

381

381

26,273

28,823

101 or more lawyers

258

321

49,639

76,493

4,423

4,921

149,334

194,526

firms

firms

lawyers

lawyers


It is important to a balanced and inclusive view of the private practice of law that this entire array of medium and large law firms be considered, and not only the very largest firms on which the legal press as well as scholars and pundits tend to focus their attention. When considering these four segments of law firms it would be seriously mistaken to look upon them either as "monolithic"[n102] or as sharing all the characteristics of the very largest firms.

a. Middle-sized firms

In 1995, more than 89,000 lawyers worked in one of the approximately 4,200 medium-sized law firms (11 to 50 lawyers). Collectively, they represented a cross-section of law firm practice in all its diversity of substantive areas of practice, of clients and of firm organization and structure. They provided legal representation both for individuals and for businesses; some had a mixed practice, others stressed legal problems of individuals, and still others focused almost entirely on business law issues.

Medium-sized firms are large enough for some to offer what they describe as a "full line" of legal services, while other firms limit their practice to one or several specialties. Professor T.C. Fischer, reflecting on the current problems faced by medium-sized firms, observed that the "cycle of growth and development feeds on itself," which gives these firms a choice either to grow larger "to compete with larger firms (and accept the tremendous overhead consequences), or...focus their practice on limited clients and legal fields, remaining competitive, although small."[n103]

Many medium-sized firms, following the design of the small specialty boutiques, have directed their practices and developed their expertise to serve clients in one of the burgeoning areas such as the entertainment industry, media communications or the publishing industry. Also common among middle-sized firms is specialization in aviation accidents, product liability, toxic torts, taxation or corporate behavior; while others have specialized in the rapidly developing field of intellectual property (which today embraces long-recognized specialties of patent, copyright and trademark law), of health and hospital law, of waste disposal and of environmental law.

In one sense, the middle-sized firm stands at the center of the profession today. Many have resisted the institutionalization of practice and the bureaucratic model. While now acknowledging the importance of effective law office management, they have continued to lend emphasis to the idea that law is first a profession, and only secondarily a business. As a consequence, lawyers from this segment of practice have frequently been the backbone of activities within the organized bar, stressing "professionalism" and providing leadership for professional organizations. In some ways, the medium-sized law firm appears to have mitigated the effects upon the profession as a whole of the transformation of the large law firm, to which we next turn.[n104]

b. The "large firm" phenomenon

The more than 105,000 lawyers in the 700 largest law firms[n105] are the most prominent sector of the profession today. It is clear that the emergence of what came to be referred to as the "Wall Street law firms" has profoundly affected both the structure and the operations of many law firms of both large and of lesser size. In addition, it has had a significant effect upon the profession generally, as well as upon recruitment and placement policies at many law schools, if not upon curricula.[n106] One recent study concluded that large firms have been the "critical catalysts" of recent changes in the legal profession.[n107]

The largest law firms of today are the professional progeny of "the Wall Street lawyer," who rose to prominence in the early years of this century as servant and adviser to big business and architect of its financial structure. Legal historian Lawrence Friedman writes:

There is no question that the rise of the Wall Street lawyer was the most important event in the life of the profession during the [the 1890s to 1930s] period.[n108]

Friedman and others have recounted the revolution in the structure and operation of large law firms led by Paul D. Cravath, which began in New York City early in this century. He instituted a system of firm operation that was adopted by other firms serving the business community. It included hiring outstanding graduates straight out of law school, with hopes of a partnership after an extended probationary period. They were required to work only for the firm, were paid a salary and were provided training and a graduated increase in responsibility. The system included outplacement of lawyers who were not promoted to partner and the concept that only the firm had clients and not the individual lawyers.

After 50 years of steady but gradual growth by law firms adopting the Wall Street model of hired associates,[n109] the Census Bureau reported in 1947 that there were 77 law firms having 50 or more employees, still concentrated, however, in New York, Chicago and Washington, D.C.[n110]

By 1950 these larger firms had well-established law practices providing the high-quality and sophisticated legal services sought by major corporations and other large institutions. Their relations with their clients were stable and commonly reenforced by retainer agreements under which they provided continuing counsel, while standing ready to handle any special matters for their clients that might arise. The consumer and civil rights movements were heating up, and with spirited enforcement of the antitrust laws as well as a high level of business scrutiny by the federal regulatory agencies that had been established during the 1930s, the corporate law firms were in heavy demand by their clients.

Moreover, it was a period of heightened general economic activity. Legal work and prosperity went hand in hand and the large law firms steadily grew during the decade of the 1950s. Galanter & Palay refer to "Circa 1960" as "The Golden Age of the Big Law Firm."[n111]

A salient feature of law practice -- large or small -- in this period was keeping to one’s self not only a client’s confidences, but also firm information as to finances, billing, income, relations with clients or firm operations. Moreover, maintaining a low profile was enjoined by Canon 27 of the 1908 Canons of Professional Ethics which condemned as "unprofessional" various forms of advertising and solicitation and concluded:

Indirect advertisement for business by furnishing or inspiring newspaper comments concerning causes in which the lawyer has been or is engaged, or concerning the manner of their conduct, the magnitude of the interests involved, the importance of the lawyer’s positions, and all other like self-laudation, defy the traditions and lower the tone of our high calling and are intolerable.

The most obvious feature of the transformation of large firms in the 1970s and 1980s was the exponential growth in the size of firms, to which the structure and mode of operation of the larger firms was highly conducive. Galanter & Palay presented a compelling demonstration of the inevitability of such exponential growth so long as law firms were structured around a system that maintained a leveraged ratio of associates to partners combined with a fixed policy of "up-or-out/promotion-to-partner."[n112]

Many large firms during the 1970s, seeking to retain old clients and to acquire new, began to scatter branch offices and to open foreign offices. Specialization became more intense and additional specialities were added so as to offer a "full product line" of services.[n113]

At the same time, the firms found their relations with their business clients less enduring.[n114] Corporate clients had substantially increased the size of their law departments during the 1950s and began to draw more and more of their legal work in-house. During the 1970s and 1980s many discontinued comprehensive retainer agreements and shifted to having their in-house general counsels, as sophisticated shoppers for legal service, arrange ad hoc engagements of outside law firms. For large hotly-contested one-of-a-kind transactions, in-house general counsel shopped for law firms that had assembled specialty groups. Outside counsel were also engaged for major litigation, but more routine litigation and support for litigation were frequently kept in-house.

Some changes in relations between law firms and their business clients have been industry-specific, as in the case of insurance defense counsel. Ever since courts accepted the principle of insurance companies retaining defense counsel for their insureds, it has been common for stable relationships to exist between insurance companies and the law firms they retain as defense attorneys. But with the changing profile of the insurance industry, the traditional relationships are no longer secure as companies draw more work in-house, experiment with cost-cutting devices such as "reverse" contingency agreements, and even acquire entire law firms to handle their defense work.[n115] Recently, the Indiana Supreme Court ruled to allow insurers to use their own salaried attorneys to represent policyholders, but held that it was misleading to name its "captive law firm" Berlon & Timmel. Subsequently, the name was changed to "Law Offices of the Cincinnati Insurance Companies."[n116]

As a consequence of the profound changes in their practices, a new and open competitiveness among large law firms emerged. Operations became more profit-oriented. More and more firms resorted to lateral hiring and many to mergers to broaden their lines of legal expertise or to gain new clients. Some turned even to diversifying outside of the law into what they described as ancillary businesses.[n117]

The intense competition by an increased number of large firms for top law school graduates to fill what seemed to be an ever-increasing need for more top-flight associates led not only to dramatic increases in associate compensation, but also to expanded recruiting programs to a broader roster of schools. In addition, there was a significant expansion in the hiring of law students for summer employment at generous levels of compensation.

In due course, to increase the leveraging ratio of associates to partners, many firms lowered their rate of promotion-to-partner, while others introduced multi-tiered staffs of senior lawyers, specialists, a second tier of associates, as well as an increased number of non-lawyer professionals.

A fresh focus was placed on business-like management. Professional managers to run the business side of law offices became commonplace and the Association of Legal Administrators came to boast more than 5000 members.[n118] Some firms hired marketing directors, a position unknown in 1980, but by 1985 a National Association of Law Firm Marketing Administrators had also been established.[n119] A whole service industry has now grown up to work with law firms: search firms for associates, partners and law-firm mergers; attorney out-placement consultants; law-firm management consultants; special computer support centers; lawyer-software systems providers; and public relations specialists for law firms.

Fanning the fires of competition and aggressively promoting this new service industry for law firms, has been the new legal press which began publishing in the late 1970s in the wake of the Supreme Court’s decision in the Bates case striking down the ban on lawyer advertising. The ethical restraints dropped one by one and the once opaque practices and internal affairs of large law firms gradually became public information, helping to complete the change in dominant law firm culture from that of a restrained professional organization to that of a competitive entrepreneurial enterprise with a growth strategy.

The National Law Journal, soon joined by its publishing competitors, lent media support for the growth strategy by focusing attention upon the comparative size of law firms and annually compiling successively longer lists of the nation’s largest law firms with a catalog of their branch offices and revenues. When The American Lawyer began publication in the late 1970s, it shifted the focus from counting lawyers and offices to the economics of law and the business of lawyering.

At the same time, law remains a very decentralized industry, with substantially less concentration than in accounting; or in engineering, architecture and surveying; or in advertising; or in management consulting and public relations; although one of great inequality in the economic rewards.[n120]

For at least 50 years, the law has been viewed as the most unequal of all the professions in the incomes of its members.[n121] For a period during three decades, 1941 to 1969, incomes within the lawyer population gradually became more equal, but in the 1970s that trend reversed and the inequality of income became increasingly severe.[n122] The rapid increase in partner and associate income in the largest firms was not shared in by most firms of lesser size and it appears that after 1972, there was in fact a decline in real income among medium-sized and small firms.[n123] Moreover, in the economic downturn in the early 1980s, the income of sole practitioners fell a stunning 46%.[n124]

The continuing lawyer boom during the 1970s and 1980s was not, however, confined to the very large firms. The relative size of the "corporate customer" base grew at a steady rate and around 1980 for the first time it passed the "individual consumer" sector as the dominant purchaser of lawyers’ services.[n125] From 1967 to 1982, "personal" legal services rendered by lawyers grew at only a 4.7% rate (after adjusting for inflation) while "business" legal services grew at a real rate of 8%.[n126] Overall demand for legal services grew more rapidly in the business sector than in the consumer sector, and most rapidly with respect to large corporations.[n127]

For law firms with receipts of $1,000,000 or more (which would include a substantial majority of the 5,000 odd firms we have identified as medium or large firms), over 70% of firm receipts have come from business and less than 25% from individuals (which proportions appear to have remained quite stable over time).[n128]

c. The ripple effects

The extent to which law firms of lesser size, engaged primarily in a "corporate" practice, have shared in the phenomenal success of the largest firms, may well have turned on how the firms perceived themselves and how closely they held to the elitist model of the traditional "Wall Street" firm. Sander & Williams suggest:

The elite firms are elite because, in their view, they provide a special type of legal service....[T]he common specialty shared by all elite firms is complex law...the most difficult and esoteric legal issues.[n129]

They go on to contrast this practice of "complex law," concerned as it is with determining the relevant issues and engaging in exhaustive research to advance their business clients’ interests, with what they perceive as the non-elitist practice which, for the most part, involves the application of standard legal doctrine to common problems of individual clients.[n130]

Dean Robert McKay wrote in 1990 of the "the triggering influence of the major firms" which had "defined the task, fixed the rules, and determined the conditions of labor, including compensation and billable hours." Perhaps speaking prophetically, Dean McKay went on to observe that it might be "too much to say that the whole apparatus, from legal education through every form of practice, depends on the large firm’s somewhat uneasy structure," but that "at least we can say that collapse or serious damage to that imposing structure would have implications for every element of the legal profession," and that the "ripple effect on the way down would be no less dramatic than the impact occasioned by the abrupt rise of great aggregations of lawyers within the new megafirms."[n131]

For law firms of all sizes which have a predominately business practice, the 1990-92 downturn in the economy made apparent how closely linked corporate law practice has become to the general level of economic activity. The new ad hoc relationships between corporations with their own in-house law departments, and outside law firms, as well as the special staffing by law firms to serve particular corporate legal needs, makes business law firms particularly vulnerable not only to general corporate cost-cutting programs, but also to the loss of the kinds of law business, such as mergers and acquisitions, for which special staffs have been assembled.[n132]

In the early 1990s, with the demand for complex corporate legal work falling for the first time since the lawyer boom began in the 1970s, many firms had to face the reality that in their entrepreneurial ardor, they may have over-expanded. As a result, many law firms followed the lead of their corporate clients and adopted a strategy of "downsizing." This was accomplished not only by reducing and deferring the hiring of new associates, but also by the forced separation of associates and even partners.

What sustained the modest overall growth rate among the large firms during 1990-91 was a continuing increase in the number of branch offices of the firms. This phenomenon has continued as the economy recovered during the 1990s. The 1999 list of the 250 largest firms[n133] shows offices of these firms in over 260 cities in all states except Maine, Oklahoma, South Dakota and Vermont. These 250 firms are reported to have more than a thousand lawyers in each of the following 16 cities:

New York City, NY

14,691 lawyers

Washington, DC

10,372 lawyers

Chicago, IL

5,344 lawyers

Los Angeles, CA

4,133 lawyers

Philadelphia, PA

2,850 lawyers

Boston, MA

2,728 lawyers

Dallas, TX

2,712 lawyers

Atlanta, GA

2,574 lawyers

Houston, TX

2,207 lawyers

San Francisco, CA

1,963 lawyers

Palo Alto, CA

1,689 lawyers

Cleveland, OH

1,249 lawyers

Minneapolis, MN

1,104 lawyers

Kansas City, MO

1,090 lawyers

Miami, FL

1,075 lawyers

St. Louis, MO

1,011 lawyers


d. The future of the "large firm"

The professional work of lawyers in large law firms engaged in transactional work for business clients has moved from continuing work on a broad range of issues based upon ongoing relationships with clients to engagement on specific transactions or issues, often involving some competitive selection process in the lawyers’ retention.

This has driven such lawyers further toward focusing on specialties and sub-specialties. The client, with increased in-house legal staff, retains lawyers for specific matters and wants one who is expert in that specialty, frequently giving that priority over existing relationships. This trend is exacerbated by the increasing complexity of many specialties -- for example, bank regulation -- which make it difficult for a lawyer to be truly expert without concentrating in the particular specialty.

The competitive selection process puts increased emphasis on "practice development," requiring lawyers to work on what can only be called marketing themselves and law firms. Reputation can go a long way in attracting clients, but it is not enough to get most transactional assignments.

The faster pace of business has had an important effect on the work and life of lawyers working on transactional assignments. Working around the clock is, regrettably, quite common. In the past, the typical public offering of securities languished for at least 20 days at the SEC, providing time to advance the related work. Now, in many cases, securities offerings under various newly permissible methods, are done, start to finish, in a few days.

PCs, fax, the Internet, e-mail, cell phones and the like have greatly contributed to the speed of business. They have made many things easier to accomplish, but have robbed lawyers of much of the time they would otherwise have had for contemplation or life. Research can be done and vast quantities of data can be retrieved at the desk, at home or on the road. Much of the more routine, or commodity type, preparation of documents can be accomplished much more easily and quickly through forms and precedents easily stored and accessed through PCs.

A great deal of transactional work today has transnational elements, reflecting the globalization of business and finance during the past 25 years. The experience of the lawyer is enriched as the result of the exposure to other legal systems and practice patterns and the additional complexity introduced, but at a price.

Many transactions have become significantly more complex. In financings, examples would be the use of derivatives and the securitization of many types of receivables. In M&A transactions, particularly hostile deals, there is the integration into the effort of corporate communications/PR, the great development of corporate governance issues and the much deeper understanding of the intricacies and imaginative use of corporate law. In financial services, the legal issues involved in the increasing integration of banking, securities, investment management and insurance business are an important focus of many lawyers servicing business clients. Other areas that have grown significantly are environmental law and executive compensation/employee benefits law.

In this present environment, there appears to be a growing body of opinion that the outer limits of law-firm size may have been reached and that the law will not follow the accounting profession into the formation of a few giant firms that dominate the profession. Rather, it is thought to be more likely in the highly differentiated legal profession, that large business-law practice will increasingly diversify and experiment in firm organization and that lack of concentration will continue to be a principal feature of the profession.[n134]

The professional ideal of a unitary profession, with its core body of knowledge, skills and values, common educational requirements and shared professional standards has, to a significant degree, survived the profession’s profound transformation in the 1970s, 1980s and 1990s. It has survived despite the enormous pressures within and without the profession to capitulate completely to commercialization and to divide into a series of economic sub-markets in which separate groups of lawyers sell highly specialized legal services to different consumer groups.

It now appears, however, that the continuous-growth strategy of the large firms with their "up-or-out/promotion-to-partner" system will continue to give way to more bureaucratized, closely-controlled forms of law firm management that conform growth to actual increases in demand, but which recognize the effective limits of rationalization and standardization in the conduct of a corporate law practice with its inherent complexity and the inevitably personalized nature of the professional services involved.

Large firms are designing diverse firm-missions aimed at different clienteles, focusing on new specialties and coming to look less and less alike, thus beginning to display the same range of diversity in their practice as has been common for firms of lesser size all along. Galanter & Palay observe:

The big-firm form carried an inadvertent commitment to exponential growth, but that growth was sufficiently slow to be compatible for a long period with "professional" forms of governance. So law practice never suffered the separation of ownership from control; control of work by others was, in aspiration at least, only temporary. Compared to other business services, law remained relatively unconcentrated, decentralized, unbureaucratic, and worker-managed. As the big firm becomes a less congenial vehicle, lawyers enjoy new opportunities to use their institution-shaping skills to reorganize the formats of professional work to make it produce the services and protections desired by society while making it fulfilling for those who do the work.[n135]

5. The Newly Pivotal In-house Counsel

In the early years of the 20th century, lawyers were employed by corporations as house counsel primarily in response to the increasing pervasiveness of governmental regulations that required frequent consultation with lawyers by corporate management, who sought legal advice from someone knowledgeable about the company’s business and more aware than an outsider of the objectives of the enterprise. The in-house lawyer’s role came to be seen in many companies as keeping the corporation free of legal trouble rather than getting the client out of trouble.[n136] However, it was not until the New Deal legislation of the 1930s and World War II regulations that the continuing need for legal advice in virtually every area of business became so pervasive that almost all large companies created a law department.

The general movement to reduce the amount of legal work done by law firms and to bring more corporate legal work in-house began during the 1950s.[n137] As corporate legal departments developed, their paramount concern increasingly became the cost-effective use of legal services. Allocating appropriate tasks internally to in-house counsel requires an analysis of the cost-effectiveness of the alternatives. By the 1970s, this had become a major function of in-house counsel.

A 1991 survey of the general counsels of 350 major companies reported "intense pressure from management to reduce [legal] costs" and more than a quarter of the general counsels said that their own compensation was linked to controlling legal costs.[n138] General counsels used outside firms in fields such as international legal matters[n139] for European Community work, mergers and acquisitions, intellectual property, environmental work, real estate, bankruptcy and antitrust matters.[n140]

Indicative of the pivotal role now played by inhouse counsel of large corporations is their recent use of a technique taken from government contracting: issuing "requests for proposals" (RFPs) to law firms, asking them to specify in detail and at what cost how they would meet a company’s legal needs. Compared with a traditional "beauty contest" in which competing firms give hour or two-hour presentations, an RFP calls for a detailed written proposal, often followed by an in-person presentation.[n141]

The enlarged role of corporate counsel has led Professor Geoffrey Hazard to opine that "the role of corporate counsel is among the most complex and difficult of those functions performed by lawyers . . . . [It] entails intrinsic ambiguities that must be worked through in the course of a day’s work with far greater frequency than in most other practice settings. . . . Who is the client? How does a corporate lawyer deal with the duty to get ‘all’ the facts? What are the responsbilities among lawyers having different hierarchical positions within a law department?"[n142]

One consequence of the oversight of the work of law firms by in-house counsel has been to place a new focus upon how law firms manage their practice and the cost effectiveness of their work. A new PricewaterhouseCoopers L.L.P. survey of 1998 corporate law department spending forecasts an intensified conflict over money between law firms and corporate law departments. General counsel spent 6.4% more on hiring outside legal help in 1998 than in the previous year, at a time when in-house legal work cost a median of $166 per hour compared with the $250 per hour it cost to give work to the company’s main outside firms. The study suggests that law firms associates who want to go in-house will find it harder to jump ship because of fewer jobs in corporate law departments. The PricewaterhouseCoopers partner who oversaw the survey of 251 law departments envisions a year in which firms’ billable hours will take a beating as general counsel will seek to cut costs.[n143]

6. Lawyers for Government

The public role of the legal profession in the United States is reflected in the variety of relationships in which lawyers function: for government, in government, and with the support of government.

a. Private lawyers working for government

Traditionally, governments hired lawyers in private practice to represent the public interests involved. Gradually, more and more lawyers were employed as in-house counsel by government. Today the legal work of the larger governmental units has been brought "in-house" to be performed by full-time salaried employees, but there remains a substantial amount of the public’s legal work done by part-time and fee-charging private attorneys serving municipalities, school districts and special taxing districts.

According to the 1997 Census of Governments, there were 87,504 governments in the United States. In addition to the national and 50 state governments, the Census enumerated the following units of local government:[n144]

3,043

county governments (county, boroughs and parishes);

19,372

municipalities -- providing general local government through municipal corporations (cities, villages and towns);

16,629

town governments (governmental divisions of states and counties);

13,726

school districts;

34,683

special taxing districts.

 

There are approximately 39,000 local government units with police powers in the United States. Of these, some 37,000 have populations of less than 10,000.[n145] In these smaller units of government, it is customary to hire private attorneys on a part-time or a fee-work basis, just as it is for special taxing districts for schools, fire protection, water, libraries, sewers, waste disposal and other public services.

b. Lawyers employed in local, state and federal government
(both elected and appointed to offices)

Salaried lawyers employed by local governments fill a variety of legal roles. Law enforcement and criminal justice are the quintessential functions of local government, generally led by a district attorney principally responsible for criminal prosecutions. In the early 1990s, the National District Attorneys Association estimated that there were 2,800 elected or appointed district attorneys and that there were between 20,000 and 22,000 district attorneys and assistant district attorneys in the United States.[n146] Also part of the local criminal justice system are salaried attorneys serving in probation, parole and corrections.

On the civil side of local government, lawyers are employed in offices of county and city attorneys; by departments of education, city school boards and universities; in real property and land use regulation; defending against tort liability; for municipal highway and other construction projects; in welfare, health and hospital agencies; in bond financing and tax collection agencies as well as in civil rights and antidiscrimination enforcement.

The number of lawyers employed by local governments to handle this array of civil legal work in more than 5,000 governmental units has been estimated to be at least 50,000.[n147]

At the state level, the office of Attorney General is the center of legal activity and ordinarily a dominant employer of lawyers. However, the role of the Attorney General’s offices in the legal work of the departments and agencies of state government varies from state to state, making it difficult to develop an accurate count of the number of lawyers employed in the executive branches of state governments. The legislative branches are also a substantial employer of lawyers on both a part-time and a full-time basis, but again the number is not readily ascertained.[n148]

The 1995 Lawyer Statistical Report published by the American Bar Foundation counted 38,823 lawyers employed in state and local governments who were not part of the judicial branch.[n149]

At the federal level, lawyers have played a central role since the founding of the Republic in designing and administering the national government. As the role of the federal government grew, so did the number of lawyers employed by federal departments and agencies. Dean Erwin Griswold pointed out that the Federal Register in 1937, the first full year of its publication, filled 3,450 pages. In 1990 the total was 53,618 pages.[n150]

Subject to its inherent limitations in the count of government lawyers, the 1995 Lawyer Statistical Report counted 26,803 lawyers in federal departments and agencies who were not part of the federal judicial branch. Taken together, the local, state and federal governments employ 7.65% of the lawyers in America counted in the 1995 Lawyers Statistical Report, just shy of the 8.3% employed in private industry.[n151]

c. Lawyers in publicly supported programs

We have noted above in the section on "Lawyers for the poor," the growth in federal funding since 1965 for local legal services programs, administered since 1975 by the Legal Services Corporation. Similarly noted, was the growth in support by state and local governments for criminal defense services provided by public defenders, legal aid offices and court-appointed defense counsel. While the annual cost to the public for these legal services to indigents exceeds one billion dollars, the 1995 Lawyer Statistical Report counted a modest 8,499 lawyers working as legal aid and public defender attorneys.[n152]

Within New York State, the pool of private lawyers willing to take indigents’ cases is reported to be seriously shrinking, which is attributed to the failure to change the rates paid since 1986 to court-appointed lawyers, New York is said to pay the second lowest rates in the nation, ahead only of Maryland.[n153]

Chapter 4

Cooperative Arrangements With Other Professionals

1. Ad Hoc Cooperation Between Lawyers and Nonlawyer Professionals

2. Nonlegal Businesses of Law Firms and Dual Practitioners

3. Ancillary Businesses Conducted as Law Firm Subsidiaries

4. Ancillary Businesses in Which Autonomous Nonlawyers Have a Financial Interest

Ventures with Investment Advisers

Ventures with Accountants

5. Law Firms in Which Nonlawyers Have a Financial Interest.

It is well known that, in most cases in compliance with existing ethics rules, lawyers today regularly work with non-lawyers to provide integrated professional services to clients. We have found, however, that the evidence of such arrangements is largely anecdotal. No survey, scientifically conducted or otherwise, purports to cover all aspects of this question, or to address comprehensively even one of the various formats that exist for cooperation between lawyers and other professionals.

Lawyers engaged in cooperative activities with non-lawyer professionals do not always tout the arrangements in promotional materials,[n1] and little is reported in the legal press as to the business and financial relationship between the lawyers and the nonlegal firms with which they have an affiliation. What evidence of a public nature does exist focuses chiefly on a relative handful of highly publicized business alliances between lawyers and nonlawyers.

1. Ad Hoc Cooperation Between Lawyers and Nonlawyer Professionals

It is generally understood that lawyers and non-lawyers cooperate informally on a routine basis in providing professional services to their respective clients. When needs arise, lawyers are quite capable of working effectively with other professionals, and frequently recommend that particular accountants, financial advisors, investment bankers, engineers, brokers, social workers, and others, be engaged by their clients. Whether made at the behest of the client or sua sponte, these referrals and working relationships are part of everyday professional life. They vary from ad hoc relationships, formed solely for the benefit and based on the needs of a particular client or group of clients, to ongoing cooperative working arrangements for various clients over a lengthy period of time.

2. Nonlegal Businesses of Law Firms and Dual Practitioners

Common among law firms are affiliations with providers of nonlegal services that could be considered ancillary to the practice of law. The closest of these affiliations occur in the context of law firms that actually employ other professionals to assist in providing certain services to firm clients. For example, patent lawyers routinely hire scientists and nonlawyer patent agents to work with them on client projects. Antitrust lawyers frequently employ economists to assist them in dealing with the economic issues and working with expert witnesses and other outside consultants. Many law firms have professional lobbyists on staff to assist them in governmental relations. Practitioners in the real estate tax certiorari or condemnation fields often employ appraisers who assist them in advocacy as to the values for specific properties. Elder law attorneys often employ social workers who serve their clients in conjunction with the legal services provided. Law schools recognize the interdisciplinary aspect of certain practice areas by offering joint degrees, for example, in law and social work.

Indeed, it is not uncommon for lawyers to be dually licensed professionals. Lawyer-accountants in 1964 formed their own association, the American Association of Attorney-Certified Public Accountants, which has as one of its purposes the protection of the rights of its members to practice both professions as they see fit.[n2] In addition to lawyer-accountants, lawyers often practice, or are qualified to practice, a wide variety of other professions and callings, including real estate brokerage, insurance brokerage, financial planning, medicine, nursing, social work, and so on.[n3] The organized bar has only recently accepted dual practice by attorneys. For many years, the ABA took the position that the lawyer might use the non-legal occupation as a feeder to generate business for a legal practice, thereby circumventing the ban on third-party solicitation of clients.[n4] Advertising of dual professions was expressly prohibited under DR 2-102(E) of the ABA Model Code of Professional Responsibility until 1980.[n5] New York was among those states that had originally declined to follow the restrictive ABA policy,[n6] which was abandoned in the course of adoption of the Model Rules of Professional Conduct and is now generally rejected by the legal profession.[n7]

One recent and widely publicized example of a law firm operating a nonlegal business through its employees is that of Womble Carlyle Sandridge & Rice, of Winston-Salem, North Carolina, which created a Client Plus Technology Department consisting of 22 technology consultants who are employees of the firm, rather than of a subsidiary or other separate entity. The department helps clients manage multi-district mass tort litigation, and assists creditors and collection agencies cut the cost of recovering on bankruptcy claims.[n8]

3. Ancillary Businesses Conducted as Law Firm Subsidiaries

In addition to instances in which nonlawyer professionals are employed by law firms (or in which individual lawyers are dual professionals) there are those instances in which law firms have created separate wholly owned entities through which to conduct ancillary businesses.[n9] A 1992 study by the National Law Journal reported that the nation’s 250 largest firms at that time conducted over 50 ancillary businesses in such diverse areas as real estate development, management consulting, financial institution consulting, federal and state7 governmental affairs consulting, title insurance, management information services, public issues law and management, international trade consulting, employee benefits consulting, human resources consulting, financial planning, educational consulting, intellectual property consulting, environmental consulting, private judging and general business consulting.[n10]

In 1986, the "Stanley Report" of the ABA Commission on Professionalism[n11] bemoaned "what it perceived to be an increasing participation by lawyers in business activities."[n12] It found that law firms operated businesses that provided services ancillary to the practice of law, such as real estate development and investment banking, but that other lawyers engaged in businesses that had little or nothing to do with the practice of law.[n13]

Today, there is anecdotal evidence that law firms throughout the country continue to own and operate ancillary business subsidiaries within the existing legal and ethical framework governing lawyers. Here are a few examples:

The San Francisco-based Littler Mendelsohn firm, which concentrates its practice in management-side labor relations, established Employment Law Training, Inc. The subsidiary trains clients on how to minimize employment discrimination within their ranks.[n14]

Washington’s Howrey & Simon has three subsidiaries: "Capital Environmental," which has 10 scientists and other specialists who provide risk analysis and assessments of environmental cleanup costs; "Capital Accounting," which has 15 accountants and assists litigants represented by the firm in measuring their damage exposure; and "Capital Economics," which has more than 30 economists and accountants who perform market analyses for mergers and acquisitions.[n15]

Detroit’s Dickinson, Wright firm took 10 computer technicians it had recruited for its own internal purposes and created Technology Consulting Partners. The new entity helps businesses such as Chrysler Financial, Dollar Rent-a-Car and Thrifty Rent-a-Car manage their operations more efficiently.[n16]

Holland & Knight Consulting Inc., a wholly owned subsidiary of Holland & Knight LLP, includes a private investigation group, international translation operations, forensic accounting, real estate consulting, environmental consulting, corporate compliance program, maritime compliance programs and other services.[n17]

Richmond, Virginia based McGuire, Woods, Battle & Boothe formed a corporate consulting subsidiary to provide public lobbying, public relations and business relocation advice.[n18]

New York’s Anderson Kill & Olick, which has an extensive practice in insurance coverage disputes, recently announced that it is forming an insurance coverage consulting business (Anderson Kill Insurance Services) to advise companies on subjects such as choosing appropriate policies and securing maximum recoveries in policy disputes without litigation. The subsidiary will employ insurance analysts, public adjusters, environmental engineers, risk managers and insurance "archaeologists," among others.[n19]

The Mineola, New York firm of Ruskin, Moscou, Evans & Fatischek recently created Island Star Capital, an investment banking firm, to advise Long Island companies in mergers and acquisitions, to help them raise capital and to lend management expertise to early stage companies.[n20]

Thus, lawyers have long recognized that there are circumstances in which it is advantageous to them and to their clients to provide integrated professional services on certain matters, and have taken steps over the past several years to create entities, within or under the control of their firms, to provide such services.[n21]

4. Ancillary Businesses in Which Autonomous Nonlawyers Have a Financial Interest

In contradistinction to ancillary businesses owned and controlled by lawyers or law firms are the relative handful of affiliations between lawyers and other professionals in which the non-lawyer professional is not an employee of the law firm or of a subsidiary of the law firm, and has an ownership or other direct financial interest in the nonlegal business venture.[n22] Public attention was first called to these entities in 1997, and the few that have been created since then have attracted considerable media attention.

a. Ventures with investment advisers

On October 4, 1999, the Boston law firm of Bingham Dana LLP announced that it had established a joint venture with Legg Mason, Inc., a publicly traded firm that provides investment advisory, securities brokerage, investment banking and other financial services to clients worldwide, for the purpose of providing investment management and trust administration services for Bingham Dana’s clients. Called Bingham Legg Advisers LLC, the new entity is owned 50-50 by Bingham Dana and Legg Mason, and continues the operations previously performed by Bingham Dana’s Fiduciary Services Group. The former Director of the Fiduciary Services Group is now president of the LLC, and the account administrators and staff of the Fiduciary Services Group continued in their same roles in the new entity. In effect, Bingham Dana "spun off its Fiduciary Services Group into a new entity in which Legg Mason purchased a 50% interest for an undisclosed sum.

While it is not uncommon for law firms to offer their clients limited money-management services, this has been common in Boston where old-line families have often turned to law firms rather than banks to manage estates and trusts. The new venture was thus in line with past practice and apparently made business sense to both parties. On the one hand, it enhanced Bingham Dana’s ability to provide trust administration and portfolio management services to its clients as well as providing an unspecified influx of capital. On the other hand, it provided Legg Mason with greater access to high net worth families in Boston.[n23]

While the joint venture between Bingham Dana and Legg Mason marked the first such combination, it was not the first entity affiliated with a law firm to become a registered investment advisor. In 1998, the Boston law firm of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo formed a wholly owned subsidiary called Mintz Levin Financial Advisors, and hired a nationally known financial planner to provide investment advice and services to its clients.[n24]

b. Ventures with accountants

In 1997, the Washington, D.C. law firm of Miller & Chevalier announced a "strategic alliance" with the accounting firm then known as Price Waterhouse. Described as a "loose" affiliation, the alliance presented both firms with a non-exclusive source of business referrals and the ability to market themselves nationwide as being able to provide "seamless service" to their clients.[n25] Similar alliances were formed during 1999 between KPMG, the 25-lawyer Chicago firm of Horwood Marcus & Berk Chtd. and the San Francisco-based 700-lawyer firm of Morrison & Foerster.[n26] While the terms of the alliances are not public, the public announcement refers to an agreement by the participants to use their best efforts to refer clients to one another. To ensure that each participant is able to exercise independent professional judgment in choosing the best service provider for a particular client, the referral arrangement is said to be non-exclusive. The client is not required to engage the services of the recommended firm, and there may be circumstances (such as conflicts of interest) that preclude the recommended firm from accepting the matter. The law firms are reported to have also agreed to serve as counsel to KPMG in certain state and local taxation matters. No fees are shared, nor are referral fees to be paid.

5. Law Firms in Which Nonlawyers Have a Financial Interest.

In November 1999, an accounting firm and lawyers from an established law firm took a step beyond any prior joint venture between lawyers and nonlawyers and formed a new law firm called McKee Nelson Ernst & Young LLP in Washington, D.C.[n27] William McKee and William Nelson both withdrew from the King & Spalding firm to create the new entity. According to press reports, Ernst & Young is providing "start-up" financing of an unspecified amount to the new firm but otherwise has "no financial interest" in the firm and "will not be involved" in its day-to-day management. Although the law firm will rent space from Ernst & Young, the offices of the firms will be physically separate, and the law firm’s files are said to be inaccessible to employees of the accounting firm.

* * *

The foregoing examples illustrate the extent to which lawyers, purportedly operating under existing legal and ethical strictures in their respective jurisdictions, particularly in the past several years, have affiliated in varying degrees with non-lawyer professionals in providing services to their clients.

Chapter 5

The Organization, Education and Maintenance of a Single American Legal Profession

In contrast to the divided bar in other common law countries and the diffuse character of lawyering in various civil law countries, the American legal profession over the last 200 years has evolved as a single profession, set apart and unified by its organization, education and common body of learning, as well as by acquired skills and adopted values associated with the profession. Law and medicine have been distinguished in this manner from other professions in the United States, including that of accountancy, which has never achieved an identity but has been splintered and spread into diffuse components.[n1]

Even in the early years of the nineteenth century, American lawyers had more in common than members of similar professions abroad. Although the traditions of the English legal professions deeply influenced this country, the distinction between barristers and solicitors never took root here. Neither did we follow the civil law systems, which tend to recognize advocates, notaries, judges and sometimes others as distinct professions. The main obstacle to unity, aside from the disorganization of lawyers in most states, was the existence of separate legal systems in each state, each with its own bar admission arrangements. Yet even this was counteracted to some extent by a shared common law heritage, by the mobility of lawyers along with other Americans, and by the increasing, unifying role of federal laws and federal courts.

In the 1870s a single identity for the American legal profession began to be framed in the organization of bar associations, first in a few major cities,[n2] then in a few states,[n3] and in 1878 nationally with the establishment of the American Bar Association.[n4] At its organizational meeting, the ABA established a Standing Committee on Legal Education and charged it with developing a program which visualized a unitary legal profession with common admissions and educational requirements for the entire country.

Meanwhile, Christopher Columbus Langdell had left the practice of law in New York City and had become dean of the Harvard Law School, which at the time, along with a few other law schools, was striving to move into the mainstream of American university education and out of what had been their subordinate educational role. The 1870s was the time that the university in America was beginning to flourish, the intellectual community was infatuated with the "new sciences" that were driving industrial development. Technical training became the badge of contemporary achievement. It was in such circumstances that Dean Langdell introduced the "case method" and began the promotion of legal education as the study of a "science," with the "case method" providing the laboratory in which legal doctrines and principles could be explored and developed out of the opinions of appellate courts.[n5]

While many schools continued the earlier methods of instruction, the Langdellian reorganization of legal education into an academic discipline acceptable to the university community assured law schools that adopted the Langdell model of a place in the modern university, at the same time that it presented the profession with an educational program for lawyers that could raise both the status and the standards of the bar.

The ABA upon its founding thus became a strong ally of the law schools in their efforts to establish their niche in American university education. In 1881 the ABA initiated what became a century-long campaign, passing a resolution recommending attendance at law school for three years and that all states give credit toward required-apprenticeships for time spent in law school. With bar leaders advocating that a type of academic law school was needed to control entry into the bar, a national alliance developed between the newly organized bar and the burgeoning law schools.[n6]

Toward the end of the 19th century, the ABA called for the establishment of an organization of "reputable" law schools and in 1900 the Association of American Law Schools was founded with 32 charter-member schools. Membership was open to schools rather than individuals, and schools were required to meet certain minimum standards.[n7] For the next 14 years, AALS met regularly with the ABA until World War I, when the ABA heedlessly scheduled its annual meeting to conflict with the academic term.[n8]

However, the separation of AALS meetings from those of the ABA beginning in 1915 breathed new vigor into the AALS. By 1920, its leadership, convinced that the schools could do little by themselves to raise requirements for admission to the bar, urged law faculties of the member-schools to work actively with the ABA in a standards-raising effort. With the active participation of a large body of law professors at the 1920 meeting of the ABA Section of Legal Education and Admissions to the Bar, a special committee on legal education was established chaired by the lawyer-statesman Elihu Root. The Root Committee reported in 1921 that "only in law school could an adequate legal education be obtained;" that two years of college should be required before admission to law school; and that the ABA should invest a council on legal education with power to accredit law schools. The report was accepted by the Section, and Root and Chief Justice Taft piloted it to approval by the 1921 ABA convention.[n9]

The Root Report was not without its critics, who argued that the standards-raising initiative was exclusionary and designed to drive out the intellectually less fashionable schools.[n10] Moreover, the notion of a unitary profession with a single standard of qualification was contrary to the position that Alfred Z. Reed, who conducted a series of studies of legal education and the legal profession sponsored by the Carnegie Foundation, espoused. Reed argued for a differentiated bar and for different types of law schools for lawyers of differing skills and qualifications to serve different purposes and different elements in society.[n11]

A salient accomplishment of the ABA during the early years of the 20th century, born of its relationship with the law schools, was to wrest legal education from the local control of the practicing profession and to place it increasingly in the law schools. When state-wide admissions standards were first prescribed by newly-established boards of law examiners in the late 19th century, it was common to require at least one year of law school preceded by two years in either a law office or a law school,[n12] but the growing sentiment among legal educators, supported by the organized bar, led to the call for requiring that the entire three years be spent in law school, which ultimately became the rule.

Today, all but seven states require all applicants for bar admission to have graduated from a three-year law school program (or its part-time equivalent). California, Vermont, Virginia and Washington do permit law office study (for the few who wish it) to be a substitute for law school graduation, and Maine, New York, and Wyoming permit a combination of law school and law office study as a substitute for law school graduation.[n13]

For the profession to create for itself an identity, it had not only to claim as its own a special body of learning and skills -- for which the legal profession looked increasingly to the law schools -- but it had also to embrace a core body of values which it could assert set members of the profession apart and justified their claim to an exclusive right to engage in the profession’s activities.[n14] In the next section of this report we will address the way in which that body of values formally embraced by the American legal profession has been articulated and enforced.

The result has been that to this time the American legal profession has succeeded to maintain its overall identity and in some respects to have come together as possibly a more unified profession than in the past. In 1880 only 552 of the more than 64,000 lawyers in America were members of the ABA. In 1929 only 18% of the lawyers were ABA members. Today the ABA has approximately 405,000 members, which represents more than 40 percent of the lawyers in the country. Moreover, according to the ABA Redbook for 1999-2000, 28 independent organizations linked to the law and the justice system are formally affiliated with the ABA and have a representative who sits in the ABA House of Delegates. In addition, the vast majority of non-ABA members belong to State and local bar associations (with lawyers in at least 35 states required to belong in order to practice).

The bar of America is today a more organized and unified profession than at any time in its history, despite its great size and diversity in practice settings. Its aspired-for identity is now declared in the opening sentence of the Preamble to the Model Rules of Professional conduct:

A lawyer is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice.

The Preface to the Restatement of the Law Governing Lawyers opens with similar words that acknowledge the multiple sources of lawyer regulation:

Lawyers are regulated by moral, professional, and legal constraints in discharging their several responsibilities as representatives of clients, officers of the legal system, and public citizens having special responsibilities for the quality of justice.

The profession has successfully created for itself a loosely defined but distinct identity in learning, skills and values with which most lawyers can identify. Indispensable to that creation have been the organization of the bar and the development of formal legal education as the common gateway to the profession, as well as the universal control by the judiciary over entry providing a strongly unifying effect despite the ever-increasing diversity and extraordinary growth of the profession. Maintaining such a unified profession has become a central feature and core value of the American legal profession.

Chapter 6

The Articulation and Enforcement of Professional Values

1. The Bar and the Courts

2. The Multiple Channels of Professionalization

Rule-making

Academic instruction

Admission requirements and continuing legal education

Professional discipline

Litigation

Fostering professional culture

Two features distinguish the regulation and professionalization of the American bar from those of most other professions. First, lawyers shape their values and rules through unusually open and intense debate that extends beyond the organized bar. In particular, the profession has a special relationship with the courts, so that it is regulated - more actively than other professions - by persons who are both insiders and outsiders. Second, professional values are shaped and brought to bear through many forms of inculcation and enforcement. Both of these features have become more prominent during recent decades, as part of the increasing emphasis on the law and ethics of lawyering.

1. The Bar and the Courts

If debate leads to the triumph of right, the standards of American lawyers should be unusually enlightened. Its principles are not imposed from outside or worked out in private, but emerge from vigorous debate. Lawyers tend to be argumentative; and lawyers in the United States work and are trained in a tradition that sees lawyers, not as upholders of a fixed law that others have laid down, but as helping to remodel the law in the light of felt necessities and public policy. The bar has tended to be relatively accessible to those not born into the elite, and in recent decades has increased in its racial, religious, ethnic and sexual diversity.[n1] Its members work in many practice settings -- large corporate firms, specialty boutiques, solo and small firm practice, government work, corporate law departments, public interest practice, academe -- and are attuned to the concerns of many different clienteles.[n2] Bar associations are no longer the preserve of elite white males.[n3] The American Bar Association contains sections and other groupings that freely express their viewpoints, and there are many other lawyers’ associations organized on the basis of geography, field of practice, or belief.

Debate about lawyers’ behavior and ideals extends beyond the practicing bar: state supreme courts in the United States claim the primary, and in some states the exclusive, power to regulate the legal profession.[n4] They promulgate rules, hear disciplinary proceedings, impose litigation sanctions, shape the law of privilege, malpractice and other matters, and in many states establish standards for bar admission and appoint enforcement personnel. The judges who exercise these powers have almost all practiced or taught law. They are members of the profession, respected as such by practicing lawyers, but members with a relatively objective viewpoint.

This is a very unusual pattern of professional regulation. Nonlegal professions are either (if unrecognized by the state) self-regulating or (if recognized) subject to significant control by courts and legislatures in which members of the profession play small roles. In either case, their rules do not arise from the debate and interplay characterizing the American bar. In civil law nations, judges form a profession of their own and do not predominate in regulating lawyers.[n5] Even in England, where judges are chosen from among practitioners and at one time participated actively in the bar’s regulation through the Inns of Court,[n6] their involvement has tended to decrease.

Although some might anticipate that former lawyers would not regulate lawyers very vigorously, courts have shaped and remade the law governing lawyers with considerable vigor. During recent decades, for example, courts legitimized group legal services, price competition, and lawyer advertising, against the opposition of much of the organized bar,[n7] recognized the rights of certain nonclients to sue lawyers for malpractice,[n8] modified the bar’s proposed rule concerning disclosure of proposed client wrongdoing,[n9] and (this time following ABA recommendations) instituted full-time disciplinary counsel to invigorate the disciplinary system.[n10]

Judges have been relatively vigorous regulators because they know and care about the profession’s needs and values, while at the same time enjoying a viewpoint partly outside it. Members of other professions, by contrast, have tended to be regulated either by their own organizations or by uninvolved outsiders who are likely to accept those organizations’ diagnoses and proposals.

The central role of state supreme courts in regulating lawyers fosters dialogue and experimentation, but also creates problems in an age of multi-state and multinational transactions. The bar and its regulators have only begun to address the rights of lawyers to perform some acts in states where they are not admitted,[n11] and the disciplinary standards and mechanisms applicable to such lawyers.[n12] Although there have been a few efforts to enforce national standards for lawyers,[n13] overall the tradition of state regulation continues.[n14]

Like judges, others who help frame and enforce lawyers’ standards often stand both within the profession and outside private practice. That is the case with law teachers and with many government officials, for example, the Antitrust Division lawyers who intervened in the group legal services and lawyer advertising debates.[n15] When legislatures legislate about lawyers, which in most states is infrequent,[n16] some of the many lawyer-legislators[n17] usually take the lead. Of course, non-lawyers also express their views about lawyers’ rules and ideals, but often with the aid of lawyers of their own.[n18]

Because of the vigor with which the bar debates its values, and the active involvement of lawyers of varying viewpoints and views, one could expect lawyer standards to multiply and evolve. That is just what has happened in recent decades.

2. The Multiple Channels of Professionalization

Professional standards, emerging from a debate of many voices, are transmitted and enforced in many ways, which in turn interact with each other.[n19] Only an outline of this process can be given here.

a. Rule-making

The revision of standards for lawyering has accelerated in recent years. During the nineteenth century, a number of American lawyers tried to state the rules of their profession,[n20] but the promulgation of standards for national acceptance occurred only after the American Bar Association was founded in 1878. The ABA’s Canons of Professional Ethics of 1908 held the field for sixty years. Its successor, the Model Code of Professional Responsibility (1969) was followed after only fourteen years by the Model Rules of Professional Conduct (1983), and the ABA’s Ethics 2000 project is now considering extensive changes to the Model Rules.

From revision to revision, these sets of rules have increasingly emphasized legal enforceability and de-emphasized moral exhortation.[n21] The Canons spoke of what a lawyer "should" or "has the right" to do; the Model Code contained both enforceable Disciplinary Rules and aspirational Ethical Considerations; and the Model Rules are virtually all drafted as binding legal commands. The state Supreme Courts, moreover, by adopting versions of either the Model Rules or the Model Code as rules of court, have made them enforceable through disciplinary proceedings. And although comments to the Model Code and Model Rules disclaim any enforcement of their provisions through civil suits, courts hearing such suits have drawn on them to chart the duties lawyers owe their clients.[n22]

The content and scope of professional rules have also evolved from version to version. The Canons’ emphasis on preventing lawyer advertising and price competition has gradually yielded to the facilitation of access to legal services.[n23] Where the Canons stressed the lawyer as litigator, the Model Code and Model Rules have devoted more attention to the roles of lawyers as counselors, negotiators, arbitrators, lobbyists, and government officials.[n24] Where the Canons gave only grudging recognition to law firms, the Model Rules begin to grapple with the problems they pose.[n25]

The process of formulating professional rules has become increasingly open to conflicting views and interests. The Canons, and to a great extent the Model Code, emerged full-grown from a small drafting committee; the Model Rules, by contrast, went through several publicized drafts, leading to public commentary and lobbying, to counterproposals, to changes in the drafts, and ultimately to revisions by the ABA House of Delegates.[n26] Meanwhile, as already noted, state supreme courts have become increasingly willing to modify ABA rules before promulgating them, sometimes providing for public comment or committee reports to guide them.[n27] The states, indeed, sometimes moved ahead of the ABA in dealing with such matters as discrimination and sexual harassment by lawyers,[n28] activities of lawyers from abroad,[n29] and discipline of law firms.[n30]

b. Academic instruction

Law school has been a central institution for the inculcation of lawyers’ skills and values.[n31] With insignificant exceptions, all American lawyers share the three-year law school experience as their initiation into the profession.[n32] Even in the nineteenth century, this initiation might include not just training in legal knowledge and skills but also lectures on professional behavior, with formal legal ethics courses appearing in the early twentieth century.[n33] No doubt, teachers incorporated instruction in how lawyers should behave into other courses, especially after the Council on Legal Education for Professional Responsibility fostered the institution of clinical legal education starting in 1968.[n34]

Since 1974, American law schools have been required, as a condition for ABA accreditation, to educate students in professional responsibility.[n35] Although some schools rely on the "pervasive method," in which all teachers are expected to include professional responsibility in their courses, most schools require students to take a two or three credit course in the subject.[n36] With the recent help of the Keck Foundation, law teachers have developed a variety of ways to teach and enrich the course.[n37] The content of the course also varies, at least in emphasis: some teaching materials stress the Model Rules or the broader law of lawyering, while others pursue more philosophical, moral or religious approaches.[n38]

In addition to presenting students with problems and rules they will face when they enter practice, requiring instruction in professional responsibility has also given rise to a group of academics with a scholarly interest in the subject, and hence to a burgeoning literature. Some of this literature is directed to practicing lawyers, some to students, some to rule-makers and reformers, and some to other scholars. Much of it, arising from a perspective more or less removed from practice, takes a more critical and reformist view of existing law and behavior than did traditional writing -- or rather, takes several more critical and reformist views, for the criticism and reform proposals come from different directions.[n39] The professorate has thus helped rule-makers to rethink the rules, and indeed some of the leading recent rule-makers have themselves been professors. This strong academic involvement distinguishes the United States from other countries such as England and France, in which there has been little university teaching of professional responsibility.[n40]

c. Admission requirements and continuing legal education

To be admitted to the bar, an applicant must not only graduate from law school but also be appraised for "good moral character" and pass the jurisdiction’s bar examination.[n41] The examination, of course, is meant to ensure that lawyers possess legal knowledge and the ability to apply it. The great majority of jurisdictions now also include in their examinations the Multistate Professional Responsibility Examination (MPRE) or a comparable test on local rules.[n42] The MPRE began in 1980 as an examination on the ABA’s Model Code and Model Rules, but is now expanding to include other aspects of the law of lawyering.[n43] The bar admission and membership renewal process provides an opportunity for regulators to gather information about lawyers, to ensure that regulators and others can ascertain their whereabouts, and to collect fees that fund the regulatory system.

In addition to seeking to ensure that those who enter the profession will know its rules, lawyers and judges have taken measures to train new practitioners through transition education[n44] and to refresh experienced practitioners’ familiarity with professional standards as they evolve. Organized continuing legal education supplements the professional reading that diligent lawyers have always undertaken. Nationwide organizations such as ALI-ABA and the Practicing Law Institute as well as organizations in individual states have long offered courses in a variety of legal subjects, including professional responsibility.[n45] Since Minnesota required lawyers to take such courses in 1975,[n46] other states have followed suit, and in about eighteen states professional responsibility is a required subject.[n47]

d. Professional discipline

In the last two decades, the proportion of American lawyers disciplined each year has increased from about one tenth of one percent to more than six times that rate in 1995. In that year, disciplinary authorities investigated about 10 complaints for each one on which sanctions were imposed.[n48] Traditionally, the usual grounds for discipline have been gross misconduct such as committing a crime or taking a client’s money, but discipline is now imposed for other offenses as well.[n49]

The increase in the percentage of lawyers disciplined seems to reflect an increase in enforcement efforts rather than one in lawyer misconduct. Until the early 1970s, enforcement efforts were usually perfunctory, although no more so than those of other professions.[n50] In 1970, the ABA’s Clark committee, named for retired Justice Tom Clark who served as its chair, vigorously criticized the disciplinary system and proposed reforms, most of which have been adopted by state supreme courts.[n51] Most states now have full time disciplinary staffs ranging from three to 297 persons, significant disciplinary budgets, and reasonably prompt procedures.[n52] The ABA has adopted model rules for disciplinary procedures and sanctions, and its McKay Report proposes further improvements.[n53]

In addition to promoting compliance by deterrence and by removing some offenders from the profession, the disciplinary system also helps educate the bar about what the rules require. The names and offenses of offenders are usually made public when discipline is imposed -- which is not the case in some professions -- and often even earlier, when officials have found probable cause to proceed.[n54] Often, a full opinion of an appellate court announces the discipline and explains its grounds. When a decision is unexpected or involves a prominent lawyer, it receives publicity in professional publications.[n55] Indeed, a number of disciplinary proceedings have led to important precedents on the rights and duties of lawyers.[n56] A supreme court’s disciplinary practice, such as invariable disbarment for lawyers who knowingly use client funds, also becomes widely known.[n57]

The organized bar helps to expound and publicize the requirements of disciplinary rules by publishing ethics opinions applying the rules to specific situations. The ABA, state bar associations, and some county and city bar associations have ethics committees whose members, most of them practicing lawyers, issue hundreds of opinions every year.[n58] A lawyer facing a problem can often seek such an opinion for his or her guidance. In a few states, the state Supreme Court appoints an ethics committee or hears appeals from some of its rulings, giving committee opinions quasi-official status.

e. Litigation

Like disciplinary proceedings, litigation has provided many opportunities for courts to expound and enforce professional norms. The knowledge and concern that judges bring to the legal profession has made their involvement more intense than it has been for any other profession. The bar, for its part, recognizes the authority of the courts and is accustomed to studying their opinions. And of course the participation of lawyers in court proceedings has multiplied the occasions for judicial involvement, as well as the incentives for lawyers to heed judicial pronouncements. Ordinary civil litigation, as well as a scattering of law reform[n59] and criminal proceedings,[n60] thus contributes powerfully to regulate the legal profession.

Claims of legal malpractice, if less publicized than the medical malpractice boom, have in past decades become frequent enough to distress the bar, but also to influence its behavior.[n61] Clients’ malpractice suits almost always include claims that lawyers have failed in competence or diligence, and thus help to ensure that lawyers will provide quality services. They often also allege breach of professional norms such as those forbidding conflicts of interest.[n62] Violating other professional standards may subject a lawyer to other remedies, such as rescission of a lawyer-client business transaction that the lawyer cannot prove to be fair,[n63] or in some jurisdictions enhanced remedies under consumer protection statutes.[n64] In dealing with these various claims, courts often hear expert testimony on professional standards and rely on those standards in shaping their rulings.[n65] The lessons for lawyers that client suits inculcate are disseminated through the professional media, for example through "preventive malpractice" publications explaining how lawyers can best avoid liability.[n66]

Fee disputes between lawyers and clients likewise help to propagate and enforce professional requirements. The law governing these disputes not only forbids unreasonably high fees but also incorporates various ancillary rules arising out of the lawyer’s obligations as a fiduciary.[n67] For example, a lawyer who seriously breaches duties owed to a client may forfeit the right to compensation.[n68] Other law allows clients to sue for the refund of fees already paid, imposes burdens of justification on lawyers, and entitles clients in some states to require their lawyers to arbitrate fee disputes.[n69]

Nonclients as well as clients can sue lawyers in certain circumstances, in the process helping to develop and enforce the limits on lawyer adversarial behavior. The privity doctrine, which formerly forbad nonclient suits for negligence,[n70] has yielded to recognitions that suits should sometimes be allowed, for example, when a lawyer’s negligent opinion letter misleads its nonclient recipient.[n71] Nonclients can sometimes invoke other causes of action as well.[n72] When courts determine that lawyers are liable to nonclients, they necessarily decide where a lawyer’s duty to advance a client’s interests is limited by the legitimate concerns of others. These conflicts are frequently difficult and controversial, so that they attract much professional attention. For example, the Kaye, Scholer litigation, in which a bank regulatory agency charged a large New York firm with concealment and misrepresentation and proceeded to freeze its assets, led to much debate on the duties of lawyers dealing with agencies in situations not involving litigation.[n73]

Even when lawyers are not parties to litigation, court decisions frequently expound and enforce professional values. We owe to such decisions much of the law on such matters as conflicts of interest,[n74] direct communications with represented parties,[n75] and, of course, the attorney client privilege.[n76] The courts’ power to sanction parties and their lawyers for litigation misconduct[n77] likewise helps shape lawyers’ behavior.

Recent years have brought efforts to understand and systematize these and other means of professional regulation.[n78] The American Law Institute, after many drafts and meetings, is now on the verge of publishing its Restatement of the Law Governing Lawyers, which attempts to organize, clarify, improve and disseminate bodies of law covering a variety of subjects and remedies.[n79] The Restatement in turn seems likely to influence the Ethics 2000 Commission’s reconsideration of the ABA Model Rules,[n80] providing another example of the interplay between the bar and the courts in remodeling professional values.

f. Fostering professional culture

Lawyers’ own customs, expectations and ideals influence their behavior. A profession whose models are lawyers such as Abraham Lincoln, Louis Dembitz Brandeis and Thurgood Marshall will differ from one that looks back only to Howe and Hummel.[n81] Although lawyers often transmit professional culture informally or by example, the process has not gone wholly unrecorded.

Apprenticeship traditionally introduced lawyers to the skills and values of their profession.[n82] The spread of formal legal education did not remove the need for further training, which many firms continued to provide.[n83] Some bars have also introduced counseling programs through which lawyers can seek advice outside their firms.[n84] In many firms, ethics partners or an ethics committee provide a similar resource, as well as a forum for resolving disputes about the conduct of firm lawyers.[n85] Malpractice insurers’ risk prevention departments and other risk reduction consultants have helped lawyers develop office procedures to assure competent and ethical service.[n86]

The bar engages in a variety of voluntary activities promoting professional culture and values. Firms and bar associations, for example, have promoted pro bono representation.[n87] Many bar associations disseminate publications to the bar and public, advocate improvements in the law, arrange colloquia and continuing education activities, offer fee arbitration services, and support a variety of specialized committee work.[n88] Most states have integrated bars, to which all lawyers must belong and pay dues, and which pursue both these activities and others already mentioned, such as drafting, interpreting and helping enforce professional rules.[n89] In other states, the state supreme court collects fees from lawyers to fund the disciplinary system and other core functions, while bar associations conduct other activities, a model which has become more attractive since constitutional and political challenges have somewhat inhibited integrated bars.[n90]

The law of lawyering has begun to encourage law firms to foster proper professional practices. The Model Rules require lawyers, on pain of discipline, to institute measures and assert their authority to ensure that lawyers and non-lawyers in the firm conform to the requirements of the rules.[n91] A few states have authorized discipline of firms as well as of individual lawyers.[n92] A firm’s vicarious liability for the malpractice of its lawyers encourages preventive measures, at least in firms organized as traditional partnerships, in which all partners are personally liable.[n93] Courts have begun to provide remedies for whistle-blowing lawyers against their employers.[n94]

Pressure of clients and competitors, although not likely to promote all professional values,[n95] constitutes a powerful impetus for lawyers to provide competent and economical services. Even relatively unsophisticated clients tend to do better if they take an active role in their cases.[n96] The law has moved away from the model in which virtually all decisions were left to the lawyer, albeit without renouncing the lawyer’s power and duty to act ethically regardless of client wishes,[n97] and many clients have become more assertive. The Supreme Court has likewise fostered competition among lawyers by forbidding price fixing[n98] and legitimating advertising.[n99] These decisions have, in turn, vastly increased the amount of information about lawyers, law firms and legal services that circulates through the professional and general press, so that both clients and lawyers are better informed than ever before about lawyer behavior and misbehavior. The promulgation and enforcement of professional norms thus takes place in conditions of increasing openness and participation.

PART TWO

THE CHALLENGES TO MAINTAINING A SINGLE PUBLIC PROFESSION OF LAW  

Chapter 7 Marketing Legal Services asPart of a Multidisciplinary Practice

1. The Metamorphosis in the Accounting Profession

2. The "Big Five" Phenomenon

3. The Regulation Today of the Discipline of Accountancy

4. Lawyer Recruitment and Employment by Accounting/Professional Services Firms

The Committee’s study project of nonlawyer involvement in the practice of law (see Introduction to this report) examined the historical relation between the professions of law and accountancy and the recent movement among the largest accounting firms to expand the professional services they provide and to market legal services as part of what they refer to as a "multidisciplinary practice" under the banner of "one-stop shopping." In this chapter, we review the major restructuring of the largest accounting firms through the 1980s and ‘90s, the effects of that restructuring upon the regulation of the accounting profession today, and the recruitment of lawyers by these organizations managed and controlled by nonlawyers.

1. The Metamorphosis in the Accounting Profession

a. Pre-1950s

Although the art of bookkeeping is of ancient origin, the accounting profession is relatively young. In the United States, the profession dates back to the 1880s. The rise of this profession is associated with the industrial revolution, that prompted entrepreneurs to raise investment capital from banks and other investors. The providers of funding, especially those from abroad, demanded reliable financial reports, and as a result some English accountants established themselves here.[n1]

The accounting profession evolved in two distinct forms. First came voluntary associations, then state licensure. New York provided leadership in both forms; other states followed suit quickly. The first voluntary professional accounting society in the United States was the Institute of Accountants and Bookkeepers, established in New York in 1882. The first multistate voluntary association was the Federation of Societies of Public Accountants, established in 1902. The American Institute of Accountants (predecessor of today’s American Institute of Certified Public Accountants) was formed in 1916.

As regards state licensing of accountants, New York adopted the first statute in 1896. The first model state accountancy law was proposed in 1916. By 1921, all states had enacted statutes for licensing accountants. The title "Certified Public Accountant" ("CPA") was reserved to individuals who had demonstrated their competence and received state licenses to use that title. Other individuals were allowed to describe themselves as "accountants" or "bookkeepers" and to perform many of the same functions as CPAs.

In the early years, the accounting profession adopted standards of etiquette similar to those of the legal profession, including prohibitions against advertising and solicitation. These standards were promulgated, either in the codes of ethics of voluntary associations, or in the licensing statutes, or both.[n2] As noted below, the prohibitions against advertising and solicitation were invalidated by a series of Supreme Court decisions, starting in 1977.

Until the 1929 stock market crash and its aftermath, accounting and auditing were generally perceived to be a single subject. After the crash and the adoption of the federal securities laws, auditing standards received separate emphasis. Public opinion and the Securities Exchange Commission induced the profession to start establishing uniform standards for financial statements and to require auditors to be independent from those they audited.

In addition to providing accounting and auditing services, accountants also offered tax services following the enactment of the first federal income tax in 1913. The preparation of tax returns requires accounting skills, insofar as a tax return is a specialized type of financial statement, in which the accounting principles of the tax law supersede those of financial accounting.

Accountants gradually expanded their services to include tax planning as well as tax return preparation. Case law in the late 1940s and early 1950s allowed accountants to provide tax advice, but only if it was in conjunction with the preparation of tax returns.[n3] In view of accountants’ need for tax knowledge in preparing returns, giving tax advice, and auditing tax liabilities, the training of auditors and the CPA examination have for a long time included significant coverage of federal taxation.

In 1955, Harvard Law School Dean Erwin Griswold referred to the emergence, by then, of "accounting factories" which had "law departments" giving tax advice to clients.[n4] He pointed out that these "accounting factories" were of a much larger scale than even the largest law firms. Controversy existed, at that time, as to the permissible scope of tax practice by accountants. The ABA had already been in contact with the American Institute of Certified Public Accountants ("AICPA"), but the two organizations had not resolved the matter. (Later, antitrust regulators discouraged the two organizations from making any market-sharing arrangements.)

In addition to accounting, auditing and tax services, accountants developed other types of services. Perhaps the earliest arose naturally from the audit function, which requires the auditor to evaluate the client’s system of internal controls in order to determine the scope of the audit. If the evaluation reveals weaknesses in the system, the auditor brings the situation to the attention of management -- in effect, the audit role leads to a role as systems advisor. Further, the auditor’s insights into the client’s business practices, as revealed during the audit, give the auditor an opportunity to compare these practices with those of other enterprises in a similar line of business. Thus the audit role leads to a role as business advisor. And, having developed expertise and a reputation as business advisor for audit clients, an accountant may offer business advisory services to other clients beyond those who are audit clients. As noted later in this chapter, the expansion of business advisory services provided by accounting firms has been a major development in recent years.

b. 1950s and later

The tendencies which were apparent to Dean Griswold in 1955 went through rapid development in the decades following. The major accounting firms consolidated further (most recently into the "Big Five") becoming large multinational bureaucratic enterprises.[n5]

Auditing revenues increased, but revenues from other types of services increased even more quickly, with the result that audit revenues constituted a decreasing percentage of total revenues. Further, malpractice liability and price cutting in response to competition reduced the net income from auditing, while management consulting and other professional services generated increasing net income as well as gross revenues.[n6] The big firms continue to offer auditing services, even though these services constitute a less lucrative segment of their practice. Auditing maintains the firms’ prestige and gives them access to information and personnel, so that they can offer the more lucrative types of "consulting" services to their audit clients (as allowed by the existing standards of conduct), as well as to others.

Meanwhile, pressure from malpractice suits and critics within and outside the profession led to increasingly intricate standards promulgated by the Financial Accounting Standards Board (created in 1973 to be independent of AICPA, which had previously promulgated all standards). AICPA still adopts audit standards, adopts the Code of Professional Conduct, issues ethics opinions, cooperates with state societies of CPAs in a joint trial board to decide ethics complaints against members, and makes other pronouncements. The AICPA also initiated a peer review program to help improve the performance of its members.[n7]

Decisions of the Supreme Court applied the commercial speech doctrine to strike down the prohibitions against advertising.[n8] The Court also struck down the prohibition against solicitation by CPAs, at least in a business setting.[n9] The Court, however, has allowed continued enforcement of the rule against solicitation by lawyers, at least in an ambulance chasing setting. Thus CPAs are allowed to engage in "cold call" solicitation of clients, while lawyers are not.[n10]

2. The "Big Five" Phenomenon

The past decade has seen unprecedented growth by the largest accounting firms as the "Big Eight" accounting firms became the "Big Five" professional services firms. During 1997 and 1998, the Big Five’s average revenue growth was 26.18%, ranging from a low of 20.9% increase to a high of 30.6%.[n11] Commenting upon this phenomenal growth and transformation of the firms and upon their "voracious appetite," the Dean of the Yale School of Management observed:

"During this decade, the Big Eight have become just five: PricewaterhouseCoopers, KPMG Peat Marwick, Arthur Andersen, Ernst & Young, and Deloitte Touche Tohmatsu. All are obsessed with leveraging their accounting relationships to help clients do other things — plan their corporate strategies, build and manage their information-technology systems, and now, solve clients’ legal problems."[n12]

a. Who are the "Big Five"?

The five multinational organizations, collectively dubbed the "Big Five," are comprised of multiple units. Each of the firms is profiled in the following summaries:

(1) Andersen Worldwide Société Cooperative of Meyrin, Switzerland, serves as the umbrella administrative organization that coordinates the activities of Arthur Andersen and of Andersen Consulting, as well as the recently organized Andersen Legal C.V., a Dutch limited partnership, which has co-operating firm agreements with a network of law firms.[n13] Andersen Worldwide was reported in 1999 to have had 1,164 owner-partners, all of whom were CPAs.[n14] It, like the other "Big Five" firms, organized in the 1990s as a limited liability partnership (LLP). Its Managing Partner is headquartered in Chicago, Illinois.

There is currently pending an arbitration before the International Chamber of Commerce in which the constituent business units of Andersen Consulting seek to separate themselves from Andersen Worldwide and to obtain $400 million in damages from Andersen Worldwide and the business units of Arthur Andersen.[n15] Andersen Worldwide is reported to have had $16.3 billion in sales in 1999 and to have had 135,000 employees[n16] and offices in 78 countries and "correspondent relationships" with other firms in 46 other countries.[n17]

(2) Deloitte Touche Tohmatsu International ("DTT") is an association under Swiss law with domicile in Zurich and has recently organized Deloitte Touche Consulting Group as a separate association under Swiss law with domicile in Basle.[n18] Deloitte Consulting and Deloitte LLP are headquartered in Wilton, Connecticut, where the Chief Executive Officer is located. DDT is the result of the merger in 1989 of Deloitte, Haskins & Sells and Touche Ross & Co., with which Tohmatsu, a Japanese firm, had been affiliated. DTT was reported in 1999 to have had 1,299 owner-partners, 34% of whom were non CPAs[n19] and to have had 82,000 employees in 130 countries.[n20]

DTT was reported in April 2000 to have had $10.6 billion of sales in 1999 and to have a staff of 90,000 employees.[n21]

(3) Ernst & Young is a federation created though the merger of Ernst & Ernst into Ernst & Whinney with Arthur Young & Co., whose structure and organization are regulated by a basic memorandum of association in an English company limited by guarantee. Ernst & Young is currently reviewing the structure to move one step further towards the goal of "one firm worldwide" with a commitment by member companies to global branding.[n22] Ernst & Young’s Chief Executive Officer and Chairman is headquartered on Seventh Avenue in New York City. In 1999, it had 1,375 owner-partners, all of whom were CPAs.[n23] Ernst & Young had estimated worldwide sales of $12.51 billion in 1999 and a staff of 97,800 employees.[n24]

A potential merger of Ernst & Young with KPMG International collapsed in February 1998, reportedly because of regulatory obstacles and cultural differences between the two firms. In December 1999, Ernst & Young announced that it was in talks to sell its management consulting business to Cap Gemini Group SA, a Paris computer-consulting company in a deal that could surpass $4.8 billion.[n25]

Ernst & Young International’s legal network operates as a combination of independent law firms and legal service practices that are an integrated part of the local national EY firms. The lawyers are linked through a multilateral Cooperation Agreement, which rules various topics of common interest to its members.[n26]

(4) KPMG International is an association under Swiss law with its registered office in Zurich.[n27] It stands at the head of the business which resulted from the merger of Peat Marwick Mitchell & Co. and certain European firms.

KPMG LLP is headquartered in New York City where its Chief Executive Officer and Chairman is based. The U.S. firm is made up of three operating businesses: a consulting practice, an assurance (auditing) practice, and, what the firm refers to as a tax practice. The organization announced in November 1999 that its global business would soon adopt the same structure,[n28] and is in the process of creating KLegal International Association, a Swiss Verein, for its legal services. The Association will be governed by the General Meeting, the Board of Directors, the Chairman and the Chief Executive Officer. The rights and duties of the members are laid down in the statutes of the Association and in the membership agreements between the Association and its members.[n29]

KPMG had 1,323 owner-partners in 1999, 24% of whom were CPAs. The owners of 16% of the equity were not CPAs.[n30] In 1996, KPMG Peat Marwick had worldwide sales of $7.45 billion[n31] that by 1999 had grown to $12.2 billion for the merged organization; KPMG is reported to have had some 800 offices in more than 150 nations in 1999, and to have had 102,000 employees,[n32] 700 of whom were attorneys in the United States, said to be in a variety of positions and a variety of different practices.[n33]

KPMG has announced that it is selling 20% of its consulting business to networking equipment maker, Cisco Systems, prior to taking its consulting arm public.[n34]

(5) PricewaterhouseCoopers LLP (PwC) was formed in 1998 from the merger of Price Waterhouse and Coopers & Lybrand. Its headquarters are in New York City. In 1999, PwC had 1,821 owner-partners, 32% of whom were not CPAs and had no equity interest in the firm.[n35] In 1999, it had revenues of $15.3 billion, realized through the efforts of 155,000 employees operating at more than 850 offices in 150 countries.[n36]

The firm has announced that to lower administrative costs it is cutting 1,000 jobs and that it is also dividing its consulting and auditing operations.[n37] Also in 1999, PwC announced a new structure for its global network of associated legal firms, which it has named "Landwell" with individual firms becoming members of a Genossenschaft, a Swiss limited liability vehicle; PwC’s legal network was said to employ 1,600 lawyers and to operate under 20 names across the different countries.[n38]

b. "Business Conglomerates" or "Multidisciplinary Practices"?

The largest accounting firms, as we have noted, have developed types of services other than accounting, audit and tax, and greatly expanded their business advisory services; with the result that the Big Five steadily escaped from the influence of the accounting profession in general, while maintaining substantial influence over the profession itself.[n39]

In these circumstances, Professor Colin Boyd points out[n40] that the phrase "multidisciplinary practices" can be misleading when applied to what the Big Five have become and the activities in which they are currently engaged. These erstwhile public accounting firms are now giant business conglomerates that manage and market multiple product lines, employ tens of thousands of employees in scores of countries, and each realizes annual sales in the billions of dollars.

In contrast, the phrase represented by the letters MDP suggests professionals from different professions, working closely together, each guided by his or her own acknowledged and enforceable codes of conduct, delivering their services, and not the virtually unregulated services provided by the Big Five.[n41] Nor do these firms resemble the cooperative arrangements between different professionals of the kinds described in Chapter 4 earlier in this report. A further divergence from the notion of a unified multidisciplinary practice has been the difficulty encountered by the Big Five in controlling impermissible investments by their professional staffs in audit clients of their firms.[n42]

These difficulties encountered by the Big Five have contributed to a growing movement to separate the audit assurance parts of the firms from the business advisory services, aggravated by the tensions within the firm created by the differing profitability of the various segments. As noted above, at least three of the Big Five are now engaged in bringing about such a separation. Market analyses accentuate the separateness of the different business activities of the Big Five:[n43] (SIC8721) "accounting, auditing, and bookkeeping";[n44] (SIC874) "management consulting and public relations,"[n45] as an entirely separate market; and (SIC81) "legal services,"[n46] as a third separate market.

3. The Regulation Today of the Discipline of Accountancy

a. The Uniform Accounting Act

The Uniform Accountancy Act ("UAA") and the accompanying UAA rules are co-sponsored by the American Institute of Certified Public Accountants ("AICPA") and the National Association of State Boards of Accountancy ("NASBA"). These two organizations are quite different. AICPA is a voluntary association of CPAs (with over 300,000 members), comparable to the ABA.[n47] NASBA is a much smaller organization, composed of members of the state boards of accountancy, many of whom are practicing CPAs. Although AICPA and NASBA have co-sponsored the UAA, the two organizations have sometimes revealed different regulatory perspectives. Nevertheless, the UAA reflects the agenda of both AICPA and NASBA.[n48]

More than half the states have enacted the 3d edition or an earlier version of the Act. AICPA and NASBA identify the following as key provisions of the current version:[n49]

(1) Substantial equivalency

This concept facilitates the mobility of CPAs across state lines if the state of licensure and the state where the CPA wishes to practice use licensing criteria which are substantially equivalent. State boards may request NASBA to determine questions of substantial equivalency. A CPA is subject to the disciplinary authority of the state where the CPA practices, as well as the state of licensure. UAA §§6(c)(2), 23.

(2) CPA=CPA

Everyone who holds a CPA license is subject to regulation and discipline by a state board, regardless of what that person does for a living and regardless of whether that person uses the CPA title. UAA §10. As noted below, however, the regulations regarding the attest function (auditing, as well as certain related functions) are much more stringent than those regarding other functions. Therefore, a CPA who does not offer the attest function is regulated by a relatively loose set of standards, set forth in the state’s version of the UAA.[n50]

A CPA who chooses to be a member of a voluntary organization, such as the AICPA or a state society of CPAs, is also subject to the organization’s code of ethics. The committee has found little information on the operation of the disciplinary systems of the AICPA and state boards in recent years. Older reports indicate that they do little.[n51]

(3) Reservation of the attest function to CPA firms

The attest function may be performed only by CPA firms, which must comply with a special set of regulations. UAA §§7(a), 14(a). Functions other than the attest function can be performed by anyone, including but not limited to CPA firms, individual CPAs, CPAs in firms that do not qualify as CPA firms, or firms in which there are no CPAs.[n52]

(4) Special regulation of compilation function

The function of compiling financial statements without the expression of an opinion, as provided in the AICPA’s Statements on Standards for Accounting and Review Services ("SSARS"), is not within the definition of the attest function. The compilation function, however, is also reserved to CPAs, and is governed by a special set of requirements, similar in some respects to those governing the attest function.[n53]

Notably, the UAA does not regulate the ownership of firms that perform compilations. These services may therefore be provided by CPAs who work for firms owned by non-CPAs, including passive investors.

(5) CPAs working in nonCPA firms

Firms which do not offer the attest function need not be licensed by the state, and need not be owned by CPAs, so long as they do not call themselves CPA firms. Any individual CPA working in such a firm must hold a license and is subject to regulation and discipline; see supra, "CPA=CPA." CPAs in nonCPA firms may perform compilation services; see discussion above.

(6) Regulation of CPA Firms

A CPA firm must be licensed by the state. UAA §§7(a), 14(a). It must undergo peer review every three years, UAA §7(h), and must make sure that the CPAs who supervise and sign attest engagements meet an appropriate level of competency, to be spelled out in professional standards. UAA §§7(c)(3), (4).

A simple majority of the ownership of a CPA firm, as regards financial interests and voting rights, must be held by CPAs. UAA §7(c)(l). (Previously, all owners had to be CPAs, as is still the case in New York.) All nonCPA owners must be active individual participants in the firm or its affiliated entities. UAA §7(c)(2).[n54] The firm name may not include the name of a non-CPA if "CPAs" is included in the firm name. UAA Rule 14-1-1.

(7) Licensure and education requirements

UAA §5(c) and UAA Rule 5-2 add more higher education credits to the educational requirement for CPA candidates. The additional requirement becomes effective five years after a state adopts the UAA.

Among other requirements for obtaining a CPA license, a candidate must complete one year of experience. The UAA allows a candidate to satisfy this experience requirement by providing some type of professional services or advice involving the use of accounting, attest, management advisory, financial advisory, tax or consulting skills, so long as the experience is verified by a CPA. UAA §5(i), UAA Rule 6-2. (The previous requirement was one year, but limited to accounting experience.) Of course, CPAs still have to pass an examination. UAA §5(d).

(8) Continuing professional education

The basic requirement is 120 hours during a three-year period. UAA Rule 6.

(9) Commissions and contingent fees

CPAs or CPA firms may not accept commissions or contingent fees for products or services provided to clients for whom they perform attest or compilation services. UAA §14(n)(o). CPAs may accept commissions that are disclosed to clients, except when the CPAs perform attest or compilation services for the client whose business with a third party generated the commission. CPAs may accept contingent fees for services, except for attest or compilation services, and except for preparing an original tax return.

Contingent fees for amended tax returns or refund claims are permitted, provided the CPA anticipates the claim will be reviewed by a taxing authority . UAA §14(m), (n).

(10) Tort Reform

Although not highlighted by AICPA/NASBA in their most recent background paper, other noteworthy provisions of the UAA include provisions on tort reform, each tending to minimize the exposure of accountants to civil liability.

UAA §20 adopts a strict rule of privity. Only persons in a direct contractual relationship, or a relationship so close as to approach contractual privity, may sue an accountant for negligence. The comments to this section note its derivation from the New York cases of Ultramares Corp. v. Touche, 255 N.Y. 170 (1931) and Credit Alliance v. Arthur Andersen & Co., 65 N.Y.2d 536 (1985).

UAA §21 establishes a statute of limitations for contract and negligence suits against accountants. The basic period is one year from when the act was or should have been discovered, but in no event more than three years after completion of the service, or three years after initial issuance of the accountant’s report.

UAA §22 provides for proportionate liability in all claims against accountants for money damages (including common law and statutory claims), except that fraud actions continue to be governed by generally applicable rules. Under the proportionate liability system, the trier of fact determines the percentage of each defendant’s responsibility for the plaintiff’s damage. In making this determination, the trier of fact shall consider both the nature of each person’s conduct and the nature and extent of the causal relationship between that conduct and the plaintiff’s damage. Each defendant is liable for the appropriate percentage, as thus determined, of the plaintiff’s total damage. An accountant shall not be jointly liable for any judgment entered against any other defendant. This version of proportionate liability is similar but not identical to the Private Securities Litigation Reform Act of 1995.

b. Independence Standards Board

In recent years, the SEC and others have expressed concern about the independence of accounting firms from the businesses they audit, especially when they also provide advisory or other services to those businesses. The Independence Standards Board ("ISB") is an advisory organization which developed as a result of discussions between the AICPA, other representatives of the accounting profession, and the SEC. Its mission is to conduct a timely, thorough and open study of issues involving auditor independence and to encourage broad public participation in the process of establishing and improving independence standards. In addition, the ISB staff answers questions and provides interpretations to accounting firms in the SEC Practice Section of the AICPA.[n55]

The Board recently invited public comment on two discussion memoranda ("DM"). While these DM do not reflect the Board’s policy, they provide important factual information, together with insights into the agenda of the leaders of the accounting profession who serve with outsiders on the Board.

c. Discussion Memorandum on Firm Structure and Organization

DM 99-2, Evolving Forms of Firm Structure and Organization (October 1999) raises questions about the impact on auditor independence of various innovative forms of firm structure and organization. The DM identifies several forms of firm structure which currently exist, or are evolving.

(1) Traditional partnership, often with separate auditing, tax, and consulting divisions

The DM mentions but does not extensively discuss traditional partnerships, since these are not "evolving forms." The DM therefore does not explore the risks to independence which may result from the combination, in a single firm, of audit and non-audit functions, especially when the firm provides audit and non-audit services to the same client.

The DM does note, however, the expanded range of services offered by large accounting firms since the mid-1900s. Appendix A to the DM provides an extensive list of services offered by accounting firms at the present time. The list includes, among numerous other items, "Estate planning including preparation of wills, trusts, etc." and "Corporate and commercial legal services to national and international companies worldwide." The DM does not mention the extent to which some of these services are reserved to lawyers, or the rules under which lawyers are not allowed to share fees or partner with nonlawyers regarding these services.

(2) Corporate purchase of the non-audit business of one or more traditional firms

The DM portrays a typical "alternative practice arrangement" as follows:

(1) A company, which may be publicly owned, buys the non-audit portion of a CPA practice from the firm’s partners for cash, stock, or a combination of both. The price may be based in part on the future earnings of the acquired business.

(2) The company may have subsidiaries such as a bank, insurance company, broker-dealer, and professional services. The professional services subsidiary will offer the non-audit services of the acquired CPA firm.

(3) Partners and employees of the acquired CPA firm become employees of the company (or its subsidiary) and provide clients with non-audit services.

(4) The audit function of the CPA practice remains intact, and continues to be owned by some or all of its original partners, who are now also employees of the company in providing non-audit services.

(5) The audit firm provides its services by leasing employees from the company -- or the audit firm retains its own employees and leases them to the company to perform non-audit services.

(6) The audit firm pays fees to the company for the use of office space and equipment and for administrative services and advertising.

(7) The company may engage in transactions of this type with numerous audit firms, which may retain their separate identities as sister firms, or may merge into a single audit firm.

(8) As a result of the above transactions, the management of the company directly supervises the owners of the audit firm, in their work as employees of the company in non-audit work. The DM notes that some people believe that this employment, together with other aspects of the relationship, may in effect allow the company to control the audit firm in its performance of audits.

It is noteworthy that the type of alternative practice structure described above was portrayed, without disapproval, in AICPA Ethics Interpretation 101-14 (February 1999). The only issue was whether certain individuals involved in the transaction should be regarded as the AICPA member’s "firm," for purposes of applying the standards on auditor independence. The Interpretation concluded that direct supervisors of the non-audit activities of a CPA, or substantial investors in the company, should be regarded as members of the CPA’s "firm." Therefore, the CPA would be disqualified from auditing a client in which such supervisors or investors had a significant interest.

(3) Roll-up transactions

The roll-up transaction is a variation of the above alternative practice structure. In a roll-up, a number of firms are assembled under a holding company that is sold to the public in an initial public offering.

(4) Public ownership of interest in non-audit practice of traditional firm

A traditional public accounting firm may place all or part of its non-audit business in a subsidiary, some of which is sold to the public or to private investors.

(5) Association

The DM uses the term "associations" to describe networks of independently owned firms which are linked for certain purposes, such as shared training and marketing, or to fill gaps in expertise or geographical presence.

Member firms are financially independent and practice under their own names, but they may note their membership in an association on their letterhead, web sites or other marketing material. They do not share profits with one another, but they may receive "correspondent fees" for referral or for participating in engagements. These fees are arranged directly by the firms, not by the association. Member firms pay fees to the association.

(6) Affiliations

The DM uses the term "affiliations" to denote networks of firms under common management, or participating in some type of profit or expense sharing. According to the DM, all of the larger firms have affiliates around the world that practice under the umbrella organization’s name. The degree of independence of member firms varies, but generally they use the manuals, technology and training of the umbrella organization. The DM notes further that the SEC staff requires foreign affiliates to be independent with respect to the U.S. firm’s audit clients.

d. Discussion Memorandum on Legal Services

Discussion Memorandum 99-4, Legal Services (December 1999) poses the question, "Under what circumstances, if any, can an audit firm or its affiliates provide legal services for SEC audit clients without impairing independence?" The DM immediately defines "legal services" as "those services that can only be provided by someone licensed to practice law."

It is not clear whether the DM attaches the same meaning to the term "provide" in the question and in the definition. If the meanings are the same, the question has little practical significance as regards current practice in the United States, since an audit firm is not "someone licensed to practice law" (unless all of its members happen to be lawyers as well as CPAs), and therefore an audit firm cannot provide legal services. The question has greater significance in international practice, since an audit firm or its affiliates may qualify in certain foreign countries as "someone authorized to practice law."[n56]

Another possible interpretation is that the term "provided," as used in the definition, actually means "performed." According to this interpretation, the DM discusses legal services performed by lawyers but provided by an audit firm under some kind of sponsorship arrangement, such as employment, partnership, or affiliation. This interpretation invites speculation about potential future changes in American law, which may allow nonlawyers to sponsor the performance, by lawyers, of legal services. Of course, the ISB function is limited to safeguarding audits independence, and does not include passing on who may practice law.

The DM discusses the impact on auditor independence of legal services "provided" by audit firms in two distinct settings, corresponding approximately to the above two interpretations of the term "provided" in the definition.

The first setting involves an audit firm that offers legal services to foreign clients, including foreign units of SEC clients. A footnote to the DM notes that such services are rendered in a variety of forms, depending on the law of the foreign country. In some countries, the U.S. audit firm enters into affiliation arrangements with independent law firms. In others, legal services may be offered by the accounting firm itself, or by a separate law firm in partnership with the accounting firm. The DM also reports its understanding that, since around 1993, some U.S. audit firms have provided legal services to foreign subsidiaries of SEC audit clients, and to foreign audit clients, based on the following principles:

(1) The subject matter is not material to the financial statements;

(2) The relevant country permits the service;

(3) The firm does not act as general counsel or management of the subsidiary; and

(4) The matter and the legal relationship are not likely to be highly visible.

The second setting is based on speculation that the current rules in the United States, prohibiting partnerships and fee sharing between lawyers and non-lawyers, may be relaxed in accordance with the June 1999 recommendation of the ABA Commission on Multidisciplinary Practice.

The DM sets forth five alternative views regarding the issue of auditor independence in either of the above two settings. These alternatives are, in summary:

(1) Legal services not permitted at all -- this reflects the position of the SEC, that "the attorney-client relationship is inconsistent with the independence required of accountants in reporting to investors."[n57]

(2) Legal services not permitted if they involve a high degree of advocacy.

(3) Legal services not permitted if they relate to matters with a material financial impact on the client.

(4) Legal services not permitted unless appropriate safeguards are established, such as changing the organization of the firm, establishing "firewalls" (although the DM observes that these are currently not allowed under Generally Accepted Auditing Standards), obtaining client waivers, and other safeguards.

(5) Legal services permitted, provided the auditor does not become a de facto employee or officer of the client, perform other management functions, or audit its own work.

e. SEC Practice

The SEC has broad regulatory authority over the auditors for publicly held companies. The SEC has authority to establish accounting principles, and participates in an advisory role in deliberations of the Financial Accounting Standards Board (FASB). Once the FASB has adopted a standard, the SEC generally defers to it.

Rule 102(e) of the SEC rules of practice empowers the SEC to impose sanctions on professionals, including CPAs, for unethical conduct. In addition, the SEC has power to seek federal court injunctions against auditors as well as their clients.

The SEC designated 1999 as the "year of the accountant" and devoted special attention to alleged irregularities in the audits of public companies. Once an SEC proceeding is pending, state boards of accountancy generally await its outcome before bringing their own disciplinary proceedings based on the same allegations. Thus the SEC takes the lead in enforcement actions against auditors. Private litigation has played an especially important role in enforcing compliance with auditing standards, although the Private Securities Litigation Reform Act of 1995 has made it more difficult for plaintiffs to maintain suits against auditors. An auditor’s improper conduct in the audit of an SEC client may also violate the standards of voluntary organizations, such as the AICPA (especially its SEC Practice Section), or a state society of CPAs. The published reports of discipline by the joint processes of AICPA and the state societies, however, reveal few proceedings arising from alleged violations of professional standards during SEC audits.[n58]

The SEC prohibits the same firm from acting as auditor and legal counsel for the same client, but its position with respect to the provision of legal services to foreign subsidiaries of SEC audit clients and foreign SEC audit clients is unclear.[n59]

f. Tax Practice

The Agency Practice Act, 5 U.S.C. §500(c), authorizes CPAs to "practice" before the Internal Revenue Service ("IRS"). Practitioners are governed by the IRS Rules of Practice, generally known as Circular 230, and can be debarred or suspended from IRS practice for violating the rules. CPAs who engage in tax practice are subject to discipline by state boards of accountancy if they violate state statutes during federal tax practice. They are also governed by the AICPA Statement on Standards of Tax Practice, and are subject to sanctions by the AICPA and the state society of CPAs.

Tax work includes such a wide range of functions that some individuals are authorized to engage in some but not others.

Tax returns. Circular 230 declares that anyone can prepare a tax return for another. This statement may be subject to the Agran case,[n50] which held that some returns are so complex that only a lawyer is allowed to prepare them. This case, however, may no longer be good law.

Advocacy before the IRS. The Agency Practice Act, supra, expressly authorizes CPAs to engage in "practice before the IRS," which apparently means advocacy for a specific client within the administrative levels of IRS. The Act, however, says nothing about the type of firm with which a CPA may or may not be associated, except to prohibit association with certain individuals who are disqualified from IRS practice. In the absence of federal specifications, the type of firm is apparently left to the states. Arguably, this means that a state would not run afoul of federal law if it disciplined a lawyer for violating a disciplinary rule regarding fee sharing or partnership with nonlawyers, even if the violation took place during federally authorized tax practice.

Practice before Tax Court. Tax Court Rule 200 admits any attorney, and any other person who passes the court’s exam. Many CPAs have passed the exam.

Practice before other courts. Tax practice before other courts is limited to lawyers.

4. Lawyer Recruitment and Employment By Accounting/Professional Services Firms

The Bowman Reports (according to the Executive Director of the Florida Institute of CPAs, June 3, 1999) placed the staff of the Big Five in the United States in 1998 at 174,939, of whom 10,464 were partners and 125,383 were "other" professionals. We had hoped at the outset of this project to determine just how many of the "other" professionals are lawyers who remain in good standing in the Bar or Bars to which they have been admitted and to learn the nature of their duties on behalf of their employers. This has not been possible.

a. Four of the Big Five turn a deaf ear to this committee

The report of the ABA Commission on so-called "multidisciplinary partners" contained only limited information regarding the recruitment and employment of lawyers by the Big Five. Thus, at the beginning of this Committee’s work, the chair of the Committee sent a personal letter in September 1999 to the chief executive of each of the Big Five firms. The letter requested assistance in assembling data relative to the number of lawyers (both partners and employees) in each firm, how the number of lawyers had changed during the years 1995 to 1999, and whether the lawyers were or were not admitted to practice in a U.S. jurisdiction.[n61]

No written acknowledgment of the letters was received from any of the Big Five firms. A single voicemail message was left by one employee, who left only her first name. She stated that she was calling from Kathryn Oberly’s office at Ernst & Young regarding the study being done by the New York State Bar Association. She further stated: "it is information that we don’t keep track of . . . . we don’t have any idea of who is admitted to practice in a U.S. jurisdiction or not admitted to practice in a U.S. jurisdiction." She added that the only people for which such information could definitely be provided, were in the general counsel’s office, who are "just a small group of people." The voicemail caller went on to acknowledge: "We probably have lots of people that have a J.D., but they’re not practicing law because they are working as a consultant or something like that."[n62]

Having received no response with respect to bar admissions from four of the five firms and a generally unresponsive voicemail message from the fifth, we concluded that to get such information we must turn elsewhere than to employers who seemed to have no interest in whether their employees were or were not in good standing at the Bar.

b. Competitive lawyer recruiting

In November 1999, the Vice-Chairman of KPMG for Tax Services was more forthcoming in addressing the subject of recruiting lawyers than the firms had been in response to the Committee’s request for assistance.[n63] He stated that KPMG employed about 700 attorneys in the United States in a variety of different positions.[n64] He further stated that to support the firm’s 25 percent revenue growth rate in its U.S. Tax Practice, KPMG planned to double the number of the tax lawyers the firm would hire in the current year. As to recruiting sources, the KPMG Vice-Chairman said that the hiring would be both directly out of law schools and from other sources, all the way from associates through the partner level.[n65] Vice-Chairman Lanning went on to say that KPMG hires "more and more people with master’s degrees in taxation."[n66] He explained: "As to lawyers, we certainly like people who have experience as practicing tax attorneys or have LLMs in taxation."

This fact explains the mistaken report published in Legal Times in 1997, that twenty percent of the graduates of NYU Law School had joined accounting firms.[n67] That figure was for graduates of the NYU’s LLM program in taxation -- of which the accounting firms are particularly supportive -- and not for the JD graduating class from the law school.[n68] While the percentage of NYU law graduates finding positions in business and industry of any kind is around four percent, a greater percentage of graduates of some other law schools find their first positions in business or industry.[n69] In recent years, the total number of JD graduates from some 175 approved law schools who joined accounting firms were less than three percent of the graduates.[n70]

Looking to the future, the KPMG Vice Chairman predicted: "you will also see us focusing more on people with a good background of general legal skills."[n71] In the course of his published interview, Vice Chairman Lanning of KPMG landed the firm’s strength in the state and local tax areas in this way: "We have approximately 700 full-time state and local tax professionals, serving thousands of clients. We probably have one hundred tax professionals in New York alone. We have fifty or sixty tax partners across the country who focus full-time on state and local tax issues. Many of them are attorneys. From a client’s perspective, this creates an enormous state and local experience base that they can tap into."[n72] He contrasted this with the fact that "Even the largest law firms frequently have only one or two tax attorneys who deal with state and local tax issues."[n73]

On the subject of whether to use an accounting firm or a law firm for tax advice, the KPMG Vice Chairman stated:

"The critical question is where the top talent can be found. If you go back five, six, seven years, most of the top tax attorneys in the U.S. were in law firms. Today, many top tax lawyers are moving into big five public accounting firms. What many companies are saying is that when it come to areas of tax, tax planning and dealing with tax issues, we are not as concerned about whether we go to a law firm or a big five accounting firm. We want to go where the best people are. This is above all a race for the top talent."[n74]

The Big Five firms have expended significant effort to recruit lawyers to provide tax services in the only legally-sanctioned area of overlap between law and accountancy. As the Journal of Accountancy notes, "although CPA firms are among the largest employers of attorneys in the United States, lawyers working in the U.S.-based firm can offer clients only consulting and tax advice."[n75]

c. Lawyers employed by the Big Five

The Big Five’s cadre of lawyers in the United States in 1998 was reported to be: Andersen Worldwide, approximately 1,000 lawyers; Deloitte & Touche, 910 lawyers; Ernst & Young, 1,800 lawyers; KPMG, 775 lawyers; and PricewaterhouseCoopers, 1,500 lawyers.[n76]

During 1999, there was aggressive recruiting of experienced lawyers by all the Big Five. A sampling: Ernst & Young-Charles Kingston from Wilkie Farr & Gallagher, New York, for international mergers and acquisitions; Prentiss Willson, former managing partner of Morrison & Foerster, San Francisco; Glen Kohl, tax group chair at Wilson Goodrich & Rosati, San Francisco; KPMG-David Brockway from Dewey Ballentine, Washington, D.C., as partner in charge of national tax practice.[n77] King & Spalding, the Atlanta-based law firm, was the source of the lawyers to create Ernst & Young’s created and "branded" law firm in Washington, D.C.[n78]

Generalizations regarding "multidisciplinary partnerships" drawn from experience in tax practices can be misleading. There is substantial overlap between the areas of competence of the tax lawyer and the tax accountant. The competition for top talent in the field between law firms and accounting firms is unabating. After all, accounting firms are the creators of the financial statements that are the basis for tax returns. Accountants provide the accounting rules on which financial statements are based.

The 1997, 1998 and 1999 editions of the Lawyers Diary and Manual carried a listing for Deloitte & Touche LLP as a law firm in the Bar Directory for New York State: "(212) 436-2000 Deloitte & Touche, LLP -- 2 World Financial Center, New York, New York 10281." The listing does not appear in the 2000 edition.

Similarly, KPMG was listed in the 1999 edition of the Lawyers Diary and Manual as follows: "(212) 909-5000 KPMG Peat Marwick, LLP -- 757 3rd Av. NY 10017." Its listing does not appear in the 2000 edition of the Bar Directory for New York State.

In the 1994 edition of the Martindale Hubbell Law Directory, a firm biography appeared for ATAG Ernst & Young AG in Bern, Switzerland. It carried the following:

FIRM PROFILE: The Swiss Law practice of ATAG Ernst & Young AG gives advice in all business related legal and tax matters, both on a national and international basis. It is connected with other Law practices of Ernst & Young in Europe in Belgium, France, Germany, Hungary, Italy, The Netherlands, Portugal and Spain.

In response to protests of the Swiss bar authorities, the entry did not appear thereafter.[n79]

Pursuing its policy of "global branding" and its legal network to the United States, Ernst & Young attached its name to a new law firm in Washington, D.C., established as McKee Nelson Ernst & Young. The new firm’s outside counsel announced that McKee Nelson Ernst & Young and Ernst & Young had signed multiple agreements that covered:

Use of the Ernst & Young trademark. The start-up loan. A sublease from Ernst & Young for the law firm’s offices, first the temporary quarters and later permanent space within the Big Five firm’s building. General building and administrative services, such as reception, janitorial, and physical amenities, for which the firm will pay Ernst & Young market rates and to keep a wall between the lawyers and Ernst & Young, the law firm’s client files would be separate from, and off limits to, the accounting firm.[n80]

Chapter 8

The Globalization of American Law Practice

1. The Modest Beginnings

2. The Expansion Abroad of U.S. Law Firms

3. Professional Regulation

1. The Modest Beginnings

In Colonial America, law was imported, chiefly from England. In the early years of the Republic those who had trained in the law abroad were prominent practitioners. Coke and Blackstone were established texts for American lawyers.[n1]

It was not until the late 19th century that this imbalance of trade in law began gradually to change, undoubtedly influenced in part by the attention that had been given abroad to American political institutions grounded in written constitutions and declarations of individual rights authored principally by American lawyers. However, the direct stimulus for exporting American law came from the economic and industrial development in the nation and the resulting growth in foreign trade and international finance that brought a small circle of lawyers, principally from New York City, into transnational transactions, marking the modest beginnings of the globalization of American law and practice.

As New York City became a world financial center, Dutch, English, French and German bankers, all sought legal representation in their financing of American railroads and subsequently, when things turned sour, in receiverships and reorganizations for the troubled lines.[n2] The growth of foreign trade with new trading partners using various shipping lines to carry the trade brought an increasing number of American lawyers into the transactions involving foreign countries. Wars and military actions in Latin America and Europe, canal building in the mideast and in Panama, all with political and economic fallout, further enlarged the circle of American lawyers engaged in transnational matters. Both in the private sphere of corporate America’s foreign business and the public sphere of negotiating international treaties - even the planning for the League of Nations - American lawyers were significant participants.

2. The Expansion Abroad of U.S. Law Firms

While a few American law firms since the 1930s have had offices in Europe, South and Central America and East Asia, political events of recent years have had profound repercussions in international commerce and finance, creating new capital markets, channels of trade and wholesale privatization, all of which have brought new law and regulation and the need for expert legal counsel equipped to advise both government and private enterprise regarding an emerging new international legal regime.

The European Union has brought European lawyers into a new legal arena along with a growing number of American law firms. Eastern Europe’s turn toward market economies, organization of stock markets and broad-scale privatization of national enterprises have created a demand for multinational legal assistance from experienced U.S. lawyers. Meanwhile, Japan has slowly accepted the presence of American law firms, and from Hong Kong southward and westward: Malaysia, Australia, across a changing India and even in Africa, economic and financial linkages have been forged in which American corporate lawyers are finding public and private clients eager for their knowledgeable services. Multinational practice has become a favorite avenue of expansion for corporate law firms.

The most pronounced growth among middle-sized and large law firms during the 1990s was expansion outside the United States. Foreign offices of the 250 largest firms (identified by the National Law Journal) are now located in 72 cities in more than 50 foreign countries and are reported to employ more than 4,900 U.S. and foreign lawyers.[n3] These 250 firms are reported to have more than 100 U.S. and foreign lawyers in each of the following 12 foreign cities:

London, England

1,087 lawyers

Paris, France

489 lawyers

Hong Kong, China

378 lawyers

Brussels, Belgium

270 lawyers

Sydney, Australia

204 lawyers

Frankfurt, Germany

192 lawyers

Warsaw, Poland

184 lawyers

Moscow, Russia

144 lawyers

Amsterdam, Netherlands

139 lawyers

Singapore

105 lawyers

Mexico City, Mexico

103 lawyers

Tokyo, Japan

101 lawyers


A soon-to-be-published empirical study of the international activities of U.S. lawyers adopts the foreign office as a proxy for internationalization and globalization of the U.S. market in legal services. It chronicles the foreign office expansion of 72 of the largest and most international U.S. firms, documenting how U.S. law firms over the last 25 years moved into foreign legal markets in increasing numbers.[n4]

Accompanying this movement into foreign countries has been a delocalization of law practice within the United States. The study notes: "New York has become a gateway for the overseas activities of non-NY law firms and it serves as an anchor for their international identities.[n5] At the same time, U.S. firms are staffing their foreign offices with local hires and even groups of lawyers from foreign firms The demand for staff has led to an increase in the LL.M programs in American law schools to help fill that demand.[n6]

A recent empirical study of International Commercial Arbitration, sponsored by the American Bar Foundation, traced the internalization of legal practice as seen through international commercial arbitration and the growth of the U.S. presence in that field. The study documented how legal developments within the United States are affecting international arbitration. The authors concluded:

From the perspective of the United States . . . . , the international and the national legal markets are growing very close. In one obvious respect, the U.S. business world is connected closely to other countries around the world. Less obviously, the legal practices and approaches of big U.S. law firms are providing an almost general legal language for transnational business transactions.[n7]

3. Professional Regulation

Lawyers practicing in host countries other than their home countries are as a general matter subject to regulation in both countries. Practically speaking, home-country regulation may be somewhat attenuated, but disciplinary action by home-country authorities of a lawyer practicing abroad is not unknown. Host-country regulation, on the other hand, tends to be the more immediate context in which such a lawyer practices.

Most major centers of international legal practice have rules governing the activities of foreign lawyers established in those jurisdictions.[n8] Some form of local registration is usually required. A special status for the foreign lawyer may have been created as, for example, in Brussels. The applicable rules range from relatively restrictive in France and Japan to relatively permissive in Hong Kong, London and New York. Some jurisdictions such as China (other than Hong Kong) limit the number of foreign law offices that may be opened. Others such as France may require that the foreign lawyer pass a local bar examination administered in the local language. Most jurisdictions permit associations between foreign and local lawyers, although Japan continues to be rather restrictive in this respect.

The European Union has adopted Directives relevant to the right of lawyers from one EU member-state to practice in other EU member states -- the most important of which is the Establishment Directive currently being put into effect by the several EU member states. Lawyers who are not citizens of EU member states are not entitled to the benefits of the Establishment Directive, however.

In the United States, a number of states (following the lead of New York in 1974) have adopted rules for the licensing of "legal consultants" (based on the French concept of conseil juridique).[n9] The legal-consultant rules of the various U.S. states vary significantly from state to state, and very few have followed all major aspects of the ABA’s Model Rule for the Licensing of Legal Consultants (1993) (which is based on New York’s rules).[n10] Generally, a legal consultant is a lawyer qualified to practice in a foreign jurisdiction who, without taking a U.S. bar examination, is authorized by a host U.S. state to conduct an advisory but not a courtroom legal practice in the host U.S. state.

All members of the World Trade Organization are bound by the General Agreement on Trade in Services, which covers legal services (among many other fields). The extent of GATS coverage of legal services is largely dependent, country-by-country, on the specific commitments that a given country made with respect to legal services during the Uruguay Round of Multilateral Trade Negotiations (or, possibly, which that country unilaterally liberalized thereafter).[n11] Thus, to determine the regulatory status of a foreign lawyer in a given country, it is necessary to consult not only the relevant rules of that country but also its scheduled legal-service commitments under the GATS. At the present time (March 2000), as a practical matter, these GATS commitments by the three countries that are parties to the North American Free Trade Agreement subsume the operative NAFTA provisions on legal services.

Both GATS and NAFTA provide for on-going liberalizing negotiations on professional services, but (according to lawyers in the office of the United States Trade Representative as of March 1, 2000) GATS negotiations for the liberalization of legal services are not expected to take place, and NAFTA negotiations for such liberalization are not expected to take effect, in the near future.[n12] Thus, for the time being in the United States, the provision of legal services by lawyers including, foreign lawyers in the several states, is subject to the rules of those states governing legal services. The relevant rules are those for admission to the Bar and, in U.S. states which have them, rules for being licensed as legal consultants.