Chapter 10

Identifying and Appraising the Factors Looking Toward Change

1. Increasing Transactional Complexity

2. The Growth of the Theory of "Market Regulation" and Consumerism

3. The Advances of Expert Systems

4. The Difficulty of Defining the "Practice of Law"

5. The Desire for Liquidity of Professional Interests

6. The Economic Power of Proponents of MDP

Whether there are factors that make MDP "inevitable" or not is a matter of speculation. While that speculation is not helpful in and of itself, the isolation of factors that some people claim will favor MDP may help develop a strategy that will protect the unique benefits that a legal profession operating with independence, confidentiality and freedom from conflicts of interest brings to its clients.

The committee has isolated six major factors that tend to favor MDP

1. Increasing Transactional Complexity -- Early English Law was simple by comparison with modern law because it dealt with a simple, local society. Relatively few concepts (e.g., trespass vi et armis, trespass on the case, detinue and assumpsit) were entirely sufficient in a society where the rules were designed to regulate only the quality of work from a few easily understood occupations and the rights of people in uncomplicated relationships.[n1]

By contrast, it has been estimated that the documentary "confirms" generated in modern derivatives trading, one of the many arcane areas of modern law, require logical decision trees that contain some 2,500 variables.[n2] The increased complexity of modern legal issues and the specialized knowledge required to understand the factual predicates for appropriate legal analysis have required that lawyers collaborate ever more closely with members of other disciplines. Many law firms have developed referral relationships with other professionals to avail themselves of the necessary technical advice. Yet other law firms have hired expert professionals to provide the advice in house. Likewise, some non-legal professional firms have hired lawyers to help them with the understanding of the legal issues surrounding their clients’ technical problems.[n3] One of the pressures for MDP has been the desire on the part of these firms to compensate other professionals on the basis of profit sharing both to recognize their efforts on behalf of the firm and to help attract the highest quality personnel.

2. The Growth of the Theory of "Market Regulation"and Consumerism -- Almost 20 years ago ethics commentators began observing that trust in the "market" was beginning to replace professional regulation as a means of monitoring and policing the practice of law.[n4] Since that time many things have changed that have established the "market" as a dominant force in the delivery of legal services. Because of the increasing faith in the market as an effective and appropriate regulatory force for the legal profession, decisions made by the consumer of legal services have become a very important catalyst for changing the methods of delivery of legal services.

In its hearings, the ABA Committee on Multidisciplinary Practice heard testimony or received direct replies from several consumer organizations.[n5] These groups claimed that the consumer needed and could successfully make informed choices about whether to use an MDP or a group of independent professionals. Each claimed that giving choices to consumers of legal services would reduce the cost of those services as well as their complexity. In commenting on the final report, Wayne Moore, representing the AARP Foundation, wrote that consumers are interested in choice, access, convenience and cost of legal services.[n6]

The testimony of these consumer representatives does not prove demand for choice in the form of MDP, except insofar as they make the argument that the position of the organized bar is self-serving and designed to facilitate "lawyers defending their economic turf."[n7] These claims make it more likely that MDP could succeed if only because these claims might appeal to legislators or other relevant decision-makers.

The Committee has reviewed, and would expect interested members of the Bar to take account of, analyses of MDP that either favor, or consider that market forces will render inevitable, MDPs in which the practice of law is owned or otherwise controlled by nonlawyers.[n8] These analyses tend to view the legal profession as a cartel whose ethical rules serve economically unhealthy protectionist ends. Instead, according to these analyses, "The legal profession should welcome [such] MDPs as creating new career and economic opportunities for its members."[n9] The goals of organized bar groups, it is said, "are no different from [those of] any other trade union or interest group pursuing economic protectionism."[n10]

MDPs in which the practice of law is owned or otherwise controlled by nonlawyers, it is said, are well suited to provide "one-stop shopping," which clients will demand. To this is added the observation not only that client demand will cause the proliferation of this type of MDP, but also that the consumer should not be inhibited by rules of the legal profession in determining where to seek legal services. In sum, such "MDPs might be able to offer clients a superior product at lower cost...."[n11]

This line of reasoning emphasizes consumer forces--emphasizes that choices made by consumers, including sophisticated business consumers, have become powerful agents for change in the delivery of legal services. Additionally, it is said, complex legal problems and the need for multidisciplinary input have fueled client demands for "one-stop shopping."

In this light, consideration can be given to the changes proposed by this Report (see Chapter 12 below). If adopted (and subject to certain safeguards), these proposed changes will permit the following:

The provision of nonlegal services by law firms.

Interprofessional contractual relationships between legal and nonlegal professionals for the systematic and continuing provision of legal and nonlegal professional services.

Within the context of such relationships, the sharing of expenses, the referral of clients, and the advertising of the relationships.

Thus, changes proposed by this Report, if adopted, will make available to consumers two forms of multidisciplinary practice that have been proposed in the debate on MDP.[n12] The Committee's proposed changes do not, however, include changes that would permit MDPs in which the practice of law is owned or otherwise controlled by nonlawyers. Even were changes permitting such MDPs to be considered desirable, the Committee is of the view that substantial additional time would be required to develop informed views about suitable rules to this end. At the present time, the Committee does not consider it appropriate to undertake the formulation of possible rules permitting such MDPs. On the other hand, the Committee is quite mindful of the views mentioned above relating to consumer forces, and would deem it prudent for the NYSBA, first, to be a sensitive and informed observer of those forces and, second, should consumer interests and the public interest in general so demand, to remain open to a reconsideration of MDPs in which the legal practice is owned or otherwise controlled by non-lawyers.

3. The Advance of Expert Systems[n13] – Even the largest clients and law firms are attuned to the issue of costs. The application of computer technology is sometimes seen as addressing this concern. To this end some law firms are developing expert systems that simulate the decisions an experienced professional would make about a given fact pattern.

Linklaters & Alliance, a London-based law firm, has developed "Blue Flag," a line of computerized products using expert system technology, which can replicate the advice of a live lawyer in certain circumstances. One of the Blue Flag[n14] systems, for example, advises investment banks about the laws of 31 countries. If a bank wants to buy or sell securities across 20 countries, the system can outline the legal requirements of each jurisdiction. A London-based technology consultant, Neil Cameron, claims that "Blue Flag is the most revolutionary advance in high-value, low-volume e-Commerce -- and there is still no U.S. equivalent."[n15] Linklaters claims its system reduces the cost to the client.[n16]

Davis, Polk & Wardwell is developing its "Global Collateral Project" which focuses on cross-border financing transactions. By entering the variables for a specific transaction a client can retrieve the analyses the firm has made of similar transactions. The theory is that this "preliminary analysis" would be used as a basis for supplemental value added legal advice from the firm.[n17]

The Sydney, Australia, firm of Blake Dawson Waldron also has a program that makes a preliminary determination whether the terms of an advertisement violate the provisions of any Australian rule relating to advertising claims.[n18] Elizabeth Dawson, the partner in charge of the Blake Dawson project, says, "From a client’s perspective, the products deliver hundreds of thousands of dollars of legal/compliance advice for a fraction of that cost." She adds, "From the firm’s perspective, the products, or eServices, as we now call them, allow us to break the nexus between time billing and profitability."[n19]

The accounting profession is pursuing the same ends. "Ernie," an Ernst & Young system, allows $5,000 per year subscribers to ask an unlimited number of questions about business, tax and technology matters. Live Ernst & Young consultants answer the questions and return an answer within two days. The answers are stripped of their identifying characteristics and become part of the Ernie database, searchable by subscribers.[n20]

So far, the firms using expert systems view them as feeders for value added services.[n21] It is easy to imagine, however, that the concept could be applied to estate planning,[n22] estate administration or other "bread and butter" areas of practice.[n23]

In many areas of practice (perhaps with the important exception of litigation[n24]) lawyers working with computer programmers, accountants, actuaries or other professionals could develop expert systems to sell individualized "legal" product to consumers or to businesses.[n25] In those cases, nonlawyers might expect to share profits, if any, with the lawyers. In some cases, there might be no lawyers involved.

Some expert systems now perform routine functions often or historically performed or supervised by lawyers. Mortgage.com[n26] and eOriginal[n27] both claim to be able to process mortgages and manage real estate closings more efficiently than by using the traditional paper transaction.[n28]

The use of expert systems may pose the greatest threat to the core professional values that we seek to protect for clients. They may also be very attractive to consumers.

4. The Difficulty of Defining the "Practice of Law" -- The ABA Commission report defined the "practice of law" in very broad terms.[n29] By contrast, some people believe that the practice of law means only that you have appeared in court and claimed that you are a lawyer.[n30]

On January 22, 1999, Judge Barefoot Sanders, Senior Judge of the United States District Court for the Northern District of Texas, decided that "Quicken Family Lawyer," a computer software product of Parsons Technology, Inc. that offered 100 different legal forms, was engaged in the unauthorized practice of law in Texas. He enjoined the sale of the product. Subsequent to the filing of the appeal and prior to a decision of the Fifth Circuit Court of Appeals the Texas legislature amended the unauthorized practice of law statute to allow the sale of Quicken Family Lawyer and other similar programs so long as they contained an appropriate disclaimer.[n31]

The Fifth Circuit Court of Appeals vacated the injunction and judgment of Judge Sanders and remanded the case to the district court "for further proceedings, if any should be necessary, in light of the amended statute."[n32]

When they are confronted by unauthorized practice allegations, the "Big 5" accounting firms simply deny that they are engaged in the practice of law at all.[n33]

No single definition of "the practice of law" will apply in all the situations in which that phrase is used. For example, the activities that are properly forbidden to nonlawyers as constituting "the practice of law" differ from those forbidden to people who are lawyers but who are not admitted in the forbidding state as constituting "the practice of law" within that state. Whether an activity should fall within one of these prohibitions may turn, not just on whether it calls for the use of traditional legal skills, but also on other factors such as the qualifications of a particular group of nonlawyers to accomplish the activity in question, and the public’s need to call on that group of nonlawyers to conduct the activities.

The lack of a consistent definition of the practice of law and the fact that the definition can be changed legislatively, administratively or by court rule[n34] makes it difficult to enforce unauthorized practice statutes. At least one commentator suggests that rather than seek to enjoin "unauthorized practice", the courts should require that nonlawyers be regulated "in ways that impose sanctions as stringent as those provided for lawyers".[n35]

Some commentators have questioned whether consumers "protected" by the market need regulatory protection from the unauthorized practice of law.[n36] Many commentators suggest that specific harm from nonlawyer practice cannot be established.[n37]

5. The Desire for Liquidity of Professional Interests -- In 1987, Steven Brill, Yale Law graduate and sometimes controversial editor of The American Lawyer, put forth the idea of a public law firm.[n38] Brill recanted his view nine years later by branding it as a "completely awful idea."[n39] In the late 1960s, many years before Brill articulated the idea, at least one member of the investment banking community had taken the plunge. When Goldman Sachs went public in May 1999, employees owned two-thirds of an enterprise valued on the market at more than $33 billion.[n40]

Craig Johnson, a founder of the Venture Law Group in Menlo Park, CA, says he was told that the normal valuation for a professional service firm is 20 times trailing earnings. Under this formula a firm with $1.5 million in earnings that was willing to leave $750,000 in the firm would be worth $15,000,000. As Johnson points out, the short-term pain a firm must accept (by reducing partner distributions) must be balanced against the desire to increase long-term value.[n41]

Professional service firms other than law firms are already testing these waters. Centerprise, a conglomerate accounting and consulting firm[n42] with aggregate revenues of $191.1 million, designed to offer a "full range of consulting, accounting, tax and related professional services," was to have gone public in early November, 1999 by selling 10.5 million shares at $11.50-13.50 per share. The proceeds of the public offering were to have been used to provide working capital and to purchase the interests of partners. The public market would have provided partners with liquidity for their shares.[n43]

The offering was withdrawn because an increase in the Producer Price Index and the success of the United Parcel Service initial public offering on the same day made market conditions "unfavorable" for the sale.[n44]

The possibility of liquidity at a multiple of earnings is obviously a strong incentive for repealing rules against ownership of law practices by other than lawyers.

6. The Economic Power of Proponents of MDP -- The major factor in the development of MDP worldwide and in the United States has been the immense economic power of the major accounting firms. The "Big 5" international accounting firms have been the principal proponents of relaxation of the rules against MDP with lawyers. To date, these firms have simply denied that they are engaged in the practice of law in the United States.[n45] The fact is that they have also spent huge sums in lobbying for changes in rules that would allow them to practice law and any other profession they thought was profitable. When the Texas Unauthorized Practice Committee with an annual budget of $60,000 began to investigate Arthur Andersen, the accounting firm hired Weil, Gotshal and Manges to represent it. Rumor has it that the fees paid to Weil, Gotshal exceeded the annual budget of the Texas committee by more than an order of magnitude. It has also been said that the accounting profession spent an eight-figure dollar amount to secure their very limited tax practitioner privilege under the Internal Revenue Code.[n46] This battle was won against the active lobbying of the American Bar Association.

It was prior to the normal course of decision in the Fifth Circuit Court of Appeals that the Texas Legislature was persuaded to amend their unauthorized practice of law statute to allow the continuing sale of Quicken Family Lawyer.

The substantial economic power of international professional service organizations with hundreds of thousands of employees must be taken seriously.

PART THREE

ANALYSIS OF THE PRINCIPAL ISSUES AND RECOMMENDATIONS

Chapter 11

Clients, the Public, Law Firms, and the Professional Responsibilities of Lawyers

1. Fiduciary Duties to Clients

Confidentiality

Conflicts of interest

Independent judgment

Competence

2. Duties Arising from Lawyers’ Roles in the Adversary and Governmental Systems.

Advocacy

Access to legal services

The independent legal profession and the rule of law

Considering whether lawyers and other professionals should be allowed to join in various practice arrangements calls for analysis of whether and how the obligations and functions of the professions in question are compatible. Because there are many professions whose members might conceivably work together with lawyers, and because these professions differ enormously among themselves, it will be essential to look at each profession separately before reaching conclusions about its compatibility with legal practice. This report will not undertake such a comprehensive survey. It will focus on the lawyers’ end of the compatibility inquiry, with references to accountants and others who might be included in multidisciplinary practice.

The duties of lawyers and law firms have two main sources. First, because clients entrust matters vitally affecting them to lawyers, and because it is very hard for a client to monitor a lawyer’s performance, lawyers have extensive fiduciary duties to their clients, enforceable though a variety of remedies. This distinguishes lawyers from other professionals, whose fiduciary duties may be different (for example, in the case of physicians) or weaker (for example, in the case of real estate agents) or who may have no "clients" at all (for example, in the case of journalists).

Second, the legal profession’s role in the administration of justice imposes obligations on lawyers and their firms. In litigation, lawyers help make the adversary system work through honest but partisan advocacy. They play similar but modified roles when they provide representation before administrative agencies, negotiate contracts, and perform other functions. More broadly, the legal profession contributes in various ways to the legal system, and hence to the protection of rights and the rule of law. Because these functions are entrusted to lawyers, they possess both special powers and special duties, such as limits on trial publicity and advocacy.

The obligations that arise from these various sources are nuanced and qualified, because they reflect a balance of competing policies. They vary with the situation, and in some cases with the jurisdiction or with the sophistication of the client. The following discussion therefore unavoidably oversimplifies in some respects. It also does not cover every obligation lawyers owe.

1. Fiduciary Duties to Clients

a. Confidentiality

Like members of most other professions, lawyers and law firms may not disclose clients, confidential information. The lawyer’s obligation is particularly broad, however, because it covers substantially all information learned in the course of a representation.[n1] In addition, confidential communications to a lawyer are protected not only against the lawyer’s voluntary disclosure but against court compulsion: they are guarded by the attorney-client privilege. Communications with members of other professions may have no or limited privileges,[n2] or privileges subject to exceptions unlike those applicable to lawyers.[n3]

Lawyers’ confidentiality duties likewise vary from those of other professionals. Depending on the jurisdiction, for example, lawyers are allowed, forbidden or required to disclose ongoing and projected client frauds; but lawyers in all jurisdictions are forbidden to disclose past frauds in which they were not involved.[n4] By contrast, federal legislation and possibly professional standards require an auditing accountant to ensure disclosure of frauds that could materially affect the audited corporation’s financial statements, including completed frauds not involving the accountant.[n5] Members of both professions must balance the need to secure the client’s confidence against the need to protect the public; but the rules also reflect the fact that a core function of lawyers is to defend clients against charges of past wrongdoing, while a core function of accountants conducting an audit is to promote full and accurate disclosure of clients’ financial situations. The distinction can be otherwise described: because an audited business must disclose certain unlawful activities, an accountant may conclude and certify an audit only if this has been done to the best of his knowledge,[n6] while a lawyer may properly take many steps to defend a client who has committed a fraud without the lawyer’s assistance but has not disclosed it. Other professions strike still different balances.[n7]

These variations of privilege and confidentiality rules would pose obvious problems for members of different professions practicing in the same firm. One profession might be required to disclose what another was required to keep secret. If the firm provided services of different professionals to the same client, the firm’s obligations to its client or the public might be unclear or contradictory.[n8] Rules or procedures that might resolve such problems for some professions might not work for others having different rules.

b. Conflicts of interest

Although most professionals confront conflicts of interest, American lawyers have evolved far more detailed and stringent rules to regulate them than have members of other professions, or indeed lawyers abroad.[n9] One explanation for this pattern is that clients and former clients have had the means and the motives to enforce and develop the conflicts rules by means of motions to disqualify counsel. More basically, of course, the conflicts rules reflect the high value that lawyers and judges place on the principles of loyalty, fiduciary duty and confidentiality that underlie the profession. Rather than trying to set forth all the lawyer conflicts rules,[n10] this report will simply note some problems they pose for new forms of practice involving members of different professions.

Because the lawyer rules are firm-wide they affect the size and structure of law firms. In general, whenever a conflict of interest disqualifies one lawyer in a firm, the whole firm and all its lawyers are disqualified. Despite the existence of certain exceptions, notably for former government lawyers and for certain personal conflicts, this principle governs most conflicts.[n11] It reflects factors including the prevalence and desirability of sharing information and commitment within a firm, the difficulty of monitoring screening systems, and the importance of fostering client trust and confidence.

The more complex a firm’s practice becomes, the more likely it is that conflicts of interest will arise, and the more advanced its procedures for checking conflicts must be. Such procedures must deal not just with conflicting representations of two clients in the same matter but also with other conflicts rules applicable to lawyers--for example, those forbidding suit against a firm client even in a matter unrelated to those in which the firm represents the client, and those forbidding certain suits against former clients.[n12]

Bringing nonlawyers into a law firm raises problems under the principle imputing conflicts throughout the firm. Exempting nonlawyers from the principle could dilute its effectiveness. Including them could multiply conflicts, particularly if the resulting firms were as large and complex as the Big Five accounting firms are today. Similar problems would arise from other lawyer conflicts rules that are more stringent than those of other professions. For example, including within a law firm professionals who give expert witness testimony would normally, absent an exemption for nonlawyers, disqualify the firm’s lawyers from participating in any case in which the nonlawyers testify.[n13]

In at least one situation, lawyers’ rules are less restrictive than those of another profession. Both lawyers and accountants limit business transactions with clients, but for different reasons and hence in different ways. The lawyer rule protects the client, who may therefore sometimes waive it if properly informed. The accountant rule protects the public by promoting the independence of auditing accountants from management, so it is not subject to waiver by the client.[n14] If this rule were to apply to lawyers in a firm containing accountants, it would prevent such frequent (but sometimes questioned) practices as sitting on a client’s board or accepting payment in a client’s stock. Indeed, in the SEC’s view it might prevent the firm from providing legal services to any client that the accountants in the firm audited.[n15]

In all these situations, multiprofessional firms can avoid violating any profession’s conflicts rules by following the most restrictive rule applicable to any of its members. In most but not all cases, that will be the rule governing lawyers.[n16] The only questions therefore are whether all those involved are willing to accept the burdens of this solution and whether, if not, a more lenient approach would undermine unacceptably the principles that conflicts of interest rules promote.

c. Independent judgment

The law governing lawyers proceeds on the assumption that nonlawyers with the power to do so could impair a lawyer’s freedom to exercise independent professional judgment in a client’s behalf. The law thus bars everyone but lawyers in a firm from owning interests in the firm or having a right to share the firm’s fees. For the same reason, a lawyer may accept payment for a representation only from the client, or with the client’s informed consent; and the lawyer may not allow a nonclient who pays for, hires or recommends the lawyer to interfere with the lawyer’s judgment. Likewise, corporate house counsel may represent the corporation but not (with minor exceptions) any outside client.[n17]

Other professions, although expecting their members to exercise independent professional judgment, vary in the extent to which they safeguard that independence through rules like those applying to lawyers. Accountants require a C.P.A. firm to be controlled by accountants,[n18] in addition to mandating the safeguards for independence from clients already mentioned. Members of some other professions--for example, engineers and health professionals--frequently work for entities not controlled by members of their own profession while rendering services to persons who are not their employers.

Any proposal allowing nonlawyers to be principals of a firm in which lawyers practice law would require amendment of the current lawyer rules. If the nonlawyers were accountants practicing accounting, it would presumably also require amendment of current rules governing accountants. Contractual arrangements between law firms and accounting or other firms that did not affect the ownership and control structure of each firm would not require these particular changes; depending on the nature of the arrangements and the professions involved, other changes might be needed to legalize the arrangement while protecting the independent professional judgment of the lawyers and other professionals.

Because professional independence can have many meanings, depending on just what the professional seeks to be independent from, it is worth noting that lawyers do not seek to be independent from their clients in the same way as they do from nonclients who could influence their representation. On the contrary, lawyers are agents of their clients, and required to protect their interests, keep them informed, and follow their instructions as to many matters.[n19] These requirements are limited in various ways: lawyers owe obligations to third persons and the legal system, and must maintain independent judgment to fulfill those obligations, and indeed to represent their clients adequately.[n20] Nevertheless, lawyers’ concept of independence differs fundamentally from those of accountants, at least those who conduct the attest function, for whom the basic meaning of independence is independence from clients.

d. Competence

All professions require their members to render competent services, and it is hard to see how these requirements would conflict were members of different professions to participate in the same firm. That conclusion assumes that such arrangements would protect independent professional judgment so that, for example, a nonlawyer could not overrule a lawyer’s determination about his or her qualifications to undertake a representation.[n21]

Professions vary in the particular skills and training they require,[n22] and in their ways of assuring competence, and here some conflicts could arise. Accountants, for example, rely on peer review, in which a firm is "audited" by accountants from another firm.[n23] Attempts by lawyers to introduce a similar practice have been less successful, in part because they might expose a client’s confidences to a reviewing lawyer outside the firm representing the client.[n24] This problem would be more serious were an outside accountant to review the practice of accounting by the accountants of a law and accounting firm, since then the outsider learning confidences that a client reposed in a lawyer would not even be another lawyer. If, however, lawyers and others can resolve the more basic problem of protecting confidential information within such a firm, it should be possible to work out a satisfactory way to handle peer review as well.

2. Duties Arising From Lawyers’ Roles in the Adversary and Governmental Systems

a. Advocacy

Committed advocacy, with its limits, is central to what lawyers do. Its obligations, although they vary with the context, extend beyond courtrooms to areas such as alternative dispute resolution, representation before administrative agencies, legislative hearings, negotiation, and business planning. Historically, both the profession and its values grew from its role in presenting facts, framing arguments, and generally seeking to advance a client’s claims against the claims of others represented by their own counsel.

Much of the law of lawyering regulates advocacy of one sort or another. "To the extent consistent with the lawyer’s other legal duties . . . , a lawyer must, in matters within the scope of the representation . . . proceed in a manner reasonably calculated to advance a client’s lawful objectives, as defined by the client after consultation . . ."[n25] That duty is enforceable through such means as malpractice actions and professional discipline,[n26] but the traditions and training of the profession provide its central support.

Because the law presupposes that lawyers will act as committed advocates, much of its detail works out the limits of advocacy that are necessary to protect opposing parties, the legal system, and others. This detail addresses many issues: disclosure of the lawyer’s role, improper negotiating tactics and courtroom argument, direct communication with another represented party, improper fee arrangements, limits on client control, a lawyer’s right or duty to withdraw from a representation, prejudicial publicity, dealing with witnesses, and so forth.[n27] This law is found in professional rules but also in other sources such as administrative agency and court rules and judicial precedent.[n28] It applies not just to lawyers in litigation but, in good part, to other fields of legal practice.

Because other professions’ rules deal only in the most marginal way, if at all, with advocacy and its limits,[n29] multidisciplinary practice would be unlikely to involve conflicts between inconsistent professional rules. Rather, the difficulty would be to determine which lawyer rules should apply to members of other professions, and how to inculcate and enforce such rules. For example, should the rule against direct contact with a represented party apply to contacting a financial advisor who was the partner of a lawyer? Lawyers are forbidden to circumvent their own rules through the actions of another,[n30] but the other is not subject to discipline, and in any event would not always be acting on behalf of a circumventing lawyer.

b. Access to legal services.

Because people and businesses often need lawyers to protect their rights, and because the legal and governmental system depends on the participation of lawyers, access to legal services is both part of that system and an emerging right of citizenship. The Legal Services Corporation, among other institutions, reflects governmental recognition of the role of legal services, a role with roots in the Constitution.[n31]

Although much remains to be done, the bar plays an important part in securing access to legal services. Lawyers and their organizations have worked to establish and defend legal aid organizations, the Legal Services Corporation, IOLTA programs, and other institutions.[n32] They have also donated much time and effort to various law reform activities. Providing legal services at no or low charges for those who cannot afford lawyers is another tradition of the bar that some are striving to expand.[n33] Disciplinary rules and common law doctrine prohibiting unreasonably large lawyer fees reinforce these efforts, as do related doctrines governing such matters as the impact of discharge on a lawyer’s fees.[n34]

Other professions vary in their approach to these matters. The medical professions share the bar’s aspiration to provide service for all. Others such as accountants have tended to limit their services almost entirely to businesses, with access determined by the market. Establishing a firm incorporating members of the latter kind of profession along with lawyers would require deciding whether the rules that apply to lawyer fees would govern every firm fee, and if not what separate billing arrangements would be appropriate. More basically, difficulties might well arise in maintaining and increasing the commitment of lawyers in such a firm to fostering access to legal services and providing pro bono representation. The traditions of the nonlawyers in the firm could only be expected to help discourage lawyers from public service.

Like other policies, the policy of promoting access to legal services collides at its limits with countervailing concerns, in this case the prevention of lawyer overreaching and unfair competition in the search for clients. Many other professions have traditionally recognized similar concerns. Sometimes professional self interest has helped shape the resulting rules. The Supreme Court and government agencies, however, have in recent decades acted to nullify many of those rules as inconsistent with the First Amendment or the Sherman Act.[n35] For all professions, the result has been a dramatic growth in advertising and price competition.[n36]

Solicitation is one area in which significant differences between professions remain. Lawyers in almost all states may not solicit paying clients in person, a prohibition that the Supreme Court has apparently upheld against a First Amendment challenge.[n37] The accountants abandoned a similar prohibition under government pressure, and are not constitutionally free to reinstate it.[n38] These professions also have divergent rules governing receipt of referral fees by their members.[n39] If lawyers and accountants were allowed to join in a single firm, it would be necessary to decide what solicitation and referral rules would govern its members. The same rule might be applied to all, because it would be pointless to forbid some members to use methods of seeking clients or fees that others in the same firm could freely employ for their benefit. Because accountants may not constitutionally be forbidden in-person solicitation, lawyers in their firms might hence also be allowed to solicit, which in turn could lead to allowing all lawyers to do so.

c. The independent legal profession and the rule of law

The American bar occupies a unique place in our legal and governmental system. It is an integral part of that system, making law in the legislatures and courts, presenting grievances to those legislatures and courts on behalf of clients, helping keep clients in compliance with the law through advice and assistance, making rights a reality through advocacy and representation, defending law and the courts against shortsighted attacks, and working through bar associations to improve the legal system.

To fulfill this role, lawyers must uphold the integrity of our legal system even if doing so may be contrary to the interests of their clients. This responsibility to society also requires a lawyer to think critically about a client’s proposed course of action, and advise a client about to embark upon a lawful but immoral course of action of its effects on the interests of others, as well as possible repercussions to the client itself.

At the same time, lawyers in private practice are not part of the government, but a private or intermediary group with public concerns. They are free to represent or not represent anyone, whatever his or her deeds, so long as they remain within the limits of the law. The vindication of individual rights, especially against the state, requires that lawyers be able to assert and pursue client interests free of external controls. As Archibald Cox has written, "the rule of law depends upon a large measure of voluntary compliance; yet law can never be wholly self-enforcing, especially not against officials who are disposed to circumvent or ignore the law’s restrictions."[n40]

For several reasons, the American bar is more able to fill such a role than are other professions, or even the bars of other nations. Law, in the United States, is the language in which citizens and government converse. The courts, with which lawyers are especially connected, play an exceptionally large role in shaping our constitutional and legal system. Our bar is a unified one, not divided as in many nations into several legal professions, but joined by education, practical experience, professional organizations, and a shared law of lawyering.[n41] Judges and many legislators and government officials are part of that bar, bringing to their functions the experience of private practice, and often bringing back to private practice the perspectives of government. And, despite a heritage of discrimination and elitism that lawyers share with other professionals, persons of many backgrounds and viewpoints have been able to join the bar.[n42]

The size, diverse roles, and unity of the bar not only ground its importance but also enable it to maintain the independence from the state that foreign bars value but do not always achieve. The state does regulate lawyers, more so than it regulates most professions, but it does so largely through judges who are lawyers themselves.[n43]

Unrestricted multidisciplinary practice would pose a substantial threat to the roles and independence of the bar. The major accounting/professional service firms characterize themselves as MDPs. The rules of the accounting profession, focused on the audit function, play a relatively minor role in the regulation of those firms today. How will lawyers maintain their professional culture if many of their daily colleagues and partners come from other professions with differing functions and values? How will lawyers join as a profession if many of their professional links are with nonlawyers? How will lawyers interpret between private clients and the government if they work in firms many of whose members lack that intermediary tradition? How will they resist pressure, whether to cut ethical corners, to reduce pro bono commitments, or to relax the profession’s rules, if colleagues from other professions with other standards call on them to do so? How will disciplinary bodies be able to determine whether a lawyer’s independent judgment has been bent or displaced by the concerns of nonlawyer partners or stockholders? If positive answers to these questions cannot be found, the bar will enter into new forms of practice only at the cost of injury to its independence and to the rule of law.

Chapter 12

In The Public Interest, What Changes Should Be Made in the Law Governing Lawyers and Law Firms?

1. With Respect to Ancillary Services Offered by Lawyers and Law Firms

2. With Respect to Interprofessional "Strategic Alliances" and other Contractual Relationships Between Lawyers and Nonlawyers

3. With Respect to Lawyers Who Work for Organizations that Provide Consulting Services and Financial Products to the Public

4. With Respect to the Unauthorized Practice of Law

5. With Respect to Nonlawyer Investment in Entities Practicing Law

6. With Respect to Transfers to Nonlawyers of Ownership or Control Over Entities Practicing Law

Appendix A Summary of Proposed Amendments to the New York Code of Professional Responsibility

Appendix B Summary of Possible Amendments to the ABA Model Rules of Professional Conduct

Our examination of the law governing law firm structure and operation has taken us through an assessment of the legal profession to an evaluation of the challenges to maintaining a single public profession of law. The American legal profession has undergone major changes over the past century, and the frequency of those changes continues to increase. Technological advances, demographic shifts and competitive pressures from within the profession and from outside forces have all combined to enhance in part and to complicate in part the ability and obligation of lawyers to provide efficient and effective services to their clients.

We now analyze the existing legal and ethical framework and assess the extent to which changes should be made to further the public interest.

1. With Respect to Ancillary Services Offered by Lawyers and Law Firms -- As discussed in Chapter 4 above, lawyers have been providing their clients with nonlegal services for many years. In some cases, law firms have formed divisions or subsidiaries to provide ancillary business services to clients. The organized bar, however, has not always been receptive to the idea of lawyers providing such services to their clients. In fact, for many years the ABA and certain state bars were openly hostile to any affiliations between lawyers and nonlawyers. The predominant concern expressed was that lawyers would circumvent the ethical prohibition against employing the aid of nonlawyers to solicit legal clients for them by using their affiliation with, or conduct of, a nonlegal ancillary business as a "feeder."[n1] Lawyers were given a choice by ABA ethics committee opinions: either practice law or relinquish the law-related business.[n2] State bars generally took a more moderate approach. A lawyer could engage in a law-related business as long as it was conducted in a manner that preserved a strict separation between it and the lawyer’s legal practice.[n3] Eventually, the ABA itself relented and condoned nonlegal businesses on this basis.[n4]

The ABA’s attitude softened even further with the adoption of the Model Rules of Professional Conduct in 1983. The Model Rules reflected the abandonment of the restriction that had been contained in the 1969 Model Code of Professional Responsibility against lawyers advertising that they were also engaged in another profession or business.[n5] This relaxation, coupled with the downturn in practice in regulatory and antitrust law precipitated by the Reagan Administration’s de-emphasis of such activities, led to the proliferation of large-scale ancillary businesses in the District of Columbia in the 1980s, with many firms turning to nonlegal work for additional revenues.[n6] Among the businesses created were a large number of lobbying groups, a bank consulting group, a public relations agency, education consulting companies, a real estate developing consulting company and trade consulting companies.[n7]

By 1986, the ABA Commission on Professionalism declared that it was "disturbed by what it perceive[d] to be an increasing participation by lawyers in business activities."[n8] At the Commission’s urging, a study was commenced to determine whether controls or prohibitions should be imposed on lawyers with respect to the provision of ancillary services.[n9] The Chairman of the Commission, Justin A. Stanley, explained his reasons for investigating this "new" phenomenon:

As reflected in conversations with sole practitioners, lawyers in small firms and lawyers in non-urban communities, the part-time businessman lawyer had not posed a major problem for the profession. The practice was not extensive and the occasional ethical problem that arose when enterprises turned sour were [sic] handled by settlement or disciplinary action. Recently, however, large firms in urban centers have . . . begun to engage in business activities in a major way. These activities have attracted the attention of the press, perhaps because of the break with tradition.

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What is happening today is quite different from what has happened in the past. Then isolated acts of individual lawyers were involved; acts which for the most part were not driven by predetermined policy decisions. Today, in addition to isolated acts of lawyers, which may or may not be more widespread, law firms as entities are involved in business activities. These activities are not isolated or accidental, but instead, are based on prior economic policy decisions by the firms and often involve large sums of money.[n10]

Various entities within the ABA, including the Section of Litigation, the Special Coordinating Committee on Professionalism and the Standing Committee on Ethics and Professional Responsibility, began to study the issue. All concluded that lawyers’ ancillary business activities implicated significant ethical concerns, but differed as to the approach the ABA should take. Some took the position that the risks of conflicts of interest, loss of confidentiality and confusion on the part of clients and nonclient customers were simply too great to justify permitting lawyers to provide ancillary services. Others viewed these concerns as too speculative to justify regulation and questioned the propriety of the ABA regulating the non-legal business activities of lawyers.[n11]

Reflecting this deep division, in August 1991 the House of Delegates of the ABA narrowly (by an 11-vote margin) adopted as Model Rule 5.7 a provision that (had any jurisdiction adopted it) would have restricted the ability of lawyers and law firms to engage in ancillary business activities. Rule 5.7(a) stated the general principle that "[a] lawyer shall not practice law in a law firm which owns a controlling interest in, or operates, an entity which provides non-legal services which are ancillary to the practice of law, or otherwise provides such ancillary non-legal services, except as provided in paragraph (b)." Rule 5.7(b) stated the four conditions under which lawyers could "practice law in a law firm which provides non-legal services which are ancillary to the practice of law":

(1) The ancillary services are provided solely to clients of the law firm and are incidental to, in connection with and concurrent to, the provision of legal services by the law firm to such clients;

(2) Such ancillary services are provided solely by employees of the law firm itself and not by a subsidiary or other affiliate of the law firm;

(3) The law firm makes appropriate disclosure in writing to its clients; and

(4) The law firm does not hold itself out as engaging in any non-legal activities except in conjunction with the provision of legal services, as provided in this rule.[n12]

The rule was controversial and the subject of widespread criticism during 1991-92. No state had adopted it, in form or substance.[n13] Thus, after only one year, the Rule was repealed by the ABA, by an even narrower vote (a margin of seven) at the 1992 Annual Meeting.[n14] Shortly thereafter, the ABA created a committee on ancillary businesses to study the issue further and draft an appropriate rule. The product of this effort was the current version of Model Rule 5.7, adopted in 1994 by a vote of 237-183.[n15] In order to allay concerns that professionalism and ethical conduct would suffer in the context of the non-legal ancillary business, the rule establishes a rebuttable presumption that the framework of attorney ethics rules apply to a lawyer who performs law-related services or controls an entity that does so. The rule provides:

(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:

(1) by the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or

(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

(b) The term "law-related services" denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

This permissive approach to the conduct of ancillary business enterprises is echoed in the American Law Institute’s forthcoming "Restatement of the Law Governing Lawyers":

So long as each enterprise bills separately and so long as the ancillary enterprise does not engage in the practice of law, involvement of both the lawyer’s law practice and the lawyer’s ancillary business enterprise in the same matter does not constitute impermissible fee-splitting with a nonlawyer, even if nonlawyers have ownership interests or exercise management powers in the ancillary enterprise.[n16]

Notwithstanding this apparent consensus between the ABA and ALI, only six jurisdictions have adopted Model Rule 5.7 or a corresponding provision.[n17] New York is not one of them. This is not surprising, given that the rule did not announce anything particularly new and does not permit or prohibit anything that was not permitted or prohibited before.[n18] What it does, however, is remind lawyers that as a general rule they are subject to professional discipline even when the services they or their law firms are performing for clients could lawfully be rendered directly to clients by nonlawyers,[n19] and clarify the circumstances under which a lawyer participating in an ancillary business activity will be held subject to the full panoply of ethics rules.

Perhaps as a consequence, most states have dealt with the ethical issues associated with ancillary businesses through ethics committee opinions that interpret existing rules. For example, it is generally agreed that lawyers must disclose to clients their interest in the ancillary service-provider so that the clients can take that fact into account in evaluating whether to engage the services of the ancillary business or of the lawyer.[n20] Likewise, the lawyer must be mindful of conflicts of interest arising out of the activities of the ancillary business, obtaining conflict waivers if necessary.[n21] The clients should also be advised that they will not have an attorney-client relationship with the ancillary service entity or with the individuals providing those services, so that they do not unknowingly risk waiver of the attorney-client privilege in their communications with ancillary business representatives.[n22]

The current ethical landscape in New York can be summarized as follows: under the existing rules, ancillary businesses are permitted so long as (a) there is a strict division between the services provided by the lawyers and those provided by the nonlawyers, so that the nonlawyers cannot hold themselves out to clients as being able to provide legal services; (b) the lawyers do not use the nonlegal business as a feeder of clients for their law practice; (c) the lawyers do not recommend that their clients purchase the specific products being sold by the ancillary business (e.g., title insurance, financial planning services); and (d) all other ethical rules (regarding confidentiality, conflicts of interest, nonlawyer partners, sharing of fees with nonlawyers, etc.) are followed.[n23] The emphasis of the New York framework is on the relationship between the ancillary business entity and the client, as seen from the perspective of the client.

The thrust of the New York ethical framework is more consistent with the approach taken in the version of Model Rule 5.7 adopted by the Commonwealth of Pennsylvania. That rule provides:

Rule 5.7 — Responsibilities Regarding Nonlegal Services

(a) A lawyer who provides nonlegal services to a recipient that are not distinct from legal services provided to that recipient is subject to the Rules of Professional Conduct with respect to the provision of both legal and nonlegal services.

(b) A lawyer who provides nonlegal services to a recipient that are distinct from any legal services provided to the recipient is subject to the Rules of Professional Conduct with respect to the nonlegal services if the lawyer knows or reasonably should know that the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship.

(c) A lawyer who is an owner, controlling party, employee, agent, or is otherwise affiliated with an entity providing nonlegal services to a recipient is subject to the Rules of Professional Conduct with respect to the nonlegal services if the lawyer knows or reasonably should know that the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship.

(d) Paragraph (b) or (c) does not apply if the lawyer makes reasonable efforts to avoid any misunderstanding by the recipient receiving nonlegal services. Those efforts must include advising the recipient that the services are not legal services and that the protection of a client-lawyer relationship does not exist with respect to the provision of nonlegal services to the recipient.[n24]

Pennsylvania improved upon the model provided by the ABA rule and provided in its version more practical and specific guidance for lawyers who engage in what Pennsylvania calls "nonlegal" services, a category of services that is broader and arguably more susceptible to identification than the ABA’s "law-related" services. Whereas the focus of the ABA rule is on the provider of the service, i.e., the lawyer, the Pennsylvania rule looks to whether the client is receiving services that are distinct from legal services. The Pennsylvania rule in its overall approach is more attuned to the public interest, or more specifically the interests of the consumers of legal services, in that it imposes on the lawyer a duty to educate the recipient of nonlegal services if there is a chance that the recipient will fail to understand the implications of the lawyer’s role in the ancillary business.[n25]

We have carefully considered whether to recommend the adoption of the ABA’s Model Rule 5.7 in New York, and have concluded that in its present form it would not add anything of significance to our current body of law.[n26] We believe, however, that the Pennsylvania version of Rule 5.7 has greater clarity, and focuses (as does the existing body of law in New York) more appropriately on the manageable risks to the consumer of legal services that ancillary services generate. Particularly when accompanied by a series of explanatory Ethical Considerations, we believe that a rule patterned on the Pennsylvania formulation of Rule 5.7 would be a worthwhile addition to our Code of Professional Responsibility.

But something more is required. Absent from even the Pennsylvania formulation of Rule 5.7 is any admonition regarding the not insubstantial risk that the nonlawyer constituents of an ancillary business may exercise undue influence and control over the way in which the legal practice is conducted. At present, both the Model Rules and New York Code contain provisions barring the sharing of legal fees with nonlawyers,[n27] preventing lawyers from forming partnerships with nonlawyers,[n28] admonishing lawyers not to allow persons who recommend, employ or pay the lawyer to direct the lawyers’ professional judgment in rendering legal services,[n29] and prohibiting lawyers from practicing law in organizations in which nonlawyers own any interest.[n30] Not expressly addressed in this grouping of rules is the risk that a nonlawyer generating a substantial amount of revenue for a law firm through ancillary business activities may attempt to manage or control the overall venture and to dictate, to some extent, the way in which the legal practice is conducted. We therefore recommend an addition to the rule (reflected in proposed DR 1-106(B) below) paralleling the language of DR 5-107(B), to make clear that the lawyer must not allow nonlawyer colleagues to intrude upon the ability of the lawyer to exercise independent professional judgment on behalf of clients.[n31]

The Committee, therefore, proposes that the New York Code of Professional Responsibility be amended to add the following new Disciplinary Rule and four new Ethical Considerations[n32]:

DR 1-106 Responsibilities Regarding Nonlegal Services

A. With respect to lawyers or law firms providing nonlegal services to clients or other persons:

1. A lawyer or law firm that provides nonlegal services to a person that are not distinct from legal services being provided to that person by the lawyer or law firm is subject to these Disciplinary Rules with respect to the provision of both legal and nonlegal services.

2. A lawyer or law firm that provides nonlegal services to a person that are distinct from any legal services being provided to that person is subject to these Disciplinary Rules with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

3. A lawyer or law firm that is an owner, controlling party or agent of, or that is otherwise affiliated with, an entity providing nonlegal services to a person is subject to these Disciplinary Rules with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

4. For purposes of DR 1-106(A)(2) and DR 1-106(A)(3) above, and in the absence of circumstances requiring additional communications, it will be presumed that the person receiving nonlegal services could not reasonably believe the services to be the subject of an attorney-client relationship if the lawyer or law firm has advised the person in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services.

B. Notwithstanding the provisions of DR 1-106(A), a lawyer or law firm that is an owner, controlling party, agent, or is otherwise affiliated with an entity providing nonlegal services to a person shall not permit any nonlawyer providing such services or affiliated with that entity to direct or regulate the professional judgment of the lawyer or law firm in rendering legal services to any person, or to cause the lawyer or law firm to compromise its duty under DR 4-101(B) to maintain the confidences and secrets of a client receiving legal services.

C. For purposes of DR 1-106, "nonlegal services" shall mean those services that lawyers may lawfully provide and that are not prohibited as the unauthorized practice of law when provided by a nonlawyer.

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Provision of Nonlegal Services

EC 1-9 For many years, lawyers have provided to their clients nonlegal services that are ancillary to the practice of law. By participating in the delivery of these services, lawyers can serve a broad range of economic and other interests of clients. Whenever a lawyer directly provides nonlegal services, the potential for ethical problems exists. Foremost among these is the possibility that the person for whom the nonlegal services are performed may fail to understand that the services may not carry with them the legal and ethical protections that ordinarily accompany an attorney-client relationship. The recipient of the nonlegal services may expect, for example, that the protection of client confidences and secrets, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of nonlegal services, when that may not be the case. The risk of confusion is especially acute when the lawyer renders both legal and nonlegal services with respect to the same matter. Under some circumstances, the legal and nonlegal services may be so closely entwined that they cannot be distinguished from each other. In this situation, confusion by the recipient is likely to be unavoidable as to whether and when the relationship is protected as a client-lawyer relationship. Therefore, DR 1-106(A)(1) requires generally that the lawyer providing nonlegal services adhere to all of the requirements of the Code of Professional Responsibility. DR 1-106(A)(1) applies to the provision of nonlegal services by a lawyer even when the lawyer is not personally providing any legal services to the person for whom the nonlegal services are being performed if the person is also receiving legal services from another lawyer in the firm that are not distinct from the nonlegal services.

EC 1-10 Even when the lawyer believes that the provision of nonlegal services is distinct from any legal services being provided, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(2) requires that the lawyer providing the nonlegal services adhere to the Disciplinary Rules, unless exempted by DR 1-106(A)(4). Nonlegal services also may be provided through an entity with which a lawyer is affiliated, for example, as owner, controlling party or agent. In this situation, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(3) requires that the lawyer involved with the entity providing nonlegal services adhere to all the Disciplinary Rules, unless exempted by DR 1-106(A)(4).

EC 1-11 The Disciplinary Rules will be presumed not to apply to a lawyer who directly provides or is otherwise involved in the provision of nonlegal services if the lawyer complies with DR 1-106(A)(4) by communicating in writing to the person receiving the nonlegal services that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services. Such a communication should be made before entering into an agreement for the provision of nonlegal services, in a manner sufficient to assure that the person understands the significance of the communication. In certain circumstances, however, additional steps may be required to communicate the desired understanding. For example, while the written disclaimer set forth in DR 1-106(A)(4) will be adequate for a sophisticated user of nonlegal services, such as a publicly held corporation, a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and nonlegal services.

EC 1-12 Although a lawyer may be exempt from the application of Disciplinary Rules on the face of DR 1-106(A), the scope of the exemption is not absolute. A lawyer who provides or who is involved in the provision of nonlegal services may be excused from compliance with only those Disciplinary Rules that are dependent upon the existence of a representation or attorney-client relationship. Other rules, such as those prohibiting lawyers from engaging in unlawful, dishonest or discriminatory conduct (DR 1-102), requiring lawyers to report certain attorney misconduct (DR 1-103), and prohibiting lawyers from misusing the confidences or secrets of a former client (DR 4-101(B)), apply to a lawyer irrespective of the existence of a representation, and thus govern a lawyer otherwise exempt under DR 1-106(A).

Furthermore, we recommend that the advertising rules be amended to negate any remaining suggestion that a lawyer or law firm may not advertise the fact that it also provides nonlegal services to the public. As discussed above, ethics committee opinions in New York and other jurisdictions have expressed the concern that lawyers should not use nonlegal business operations as a "feeder" to supply them with legal business leads, and have gone so far as to prohibit lawyers from advertising the fact that they provide such services. In our view, such precautions are unnecessary and contrary to the public interest in receiving accurate and relevant information relating to the abilities, qualifications and services offered by lawyers. Any lingering concern that the public will be harmed by permitting lawyers to inform the public that they also offer nonlegal services would be allayed through the adoption of proposed DR 1-106 and its accompanying Ethical Considerations. We therefore recommend that DR 2-101 and DR 2-102 be amended as follows[n33]:

DR 2-101 Publicity and Advertising.

A. A lawyer on behalf of himself or herself or partners or associates, shall not use or disseminate or participate in the preparation or dissemination of any public communication or communication to a prospective client containing statements or claims that are false, deceptive or misleading.

B. (Repealed)

C. It is proper to include information, provided its dissemination does not violate the provisions of DR 2-101(A), as to:

1. legal and nonlegal education, degrees and other scholastic distinctions; dates of admission to any bar; areas of the law in which the lawyer or law firm practices, as authorized by the Code of Professional Responsibility; public offices and teaching positions held; memberships in bar associations or other professional societies or organizations, including offices and committee assignments therein; foreign language fluency;

2. names of clients regularly represented, provided that the client has given prior written consent;

3. bank references; credit arrangements accepted; prepaid or group legal services programs in which the attorney or firm participates; nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer; and

4. <legal> fees for initial consultation; contingent fee rates in civil matters when accompanied by a statement disclosing the information required by DR 2-101(L) of this section; range of fees for legal and nonlegal services, provided that there be available to the public free of charge a written statement clearly describing the scope of each advertised service; hourly rates; and fixed fees for specified legal and nonlegal services.

D. Advertising and publicity shall be designed to educate the public to an awareness of legal needs and to provide information relevant to the selection of the most appropriate counsel. Information other than that specifically authorized in DR 2-101(C) that is consistent with these purposes may be disseminated providing that it does not violate any other provisions of this Rule.

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DR 2-102 Professional Notices, Letterheads, and Signs.

A. A lawyer or law firm may use professional cards, professional announcement cards, office signs, letterheads or similar professional notices or devices, provided the same do not violate any statute or court rule, and are in accordance with DR 2-101, including the following:

1. A professional card of a lawyer identifying the lawyer by name and as a lawyer, and giving addresses, telephone numbers, the name of the law firm, and any information permitted under DR 2-101(C), DR 2-101(D) or DR 2-105. A professional card of a law firm may also give the names of members and associates.

2. A professional announcement card stating new or changed associations or addresses, change of firm name, or similar matters pertaining to the professional offices of a lawyer or law firm or of any nonlegal business conducted by the lawyer or law firm pursuant to DR 1-106. It may state biographical data, the names of members of the firm and associates and the names and dates of predecessor firms in a continuing line of succession. It may state the nature of the legal practice if permitted under DR 2-105.

3. A sign in or near the office and in the building directory identifying the law office and any nonlegal business conducted by the lawyer or law firm pursuant to DR 1-106. The sign may state the nature of the legal practice if permitted under DR 2-105.

4. A letterhead identifying the lawyer by name and as a lawyer, and giving addresses, telephone numbers, the name of the law firm, associates and any information permitted under DR 2-101(C), DR 2-101(D) or DR 2-105. A letterhead of a law firm may also give the names of members and associates, and names and dates relating to deceased and retired members. A lawyer or law firm may be designated "Of Counsel" on a letterhead if there is a continuing relationship with a lawyer or law firm, other than as a partner or associate. A lawyer or law firm may be designated as "General Counsel" or by similar professional reference on stationery of a client if the lawyer or the firm devotes a substantial amount of professional time in the representation of that client. The letterhead of a law firm may give the names and dates of predecessor firms in a continuing line of succession.

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EC 2-10 A lawyer should ensure that the information contained in any advertising which the lawyer publishes, broadcasts or causes to be published or broadcast is relevant, is disseminated in an objective and understandable fashion, and would facilitate the prospective client's ability to select a lawyer. A lawyer should strive to communicate such information without undue emphasis upon style and advertising stratagems which serve to hinder rather than to facilitate intelligent selection of counsel. Although communications involving puffery and claims that cannot be measured or verified are not specifically referred to in DR 2-101, such communications would be prohibited to the extent that they are false, deceptive or misleading. In disclosing information, by advertisements or otherwise, relating to a lawyer's legal or nonlegal education, experience or professional qualifications, or to the nature or extent of any nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer, special care should be taken to avoid the use of any statement or claim which is false, fraudulent, misleading, deceptive or unfair, or which is violative of any statute or rule of court. A lawyer who advertises in a state other than New York should comply with the advertising rules or regulations applicable to lawyers in that state.

The Committee believes that the addition of these provisions to the Code of Professional Responsibility and the other related textual amendments set forth above will facilitate the growth of ancillary business ventures through which lawyers will be able to provide integrated professional services to their clients, while protecting the public against the risks of nonlawyer involvement in the practice of law.

2. With Respect to Interprofessional "Strategic Alliances" and other Contractual Relationships Between Lawyers and Nonlawyers – Strategic alliances and other similar cooperative contractual arrangements have become commonplace between businesses. Generally, as discussed in Chapter 4 above, they involve a reciprocal undertaking by businesses, often those with related or synergistic products, to steer clients to each other’s doorstep, thereby increasing the client base of both firms, and to cooperate in serving the interests and needs of those mutual clients. Some of these arrangements involve detailed contracts between the allies, while others have largely been informal and even unstated understandings, a function of "one hand washing the other." As a leading social psychologist has demonstrated, one of the most potent forces of human nature is the need to return a favor.[n34]

In the legal community, strategic alliances have generally involved non-exclusive cross-referral arrangements between law firms and other businesses, as well as the allies’ rendering of professional and other services to each other.[n35] The first benefit of the formalization of what may have begun as "good business relations" into an "alliance" is the publicity that such an announcement often generates.[n36] Thereafter, the benefits to the participants in the alliance are only as good as the good faith efforts of one ally to steer its clients to the other, and of the recipient ally to provide quality services to that client and generate repeat business. The client, in turn, may expect to receive the benefit of coordinated professional services from two providers that have a history and track record of working together on behalf of common clients.

Depending upon the relative economic strength of the law firm and the professional service firm, the ethical implications of these interprofessional arrangements may be of a relatively low order. One such issue that must be addressed is the propriety of a lawyer referring clients to an unrelated nonlegal service provider with the expectation or understanding that the provider will reciprocate, either by virtue of social psychology or contract, and recommend the lawyer’s services to others, and conversely, the propriety of the lawyer receiving those referrals in turn "compensating" the nonlawyer service provider by steering legal clients to it.

One of the well-established rules of ethics is that a lawyer may not pay or agree to pay a nonlawyer for a client referral.[n37] As explained in the forthcoming Restatement:

Such arrangements would give the nonlawyer an incentive to refer to lawyers who will pay the highest referral fee, rather than to lawyers who can provide the most effective services. They also would give the nonlawyer referring person the power and an incentive to influence the lawyer’s representation by an explicit or implicit threat to refer no additional clients or by appealing to the lawyer’s sense of gratitude for the referral already made.[n38]

Disciplinary authorities routinely condemn lawyers who pay third party "runners" or "touters."[n39] Correspondingly, lawyers cannot give clients or other businesses anything of value for recommending their services, even with the informed consent of the client.[n40] Moreover, it is essential that an interprofessional strategic alliance be non-exclusive. The lawyer must remain free at all times to recommend a competitor of the ally if, in the exercise of the lawyer’s independent professional judgment, the competitor is better suited to the client’s needs,[n41] or to recommend no one at all if, in the lawyer’s professional judgment, the client does not truly need the nonlegal services in question.

In contrast, the propriety of a lawyer accepting a fee to refer clients to a nonlawyer service provider has divided ethics authorities.[n42] That this is a live debate is evidenced by three ethics opinions issued earlier this year in contiguous states. In one of these opinions,[n43] a Michigan ethics committee opined that a lawyer could properly accept a referral fee from an investment advisory firm provided the client received full disclosure of the nature and extent of the relationship between the lawyer and the advisory firm, was given an opportunity to seek the advice of independent counsel in the transaction, and consented in writing, all in accordance with Michigan Rule of Professional Conduct 1.8(a) governing business dealings between clients and lawyers.[n44] A joint opinion of the ethics committees for the Pennsylvania State Bar and the Philadelphia Bar Association similarly reached the conclusion that "a lawyer may ethically accept a referral fee from a service provider, so long as the lawyer takes great care to obtain valid client consent and the payment of the fee will not influence the attorney’s judgment or otherwise impair the attorney-client relationship."[n45]

In contradistinction, the Ohio Supreme Court’s Board of Commissioners on Grievances and Discipline ruled that it is ethically improper for a lawyer to accept such a fee, and that client consent could not cure the problem.[n46] In so doing, however, the Board relied on Ohio precedent (not universally accepted) interpreting the prohibition in DR 3-103(A) against the formation of partnerships between lawyers and nonlawyers as being broad enough to include interprofessional business relationships and associations, not just true partnerships formed under state law. While noting that the transaction in question implicated a number of provisions of the Code of Professional Responsibility with respect to which ethical issues could be cured by informed consent of the affected client,[n47] the Ohio Board concluded that in this circumstance at least consent was unavailable because DR 3-103(A), a provision regulating the unauthorized practice of law, cannot be waived by a client.[n48]

Ethics committee opinions within New York have divided on the issue of lawyers receiving fees for referring clients to nonlawyer service providers. One line of opinions permits lawyers to accept such fees provided the referral concerns a product or service that is fairly uniform among providers and that is required in an objectively determinable quantity incident to the legal services performed by the attorney, such as mortgages and title insurance in connection with real estate transactions,[n49] or if the referral concerns a product or service that is fairly uniform among different providers and was unconnected with any particular legal services, such as certificates of deposit.[n50] Another line of authorities[n51] focuses on estate planning attorneys, part of whose legal services involves recommendations as to the purchase of life or long-term care insurance, and concludes that they may not accept a referral fee from an insurance company for recommending a client who ultimately purchases such coverage from the company. The conflict of interest created by this particular scenario has been declared non-consentable on the theory that the opportunity for overreaching by the lawyer is "too great to be tolerated."[n52]

These ethical principles provide the backdrop for, but do not directly control, the interprofessional contractual arrangements that are the subject of this discussion. What the interprofessional alliance represents is the contractual formalization of a reciprocal relationship wherein two businesses mutually agree that they can serve their clients, and benefit themselves, by focusing their referrals on each other to the extent consistent with their professional obligations to their respective clients. A byproduct, but not an insignificant one for purposes of this discussion, is that the allies generally make efforts to cooperate in rendering their respective services to the mutual clients. While some might argue that such arrangements fall within the letter of the ethical prohibitions, they are not pernicious in nature because of the responsibility of each of the allies to utilize its best judgment for its clients in selecting the most appropriate "referee." This is not to say that a rigidly structured agreement could not be viewed as violative of the restrictions on compensating nonlawyers for client referrals. Provisions such as minimum guarantees and exclusive dealing agreements would transform a symbiotic business relationship into a creature that could have a direct negative impact on clients.

In addition to the reciprocal referral fee issue, the question arises as to the extent to which the relationship between lawyer and nonlawyer service provider gives rise to a potential conflict of interest, particularly as interprofessional contractual relationships evolve into more complex sets of commercial and structural agreements. Even under current ethical principles, depending upon the economic importance of the relationship to the lawyer, the lawyer must disclose the existence and nature of the interprofessional contractual relationship to clients so that they can make an informed judgment regarding the services of both the nonlegal ally and the lawyer. This is because, as the Restatement notes, the desire of the lawyer to perpetuate the stream of referrals from the ally, if sufficiently significant to the lawyer, may constitute a business or personal interest that could conflict impermissibly with the lawyer’s duty to exercise independent professional judgment on the client’s behalf.[n53] Clearly, a law firm that subsists on referrals from a particular nonlawyer consulting firm, the loss of which would be harmful to the lawyers in the firm, has a strong interest in reciprocation that could tend to convert what would otherwise be a presumption in favor of cross-referrals to the consultants into a mandatory or automatic practice that disregards the particular needs of the client. Informed client consent to such a conflict of interest would be essential.[n54]

Perhaps because systematic and continuous interprofessional strategic alliances and other formalized client-related contractual undertakings between lawyers and nonlawyers have only recently proliferated (or at least have only recently become a matter of significant public interest), the ethics community has issued few opinions concerning the collateral implications of such arrangements. The need for such guidance is heightened by recent developments, most notably the interprofessional agreement that resulted in the formation of the Washington, D.C. law firm known as "McKee Nelson Ernst & Young," discussed in Chapter 7 above. The legal and nonlegal businesses involved in that firm reportedly have a complex set of interlocking commercial and financial undertakings that, notwithstanding any technical divisions, unite the two in the provision of professional services to clients that they have in common. Thus, it has become clear that there are lawyers and law firms who wish to proceed aggressively, perhaps more aggressively than the rules of legal ethics will currently allow,[n55] in combining their operations through structures resembling interprofessional strategic alliances, but in reality being something dramatically different from the original concept of combining forces to provide cross-referrals and the integration of professional services.

One important ramification of these developments is that, depending upon the nature and extent of the relationship between the participants, it may be necessary and appropriate to treat the law firm and nonlegal professional service firm as a single law firm within the meaning of the Code of Professional Responsibility, just as if the nonlegal professional service firm maintained an "of counsel" relationship with the law firm.[n56] Such relationships are generally found to exist in the lawyer-lawyer context when the parties have a "close, continuing, regular and personal relationship" or when the "of counsel" attorney has a "present day-to-day working familiarity with the affairs of the law firm in question."[n57] The relationship does not exist solely by virtue of the "referral of business between firms or an occasional consulting relationship,"[n58] as a result of consultation on a single matter,[n59] or "occasional collaborative efforts among otherwise unrelated lawyers or firms."[n60] Once the relationship becomes ongoing, however, and particularly if it involves more than a mere cross-referral arrangement, the interprofessional alliance more closely approximates a single enterprise in its structure and operation.[n61]

The principal implication of an of counsel relationship, which may arise in the context of a contractual relationship between the legal and nonlegal service providers, is that client relationships and conflicts of interest are imputed between the participants.[n62] Thus, the lawyer or law firm in such a relationship would be deemed, for conflict of interest purposes, to owe a duty of loyalty to each client of the nonlawyer professional or nonlawyer professional service firm, and would be precluded from accepting engagements adverse to such clients without their informed consent.[n63]

In the foregoing pages, we have examined the existing provisions of the Code of Professional Responsibility that govern strategic alliances and other interprofessional contractual relationships and have concluded that many of the risks inherent in such arrangements are already addressed. In several respects, however, the current Code does not adequately deal with significant concerns that arise in this context, such as the risk that the nonlawyer professional service firm may be the dominant participant in the alliance and may possess -- and, by possessing, exert -- economic influence of a kind not adequately anticipated or prevented by DR 5-101(A) or DR 5-107(B). Likewise, the Committee is concerned that lawyers and law firms not be permitted to join alliances with nonlawyers whose standards of ethics and professionalism could dilute the lawyers’ duties to clients.[n64] Thus, as in the case of lawyers seeking to affiliate with foreign lawyers,[n65] a lawyer entering into an interprofessional alliance must be satisfied that the nonlawyer professionals belong to a profession requiring a reasonable degree of higher education and having a set of enforceable standards of professional conduct sufficiently comparable with those of lawyers. Moreover, the Committee is concerned that in many cases it may not be possible to reconcile the standards of ethics and professionalism applicable to an association between a law firm and a nonlawyer professional service firm, and that no single public authority has jurisdiction over the association as such. Accordingly, the determination whether lawyers should be permitted to enter into systematic and continuous interprofessional arrangements is best determined on a profession-by-profession basis, taking into account the intrinsic nature of each profession and assuring that affiliation with it will not impair lawyer professional standards to any extent.

Accordingly, we recommend the addition to the Code of Professional Responsibility of the following new Disciplinary Rule and Ethical Considerations:

DR 1-107 Contractual Relationships Between Lawyers and Nonlegal Professionals

A. A lawyer or law firm may enter into and maintain a contractual relationship with a nonlegal professional or nonlegal professional service firm for the purpose of offering to the public, on a systematic and continuing basis, legal services performed by the lawyer or law firm, as well as other professional services, provided that:

1. The profession of the nonlegal professional or nonlegal professional service firm is a profession listed by the Office of Court Administration pursuant to DR 1-107(B); and

2. The lawyer or law firm neither grants to the nonlegal professional or nonlegal professional service firm, nor permits such person or firm to obtain, hold or exercise, directly or indirectly, any ownership or investment interest in, or managerial or supervisory right, power or position in connection with, the practice of law by the lawyer or law firm.

B. For purposes of DR 1-107(A):

1. Each profession on the list maintained by the Office of Court Administration shall have been designated by it, or shall have been approved by it upon the application of an individual or firm in this State, upon a determination that the profession is composed of individuals who, with respect to their profession:

a. have been awarded a Bachelor’s Degree or its equivalent from an accredited college or university;

b. are licensed by the State of New York; and

c. are required under penalty of suspension or revocation of license to adhere to a code of ethical conduct that is reasonably comparable to that of the legal profession.

2. The term "ownership or investment interest" shall mean any such interest in any form of debt or equity, and shall include any interest commonly considered to be an interest accruing to or enjoyed by an owner or investor.

C. DR 1-107(A) shall not apply to relationships consisting solely of non-exclusive reciprocal referral agreements or understandings between a lawyer or law firm and a nonlegal professional or nonlegal professional service firm.

D. Notwithstanding DR 3-102(A), a lawyer or law firm may allocate costs and expenses with a nonlegal professional or nonlegal professional service firm pursuant to a contractual relationship permitted by DR 1-107(A).

* * *

Contractual Relationships Between Lawyers and Nonlegal Professionals

EC 1-13 DR 1-107 permits lawyers to enter into interprofessional contractual relationships for the systematic and continuing provision of legal and nonlegal professional services provided the nonlegal professional or nonlegal professional service firm with which the lawyer or law firm is affiliated does not own, control, supervise or manage, directly or indirectly, in whole or in part, the practice of law by the lawyer or law firm. Examples of the activities in which the nonlegal professional or nonlegal professional service firm may not play a role include the decision whether to accept or terminate an engagement to provide legal services in a particular matter or to a particular client, the hiring and training of lawyers, the assignment of lawyers to handle particular matters or to provide legal services to particular clients, decisions relating to the undertaking of pro bono publico and other public-interest legal work, financial and budgetary matters relating to the legal practice, and the compensation and advancement of lawyers and of persons assisting lawyers on legal matters.

EC 1-14 The contractual relationship permitted by DR 1-107 may provide for the reciprocal referral of clients by and between the lawyer or law firm and the nonlegal professional or nonlegal professional service firm. It may also provide for the sharing of premises, general overhead, or administrative costs and services on an arm’s length basis. Such financial arrangements, in the context of an agreement between lawyers and other professionals to provide legal and other professional services on a systematic and continuing basis, are permitted notwithstanding that they involve the exchange of value for client referrals and, technically, a sharing of professional fees, matters that are dealt with specifically in DR 2-103(B)(1) and DR 1-107(D). Similarly, lawyers participating in such arrangements remain subject to general ethical principles in addition to those set forth in DR 1-107 including, at a minimum, DR 2-102(B), DR 5-101(A), DR 5-107(B) and DR 5-107(C). Thus, the lawyer or law firm may not, for example, include in its firm name the name of the nonlegal professional service firm or any individual nonlegal professional, or enter into formal partnerships with nonlawyers, or practice in an organization in which nonlawyers own any interest. Likewise, a law firm’s interest in maintaining an advantageous relationship with a nonlegal professional service firm might, in certain circumstances, adversely affect the independent professional judgment of the law firm creating a conflict of interest subject to DR 5-101(A).

EC 1-15 Each lawyer and law firm having a contractual relationship under DR 1-107 has an ethical duty to observe these Disciplinary Rules with respect to its own conduct in the context of the contractual relationship. For example, the lawyer or law firm cannot permit its obligation to maintain client confidences as required by DR 4-101 to be compromised by the contractual relationship or by its implementation by or on behalf of nonlawyers involved in the relationship. In addition, the prohibition in DR 1-102(A)(2) against a lawyer or law firm circumventing a Disciplinary Rule through actions of another applies generally to the lawyer or law firm in the contractual relationship.

EC 1-16 When in the context of a contractual relationship permitted under DR 1-107 a lawyer or law firm refers a client to the nonlegal professional or nonlegal professional service firm, the lawyer or law firm shall observe the ethical standards of the legal profession in verifying the competence of the nonlegal professional or nonlegal professional service firm to handle the relevant affairs and interests of the client. Referrals should only be made when requested by the client or deemed to be reasonably necessary to serve the client.

EC 1-17 To assure that only appropriate professional services are involved, a contractual relationship for the provision of services is permitted under DR 1-107 only if the nonlegal party thereto is a professional or professional service firm meeting appropriate standards as regards ethics, education, training, and licensing. The Office of Court Administration maintains a public list of eligible professions. Individuals and firms in this state may apply for the inclusion of particular professions on the list, or professions may be added to the list by the Office of Court Administration sua sponte. A lawyer or law firm not wishing to affiliate with a nonlawyer on a systematic and continuing basis, but only to engage a nonlawyer on an ad hoc basis to assist in a specific matter, is not governed by DR 1-107 when so dealing with the nonlawyer. Thus, a lawyer advising a client in connection with a discharge of chemical wastes may engage the services of and consult with an environmental engineer on that matter without the need to comply with DR 1-107. Likewise, the requirements of DR 1-107 need not be met when a lawyer retains an expert witness in a particular litigation.

EC 1-18 Depending upon the extent and nature of the relationship between the lawyer or law firm, on the one hand, and the nonlegal professional or nonlegal professional service firm, on the other hand, it may be appropriate to treat the parties to a contractual relationship permitted by DR 1-107 as a single law firm for purposes of these Disciplinary Rules, as would be the case if the nonlegal professional or nonlegal professional service firm were in an "of counsel" relationship with the lawyer or law firm. The principal effect of such a relationship would be that conflicts of interest would be imputed as between them pursuant to DR 5-105(D), and that the law firm would be required to maintain systems for determining whether such conflicts exist pursuant to DR 5-105(E). To the extent that the rules of ethics of the nonlegal profession conflict with these Disciplinary Rules, the rules of the legal profession will still govern the conduct of the lawyers and the law firm participants in the relationship. A lawyer or law firm may also be subject to legal obligations arising from a relationship with nonlawyer professionals who are themselves subject to regulation.

Aside from the structural matters addressed by the above proposed provisions, there are a number of collateral issues that also demand attention. For example, just as we believe a lawyer should be permitted to advertise the fact that he or she provides nonlegal services, either directly or through a lawyer-owned and lawyer-controlled entity as permitted by proposed DR 1-106,[n66] lawyers should be permitted to advertise their contractual relationships with nonlegal professionals or nonlegal professional service firms assuming compliance with proposed DR 1-107. We therefore recommend that DR 2-101 and EC 2-10 be further revised[n67] as follows:

DR 2-101 Publicity and Advertising.

A. A lawyer on behalf of himself or herself or partners or associates, shall not use or disseminate or participate in the preparation or dissemination of any public communication or communication to a prospective client containing statements or claims that are false, deceptive or misleading.

B. (Repealed)

C. It is proper to include information, provided its dissemination does not violate the provisions of DR 2-101(A), as to:

1. legal and nonlegal education, degrees and other scholastic distinctions; dates of admission to any bar; areas of the law in which the lawyer or law firm practices, as authorized by the Code of Professional Responsibility; public offices and teaching positions held; memberships in bar associations or other professional societies or organizations, including offices and committee assignments therein; foreign language fluency;

2. names of clients regularly represented, provided that the client has given prior written consent;

3. bank references; credit arrangements accepted; prepaid or group legal services programs in which the attorney or firm participates; nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer; the existence of contractual relationships between the lawyer or law firm and a nonlegal professional or nonlegal professional service firm, to the extent permitted by DR 1-107, and the nature and extent of services available through those contractual relationships; and

4. <legal> fees for initial consultation; contingent fee rates in civil matters when accompanied by a statement disclosing the information required by DR 2-101(L) of this section; range of fees for legal and nonlegal services, provided that there be available to the public free of charge a written statement clearly describing the scope of each advertised service; hourly rates; and fixed fees for specified legal and nonlegal services.

D. Advertising and publicity shall be designed to educate the public to an awareness of legal needs and to provide information relevant to the selection of the most appropriate counsel. Information other than that specifically authorized in DR 2-101(C) that is consistent with these purposes may be disseminated providing that it does not violate any other provisions of this Rule.

* * *

EC 2-10 A lawyer should ensure that the information contained in any advertising which the lawyer publishes, broadcasts or causes to be published or broadcast is relevant, is disseminated in an objective and understandable fashion, and would facilitate the prospective client's ability to select a lawyer. A lawyer should strive to communicate such information without undue emphasis upon style and advertising stratagems which serve to hinder rather than to facilitate intelligent selection of counsel. Although communications involving puffery and claims that cannot be measured or verified are not specifically referred to in DR 2-101, such communications would be prohibited to the extent that they are false, deceptive or misleading. In disclosing information, by advertisements or otherwise, relating to a lawyer's legal or nonlegal education, experience or professional qualifications, the nature or extent of any nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer, or the existence of contractual relationships between the lawyer or law firm and a nonlegal professional or nonlegal professional service firm, to the extent permitted by DR 1-107, and the nature and extent of services available through those contractual relationships, special care should be taken to avoid the use of any statement or claim which is false, fraudulent, misleading, deceptive or unfair, or which is violative of any statute or rule of court. A lawyer who advertises in a state other than New York should comply with the advertising rules or regulations applicable to lawyers in that state.

Consistent with the goal of DR 2-101 and DR 2-102 to permit lawyers to provide a wide range of information to the public so long as it is not false, deceptive or misleading, we recommend that, to ensure that the public is not misled by the use of a nonlawyers’ name in the name of a law firm that has entered into an agreement with a nonlegal professional service firm, DR 2-102(B) be amended as follows:

B. A lawyer in private practice shall not practice under a trade name, a name that is misleading as to the identity of the lawyer or lawyers practicing under such name, or a firm name containing names other than those of one or more of the lawyers in the firm, except that the name of a professional corporation shall contain "P.C." or such symbols permitted by law, the name of a limited liability company or partnership shall contain "L.L.C.," "L.L.P." or such symbols permitted by law, and, if otherwise lawful, a firm may use as, or continue to include in its name the name or names of one or more deceased or retired members of the firm or of a predecessor firm in a continuing line of succession. Such terms as "legal clinic," "legal aid," "legal service office," "legal assistance office," "defender office" and the like, may be used only by qualified legal assistance organizations, except that the term "legal clinic" may be used by any lawyer or law firm provided the name of a participating lawyer or firm is incorporated therein. A lawyer or law firm may not include the name of a nonlawyer in its firm name, nor may a lawyer or law firm that has a contractual relationship with a nonlegal professional or nonlegal professional service firm pursuant to DR 1-107 to provide legal and other professional services on a systematic and continuing basis include in its firm name the name of the nonlegal professional service firm or any individual nonlegal professional affiliated therewith. A lawyer who assumes a judicial, legislative or public executive or administrative post or office shall not permit his or her name to remain in the name of a law firm or to be used in professional notices of the firm during any significant period in which the lawyer is not actively and regularly practicing law as a member of the firm and, during such period, other members of the firm shall not use the lawyer's name in the firm name or in professional notices of the firm.

To avoid any questions regarding the propriety of cross-referrals between parties to a strategic alliance, we recommend that DR 2-103(B) be amended as follows:

B. A lawyer shall not compensate or give anything of value to a person or organization to recommend or obtain employment by a client, or as a reward for having made a recommendation resulting in employment by a client, except that:

1. A lawyer or law firm may refer clients to a nonlegal professional or nonlegal professional service firm pursuant to an agreement or other contractual relationship with such nonlegal professional or nonlegal professional service firm to provide legal and other professional services on a systematic and continuing basis as permitted by DR 1-107; or

2. A <a> lawyer may pay the usual and reasonable fees or dues charged by a qualified legal assistance organization or referral fees to another lawyer as permitted by DR 2-107.

We believe that these provisions will help ensure that the public is not disserved by strategic alliances between lawyers and members of other regulated professions without unduly impinging on the ability of lawyers and law firms to enter into such relationships and to afford clients the benefits thereof.

3. With Respect to Lawyers Who Work for Organizations that Provide Consulting Services and Financial Products to the Public – Business corporations and other organizations employ approximately nine percent of all lawyers in the United States.[n68] While some suggest that an analogy can be drawn between the status of the corporate attorney, who reports at some level of the organizational chart to a nonlawyer, and that of the lawyer working for a hypothetical multidisciplinary practice group controlled by nonlawyers, the analogy collapses when one considers the fact that the nonlawyer to whom the in-house attorney ultimately reports is the attorney’s client, not a customer of the corporation. Lawyers in private practice routinely work for nonlawyer clients, some of whom provide a substantial portion of the lawyer’s income. The in-house attorney is simply a lawyer with only one such client.

The analysis changes when the lawyer working for the corporation is called upon to provide legal services to clients other than the lawyer’s employer. Historically, such arrangements have been prohibited on the ground that nonlawyers should not control the practice of law.[n69] Section 495 of the New York Judiciary Law, for example:

states a sweeping prohibition against the practice of law by corporations and voluntary associations. Section 495(1) prohibits corporations and voluntary associations from engaging in seven overlapping activities that constitute the practice of law [including holding itself out to the public as being entitled to practice law or furnishing attorneys or counsel or assuming in any other manner to be entitled to practice law]; . . . and § 495(3) prohibits corporations and voluntary associations from accepting compensation for preparing deeds, mortgages, pleadings, and a variety of other documents.[n70]

Violation of this statute is a misdemeanor under New York’s Penal Law.[n71] Similar prohibitions exist around the country.[n72]

The rationale underlying this prohibition, which we recommend be retained, is perhaps best summarized in Ethical Consideration 5-23:

A person or organization that pays or furnishes lawyers to represent others possesses a potential power to exert strong pressures against the independent judgment of those lawyers. Some employers may be interested in furthering their own economic, political, or social goals without regard to the professional responsibility of the lawyer to an individual client. Others may be far more concerned with establishment or extension of legal principles than in the immediate protection of the rights of the lawyer’s individual client. On some occasions, decisions on priority of work may be made by the employer rather than the lawyer with the result that prosecution of work already undertaken for clients is postponed to their detriment. Similarly, an employer may seek, consciously or unconsciously, to further its own economic interests through the actions of the lawyers employed by it. Since a lawyer must always be free to exercise professional judgment without regard to the interests or motives of a third person, the lawyer who is employed by one to represent another must constantly guard against erosion of professional freedom.

With the advent of the professional corporation and other non-partnership forms of legal practice, it has been argued that courts must look beyond the mere fact of corporate form in assessing whether a prohibition against corporate practice should be enforced. Initially, First Amendment concerns (rights to free speech, assembly and petition) gave rise to a line of cases permitting "corporate" organizations such as labor unions and public interest groups to represent their members notwithstanding their form.[n73] Even in that context, some courts have examined the extent to which nonlawyer members of the corporation’s board of directors can interfere with the provision of legal services by the corporations’ lawyers and assured themselves of professional independence before giving their approval to the practice of law.[n74] The emphasis, even in this public-interest-oriented context, remained on the extent to which nonlawyers had the right or the ability to influence the manner in which legal services are provided by lawyers to their clients. The courts looked beyond the actual or perceived demand for cost-effective legal services on the part of the members of the organizations in question.

This issue has arisen most starkly in the context of insurance companies furnishing in-house lawyers to represent their insureds. The jurisdictions are split as to whether such representation should be permitted or whether traditional principles of corporate representation and unauthorized practice of law should continue to apply when an entity legally responsible for providing lawyers to its customers decides to maintain a staff of lawyers instead of retaining outside, ostensibly more independent counsel to do so.[n75]

The majority and dissenting opinions in a 1999 decision by the Indiana Supreme Court cogently presented the arguments on both sides of this issue.[n76] The majority concluded that the insurance company does not engage in the unauthorized practice of law by appointing in-house attorneys to represent insureds, notwithstanding the traditional prohibition against practice of law by corporations. As long as licensed attorneys do the legal work, the court reasoned, a corporation that employs in-house counsel does not practice law. The potential for conflicts of interest exists regardless of whether the attorney is an employee of the insurance company or an outside attorney whose entire income stream is dependent upon continued referrals from the company.[n77] Concluding that allowing insurers to use in-house counsel might result in better service at a lower cost, the majority determined to permit the practice. The dissent observed that the practice, on its face, violated the prohibitions against the practice of law by corporations and the unauthorized practice of law in general. Furthermore, the dissent argued that the conflict of interest created by this arrangement constituted a violation of the Indiana Rules of Professional Conduct.

Insurers, of course, generally have common interests with their insureds. They share an obligation to cooperate in the defense of the claim against the insured, a defense for which the insurer pays and ordinarily chooses counsel. Both want to avoid liability, and generally share in some way under the contract of insurance in the settlement decision-making process. Concerns about conflicts of interest might arguably be attenuated in the absence of a dispute between the insurer and the insured involving the scope or application of the underlying insurance policy, e.g., where the lawyer is defending the insured under a reservation of rights, or where the insurer refuses the client’s demand to settle the claim within the policy limits.[n78] Accordingly, New York State ethics committees have concluded that it is not impermissible per se for lawyers employed by an insurance company to represent policy holders in litigation in which the insurance company has a duty to defend and indemnify the policyholder.[n79]

At bottom, this is not a situation in which a corporate entity is marketing legal services to the general public; the company is marketing insurance. While it is true that one benefit of insurance coverage may be that an attorney will be provided to a covered person (or at least paid for), the provision of counsel is ancillary to the principal indemnity contract. Thus, arguably, the circumstances of the insurance company are not functionally distinguishable from those of the labor union or public interest group addressed by the Supreme Court;[n80] their duty to furnish legal services arises out of a separate pre-existing relationship between them and the recipient.[n81]

This issue is by no means limited to insurance companies and the defense of claims against insureds by in-house counsel. There are thousands of lawyers employed by lay agencies who provide legal advice directly to clients on a broad range of issues. Thousands of lawyers in the United States are employed by accounting firms and provide legal advice to clients of the firm on tax issues.[n82] On its face, New York’s prohibition against the practice of law by corporations and voluntary associations[n83] would seem to govern these activities. Enforcement of that prohibition is the responsibility of the New York State Attorney General, who has historically not made the enforcement of the corporate practice prohibition a priority.[n84] At the 2000 Midyear Meeting, however, the ABA House of Delegates passed a resolution, by a vote of 305-116, urging each jurisdiction "to establish and implement effective procedures for the discovery and investigation of any apparent violation of its laws prohibiting the unauthorized practice of law and to pursue active enforcement of those laws."[n85]

Accountants, however, are legally permitted to represent taxpayers before the Internal Revenue Service,[n86] even though to do so they must interpret, analyze and apply a complex body of statutory, regulatory and decisional law. It would make little sense to prohibit an accounting firm from retaining licensed attorneys to assist it in providing tax services to its clients, and even less sense to condition the propriety of such a retention on whether the attorneys are employees of the firm or independent contractors. Correspondingly, a lawyer who, behind the scenes, assists an accounting firm in connection with the firm’s rendering of tax-related services to its clients should not be disciplined for aiding the unauthorized practice of law,[n87] since what the firm is doing in the federal tax arena, and thus what the attorney is aiding, is specifically authorized.[n88]

Legal and ethical difficulties would arise, however, if the lawyer rendered legal services directly to the accounting firm’s clients. Among other reasons, such an arrangement would constitute the provision of legal services or the furnishing of attorneys by a corporation or voluntary association in contravention of Section 495 of the New York Judiciary Law.[n89] The lawyer would also run the risk of third-party influence on independent professional judgment by permitting the nonlawyer-employer to "direct or regulate" the provision of legal services to clients, or to breach their duty of confidentiality to those clients.[n90]

We do not urge that the Legislature undertake any fundamental reexamination of the underlying principle that the public is best served when it obtains legal services from people who have been specially trained and are licensed to provide those services, and therefore do not propose repeal or amendment of section 495 of the New York Judiciary Law.[n91] To the contrary, consistent with the resolutions of the ABA and NYSBA, we urge that New York’s prohibitions against the unauthorized practice of law continue to be executed by the Attorney General, and executed vigorously. However, as discussed in the following section, this cannot be done with any degree of effectiveness until we have general agreement upon a principled and enforceable definition of the "practice of law."

4. With Respect to the Unauthorized Practice of Law – Most states have a prohibition against the unauthorized practice of law,[n93] but few agree upon what the "practice of law" is. There is, of course, some consensus with respect to certain activities that everyone except the most ardent anti-lawyer groups agree clearly constitute the practice of law and must continue to be performed exclusively by professionally trained lawyers. Representing others in court proceedings, preparing legal documents and advising others with respect to legal matters, for example, are at the core of the practice of law.[n94] While disagreements arise outside of these core areas, the overarching factor generally used to determine whether a particular function can be performed only by licensed attorneys is whether the function requires the use of professional knowledge and judgment in advising and acting on behalf of others with respect to their legal rights and obligations.[n95]

Many nonlawyers function on the periphery of the practice of law, providing services that are and have traditionally been performed by licensed attorneys but that, for one reason or another, can now be lawfully performed by nonlawyers.[n96] Jurisdictions differ, for example, as to whether the preparation and selection of legal documents, and the provision of advice concerning those documents, constitutes the practice of law. While the majority view appears to be that such conduct is the practice of law,[n97] some states have allowed nonlawyers to complete legal forms under limited circumstances. Thus, there are states in which, for example, real estate brokers and escrow companies are permitted to fill in blanks on standardized forms, prepared and reviewed by lawyers, for use in connection with real estate transactions.[n98] Many states allow nonlawyers to represent clients before administrative or quasi-judicial bodies, such as in real estate tax assessment review proceedings, unemployment compensation proceedings, and workers’ compensation hearings, provided the services do not involve the application of legal principles to matters affecting the rights and obligations of the client.[n99]

As discussed above, tax accountants regularly deal with the interpretation and application of a body of law, and are legally authorized to appear before the Internal Revenue Service.[n100] Whether the right of accountants to engage in tax practice should extend to the representation of clients in tax courts is an issue that has sparked disagreement.[n101] In a recent decision, for example, the South Carolina Supreme Court declared that certified public accountants should be permitted to represent clients before administrative agencies and the probate court because of "the rigorous professional training, certification and licensing procedures, continuing education requirements, and ethical code required" of them.[n102] On the other hand, financial planners who market "living trust" documents or who otherwise purport to advise individuals regarding the type of instrument to use in estate planning have generally been prosecuted for engaging in the unauthorized practice of law,[n103] and lawyers who assist them in their efforts have been held to have aided the unauthorized practice themselves.[n104]

The reason for having prohibitions against the unauthorized practice of law is that it is in the public interest to prevent injury at the hands of people (a) who have not been duly licensed to practice law, that is, (i) who have not graduated from an accredited law school, (ii) who have not passed the bar examination or satisfied whatever other substantive screening may be required under state law and (iii) who have not had their character and fitness to practice law investigated and certified by an appropriate governmental body, (b) who are not subject to continuing legal education requirements and (c) who are not subject in general to discipline for failure to adhere to a comprehensive and well developed set of ethical precepts.[n105]

In determining whether to enforce unauthorized practice of law statutes, however, courts have often attempted to balance the need to protect the public from incompetent or unethical representation against other important and salutary public interests, such as the need of the poor and persons of modest means for access to legal services. As the New Jersey Supreme Court recently opined:

the determination of whether someone should be permitted to engage in conduct that is arguably the practice of law is governed not by attempting to apply some definition of what constitutes that practice, but rather by asking whether the public interest is disserved by permitting such conduct. . . . [T]he public interest is weighed by analyzing the competing policies and interests.[n106]

In New York, the legal framework governing the unauthorized practice of law is in need of a substantial overhaul.[n107] The substantive statutory scheme consists of two provisions, sections 478 and 484 of the New York Judiciary Law. Addressing the indisputable, section 478 prohibits anyone but a lawyer from appearing on behalf of a person other than himself or herself in a court of record in the state.[n108] Section 484 adds to that prohibition the preparation of "deeds, mortgages, assignments, discharges, leases or any other instruments affecting real estate, wills, codicils, or any other instrument affecting the disposition of property after death, or decedents’ estates, or pleadings of any kind in any action brought before any court of record in this state . . . ."[n109] Violations of these provisions may be prosecuted as misdemeanors,[n110] and are subject to investigation and civil enforcement for injunctive relief by the Attorney General.[n111]

Bar associations can play a role in the process of policing the unauthorized practice of law. The Attorney General is empowered to take action either sua sponte or "upon the complaint of . . . a bar association organized and existing under the laws of this state" against any person involved in the "unlawful practice of the law."[n112] If the Attorney General fails to act upon a written request by a bar association within 20 days of its submission, the bar association is authorized to apply to a New York trial court for leave to commence an action in its own name "on good cause shown therefor."[n113] While the practicality of private enforcement of unauthorized practice statutes by voluntary bar associations may be doubtful in light of federal antitrust concerns,[n114] the statutory scheme expresses a strong legislative policy to prevent nonlawyers from engaging in the practice of law, whatever that may be.

This Committee is of the view that New York State should undertake to review and revise Chapter 15 of our Judiciary Law,[n115] the group of statutes that deals generally with the regulation of attorneys and counselors at law, and specifically in various sections with the practice of law by those not subject to such regulation. A more clearly delineated and analytically supportable definition of the practice of law, rather than one that is brimming with ambiguity and stands begging for battles over its boundaries, could accomplish many worthwhile societal goals, such as establishing the extent to which nonlawyers will be permitted to provide quasilegal services to persons of modest means and providing a platform for meaningful consumer protection regulation over such services. Moreover, greater precision in defining the practice of law will enable more effective criminal prosecution of unlawful practitioners as well a eliminate uncertainty for persons working in law-related areas about the propriety of their conduct.

Recently, the Washington State Bar Association’s Committee to Define the Practice of Law undertook this important task.[n116] The Committee recognized that the exercise of defining the practice of law "lies at the heart of any effort to protect the public from untrained and unregulated persons who hold themselves out as able to offer advice and counsel in matters customarily performed by lawyers that affect individuals’ legal rights, property and life."[n117] Their work on this exercise resulted in a three-pronged definition. As the Committee explained:

The definition proposed by the Committee to Define the Practice of Law has three distinct parts. The first part sets out the broad definition of the practice of law. The second part identifies exceptions to the general rule that only lawyers may practice law. The third part distinguishes activities which do not constitute the practice of law, and notes that nothing in the rule shall be taken to define or affect standards for civil liability or professional responsibility.[n118]

This Committee has reviewed the definition proposed by the Washington Bar and believes that it represents an excellent attempt at solving the age-old problem of identifying those services that the government and society will permit only duly licensed lawyers to provide. While this Committee has not itself attempted to reach a consensus as to each and every element of the definition, we recommend that an appropriate committee of this Association be directed to study this issue and make appropriate proposals to the New York State Legislature for the adoption of a provision defining the practice of law. In our view, a provision along the lines of the following, adapted from the Washington Bar proposal, could form the basis for a solution:[n119]

(a) The practice of law is the application of legal principles and judgment with regard to the circumstances or objectives of another entity or person which requires the knowledge and skill of a person trained in the law. This includes but is not limited to:

(1) Giving advice or counsel to others as to their legal rights or the legal rights or responsibilities of others for fees or other consideration.

(2) Selection, drafting, or completion of legal documents or agreements which affect the legal rights of an entity or person.

(3) Representation of another entity or person in a court, or in a formal administrative adjudicative proceeding or other formal dispute resolution process or in an administrative adjudicative proceeding in which legal pleadings are filed or a record is established as the basis for judicial review.

(4) Negotiation of legal rights or responsibilities on behalf of another entity or person.

(b) Whether or not they constitute the practice of law, the following are permitted:

(1) Practicing law to the extent authorized by statute or court rule, including officers of societies for the prevention of cruelty to animals, and certain law students and law graduates pursuant to New York Judiciary Law § 478.

(2) Acting as a lay representative authorized by administrative agencies or tribunals.

(3) Serving in a neutral capacity as a mediator, arbitrator, conciliator, or facilitator.

(4) Participation in labor negotiations, arbitrations or conciliations arising under collective bargaining rights or agreements.

(5) Acting as a legislative lobbyist.

(6) Sale of legal forms in any format.

(7) Activities the state regulation of which are preempted by Federal law.

(8) Such other activities that the Court of Appeals has determined do not constitute the unlicensed or unauthorized practice of law.

(c) Nothing herein shall:

(1) affect the ability of nonlawyer assistants to act under the supervision of a lawyer in compliance with Disciplinary Rule 1-104;

(2) affect the ability of a person or entity to provide information of a general nature about the law and legal procedures to members of the public;

(3) affect the ability of a governmental agency to carry out responsibilities provided by law; or

(4) be taken to define or affect standards for civil liability or professional responsibility.

Regardless of whether this or some other formulation of the definition of the practice of law is adopted, this Committee recommends that it be combined with meaningful enforcement mechanisms consistent with NYSBA (and ABA) policy, and that the unauthorized practice of law be policed with increased vigor, with a view toward protecting the public against injury at the hands of those who lack the professional training, governmental oversight, and ethical inculcation of duly licensed attorneys.[n120]

5. With Respect to Nonlawyer Investment in Entities Practicing Law — In the debate over allowing lawyers to participate in multidisciplinary practice groups, there has been discussion concerning the possibility of allowing nonlawyers to make financial investments in entities practicing law.[n121] Nonlawyer ownership and management of firms is prohibited under Model Rule 5.4(d).[n122] New York ethics rules are to the same effect.[n123]

After considering proposals to permit such investment, we have reached the following conclusions on the basis of available information. First, the arguments in favor of allowing outside equity investment in legal practice seem to be weakest in respect of the category of law firm most likely to be in a position to attract such investment, while law firms facing shortfalls in revenues are not likely candidates for outside equity investment. The equity owners of a more prosperous law firm (normally, the partners) would not be likely to need such investment,[n124] or to find it an efficient way to raise working capital,[n125] or, above all, to be willing to share with outside equity investors the economic rent from their legal practice.[n126] Moreover, the financial problems of profitable law firms are unlikely to be long-term working capital or cash-flow related problems but tax problems relating to the funding of pension plans or the risks of professional liability (the latter being unlikely to have any attraction for outside equity investors).[n127]

Second and more importantly, the type of nonlawyer investor most likely to be willing to provide a legal practice with working capital in exchange for a de jure or de facto equity position in the legal practice is the nonlegal investor whose own business plan includes the practice of law. The leading examples of such nonlegal investors are the "Big Five" in respect of their affiliated law firms discussed in Chapter 9 and, in one case, in Chapter 4.[n128] Here, the law firm is typically the weaker economic entity, and the affiliated nonlegal entity is financially dominant. While the terms of affiliation are rarely disclosed, it does not seem unreasonable to assume that financial dominance confers control, either through outright ownership, or through the functional equivalent of outright ownership. Regulatory authorities in certain jurisdictions have called for rules that would govern affiliations of this type with a view to preserving the professional integrity of the "captive" legal practice;[n129] however, the lack of transparency in respect of the affiliations has not facilitated the search for an appropriate regulatory framework.

Third, even if nonlawyer investment in a law firm were to be so widely diffused that no single investor had substantial power over the firm, the existence of outside investment would subject the principals of the firm to a duty to run it for the financial benefit of the investors. Failure to maintain and increase profits could lead to a drop in the value of the stock, impairment of the value of the lawyers’ own holdings, and stockholder litigation or efforts to change the management. Even when lawyers are upheld by the culture and traditions of their profession, with their emphasis on placing clients’ interests first, they sometimes yield that emphasis to financial pressure.[n130]

We share the concern that outside equity investment in a legal practice may confer ultimate control of that practice on nonlawyers. When (as mentioned above) the purpose of this outside investment is to further the investor’s own business plan, and the outside investor is financially dominant in the relevant arrangement, there is a substantial likelihood that, should considerations of independent legal judgment or other considerations of legal ethics not coincide with the business plan of the dominant outside investor, that independence or those ethics might be subject to inappropriate tensions.[n131] We are of the view that this financial aspect of nonlawyer control of legal practice presents considerable risks to the legal profession and the justice system (see section 6 below) and should not be permitted in New York.

6. With Respect to Transfers to Nonlawyers of Ownership or Control Over Entities Practicing Law — The preceding sections of this chapter have analyzed the law governing lawyers with respect to the provision of nonlegal services to clients, as well as to strategic alliances and other systematic and continuing contractual relationships between lawyers and nonlawyer professionals. To reiterate, it is the view of this Committee that, subject to clarification and expansion of existing principles of legal ethics,[n132] lawyers may properly engage in such activities because, at all times, they retain unfettered control over the manner in which the legal services are rendered to clients of the enterprise. The nonlawyer participants in such ventures, whether they be the employees of a nonlegal service subsidiary of a law firm or of the marketing co-partner in a contractual affiliation, do not play a role in the management of the legal practice, and only have a managerial say with respect to the nonlegal services being provided to the public. The lawyer remains completely responsible for his or her own independent professional judgment, for maintaining the confidences and secrets of clients, and for otherwise complying with the full panoply of legal and ethical principles governing lawyers in the United States.[n133]

Of major concern to the Committee is the risk that an association in the form of a partnership between a law firm and a nonlawyer professional service firm would exist in the absence of adequate standards of ethics and professionalism for the association as such,[n134] and in the absence of a public authority having jurisdiction over the association as such. It is not inconceivable that, over time, multidisciplinary standards might be developed for such partnerships, and rules for the effective enforcement of those standards might be adopted and made the responsibility of an effective public authority. The question of what rules should be developed for lawyers and other professionals working in a single firm to ensure that all of them respect the duties of each profession raises complex issues, which vary from profession to profession. Under present circumstances, the Committee urges the greatest caution toward any association structured in a manner permitting a dominant nonlegal participant to influence the professional judgment of lawyers and to pass on matters of legal professional ethics. Dominance can be conferred by various forms of ownership or investment interest, as well as by management or supervisory authority. At present, only the lawyer or law firm in an alliance with nonlawyers is subject to the standards of the legal profession designed to assure lawyer independence, loyalty to clients, and an avoidance of conflicts of interest. For this reason, the Committee strongly urges that these alliances be permitted only under circumstances where the practice of law will not be exposed to control, de jure or de facto, by nonlawyers.

There are those in the legal profession who nevertheless advocate permitting lawyers to form general partnerships with nonlawyers. Several bar associations around the country, including some within New York, have issued reports approving of lawyer participation in multidisciplinary partnerships. These practitioners and organizations generally advance the argument that the consumer should have the right to choose the form of the entity that provides legal services to them.[n135] This right to choose would include the right to forego traditional protections, including the evidentiary privilege that ensures the confidentiality of their communications with counsel, and the ethical framework that is designed to ensure that lawyers represent their clients with undivided loyalty and provide them with the benefit of independent professional judgment at all times. The proponents of lawyer-nonlawyer partnerships would bestow upon those in need of legal services the right to decide whether to trade off these protections for the prospect of financial savings and/or the purported efficiencies of so-called "one-stop shopping."

But competition and the "free marketplace" are not the solution to all of society’s problems. To the contrary, society has historically needed frequent governmental intervention and protection against the free marketplace. The broad range of governmental agencies that are responsible for preventing potentially injurious products from reaching the consumer stand as a testament to that proposition. The efforts of government to prohibit the sale of adulterated food, unsafe pharmaceuticals, hazardous toys and other potentially dangerous consumer products are well known. Likewise, government plays a major role in preventing fraud in the sale of securities and in other transactions.[n136] Unfortunate as it may be, left to complete "freedom," competitive forces often turn pernicious.

For many of the same reasons, government has traditionally regulated professions. It is in the public interest to ensure that the people who hold themselves out as having special skills, whether they be medical, legal, accounting or other skills, in fact possess those skills and that they comport themselves in a manner commensurate with the high degree of trust the public tends to repose in its professionals. With respect to the legal profession, it has been the judicial branch of government that has been responsible for screening those who seek admission to the profession without having established a basic level of competence, for supervising continuing legal education, for exercising continuing disciplinary authority over those who engage in the practice of law, and for terminating the licenses of those who fail to comply with minimum professional standards. The free marketplace has not been permitted to override this supervisory scheme. Additionally, states continue to enforce unauthorized practice of law restrictions to be sure that nonlawyers do not injure the public by purporting to provide clients with legal services.

Likewise, the marketplace cannot serve as the architect of the set of rules under which lawyers practice. We have never allowed the consumer of legal services to choose the rules of professional conduct governing the legal profession.[n137] This sort of ethical cafeteria plan would be manifestly unwise and degenerative of societal interests. The public should not be permitted to say "I don’t care if my lawyer is tainted by outside influences" any more than it may say "I don’t care if the meat I serve my family has been adulterated."

The rules governing the integrity of the legal profession, i.e., those that require lawyers to represent clients with their undivided loyalty, unfettered by outside influences, must be preserved. Lawyers must remain free to choose which clients to represent — or not to represent — notwithstanding the popularity of their cause or their public desirability in other respects. Prohibiting nonlawyers from having any significant influence in the manner in which lawyers deliver legal services to clients (including through passive investment in entities providing legal services to the public) is a crucial attribute of the independent bar, which has traditionally played an important role in our culture.[n138]

To the extent that a demand exists for integration of legal services with those of other professions — and the evidence of such demand is equivocal at best[n139] — that demand can be satisfied by permitting lawyers to enter into strategic alliances and other contractual relationships with nonlegal professional service providers, as well as by permitting lawyers to own and operate nonlegal businesses. Subject in both cases to some additional regulation to ensure that lawyers remain completely in control of the rendering of legal services, the purported demand for integrated services is satisfied without sacrificing the independence of the bar. The only substantive difference between this approach and that favored by those who would permit multidisciplinary partnerships is that this approach does not permit nonlawyers and lawyers to call each other "partner."[n140]

This Committee is of the view that the lawyer’s duties of loyalty, confidentiality and independent professional judgment, even if some of these duties were originally the product of an elitist bar nearly a century ago, as some commentators have suggested,[n141] are of continuing importance to clients. In light of the ability of the legal profession to provide consumers of legal services with integrated professional services within the framework of the traditional law practice, this Committee sees no reason to imperil the essential fabric of the attorney-client relationship by vesting any measure of control over the exercise of these duties in the hands of nonlawyers. Indeed, the recent debate concerning the degree of control that various "pro-MDP" factions are willing to permit nonlawyers to maintain over the practice of law, and the inability of any of those factions to articulate a workable, reasonable and verifiable basis for measuring, monitoring or even divining the existence of such control, exemplify the hazard of opening the door even slightly to nonlawyer influence.

Our concerns are neither speculative nor tautological. A legal practice in which nonlawyers play a significant managerial role would be susceptible to a number of palpable dangers. At the outset, in the selection of clients and the resolution of conflicts of interest, nonlawyers would influence both the choice and the application of criteria for weighing the relative interest of the overall enterprise in serving, for example, a client that is both a legal and nonlegal client, favoring it over a client that was exclusively a legal client. It can fairly be predicted that the promotion of nonlegal profit centers will often overshadow the attorneys’ rules governing conflicts of interest. Likewise, the raising and allocation of firm capital (both debt and equity) would be ultimately controlled by nonlawyers, who could thereby orient the development of the overall enterprise as between the practice of law and engagement in other pursuits, and who for these purposes might well view the practice of law less in professional terms than in terms of being but one of several profit centers. Investment in the legal profit center might thus be controlled for purposes other than maximizing legal professionalism and fostering its values.

Competing budgetary requests could also be under the ultimate control of nonlawyers, who would decide on the allocation of resources to controversial public interest cases and to pro bono publico work, and who might be influenced less by legal professional goals than by the net earnings of the overall business’s profit centers. Indeed, the resources of the enterprise could be employed in a manner having a potential impact adverse to the public interest. Compensation and advancement of the enterprise’s professionals would be controlled by nonlawyers, whose decisions on pecuniary and professional reward (or penalty) would be highly determinative of morale, efficiency and outlook affecting the legal and nonlegal activities of the enterprise, as well as the efforts and expectations of individual professionals within the organization. In sum, placing any measure of control over the practice of law in the hands of nonlawyers would form a constant backdrop for the lawyers attempting to practice in the organization, as the financial objectives of nonlawyer management perpetually compete with considerations of professional ethics and the formulation of independent judgments in the best interests of legal clients and the legal system.

Even the so-called "lawyer-controlled MDP" endangers the fundamental nature of the attorney-client relationship. Indeed, the difficulty of detecting and preventing nonlawyer influence over the practice of law is a major inhibitor to permitting nonlawyers to participate directly in ventures that provide legal services to the public. Even the lawyers themselves may not always know whether their decisions result from independent judgment. Short of the direct order from a nonlawyer superior, lawyers are susceptible to more subtle influences betraying their duties to their clients. Hints and implicit threats could lead to a climate in which lawyers do what they think their nonlawyer managers would want them to do.

The difficulty in ensuring that lawyers maintain control over their practices is another reason leading to the rejection of nonlawyer participation. Indicia of nonlawyer influence will often be elusive. While the business world has crafted definitions of corporate control sufficient for its purposes — essentially to determine who has the decision-making power within a business enterprise or other organization — we believe that monumental would be the task of any individual or group charged with defining the point at which a nonlawyer’s role within an organization rises to the level of inappropriate interference with practice governance. We already tolerate, as discussed above, a degree of risk regarding nonlawyer influence in certain practice settings and circumstances, but it is maintained at a manageable, if not negligible, level. Given that other means exist to accomplish the ends sought to be achieved through transfers of control to nonlawyers of legal practices, we see no reason to exacerbate those risks.

Thus, we have considered and rejected the suggestion that the rules against nonlawyer participation in the practice of law should be relaxed. We do so mindful of the fact that denying nonlawyers the ability to have a financial interest or otherwise to participate in law firm governance deprives lawyers of significant opportunities for financial gain. Nevertheless, we believe that it is in the public interest that lawyers forego this opportunity.

CHAPTER 12 APPENDIX A

Summary of Proposed Amendments to the

New York Code of Professional Responsibility

(Marked to Show Changes to the Current Code)

CANON 1

Disciplinary Rules

* * *

DR 1-106 Responsibilities Regarding Nonlegal Services

A. With respect to lawyers or law firms providing nonlegal services to clients or other persons:

1. A lawyer or law firm that provides nonlegal services to a person that are not distinct from legal services being provided to that person by the lawyer or law firm is subject to these Disciplinary Rules with respect to the provision of both legal and nonlegal services.

2. A lawyer or law firm that provides nonlegal services to a person that are distinct from any legal services being provided to that person is subject to these Disciplinary Rules with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

3. A lawyer or law firm that is an owner, controlling party or agent of, or that is otherwise affiliated with, an entity providing nonlegal services to a person is subject to these Disciplinary Rules with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

4. For purposes of DR 1-106(A)(2) and DR 1-106(A)(3) above, and in the absence of circumstances requiring additional communications, it will be presumed that the person receiving nonlegal services could not reasonably believe the services to be the subject of an attorney-client relationship if the lawyer or law firm has advised the person in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services.

B. Notwithstanding the provisions of DR 1-106(A), a lawyer or law firm that is an owner, controlling party, agent, or is otherwise affiliated with an entity providing nonlegal services to a person shall not permit any nonlawyer providing such services or affiliated with that entity to direct or regulate the professional judgment of the lawyer or law firm in rendering legal services to any person, or to cause the lawyer or law firm to compromise its duty under DR 4-101(B) to maintain the confidences and secrets of a client receiving legal services.

C. For purposes of DR 1-106, "nonlegal services" shall mean those services that lawyers may lawfully provide and that are not prohibited as the unauthorized practice of law when provided by a nonlawyer.

DR 1-107 Contractual Relationships Between Lawyers and Nonlegal Professionals

A. A lawyer or law firm may enter into and maintain a contractual relationship with a nonlegal professional or nonlegal professional service firm for the purpose of offering to the public, on a systematic and continuing basis, legal services performed by the lawyer or law firm, as well as other professional services, provided that:

1. The profession of the nonlegal professional or nonlegal professional service firm is a profession listed by the Office of Court Administration pursuant to DR 1-107(B); and

2. The lawyer or law firm neither grants to the nonlegal professional or nonlegal professional service firm, nor permits such person or firm to obtain, hold or exercise, directly or indirectly, any ownership or investment interest in, or managerial or supervisory right, power or position in connection with, the practice of law by the lawyer or law firm.

B. For purposes of DR 1-107(A):

1. Each profession on the list maintained by the Office of Court Administration shall have been designated by it, or shall have been approved by it upon the application of an individual or firm in this State, upon a determination that the profession is composed of individuals who, with respect to their profession:

a. have been awarded a Bachelor’s Degree or its equivalent from an accredited college or university;

b. are licensed by the State of New York; and

c. are required under penalty of suspension or revocation of license to adhere to a code of ethical conduct that is reasonably comparable to that of the legal profession.

2. The term "ownership or investment interest" shall mean any such interest in any form of debt or equity, and shall include any interest commonly considered to be an interest accruing to or enjoyed by an owner or investor.

C. DR 1-107(A) shall not apply to relationships consisting solely of non-exclusive reciprocal referral agreements or understandings between a lawyer or law firm and a nonlegal professional or nonlegal professional service firm.

D. Notwithstanding DR 3-102(A), a lawyer or law firm may allocate costs and expenses with a nonlegal professional or nonlegal professional service firm pursuant to a contractual relationship permitted by DR 1-107(A).

* * *

Ethical Considerations

Provision of Nonlegal Services

EC 1-9 For many years, lawyers have provided to their clients nonlegal services that are ancillary to the practice of law. By participating in the delivery of these services, lawyers can serve a broad range of economic and other interests of clients. Whenever a lawyer directly provides nonlegal services, the potential for ethical problems exists. Foremost among these is the possibility that the person for whom the nonlegal services are performed may fail to understand that the services may not carry with them the legal and ethical protections that ordinarily accompany an attorney-client relationship. The recipient of the nonlegal services may expect, for example, that the protection of client confidences and secrets, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of nonlegal services, when that may not be the case. The risk of confusion is especially acute when the lawyer renders both legal and nonlegal services with respect to the same matter. Under some circumstances, the legal and nonlegal services may be so closely entwined that they cannot be distinguished from each other. In this situation, confusion by the recipient is likely to be unavoidable as to whether and when the relationship is protected as a client-lawyer relationship. Therefore, DR 1-106(A)(1) requires generally that the lawyer providing nonlegal services adhere to all of the requirements of the Code of Professional Responsibility. DR 1-106(A)(1) applies to the provision of nonlegal services by a lawyer even when the lawyer is not personally providing any legal services to the person for whom the nonlegal services are being performed if the person is also receiving legal services from another lawyer in the firm that are not distinct from the nonlegal services.

EC 1-10 Even when the lawyer believes that the provision of nonlegal services is distinct from any legal services being provided, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(2) requires that the lawyer providing the nonlegal services adhere to the Disciplinary Rules, unless exempted by DR 1-106(A)(4). Nonlegal services also may be provided through an entity with which a lawyer is affiliated, for example, as owner, controlling party or agent. In this situation, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(3) requires that the lawyer involved with the entity providing nonlegal services adhere to all the Disciplinary Rules, unless exempted by DR 1-106(A)(4).

EC 1-11 The Disciplinary Rules will be presumed not to apply to a lawyer who directly provides or is otherwise involved in the provision of nonlegal services if the lawyer complies with DR 1-106(A)(4) by communicating in writing to the person receiving the nonlegal services that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services. Such a communication should be made before entering into an agreement for the provision of nonlegal services, in a manner sufficient to assure that the person understands the significance of the communication. In certain circumstances, however, additional steps may be required to communicate the desired understanding. For example, while the written disclaimer set forth in DR 1-106(A)(4) will be adequate for a sophisticated user of nonlegal services, such as a publicly held corporation, a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and nonlegal services.

EC 1-12 Although a lawyer may be exempt from the application of Disciplinary Rules on the face of DR 1-106(A), the scope of the exemption is not absolute. A lawyer who provides or who is involved in the provision of nonlegal services may be excused from compliance with only those Disciplinary Rules that are dependent upon the existence of a representation or attorney-client relationship. Other rules, such as those prohibiting lawyers from engaging in unlawful, dishonest or discriminatory conduct (DR 1-102), requiring lawyers to report certain attorney misconduct (DR 1-103), and prohibiting lawyers from misusing the confidences or secrets of a former client (DR 4-101(B)), apply to a lawyer irrespective of the existence of a representation, and thus govern a lawyer otherwise exempt under DR 1-106(A).

Contractual Relationships Between Lawyers and Nonlegal Professionals

EC 1-13 DR 1-107 permits lawyers to enter into interprofessional contractual relationships for the systematic and continuing provision of legal and nonlegal professional services provided the nonlegal professional or nonlegal professional service firm with which the lawyer or law firm is affiliated does not own, control, supervise or manage, directly or indirectly, in whole or in part, the practice of law by the lawyer or law firm. Examples of the activities in which the nonlegal professional or nonlegal professional service firm may not play a role include the decision whether to accept or terminate an engagement to provide legal services in a particular matter or to a particular client, the hiring and training of lawyers, the assignment of lawyers to handle particular matters or to provide legal services to particular clients, decisions relating to the undertaking of pro bono publico and other public-interest legal work, financial and budgetary matters relating to the legal practice, and the compensation and advancement of lawyers and of persons assisting lawyers on legal matters.

EC 1-14 The contractual relationship permitted by DR 1-107 may provide for the reciprocal referral of clients by and between the lawyer or law firm and the nonlegal professional or nonlegal professional service firm. It may also provide for the sharing of premises, general overhead, or administrative costs and services on an arm’s length basis. Such financial arrangements, in the context of an agreement between lawyers and other professionals to provide legal and other professional services on a systematic and continuing basis, are permitted notwithstanding that they involve the exchange of value for client referrals and, technically, a sharing of professional fees, matters that are dealt with specifically in DR 2-103(B)(1) and DR 1-107(D). Similarly, lawyers participating in such arrangements remain subject to general ethical principles in addition to those set forth in DR 1-107 including, at a minimum, DR 2-102(B), DR 5-101(A), DR 5-107(B) and DR 5-107(C). Thus, the lawyer or law firm may not, for example, include in its firm name the name of the nonlegal professional service firm or any individual nonlegal professional, or enter into formal partnerships with nonlawyers, or practice in an organization in which nonlawyers own any interest. Likewise, a law firm’s interest in maintaining an advantageous relationship with a nonlegal professional service firm might, in certain circumstances, adversely affect the independent professional judgment of the law firm creating a conflict of interest subject to DR 5-101(A).

EC 1-15 Each lawyer and law firm having a contractual relationship under DR 1-107 has an ethical duty to observe these Disciplinary Rules with respect to its own conduct in the context of the contractual relationship. For example, the lawyer or law firm cannot permit its obligation to maintain client confidences as required by DR 4-101 to be compromised by the contractual relationship or by its implementation by or on behalf of nonlawyers involved in the relationship. In addition, the prohibition in DR 1-102(A)(2) against a lawyer or law firm circumventing a Disciplinary Rule through actions of another applies generally to the lawyer or law firm in the contractual relationship.

EC 1-16 When in the context of a contractual relationship permitted under DR 1-107 a lawyer or law firm refers a client to the nonlegal professional or nonlegal professional service firm, the lawyer or law firm shall observe the ethical standards of the legal profession in verifying the competence of the nonlegal professional or nonlegal professional services firm to handle the relevant affairs and interests of the client. Referrals should only be made when requested by the client or deemed to be reasonably necessary to serve the client.

EC 1-17 To assure that only appropriate professional services are involved, a contractual relationship for the provision of services is permitted under DR 1-107 only if the nonlegal party thereto is a professional or professional service firm meeting appropriate standards as regards ethics, education, training, and licensing. The Office of Court Administration maintains a public list of eligible professions. Individuals and firms in this state may apply for the inclusion of particular professions on the list, or professions may be added to the list by the Office of Court Administration sua sponte. A lawyer or law firm not wishing to affiliate with a nonlawyer on a systematic and continuing basis, but only to engage a nonlawyer on an ad hoc basis to assist in a specific matter, is not governed by DR 1-107 when so dealing with the nonlawyer. Thus, a lawyer advising a client in connection with a discharge of chemical wastes may engage the services of and consult with an environmental engineer on that matter without the need to comply with DR 1-107. Likewise, the requirements of DR 1-107 need not be met when a lawyer retains an expert witness in a particular litigation.

EC 1-18 Depending upon the extent and nature of the relationship between the lawyer or law firm, on the one hand, and the nonlegal professional or nonlegal professional service firm, on the other hand, it may be appropriate to treat the parties to a contractual relationship permitted by DR 1-107 as a single law firm for purposes of these Disciplinary Rules, as would be the case if the nonlegal professional or nonlegal professional service firm were in an "of counsel" relationship with the lawyer or law firm. The principal effect of such a relationship would be that conflicts of interest would be imputed as between them pursuant to DR 5-105(D), and that the law firm would be required to maintain systems for determining whether such conflicts exist pursuant to DR 5-105(E). To the extent that the rules of ethics of the nonlegal profession conflict with these Disciplinary Rules, the rules of the legal profession will still govern the conduct of the lawyers and the law firm participants in the relationship. A lawyer or law firm may also be subject to legal obligations arising from a relationship with nonlawyer professionals who are themselves subject to regulation.

CANON 2

Disciplinary Rules

DR 2-101 Publicity and Advertising.

A. A lawyer on behalf of himself or herself or partners or associates, shall not use or disseminate or participate in the preparation or dissemination of any public communication or communication to a prospective client containing statements or claims that are false, deceptive or misleading.

B. (Repealed)

C. It is proper to include information, provided its dissemination does not violate the provisions of DR 2-101(A), as to:

1. legal and nonlegal education, degrees and other scholastic distinctions; dates of admission to any bar; areas of the law in which the lawyer or law firm practices, as authorized by the Code of Professional Responsibility; public offices and teaching positions held; memberships in bar associations or other professional societies or organizations, including offices and committee assignments therein; foreign language fluency;

2. names of clients regularly represented, provided that the client has given prior written consent;

3. bank references; credit arrangements accepted; prepaid or group legal services programs in which the attorney or firm participates; nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer; the existence of contractual relationships between the lawyer or law firm and a nonlegal professional or nonlegal professional service firm, to the extent permitted by DR 1-107, and the nature and extent of services available through those contractual relationships; and

4. <legal> fees for initial consultation; contingent fee rates in civil matters when accompanied by a statement disclosing the information required by DR 2-101(L) of this section; range of fees for legal and nonlegal services, provided that there be available to the public free of charge a written statement clearly describing the scope of each advertised service; hourly rates; and fixed fees for specified legal and nonlegal services.

D. Advertising and publicity shall be designed to educate the public to an awareness of legal needs and to provide information relevant to the selection of the most appropriate counsel. Information other than that specifically authorized in DR 2-101(C) that is consistent with these purposes may be disseminated providing that it does not violate any other provisions of this Rule.

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DR 2-102 Professional Notices, Letterheads, and Signs.

A. A lawyer or law firm may use professional cards, professional announcement cards, office signs, letterheads or similar professional notices or devices, provided the same do not violate any statute or court rule, and are in accordance with DR 2-101, including the following:

1. A professional card of a lawyer identifying the lawyer by name and as a lawyer, and giving addresses, telephone numbers, the name of the law firm, and any information permitted under DR 2-101(C), DR 2-101(D) or DR 2-105. A professional card of a law firm may also give the names of members and associates.

2. A professional announcement card stating new or changed associations or addresses, change of firm name, or similar matters pertaining to the professional offices of a lawyer or law firm or of any nonlegal business conducted by the lawyer or law firm pursuant to DR 1-106. It may state biographical data, the names of members of the firm and associates and the names and dates of predecessor firms in a continuing line of succession. It may state the nature of the legal practice if permitted under DR 2-105.

3. A sign in or near the office and in the building directory identifying the law office and any nonlegal business conducted by the lawyer or law firm pursuant to DR 1-106. The sign may state the nature of the legal practice if permitted under DR 2-105.

4. A letterhead identifying the lawyer by name and as a lawyer, and giving addresses, telephone numbers, the name of the law firm, associates and any information permitted under DR 2-101(C), DR 2-101(D) or DR 2-105. A letterhead of a law firm may also give the names of members and associates, and names and dates relating to deceased and retired members. A lawyer or law firm may be designated "Of Counsel" on a letterhead if there is a continuing relationship with a lawyer or law firm, other than as a partner or associate. A lawyer or law firm may be designated as "General Counsel" or by similar professional reference on stationery of a client if the lawyer or the firm devotes a substantial amount of professional time in the representation of that client. The letterhead of a law firm may give the names and dates of predecessor firms in a continuing line of succession.

B. A lawyer in private practice shall not practice under a trade name, a name that is misleading as to the identity of the lawyer or lawyers practicing under such name, or a firm name containing names other than those of one or more of the lawyers in the firm, except that the name of a professional corporation shall contain "P.C." or such symbols permitted by law, the name of a limited liability company or partnership shall contain "L.L.C.," "L.L.P." or such symbols permitted by law, and, if otherwise lawful, a firm may use as, or continue to include in its name the name or names of one or more deceased or retired members of the firm or of a predecessor firm in a continuing line of succession. Such terms as "legal clinic," "legal aid," "legal service office," "legal assistance office," "defender office" and the like, may be used only by qualified legal assistance organizations, except that the term "legal clinic" may be used by any lawyer or law firm provided the name of a participating lawyer or firm is incorporated therein. A lawyer or law firm may not include the name of a nonlawyer in its firm name, nor may a lawyer or law firm that has a contractual relationship with a nonlegal professional or nonlegal professional service firm pursuant to DR 1-107 to provide legal and other professional services on a systematic and continuing basis include in its firm name the name of the nonlegal professional service firm or any individual nonlegal professional affiliated therewith. A lawyer who assumes a judicial, legislative or public executive or administrative post or office shall not permit his or her name to remain in the name of a law firm or to be used in professional notices of the firm during any significant period in which the lawyer is not actively and regularly practicing law as a member of the firm and, during such period, other members of the firm shall not use the lawyer’s name in the firm name or in professional notices of the firm.

DR 2-103 Solicitation and Recommendation of Professional Employment

* * *

B. A lawyer shall not compensate or give anything of value to a person or organization to recommend or obtain employment by a client, or as a reward for having made a recommendation resulting in employment by a client, except that:

1. A lawyer or law firm may refer clients to a nonlegal professional or nonlegal professional service firm pursuant to an agreement or other contractual relationship with such nonlegal professional or nonlegal professional service firm to provide legal and other professional services on a systematic and continuing basis as permitted by DR 1-107; or

2. A <a> lawyer may pay the usual and reasonable fees or dues charged by a qualified legal assistance organization or referral fees to another lawyer as permitted by DR 2-107.

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Ethical Considerations

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EC 2-10 A lawyer should ensure that the information contained in any advertising which the lawyer publishes, broadcasts or causes to be published or broadcast is relevant, is disseminated in an objective and understandable fashion, and would facilitate the prospective client’s ability to select a lawyer. A lawyer should strive to communicate such information without undue emphasis upon style and advertising stratagems which serve to hinder rather than to facilitate intelligent selection of counsel. Although communications involving puffery and claims that cannot be measured or verified are not specifically referred to in DR 2-101, such communications would be prohibited to the extent that they are false, deceptive or misleading. In disclosing information, by advertisements or otherwise, relating to a lawyer’s legal or nonlegal education, experience or professional qualifications, the nature or extent of any nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer, or the existence of contractual relationships between the lawyer or law firm and a nonlegal professional or nonlegal professional service firm, to the extent permitted by DR 1-107, and the nature and extent of services available through those contractual relationships, special care should be taken to avoid the use of any statement or claim which is false, fraudulent, misleading, deceptive or unfair, or which is violative of any statute or rule of court. A lawyer who advertises in a state other than New York should comply with the advertising rules or regulations applicable to lawyers in that state.

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CHAPTER 12 APPENDIX B

Summary of Possible Amendments to the

ABA Model Rules of Professional Conduct

(Marked to Show Changes to the Existing Rules)

 

RULE 5.7 RESPONSIBILITIES REGARDING

LAW-RELATED NONLEGAL SERVICES

(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:

(1) by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or

(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

(b) The term "law-related services" denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

(a) With respect to lawyers or law firms providing nonlegal services to clients or other persons:

(1) A lawyer or law firm that provides nonlegal services to a person that are not distinct from legal services being provided to that person by the lawyer or law firm is subject to these Rules of Professional Conduct with respect to the provision of both legal and nonlegal services.

(2) A lawyer or law firm that provides nonlegal services to a person that are distinct from any legal services being provided to that person is subject to these Rules of Professional Conduct with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

(3) A lawyer or law firm that is an owner, controlling party or agent of, or that is otherwise affiliated with, an entity providing nonlegal services to a person is subject to these Rules of Professional Conduct with respect to the nonlegal services if a disinterested person would conclude that the person receiving the services could reasonably believe the services are the subject of an attorney-client relationship.

(4) For purposes of paragraphs (a)(2) and (a)(3) above, and in the absence of circumstances requiring additional communications, it will be presumed that the person receiving nonlegal services could not reasonably believe the services to be the subject of an attorney-client relationship if the lawyer or law firm has advised the person in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services.

(b) Notwithstanding the provisions of paragraph (a), a lawyer or law firm that is an owner, controlling party, agent, or is otherwise affiliated with an entity providing nonlegal services to a person shall not permit any nonlawyer providing such services or affiliated with that entity to direct or regulate the professional judgment of the lawyer or law firm in rendering legal services to any person, or to cause the lawyer or law firm to compromise its duty under Rules 1.6(a) and 1.8(b) not to reveal information relating to the representation of a client receiving legal services.

(c) For purposes of Rule 5.7, "nonlegal services" shall mean those services that lawyers may lawfully provide and that are not prohibited as the unauthorized practice of law when provided by a nonlawyer.

Comment

[1] For many years, lawyers have provided to their clients nonlegal services that are ancillary to the practice of law. By participating in the delivery of these services, lawyers can serve a broad range of economic and other interests of clients. When a lawyer performs law-related nonlegal services or controls an organization that does so, there exists the potential for ethical problems. Principal among these is the possibility that the person for whom the law-related nonlegal services are performed fails to understand that the services may not carry with them the protections normally afforded as part of the client-lawyer relationship. The recipient of the law-related nonlegal services may expect, for example, that the protection of client confidences, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of law-related nonlegal services when that may not be the case.

[2] The risk of confusion is especially acute when the lawyer renders both legal and nonlegal services with respect to the same matter. Under some circumstances, the legal and nonlegal services may be so closely entwined that they cannot be distinguished from each other. In this situation, confusion by the recipient is likely to be unavoidable as to whether and when the relationship is protected as a client-lawyer relationship. Therefore, Rule 5.7(a)(1) requires generally that the lawyer providing nonlegal services adhere to all of the requirements of the Rules of Professional Conduct. Rule 5.7(a)(1) applies to the provision of nonlegal services by a lawyer even when the lawyer is not personally providing any legal services to the person for whom the nonlegal services are being performed if the person is also receiving legal services from another lawyer in the firm that are not distinct from the nonlegal services.

[2] [3] Rule 5.7 applies to the provision of law-related nonlegal services by a lawyer even when the lawyer does not provide any legal services to the person for whom the law-related nonlegal services are performed. The Rule identifies the circumstances in which all of the Rules of Professional Conduct apply to the provision of law-related nonlegal services. Even when those circumstances do not exist, however, the conduct of a lawyer involved in the provision of law-related nonlegal services is subject to those Rules that apply generally to lawyer conduct, regardless of whether the conduct involves the provision of legal services. See, e.g., Rule 8.4.

[3] [4] Even when the lawyer believes that the provision of nonlegal services is distinct from any legal services being provided, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, Rule 5.7(a)(2) requires that the lawyer providing the nonlegal services adhere to the Rules of Professional Conduct, unless exempted by Rule 5.7(a)(4). When law-related services are provided by a lawyer under circumstances that are not distinct from the lawyer's provision of legal services to clients, the lawyer in providing the law-related services must adhere to the requirements of the Rules of Professional Conduct as provided in Rule 5.7(a)(1).

[4] [5] Law-related Nonlegal services also may be provided through an entity that is distinct from that through which the lawyer provides legal services with which a lawyer is affiliated, for example, as owner, controlling party or agent. In this situation, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, Rule 5.7(a)(3) requires that the lawyer involved with the entity providing nonlegal services adhere to all the Rules of Professional Conduct, unless exempted by Rule 5.7(a)(4). If the lawyer individually or with others has control of such an entity's operations, the Rule requires the lawyer to take reasonable measures to assure that each person using the services of the entity knows that the services provided by the entity are not legal services and that the Rules of Professional Conduct that relate to the client-lawyer relationship do not apply. A lawyer's control of an entity extends to the ability to direct its operation. Whether a lawyer has such control will depend upon the circumstances of the particular case.

[5] When a client-lawyer relationship exists with a person who is referred by a lawyer to a separate law-related nonlegal service entity controlled by the lawyer, individually or with others, the lawyer must comply with Rule 1.8(a).

[6] The Rules of Professional Conduct will be presumed not to apply to a lawyer who directly provides or is otherwise involved in the provision of nonlegal services if the lawyer complies with Rule 5.7(a)(4) by communicating in writing to the person receiving the nonlegal services that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the nonlegal services. Such a communication should be made before entering into an agreement for the provision of nonlegal services, in a manner sufficient to assure that the person understands the significance of the communication. In certain circumstances, however, additional steps may be required to communicate the desired understanding. For example, while the written disclaimer set forth in Rule 5.7(a)(4) will be adequate for a sophisticated user of nonlegal services, such as a publicly held corporation, a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and nonlegal services. In taking the reasonable measures referred to in paragraph (a)(2) to assure that a person using law-related services understands the practical effect or significance of the inapplicability of the Rules of Professional Conduct, the lawyer should communicate to the person receiving the law-related services, in a manner sufficient to assure that the person understands the significance of the fact, that the relationship of the person to the business entity will not be a client-lawyer relationship. The communication should be made before entering into an agreement for provision of or providing law-related services, and preferably should be in writing.

[7] The burden is upon the lawyer to show that the lawyer has taken reasonable measures under the circumstances to communicate the desired understanding. For instance, a sophisticated user of law-related services, such as a publicly held corporation, may require a lesser explanation than someone unaccustomed to making distinctions between legal services and law-related services, such as an individual seeking tax advice from a lawyer-accountant or investigative services in connection with a lawsuit.

[8] Regardless of the sophistication of potential recipients of law-related services, a lawyer should take special care to keep separate the provision of law-related and legal services in order to minimize the risk that the recipient will assume that the law-related services are legal services. The risk of such confusion is especially acute when the lawyer renders both types of services with respect to the same matter. Under some circumstances the legal and law-related services may be so closely entwined that they cannot be distinguished from each other, and the requirement of disclosure and consultation imposed by paragraph (a)(2) of the Rule cannot be met. In such a case a lawyer will be responsible for assuring that both the lawyer's conduct and, to the extent required by Rule 5.3, that of nonlawyer employees in the distinct entity which the lawyer controls complies in all respects with the Rules of Professional Conduct.

[9] A broad range of economic and other interests of clients may be served by lawyers' engaging in the delivery of law-related services. Examples of law-related services include providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and patent, medical or environmental consulting.

[10] [7] When a lawyer is obliged to accord the recipients of such services the protections of those Rules that apply to the client-lawyer relationship, the lawyer must take special care to heed the proscriptions of the Rules addressing conflict of interest (Rules 1.7 through 1.11, especially Rules 1.7(b) and 1.8(a),(b) and (f)), and to scrupulously adhere to the requirements of Rule 1.6 relating to disclosure of confidential information. The promotion of the law-related nonlegal services must also in all respects comply with Rules 7.1 through 7.3, dealing with advertising and solicitation. In that regard, lawyers should take special care to identify the obligations that may be imposed as a result of a jurisdiction's decisional law.

[11] [8] Although a lawyer may be exempt from the application of the Rules of Professional Conduct on the face of Rule 5.7(a), the scope of the exemption is not absolute. A lawyer who provides or who is involved in the provision of nonlegal services may be excused from compliance with only those Rules that are dependent upon the existence of a representation or attorney-client relationship. Other Rules, such as those prohibiting lawyers from engaging in unlawful or dishonest conduct (Rule 8.4), requiring lawyers to report certain attorney misconduct (Rule 8.3), and prohibiting lawyers from misusing confidential information of a former client (Rules 1.6 and 1.8(b)), apply to a lawyer irrespective of the existence of a representation, and thus govern a lawyer otherwise exempt under Rule 5.7(a). When the full protections of all of the Rules of Professional Conduct do not apply to the provision of law-related services, principles of law external to the Rules, for example, the law of principal and agent, govern the legal duties owed to those receiving the services. Those other legal principles may establish a different degree of protection for the recipient with respect to confidentiality of information, conflicts of interest and permissible business relationships with clients. See also Rule 8.4 (Misconduct).

 

RULE 5.8 CONTRACTUAL RELATIONSHIPS BETWEEN

LAWYERS AND NONLEGAL PROFESSIONALS

(a) A lawyer or law firm may enter into and maintain a contractual relationship with a nonlegal professional or nonlegal professional service firm for the purpose of offering to the public, on a systematic and continuing basis, legal services performed by the lawyer or law firm, as well as other professional services, provided that:

(1) The profession of the nonlegal professional or nonlegal professional service firm is a profession listed by the [high court of the state] pursuant to Rule 5.8(b); and

(2) The lawyer or law firm neither grants to the nonlegal professional or nonlegal professional service firm, nor permits such person or firm to obtain, hold or exercise, directly or indirectly, any ownership or investment interest in, or managerial or supervisory right, power or position in connection with, the practice of law by the lawyer or law firm.

(b) For purposes of Rule 5.8(a):

(1) Each profession on the list maintained by the [high court of the state] shall have been designated by it, or shall have been approved by it upon the application of an individual or firm in this State, upon a determination that the profession is composed of individuals who, with respect to their profession:

(i) have been awarded a Bachelor’s Degree or its equivalent from an accredited college or university;

(ii) are licensed by this State; and

(iii) are required under penalty of suspension or revocation of license to adhere to a code of ethical conduct that is reasonably comparable to that of the legal profession.

(2) The term "ownership or investment interest" shall mean any such interest in any form of debt or equity, and shall include any interest commonly considered to be an interest accruing to or enjoyed by an owner or investor.

(c) Rule 5.8(a) shall not apply to relationships consisting solely of non-exclusive reciprocal referral agreements or understandings between a lawyer or law firm and a nonlegal professional or nonlegal professional service firm.

(d) Notwithstanding Rule 5.4(a), a lawyer or law firm may allocate costs and expenses with a nonlegal professional or nonlegal professional service firm pursuant to a contractual relationship permitted by Rule 5.8(a).

Comment

[1] Rule 5.8 permits lawyers to enter into interprofessional contractual relationships for the systematic and continuing provision of legal and nonlegal professional services provided the nonlegal professional or nonlegal professional service firm with which the lawyer or law firm is affiliated does not own, control, supervise or manage, directly or indirectly, in whole or in part, the practice of law by the lawyer or law firm. Examples of the activities in which the nonlegal professional or nonlegal professional service firm may not play a role include the decision whether to accept or terminate an engagement to provide legal services in a particular matter or to a particular client, the hiring and training of lawyers, the assignment of lawyers to handle particular matters or to provide legal services to particular clients, decisions relating to the undertaking of pro bono publico and other public-interest legal work, financial and budgetary matters relating to the legal practice, and the compensation and advancement of lawyers and of persons assisting lawyers on legal matters.

[2] The contractual relationship permitted by Rule 5.8 may provide for the reciprocal referral of clients by and between the lawyer or law firm and the nonlegal professional or nonlegal professional service firm. It may also provide for the sharing of premises, general overhead, or administrative costs and services on an arm’s length basis. Such financial arrangements, in the context of an agreement between lawyers and other professionals to provide legal and other professional services on a systematic and continuing basis, are permitted notwithstanding that they involve the exchange of value for client referrals and, technically, a sharing of professional fees, matters that are dealt with specifically in Rules 7.2(c) and 5.8(d).

[3] Similarly, lawyers participating in such arrangements remain subject to general ethical principles in addition to those set forth in Rule 5.8 including, at a minimum, Rules 1.7(b), 5.4(c), 5.4(d) and 7.5(d). Thus, the lawyer or law firm may not, for example, include in its firm name the name of the nonlegal professional service firm or any individual nonlegal professional, or enter into formal partnerships with nonlawyers, or practice in an organization in which nonlawyers own any interest. Likewise, a law firm’s interest in maintaining an advantageous relationship with a nonlegal professional service firm might, in certain circumstances, adversely affect the independent professional judgment of the law firm creating a conflict of interest subject to Rule 1.7(b).

[4] Each lawyer and law firm having a contractual relationship under Rule 5.8 has an ethical duty to observe these Rules of Professional Conduct with respect to its own conduct in the context of the contractual relationship. For example, the lawyer or law firm cannot permit its obligation to maintain client confidences as required by Rules 1.6 and 1.8(b) to be compromised by the contractual relationship or by its implementation by or on behalf of nonlawyers involved in the relationship. In addition, the prohibition in Rule 8.4(a) against a lawyer or law firm circumventing a Rule of Professional Conduct through actions of another applies generally to the lawyer or law firm in the contractual relationship.

[5] When in the context of a contractual relationship permitted under Rule 5.8 a lawyer or law firm refers a client to the nonlegal professional or nonlegal professional services firm, the lawyer or law firm shall observe the ethical standards of the legal profession in verifying the competence of the nonlegal professional or nonlegal professional service firm to handle the relevant affairs and interests of the client. Referrals should only be made when requested by the client or deemed to be reasonably necessary to serve the client.

[6] To assure that only appropriate professional services are involved, a contractual relationship for the provision of services is permitted under Rule 5.8 only if the nonlegal party thereto is a professional or professional service firm meeting appropriate standards as regards ethics, education, training, and licensing. The [high court of the state] maintains a public list of eligible professions. Individuals and firms in this state may apply for the inclusion of particular professions on the list, or professions may be added to the list by the [high court of the state] sua sponte. A lawyer or law firm not wishing to affiliate with a nonlawyer on a systematic and continuing basis, but only to engage a nonlawyer on an ad hoc basis to assist in a specific matter, is not governed by Rule 5.8 when so dealing with the nonlawyer. Thus, a lawyer advising a client in connection with a discharge of chemical wastes may engage the services of and consult with an environmental engineer on that matter without the need to comply with Rule 5.8. Likewise, the requirements of Rule 5.8 need not be met when a lawyer retains an expert witness in a particular litigation.

[7] Depending upon the extent and nature of the relationship between the lawyer or law firm, on the one hand, and the nonlegal professional or nonlegal professional service firm, on the other hand, it may be appropriate to treat the parties to a contractual relationship permitted by Rule 5.8 as a single law firm for purposes of these Rules of Professional Conduct, as would be the case if the nonlegal professional or nonlegal professional service firm were in an "of counsel" relationship with the lawyer or law firm. The principal effect of such a relationship would be that conflicts of interest would be imputed as between them pursuant to Rule 1.10. To the extent that the rules of ethics of the nonlegal profession conflict with these Rules, the rules of the legal profession will still govern the conduct of the lawyers and the law firm participants in the relationship. A lawyer or law firm may also be subject to legal obligations arising from a relationship with nonlawyer professionals who are themselves subject to regulation.

 

RULE 7.2 ADVERTISING

(a) Subject to the requirements of Rules 7.1 and 7.3, a lawyer may advertise services through public media, such as a telephone directory, legal directory, newspaper or other periodical, outdoor advertising, radio or television, or through written or recorded communication.

(b) A copy or recording of an advertisement or communication shall be kept for two years after its last dissemination along with a record of when and where it was used.

(c) A lawyer shall not give anything of value to a person for recommending the lawyer's services except that

(1) a lawyer may

(i) (1) pay the reasonable costs of advertisements or communications permitted by this Rule;

(ii) (2) pay the usual charges of a not-for-profit lawyer referral service or legal service organization; and

(iii) (3) pay for a law practice in accordance with Rule 1.17.

(2) a lawyer or law firm may refer clients to a nonlegal professional or nonlegal professional service firm pursuant to an agreement or other contractual relationship with such nonlegal professional or nonlegal professional service firm to provide legal and other professional services on a systematic and continuing basis as permitted by Rule 5.8.

(d) Any communication made pursuant to this rule shall include the name of at least one lawyer responsible for its content.

Comment

[1] To assist the public in obtaining legal services, lawyers should be allowed to make known their services not only through reputation but also through organized information campaigns in the form of advertising. Advertising involves an active quest for clients, contrary to the tradition that a lawyer should not seek clientele. However, the public's need to know about legal services can be fulfilled in part through advertising. This need is particularly acute in the case of persons of moderate means who have not made extensive use of legal services. The interest in expanding public information about legal services ought to prevail over considerations of tradition. Nevertheless, advertising by lawyers entails the risk of practices that are misleading or overreaching.

[2] This Rule permits public dissemination of information concerning a lawyer's name or firm name, address and telephone number; the kinds of services the lawyer will undertake; the basis on which the lawyer's fees are determined, including prices for specific services and payment and credit arrangements; a lawyer's foreign language ability; names of references and, with their consent, names of clients regularly represented; the nature or extent of any nonlegal services provided by the lawyer or by an entity owned and controlled by the lawyer; the existence of contractual relationships between the lawyer or law firm and a nonlegal professional or nonlegal professional service firm, to the extent permitted by Rule 5.8, and the nature and extent of services available through those contractual relationships; and other information that might invite the attention of those seeking legal assistance.

[3] Questions of effectiveness and taste in advertising are matters of speculation and subjective judgment. Some jurisdictions have had extensive prohibitions against television advertising, against advertising going beyond specified facts about a lawyer, or against "undignified" advertising. Television is now one of the most powerful media for getting information to the public, particularly persons of low and moderate income; prohibiting television advertising, therefore, would impede the flow of information about legal services to many sectors of the public. Limiting the information that may be advertised has a similar effect and assumes that the bar can accurately forecast the kind of information that the public would regard as relevant.

[4] Neither this Rule nor Rule 7.3 prohibits communications authorized by law, such as notice to members of a class in class action litigation.

Record of Advertising

[5] Paragraph (b) requires that a record of the content and use of advertising be kept in order to facilitate enforcement of this Rule. It does not require that advertising be subject to review prior to dissemination. Such a requirement would be burdensome and expensive relative to its possible benefits, and may be of doubtful constitutionality.

Paying Others to Recommend a Lawyer

[6] A lawyer is allowed to pay for advertising permitted by this Rule and for the purchase of a law practice in accordance with the provisions of Rule 1.17, but otherwise is not permitted to pay another person for channeling professional work. This restriction does not prevent an organization or person other than the lawyer from advertising or recommending the lawyer's services. Thus, a legal aid agency or prepaid legal services plan may pay to advertise legal services provided under its auspices. Likewise, a lawyer may participate in not-for-profit lawyer referral programs and pay the usual fees charged by such programs. Paragraph (c) does not prohibit paying regular compensation to an assistant, such as a secretary, to prepare communications permitted by this Rule.

[7] Reciprocal referrals of clients by and between a lawyer or law firm and a nonlegal professional or nonlegal professional service firm pursuant to an interprofessional contractual arrangement permitted by Rule 5.8 are excluded from the scope of Rule 7.2(c).