Ch 1 Alternative Structures Will Undermine Professionalism and Ethics

Alternative Structures Will Undermine Professionalism and Ethics

How are lawyers different? Aren’t there also many, and perhaps an infinite number of ways that lawyers can act unethically? Aren’t there many, and perhaps an infinite number of reasons why a lawyer or a law firm can be motivated to act unethically?

Many persons have argued that permitting nonlawyers to own shares in or to manage a law firm, or allowing a lawyer to partner with a non-lawyer in a multidisciplinary practice, will lead to the loss of professionalism. “Law is a profession, not a business,”[1] which is “an entirely different set of values,”[2] and in permitting alternative structures, law will become a business. Other variations of this argumentation include:

  • Alternative structures will undermine the attorney-client relationship by placing into question confidentiality and attorney-client privilege,[3]
  • Alternative structures will undermine lawyer independence and professional judgment because lawyers will prioritize the interests of their shareholders and their nonlawyer managers and partners over the interests of clients,[4]
  • Alternative structures will prioritize profits above service,[5]
  • Alternative structures will lead to unethical practices because nonlawyers are not bound by lawyers’ ethical rules.[6]

A number of responses have been offered to these arguments. They can be summarized as follows:

  1. A debate as to whether law is, or should be, a profession or a business is nonsensical at best and hypocritical at worst. Everyone, including lawyers, needs to make a profit in order to stay in business, and the firms that appear on The American Lawyer’s annual listing of the top grossing law firms have clearly made profitability a priority. From this perspective, the suggestion that alternative structures will prioritize profits over service is disingenuous.
  2. There is nothing inherent about being a lawyer or about not being a lawyer that makes a person more or less ethical, or more or less able to understand and follow ethical rules. It is repugnant to suggest that companies cannot act ethically, for the simple reason that they are companies and have shareholders. Many companies operate in an ethical manner — the mere fact that they are companies does not pose any greater or lesser challenge for them to act ethically, or make them any more or less likely to act ethically. At the same time, there are a number of examples to demonstrate that lawyers can and do act unethically.
  3. The protection of the attorney-client relationship and the respect of ethical rules and lawyer independence are important values that must be respected and protected. But the persons who argue that alternative structures will undermine these values offer no proof of their arguments, no empirical research — they simply imagine a multitude of scenarios, more or less plausible, in which it could happen, and then assert that it necessarily will happen.

It is certainly true that an alternative structure, and anyone associated with one (shareholder, manager, employee), can act unethically and/or pressure someone else associated with the structure to act unethically. In fact, there are many, and perhaps an infinite number of ways that an alternative structure and the people associated with it could act unethically, and an infinite number of reasons why they could be motivated to do so. A multitude of possible scenarios have been proposed, including: (i) an insurance company that offers legal services in personal injury that lobbies the government for regulations to reduce personal injury payouts by insurance companies,[7] (ii) a company that offers criminal defense legal services and also operates prisons,[8] and (iii) Walmart, one of the country’s largest and most controversial employers, offering employment law service to its customers, as employees.[9]

By the same token, it is equally true that an alternative structure, as well as those associated with it, might be enabled as well as motivated to act ethically in an exemplary manner. For example, a firm could bring in executives who are expert in business processes, who could institute for the firm processes to assure a high standard of compliance. Another example is a large company whose value is in its brand — knowing that the mere appearance or suspicion of unethical behavior could wipe out the value of the brand, the company could be highly motivated to operate in ways that would place it beyond reproach. A third example is a listed company — listed companies are vulnerable to short sellers, and a listed company that provides legal services is arguably especially vulnerable to short sellers with respect to ethical matters. For that reason, a listed company that provides legal services arguably has every motivation to be scrupulously ethical. And if they are not, the public will soon be made aware and the company’s stock will suffer for it — short sellers will make sure of it.

At any rate, how are lawyers different? Aren’t there also many, and perhaps an infinite number of ways that lawyers can act unethically? Aren’t there many, and perhaps an infinite number of reasons why a lawyer or a law firm can be motivated to act unethically? The records of the various state disciplinary authorities evidence that some lawyers do act unethically — sometimes in predictable ways and with predictable motivations, and sometimes in less predictable ways and with less predictable motivations.

We do not use the possibility of unethical behavior, predictable or not, as a reason to keep all lawyers out of the market — because they might act unethically, because they might have or might one day develop motivations to act unethically. Instead, we have put in place a system to regulate the ethical conduct of lawyers. The system we have put in place in the US is a set of rules that delineates proper and improper conduct, and we have vested power in certain institutions to enforce those rules, including the power to bar from the market those lawyers who demonstrate by their actions that they cannot be trusted to act ethically.

The examples of England and Wales and of Australia demonstrate that, in adopting a new regulatory framework that governs legal services rather than simply lawyers, it is possible to put in place a system to govern the ethical conduct of all legal service providers, including alternative structures and those associated with them. While the systems that those two countries have implemented vary in their complexity, they share these two pertinent elements:

1. Entity-based regulation and appointment of at least one responsible lawyer: Both Australia and England and Wales have moved to entity-based regulation. In this manner, they have moved from regulating lawyers, exclusively, to also regulating legal services, more generally. In addition, their rules of require the designation of at least one person to bear responsibility for the ethical compliance of the entity. More specifically:

In New South Wales and Victoria (Australia), each “principal” of a structure that provides legal services (regardless of the type of structure, and notably regardless of whether it is an ILP or not) is responsible for the firm’s compliance with professional conduct and other rules. As regards ILPs, “principals” are each of the lawyers of the ILP who are “validly appointed” directors. As regards other types of structures, and notably partnerships, “principals” are each of the partners of the firm. A principal bears responsibility if the principal “knowingly authorized or permitted” the act (or omission), or if the principal “was in or ought reasonably to have been in a position to influence”[10] the relevant conduct of the ILP.[11]

In Queensland and the other states of Australia, responsibility for the compliance of an ILP is placed upon the shoulders of a “Legal Practitioner Director” (LPD), a person that the ILP itself designates and who must be a lawyer. The LPD is responsible for assuring that the firm has appropriate management systems in place that enable the firm to provide legal services in accordance with the applicable ethical rules. And, in the event of an violation by the firm and/or by any employee of the firm, the LPD as well as the firm itself can be held responsible:[12] not only can the LPD lose his/her practicing certificate (that is, be disbarred) but the entire ILP can be liquidated.[13]

In England and Wales, all firms (ABS or not) are required to appoint a Compliance Officer for Legal Practice (COLP), as well as a Compliance Officer for Finance and Administration (COFA). Every firm must at all times have a designated COLP as well as COFA. The COLP is responsible for ensuring that the firm has in place the systems and controls needed to comply with the applicable ethical and professional standards. The COFA is responsible for ensuring that the firm complies with the Solicitors Regulation Authority’s (SRA, the largest “front-line” legal regulator in England and Wales) accounting rules. These persons bear principal responsibility for the firm’s compliance and they are obliged to report to the SRA material non-compliance. In the event the SRA suspects dishonesty or failure to comply with the Code of Conduct or accounting rules, the SRA can suspend the COLP’s practicing certificate and can revoke the firm’s authorization, effectively forcing it to wind up.[14]

2. Adoption of proactive, management based regulation (Australia) / outcomes-focused regulation (England and Wales): Both Australia and England and Wales have moved away from proscriptive, rules-based regulation (the kind in place in the US) in favor of what has been termed in Australia as “proactive, management based regulation”[15] (PMBR) and in England and Wales as “outcomes-focused regulation” (OFR) (and, as discussed in Chapter 2, Canada is calling “compliance-based regulation”). With this change, rather than being obliged to conform to a specific set of proscriptive rules, firms are required to deliver specific outcomes regarding the management and the ethical compliance of the firm. An example is England and Wales’s Outcome 3.4: “you do not act if there is [a conflict with your own interests] or a significant risk of [a conflict with your own interests].”[16] Each firm is responsible for designing and implementing its own systems and processes necessary to achieve those outcomes, under the rational that the systems and processes appropriate for one firm are not the same that are appropriate for another. With such a system, there is no need to devise rules that try to anticipate every possible kind of ethical violation, and no need for a regulator to prove that any such specific rule was violated. Instead, a regulator simply needs to inquire as to why a firm did not act with integrity / why a specific outcome was not achieved.

Alternative structures have existed in Australia since 2001, and in England and Wales since 2012. There is nothing in the public record in either country indicating that they have had an adverse effect on professionalism or ethics. There is no evidence that ethical rules have been violated for reasons connected to the status of a firm as an ILP or ABS. As Steve Mark, the former Legal Services Commissioner for New South Wales and one of the persons principally responsible for the development of PMBR in Australia has observed: “The legal ethics sky has not fallen…chicken little has survived!”[17]

In fact, in Australia, research has demonstrated that the number of complaints received in relation to ILPs are two-thirds lower than the number of complaints received in relation to traditional firms.[18] In this manner, some have argued, Australia’s proactive regulatory framework curbs unethical behavior in a way that a reactive regulatory framework cannot,[19] justifying Mark’s description of the framework as an “ethical infrastructure.”[20]

In England and Wales, some firms, ABS or not, have adjusted more easily to the new regulatory framework than others. This has notably been the case with respect to the role of the COLP, with some firms, both ABS and not, reporting that they have had trouble identifying and, according to their COLPs, asserting the right the right level of authority.[21]  Regardless of these struggles to adjust, the data shows that from 2011 to 2013, Legal Disciplinary Practices (LDPs, a precursor structure to ABSs) were the subject of the smallest number of complaints, as a ratio to turnover. The data also shows that while the rate of complaints against ABSs is not lower than those against traditional firms: (i) the complaints are not connected to the ABS status of the firm, and (ii) ABSs, together with LDPs, have better complaint resolution ratios (that is, they address complaints more efficiently and effectively).[22]

In its December, 2014 Consumer Impact Report, The Legal Services Consumer Panel observed:

[T]he dire predictions about a collapse in ethics and reduction in access to justice as a result of ABS have not materialised. There have been no major disciplinary failings by ABS firms or unusual levels of complaints in the Legal Ombudsman’s published data. Our Tracker Survey isn’t able to segment between ABS and non ABS firms, but does show that overall consumer confidence in the quality of work and professionalism of lawyers has held steady since 2011. The data indicates that service satisfaction reduces as the size of the law firm used increases, but this is a function of size rather than ownership structure.[23]

The Legal Ombudsman, mentioned in the quote above, is an independent body that offers an avenue for the resolution of complaints against regulated legal service providers (individuals as well as entities) in England and Wales. Indeed, the reports issued by the Legal Ombudsman are highly telling: Each year since 2012 the number of complaints filed with the Ombudsman has fallen by between 5% and 8% as compared to the previous year.[24]

Stories online:

John Ray, Senior Consultant, Law Firm Consulting Group: Ray argues it is the fact that lawyers do not have access to adequate capital that adversely affects their professional judgment. It limits the cases they are willing to take on, and it limits the extent to which they are willing to prosecute the cases that they do take on.

Paddy Oliver, Managing Director and Founder, Lexcel Consulting: Oliver argues that outside investment and greater public scrutiny will result in better managed law firms that act ethically from both a legal and business perspective.

John Briton, Former Legal Services Commissioner, Queensland: Briton acknowledges that lawyers can be influenced by a number of different people, including nonlawyer shareholders. However, he argues that this is not a reason to exclude them, it is merely a reason to manage the risk.

Darrel Pink, Executive Director, Nova Scotia Barristers’ Society: Pink explains that alternative structures can be discussed in Nova Scotia only after first addressing the regulation of entities in addition to the regulation of individuals.

Kristin Dangerfield, CEO, The Law Society of Manitoba: Dangerfield explains that entity regulation will permit Manitoba to move toward permitting lawyers to partner with nonlawyers and allowing law firms to accept capitalization from other sources.

Notes

[1] Charles Ruffin, Comment Submitted to ABA Commission on Ethics 20/20, February 10, 2012, http://www.americanbar.org/content/dam/aba/administrative/ethics_2020/ethics_20_20_comments/ruffin_alpsdiscussiondraft.authcheckdam.pdf; Forrest A. Norman, “Alternative Business Structures – Comment,” April 26, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/forrest_a_norman_abs.pdf.

[2] John E. Thies, “President’s Page: The Battle against Non-Lawyer Involvement in Legal Practice,” Illinois Bar Journal 101 (2013): 8, http://www.isba.org/ibj/2013/01/thebattleagainstnonlawyerinvolvemen.

[3] State Bar of Texas, Letter to Katy Englehart, May 5, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/state_bar_of_texas_abs.pdf.

[4] Paul Bennet, “Comment on Alternative Business Structures,” April 25, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/paul_w_bennett_abs.pdf; Jess C. Rickman, “ABS Survey–Rejection of the Proposal,” April 27, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/jess_c_rickman_abs.pdf.

[5] International Association of Defense Counsel, “ABA Commission on the Future of Legal Services – Alternative Business Structures,” May 3, 2016, 1, http://www.americanbar.org/content/dam/aba/images/office_president/international_association_of_defense_counsel_abs.pdf; William W. Clifton, Jr., “ABA Commission on the Fuiture [sic] of Legal Services Report,” April 28, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/william_w_clifton_jr_abs.pdf.

[6] Thomas W. Seiler, “Non Lawyer Ownership of Law Firms,” April 29, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/thomas_w_seiler_abs.pdf; J. Michael Weston, “ABA Commission on the Future of Legal Services – Alternative Business Structures,” April 27, 2016, http://www.americanbar.org/content/dam/aba/images/office_president/lederer_weston_craig_abs.pdf.

[7] Nick Robinson, “When Lawyers Don’t Get All the Profits: Non-Lawyer Ownership of Legal Services, Access, and Professionalism,” Georgetown Journal of Legal Ethics 29 (2016), HLS Program on the Legal Profession Research Paper No. 2014-20, 43, http://ssrn.com/abstract=2487878.

[8] Ibid., 14.

[9] Ibid., 43-44.

[10] Legal Profession Uniform Law (New South Wales), 2014, Section 35(1), http://www5.austlii.edu.au/au/legis/nsw/consol_act/lpul333/s35.html.

[11] Legal Profession Uniform Law (New South Wales), 2014, Section 35(1), http://www5.austlii.edu.au/au/legis/nsw/consol_act/lpul333/s35.html.

[12] See, for example, Queensland Legal Services Commission, “Obligations of LPDs,” last modified November 11, 2013, https://www.lsc.qld.gov.au/compliance/incorporated-legal-practices/obligations-of-legal-practitioner-directors.

[13] For a more detailed description of the regulatory framework that Queensland adopted from New South Wales, see Steve Mark, “The Future Is Here: Globalisation and the Regulation of the Legal Profession — Views from an Australian Regulator,” May 27, 2009, http://www.americanbar.org/content/dam/aba/migrated/cpr/regulation/steve_paper.authcheckdam.pdf.

[14] With respect to England and Wales, see Hadfield and Rhode, “How to Regulate Legal Services,” 20-32.

[15] Ted Schneyer is credited with coining the phrase “proactive, management-based regulation. See, for example, Schneyer, “The Case for Proactive Management-Based Self-Regulation to Improve Professional Self-Regulation for US Lawyers,” Hofstra Law Review 42 (2013): 233-265. http://www.hofstralawreview.org/wp-content/uploads/2014/02/BB.7.Schneyer.final2_.pdf.

[16] SRA Code of Conduct 2011, accessed May 20, 2016, http://www.sra.org.uk/solicitors/handbook/code/content.page.

[17] Mark, “The Future Is Here,” 3.

[18] Christine Parker, Tahlia Ruth Gordon, and Steve A. Mark, “Regulating Law Firm Ethics Management: An Empirical Assessment of the Regulation of Incorporated Legal Practices in NSW,” Journal of Law and Society, 37 (2010): 466-500, http://dx.doi.org/10.2139/ssrn.1527315.

[19] Andrew Grech and Tahlia Gordon, “Modern Law Firm Management: Should Non-Lawyer Ownership Be Endorsed and Encouraged?” Working Paper, April 2015, 8, http://www.law.georgetown.edu/academics/centers-institutes/legal-profession/upload/Grech-Gordon-Non-Lawyer-Ownership-Paper-Final.pdf.

[20] Mark, “The Future Is Here,” 3. Mark credits Schneyer as well as Elizabeth Chambliss and David B. Wilkins for the development of the term “ethical infrastructure:” Ted Schneyer, “A Tale of Four Systems: Reflections on How Law Influences the ‘Ethical Infrastructure’ of Law Firms,” South Texas Law Review, 39 (1998): 245-277; Elizabeth Chambliss and David B. Wilkins, “A New Framework for Law Firm Discipline,” Georgetown Journal of Legal Ethics 16 (2002): 336-341, http://heinonline.org/HOL/LandingPage?handle=hein.journals/geojlege16&div=18&id=&page=.

[21] Nick Hilborne, “COLPs Failing to Report Problems to SRA, Groundbreaking Study Finds,” Legal Futures, March 3, 2016, http://www.legalfutures.co.uk/latest-news/colps-failing-to-report-problems-to-sra-groundbreaking-study-finds.

[22] Legal Services Board, “Evaluation: Changes in Competition in Different Legal Markets -An Empirical Analysis,” October, 2013, 6-7, https://research.legalservicesboard.org.uk/wp-content/media/Changes-in-competition-in-market-segments-REPORT.pdf.

[23] Legal Services Consumer Panel, “Consumer Impact Report 2014,” December 5, 2014, 15, http://www.legalservicesconsumerpanel.org.uk/publications/research_and_reports/documents/Consumer%20Impact%20Report%203.pdf (hereinafter “UK 2014 Consumer Impact Report”).

[24] For each year ending in March, the number of complaints was: 22,350 (2012), 20,500 (2013), 19,450 (2014) and 18,185 (2015).The drop in complaints for the year ended March 2015 as compared to the year ended March 2012 was 18.62%. Legal Ombudsman, “Annual Report and Accounts for the Year Ending 31 March 2015,” January 28, 2016, 12, http://www.legalombudsman.org.uk/wp-content/uploads/2014/09/Annual-Report-2014-15.pdf. See also Neil Rose, “Complaints About Lawyers Fall to Lowest Level Yet,” Legal Futures, January 29, 2016, http://www.legalfutures.co.uk/latest-news/complaints-about-lawyers-fall-to-lowest-level-yet.

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