MULTIDISCIPLINARY PRACTICES (MDPs): Law Related Services Provided By Nonlawyer Professional Service Entities

by James M. McCauley, VSB Ethics Counsel

The "Big Five"⁽¹⁾ accounting firms-- Arthur Anderson & Co., Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, and PriceWaterhouseCoopers- employ thousands of lawyers around the world to serve their clients. The "Big Five" now employ as many lawyers in the United States as they do in the rest of world combined. Lawyers in established private practices are being lured by generous salaries to switch to the "Big Five" accounting firms.⁽²⁾ The "Big Five" are seeking lawyers not only for tax practice but also attorneys with expertise in corporate law, securities, mergers and acquisitions, employment law, employee benefits, and environmental law, intellectual property, health care, commercial real estate and regulatory law. Multidisciplinary practices (MDPs) are growing rapidly in some countries where the law permits law firms to form associations with accounting firms. In the future, competition from MDPs may emerge not only from accounting firms, but also from financial services organizations such as American Express, banks, and insurance companies.⁽³⁾

Philip Anderson, President of the American Bar Association, appointed a Commission on Multidisciplinary Practice to study the intrusion of the "Big Five" accounting firms into the legal services market. The commission has already conducted public hearings in Washington D.C. in November 1998 and Los Angeles in February 1999. The commission has just issued its first background paper on MDPs which can be found on the Internet at http://www.abanet.org/cpr/ multicomreport0199.html.

In the August/September 1998 issue of the Virginia Lawyer Register, a discussion about accounting firms delivering legal services to the public raised questions about the unauthorized practice of law. This article addresses some of the ethics rules that operate to prohibit multidisciplinary practices (MDPs) in the United States.

Although MDPs have escaped the attention of the legal community in United States for some time, the "Big Five" have already penetrated the legal services market in Europe and their market share is growing.⁽⁴⁾ In 1996, Arthur Anderson acquired of one of Spain's largest law firms and has also established a "captive" law firm in London.⁽⁵⁾ Ernst and Young⁽⁶⁾ and KPMG⁽⁷⁾

have followed suit. The accounting firms have also formed ties with local lawyers to practice law in developing Eastern European and former Soviet bloc countries. In Australia, multidisciplinary partnerships were approved by the legislature in 1994.

In total, the "Big Five" employ more than four hundred fifty thousand people worldwide with Price WaterhouseCoopers employing 140,000 of those. The biggest law firm in the world, Baker and McKenzie, has less than 6,000 employees. Arthur Anderson has 58,000 employees; Deloitte & Touche has 72,000; Ernst and Young has more than 80,000; and KPMG employs more than 85,000 people.⁽⁸⁾

In the United States, jurisdictions adopting either the ABA Model Code⁽⁹⁾ or Model Rules⁽¹⁰⁾ format prohibit MDPs. The District of Columbia is the only jurisdiction in this country that permits lawyers and nonlawyers to enter into partnerships with, or share ownership of, other entities that provide legal services, if certain requirements are satisfied. In the United States, the Model Rules and the Model Code prohibit nonlawyers from holding an ownership interest in law practices.⁽¹¹⁾ The Model Code forbids a lawyer from entering into a partnership with a nonlawyer if the partnership intends to practice law. In addition, the Model Code does not permit a lawyer to practice in an organization that practices law for a profit if a nonlawyer holds a financial interest in the organization, a nonlawyer is an officer of the organization, or a nonlawyer has the right to direct a lawyer's professional judgment.

The provisions in the Model Rules governing the interaction between lawyers and nonlawyers are substantially identical to the applicable Model Code disciplinary rules. Rule 5.4⁽¹²⁾

prohibits lawyers from sharing fees for legal services and forming partnerships to provide legal services with nonlawyers. In addition, Rule 5.4 forbids lawyers from practicing law in an organization practicing for profit if a nonlawyer owns an interest, is a corporate officer, or has the right to direct the lawyer's professional judgment. The Model Code Ethical Considerations ("ECs") explain that lawyers should not practice law in association with a nonlawyer because lawyers should not assist or encourage nonlawyers to practice law.⁽¹³⁾

The comment to Rule 5.4 adds that the limitations expressed in the rule serve to protect lawyers' independent professional judgment.

In 1994, the Virginia State Bar Standing Committee on Legal Ethics issued an opinion involving D.C. Rule 5.4 and a multidisciplinary law firm in D.C. which included a non-lawyer partner and a Virginia admitted attorney. Legal Ethics Opinion 1584. The Virginia lawyer's inquiry was whether he could ethically practice law in a partnership which included non-lawyer partners. The committee was faced with a conflict between DR 3-103 (A) which prohibits lawyers from practicing law with non-lawyer partners, and D.C.'s Rule 5.4 which permitted such practice. Applying DR 1-102 (B)'s choice of law provisions, the committee concluded that D.C.'s more permissive rule would enable the Virginia attorney to practice in that firm in D.C., despite DR 3-103 (A)'s prohibition. However, the law firm could not practice law in Virginia, even through the Virginia licensed attorney. The Ethics Committee cited ABA Formal Opinion 91-360 (1991) which had addressed this same issue, reaching the same conclusion.

I. Conflicts of Interest Problems in MDPs

Lawyers practicing in MDPs have potential conflicts of interest problems. For example, a lawyer in a MDP may be inclined to refer a client to other professionals in the same firm although the client may be better served by someone outside the firm. The Model Rules prohibit a lawyer from representing a client if the client's representation may be materially limited by the lawyer's own interests or by the lawyer's responsibilities to others, unless the client consents and the lawyer reasonably believes the representation of the client will not be adversely affected. Rule 1.7 (b). In addition, the Model Rules forbid a lawyer from transacting business with a client or acquiring an adverse ownership, possessory, security, or other pecuniary interest to that of a client unless the transaction is fair and reasonable to the client and the lawyer discloses the information to the client. Rule 1.8 (a). Similarly, the Code of Professional Responsibility forbids a lawyer from representing a client, absent full disclosure and the client's consent, if the lawyer's financial, business, property, or personal interests will or reasonably may affect the lawyer's professional judgment.⁽¹⁴⁾ In addition, the Code instructs a lawyer not to enter into a business transaction with a client if they will hold differing interests and the client expects the lawyer to represent the client in that transaction, unless the lawyer fully discloses the lawyer's position to the client and the client consents.⁽¹⁵⁾

However, the bar has permitted lawyers to cure personal interest conflicts under DR 5-101 (A) with consent of the client after full and adequate disclosure of any personal, business or financial interest. There is no reason why lawyers working in a MDP cannot abide by the same conflicts rules. A more difficult issue is the MDP's representation of multiple clients whose interests are potentially or actually adverse, say, for example, the target and surviving entities in a merger and acquisition. An important distinction between the multiple client conflicts rules for lawyers and the conflicts rules for CPAs⁽¹⁶⁾

is that an accountant's conflict of interest is not automatically imputed to the other members of the accounting firm.

Suppose a married couple used a MDP for their financial planning and tax work, including the preparation of joint returns. Thereafter, the husband wishes to consult with an attorney member of the MDP about a divorce and division of marital assets. Should the MDP be able to represent the husband over the objection of the wife? How do the big accounting firms handle these conflicts? In Virginia Legal Ethics Opinion 1634 (1995) the committee held that a lawyer acting in the dual capacity of accountant and lawyer could not undertake the representation of husband before the IRS on a tax matter that would adversely affect the interests of the wife, whom the attorney had represented in the past jointly with husband in the preparation and filing of their tax returns. In the opinion, the committee stated that the wife was to be treated as a "former client" for purposes of DR 5-105 (D) and an attorney must be responsive to the Code of Professional Responsibility when functioning in a dual capacity as lawyer and accountant. So, may the MDP use an "ethics screen" and assign husband's case to another member in the firm, over the former client's objection?

II. Confidentiality

Multidisciplinary practices threaten confidentiality because there is a serious risk that nonlawyers will learn client confidences or that nonlawyer partners subject to confidentiality rules will inadvertently waive the attorney-client privilege. Model Rule 1.6 generally forbids lawyers from revealing client confidences unless authorized by the client or necessary for representation of the client. DR 4-101 of the Virginia Code of Professional Responsibility also prohibits a lawyer from revealing the client's confidences or secrets. Uncertainty exists as to the protection of communications between clients and non-lawyer partners in MDPs. Some proponents of MDPs assert, in response to arguments that they are "practicing law," that the services which MDPs provide do not constitute the "practice of law." If attorneys that work for professional service firms do not practice law, then a client's confidential communications with that attorney will not be protected by the attorney-client privilege. See United States v. Arthur Young, 465 U.S. 805 (1984).⁽¹⁷⁾

Moreover, Virginia has yet to recognize any "accountant-client privilege" that would protect communications between clients and employees of MDPs.⁽¹⁸⁾

The attorney-client privilege requires the creation of an attorney-client relationship, and a communication between attorney and client in which legal advice or legal services are sought or being performed. Inserting an attorney into the middle of a situation does not create an attorney- client privilege if the facts do not demonstrate the lawyer's role as a legal advisor. United States v. Adlman, 68 F.3d 1495 (2d Cir. 1995). The attorney-client privilege does not apply when the client consults directly with a non-lawyer for advice. Thus, if a client of a MDP goes first to a non-lawyer professional for advice, the communications between that client and non-lawyer professional are not protected under the attorney-client privilege. This would hold true even though an attorney in the MDP may later rely on such information in giving legal advice to the client. On the other hand, if a client goes first to an attorney for legal advice, the attorney-client privilege is extended to a non-lawyer accountant hired by the attorney, where the communication by the client to the non- lawyer accountant was to assist the attorney in advising the client. United States v. Kovel, 296 F.2d 918 (2d Cir. 1962). MDPs must consider these issues when providing law related services and disclose to their clients the potential legal ramifications. Some argue that this problem does not, however, justify prohibiting MDPs. Clients simply need to know before they reveal information that might fall into their adversaries' hands, that such information is not protected under the attorney-client privilege.

Finally, confidentiality becomes a problem if the MDP undertakes to perform an independent audit, such that it may owe duties to disclose information to a number of parties, which disclosure may hurt or embarrass an existing or former client. Though accounting firms are subject to an ethical duty to protect client confidentiality, they must also reconcile that duty with their obligations of independence and integrity in the performance of auditing functions. Independence impairments cannot be cured by disclosure and consent of the parties. AICPA Rule 102, Interpretation 102-2.⁽¹⁹⁾

It would be difficult, if not impossible, for a MDP to accept an auditing engagement while simultaneously performing a "management consultation" involving the same corporation. In its consulting role, the MDP might learn of information that must be disclosed in order to objectively and independently perform its auditing engagement. There is an inherent conflict between the MDP's duty of confidentiality in the consulting function and its duty to make required disclosures when performing the auditing function.

III. Fee Sharing With Non-Lawyers

Rules governing the sharing of fees received for legal services between lawyers and nonlawyers affect MDPs. Model Rule 5.4 generally prohibits lawyers from sharing fees for legal services with nonlawyers. The Virginia Code of Professional Responsibility also generally prohibits a lawyer or law firm from sharing legal fees with a nonlawyer, except in specified situations. DR 3-102. Lawyers today generate and share fee awards with non-lawyer public interest organizations and groups on whose behalf they successfully litigate civil rights, environmental, consumer and other public interest claims. While such arrangements are protected under the constitutional freedom of association, are lawyers in purely commercial partnerships more likely to lapse into ethical misconduct, simply because they share fees with nonlawyer members in their organization?

MDPs can probably overcome violation of the bar's rules prohibiting fee-sharing with non-lawyers without much difficulty. First, some will argue simply that the services performed by their in-house lawyer is not "legal advice" and that the services performed are not legal services. Consequently, the fees charged and collected for this work are not "legal fees." Second, the lawyers do not actually "split" the fees with the non-lawyer; rather, the MDP bills the client directly and pays the lawyer a salary out of the general revenues of the firm. This is the way lawyers pay nonlawyer staff in a traditional law firm and is not improper fee sharing with such nonlawyers. Third, the division of a MDP's profits with nonlawyer equity partners is arguably not fee-splitting in the traditional sense, since it is not client nor case specific, but merely the division of all profit in the aggregate. Existing rules authorize the sharing of profits with nonlawyer employees. DR 3-102 (A)(3); Model Rule 5.4 (a)(3).

IV. Non-Lawyer Control Over Delivery of Legal Services

Finally, ethics rules addressing the management of law firms by nonlawyers impact MDPs. Model Rule 5.4(d) forbids lawyers from practicing in organizations that have nonlawyer corporate directors or officers, or that give nonlawyers the right to direct or control lawyers' professional judgment. The Model Code has the same restrictions as the Model Rules. DR 5-106. The restrictions are designed to prevent nonlawyers from interfering with lawyers' professional judgment.

The purpose of DR 5-106 is to ensure that a lawyer's professional judgment on behalf of a client is not influenced when someone other than the client is paying the lawyer for the services. Presumably, DR 5-106 only applies to lawyers acting in their professional capacity in a lawyer-client relationship, which may or may not exist in the case of a MDP. In addition, a finder of fact would have to conclude that non-lawyers in an organization have the right to control the professional legal judgments of the lawyers who work for it. The MDP could adopt a management rule or policy that nonlawyer owners may not, directly or indirectly, control the professional legal judgment of the lawyers employed by the MDP, while permitting the nonlawyer to participate in management decision making in all other respects If the organized bar insists that nonlawyer ownership of a MDP is a per se rule violation, then the bar should reexamine its formal opinions in regard to in-house staff attorneys employed by liability insurance companies to defend policyholders. See UPL Op. # 60; Legal Ethics Opinion 598. Both opinions were approved by the Supreme Court of Virginia and implicitly trust that lawyer employed by a lay corporation will manage to exercise independent professional judgement in that environment. Shouldn't lawyers employed by a MDP be expected to do likewise? Lawyers in legal aid are governed by policies and dictates of Legal Services Corporation and governing boards which include lay members. Are legal aid lawyers violating DR 5-106?

The possibility for interference with the lawyer's judgment undoubtedly exists. But our present legal system already permits some degree of nonlawyer control over the provision of legal services and we have not chosen to prohibit the activity or exclude lawyers and non-lawyers from such arrangements. Opponents of MDPs fear that nonlawyers will be driven by making profit, sacrificing professionalism for the "bottom line." But it is arrogant for the profession to assert that the traditional law firm is less entrepreneurial or profit driven than a lay corporation. Many lawyers work as associates for law firms in which they have no control or ownership interest. Their employers, the law partners, may be just as profit driven as a nonlawyer business owner, directing the associate to bill more hours than necessary or reasonable, to the expense and detriment of the client. Despite these pressures, economic and otherwise, and recurring stories and articles about overbilling, churning, fraud and abuse, we accept the situation, hoping that these associates will abide by the applicable disciplinary rules

To support a rule banning all involvement by non-lawyers in law-related matters, those opposing non-lawyer involvement should be required to show, in that particular instance, that non-lawyer control is more pernicious, or creates a specific threat to the lawyer's independence. Many lawyers in private practice are paid or employed by one party to provide legal services to another. This happens when a parent pays a lawyer to represent a child or when corporations pay for legal counsel to defend their employees. While these arrangements undoubtedly present possible conflicts of interest, they are not prohibited altogether. The profession simply expects the lawyer in such an arrangement to comply with the rules it has adopted to address those situations. The lawyer must disclose to the client the fact that the lawyer is being compensated by another person and obtain the client's consent to that arrangement after full and adequate disclosure. DR 5-106 (A). Apparently the profession believes that in many cases the lawyer is in fact capable of exercising independent professional judgment. If the attorney believes he is incapable of doing so, then the rules direct the attorney to withdraw from the representation or not undertake the representation in the first place.

The United States Supreme Court upheld the right of labor unions to pay for or promote the services of particular lawyers for their members. Labor unions provided legal services to its members through lawyers employed by the unions. The organized bar opposed the arrangement asserting that the lawyers' professional judgment would be impaired by the financial control exerted by the union. They also cited the conflicting interests of the union and the individual member. The opponents of the unions' arrangements were unable, however, to demonstrate any concrete injury to clients in any of the cases and the Supreme Court rejected their argument as only "theoretically imaginable." United Transp. Union v. State Bar of Mich., 401 U.S. 576, 580 (1971); Brotherhood of R.R. Trainmen v. Virginia, 377 U.S. 1, 8 (1964); cf. NAACP v. Button, 371 U.S. 415 (1963) (establishing same principle for political organization). Labor unions and prepaid legal insurance today provide for legal services to their members despite their financial control and influence.

Therefore, given the current system's tolerance for nonlawyer involvement in the delivery of legal services to others, an outright ban on multidisciplinary practice using DR 5-106 as a basis would appear to many as hypocritical and suspect.

• Conclusion

The rules of professional conduct are intended to protect the public by requiring licensed practitioners to meet minimum educational and ethical requirements and make lawyers accountable to their clients. The lawyer's failure to discharge these professional obligations may lead to discipline and/or malpractice claims. The accounting firms similarly are subject to ethics rules and discipline for breaching ethical duties to their clients.⁽²⁰⁾

To a large extent, albeit not completely, the clients and general public are protected because the work of lawyers and accountants are regulated. Whatever differences may exist in how lawyers and accountants are regulated, the lawyers employed by a MDP remain subject to the rules of the legal profession. For example, MDP lawyers must decline employment by clients if required under the legal profession's conflicts of interest rules. Whether the accounting profession's conflicts rules will permit the engagement is irrelevant.

In the context of MDPs, the bar will find it extremely difficult to justify the continued prohibition of lawyers joining forces with nonlawyers. Lawyers today are permitted in certain instances to work for entities controlled by non-lawyers and few complaints are made about lawyers functioning in that environment. Lawyers in MDPs must be held accountable for breaches of ethics by non-lawyer staff under their supervision, just as lawyers are responsible for non-lawyer staff in the traditional law firm. MDPs must be required to train non-lawyer staff to perform their tasks professionally and ethically. The organized bar and the accounting profession need to work together and agree on ethical standards that would permit lawyers hired by MDPs to operate without being placed at risk of violating client-protective ethical rules that apply to lawyers. The focus should be on confidentiality and conflicts rules that will serve and protect the client. The public needs assurance from the organized bar that professional responsibility follows a lawyer wherever he or she goes, including non-traditional employment in a MDP. The bar needs to reevaluate the current rules that prohibit these two professions from combining their skills and talents. Current opposition to MDPs is based more on the fear that the "Big Five" will wrestle control of the legal services market from established law firms rather than client protection.

MDPs are here to stay and ultimately the current rules which prohibit them will be tested. The sophisticated consumer of legal services will likely resent the organized bar's current resistance to MDPs and demand the right to choose between MDPs and traditional law firms. The organized bar should consider how clients will be harmed or benefitted by permitting lawyers to form partnerships with nonlawyers and entering into fee sharing relationships with nonlawyers. With the growth of MDPs in Europe, can any specific instances of harm to clients be cited that would justify retention of the current rules prohibiting MDPs in the United States? Are the differences in the manner in which the accounting and legal professions handle conflicts and confidentiality merely theoretical and abstract, or are there, in fact, practical consequences? These questions need to be answered soon.

ENDNOTES

1. The "Big Six" became the "Big Five" accounting firms when Price Waterhouse and Coopers & Lybrand merged.

2. Current Reports, 14 ABA/BNA Lawyers Manual Prof. Conduct 542 (11/25/98)

3. Id.

4. John Gibeaut, "Squeeze Play," 84 ABA Journal 42 (Feb. 1998). See also, Gianluca Morello, Note, "Big Six Accounting Firms Shop Worldwide for Law Firms: Why Multi-Discipline Practices Should Be Permitted in the United States," 21 Fordham Int"l L.J. 190, 198-203 (1997)(describing legal activities of "Big Six" accounting firms in Europe)(hereinafter "Morello").

5. Arthur Andersen's law firm in the United Kingdom is called Garrett & Co. ("Garrett") with offices in seven cities, including London, Reading, Leeds, and Manchester. Garrett competes with other law firms for high-profile corporate work, including banking, intellectual property, and real estate. Garrett aggressively recruits lawyers from other English law firms and competes with established law firms for sophisticated corporate work involving major transactions. Andersen has established a law practice in the Netherlands under the name Wouters Advocaten. In Spain, Andersen ALT recently merged with a Spanish law firm to form J & A Garrigues Andersen y Cia. In 1992, Andersen acquired the Paris office of the English law firm S.G. Archibald, acquiring an established corporate and intellectual property practice to complement its tax work. As a result of the acquisition, the firm grew from approximately fifty lawyers to over 240 attorneys as of 1996. Morello, supra, at 199-200.

6. Ernst & Young L.L.P. ("Ernst & Young") has several ties with Dutch law firms and has legal practices in Switzerland, Spain, Germany, and France. In addition, Ernst & Young has links to a Canadian law firm and desires to establish a MDP in Canada if the prohibition against MDPs is lifted. Ernst & Young is considering a law practice in the United Kingdom Id. at 202-03. Last year, the Law Society of Upper Canada recommended a prohibition of employment of lawyers by organizations owned by nonlawyers. Meanwhile, in England, Parliament has recently lifted a ban on MDPs, giving the Law Society six months to figure out how to include nonlawyers in the delivery of legal services in that country. Mary Smith Judd, "Accounting Firms are Gobbling Up Law Firms Abroad" The Florida Bar News, March 15, 1999 at 16-17.

7. KPMG Peat Marwick L.L.P. ("KPMG") has a large legal and tax division in France named KPMG Fidal Peat International ("KPMG Fidal"). In 1991, KPMG Fidal had 760 lawyers in 130 offices throughout France, practicing a variety of legal and tax work on behalf of small and medium-sized French companies. That same year, sixty-one percent of KPMG Fidal's work was tax-related and thirty-nine percent legal. KPMG Fidal's legal work included mergers and acquisitions, restructurings, joint ventures, and routine contract work. Today, KPMG Fidal is the largest law firm in Europe. KPMG also recently formed an alliance in Sweden with new law firm KPMG Wahlin Advokatbyra. Id. at 201-02.