DAN'S WORLD: A FREE ENTERPRISE DREAM; AN ETHICS NIGHTMARE
Lawrence J. Fox1
The great Business Law Section asking me - a mere trial lawyer - to respond to the legendary Dean Dan Fischel of that bastion of economics over law - the University of Chicago School of Multidisciplinary Practice - was an invitation too delicious to resist. Could I articulate the arguments why we as a legal profession must not succumb to the forces of economic hegemony - after economics as destiny was so persuasively presented in the May issue of this journal by Dean Fischel? That is a question only you, gentle reader, can answer. But to observe that I enjoyed the challenge vastly understates my delight in putting this response together.2
Dean Fischel taught us in the May issue of this journal that the marketplace yields far better results for our clients than any regulatory arrangement we lawyers can construct, that mandatory principles of professional independence, conflicts of interest, confidentiality and even professional licensure were unnecessary in a world where free enterprise was permitted to flourish, that multidisciplinary practice was an idea whose time had come and that rather than cling to our outdated ethical rules, such as Rule 5.43 which prohibits sharing legal fees with non-lawyers, as a transparent subterfuge for maintaining our professional monopoly, we lawyers should embrace the new model in which anyone can offer legal services on any terms, and the clients will vote with their pocketbooks.
The brashness of Dean Fischel's approach left me weak of knee, my forehead beaded with perspiration, palpitations interrupting my ability to think straight. But then I recovered, recalling my commitment to the ideas that lawyers are not just another set of service providers, that what separates us from a world of auditors, investment bankers and insurance salesmen is our commitment to a higher set of values, that placing lawyers in alternative practice settings in which they were mere employees or even partners of others would destroy the bulwark that has been our profession's best defense again the compromise of these values, that the laboratory of the Big 5 has demonstrated better than any chalkboard economic calculations how the principles Dean Fischel celebrates are destructive of the protections we offer our clients, and that if the Big 5 reflected the alternative universe which Dean Fischel considers the ideal, we should collectively pray our profession is not forced to travel there.
I. Accounting Stories.
1. PricewaterhouseCoopers Independence.
My response does not start with lawyering at all. Rather I invite you into the boardroom of the closed end investment companies for which I have served for a decade as an independent director. It is early February 2000. On the agenda is the question whether we will recommend the retention of PricewaterhouseCoopers to be the independent auditors of the funds. The PricewaterhouseCoopers slick written presentation was sent weeks before the meeting; it is annotated through an in-person appearance by the partner in charge who walks us through the information. After a discussion of audit scope, audit personnel and audit fees, we arrive at the question of PricewaterhouseCooper's independence. In the written materials is a disclosure of all ties between PricewaterhouseCoopers and our fund's adviser. While principles of confidentiality prevent me from sharing the details of this presentation, suffice it to say that PricewaterhouseCoopers had a multimillion dollar consulting contract, two engagements in connection with proposed transactions whose fees, in the millions, may double with the result (as we used to say, in the old days, you could live on the difference), and other financial relationships with an affiliate of our advisor that approached nine figures.
Our reliance as independent directors upon PricewaterhouseCoopers for audit services is profound. Our closed end funds hold many securities with a thin or no market. Everyday those securities must be fair valued so that the world knows our funds' net asset value, and therefore the true discount or premium at which our closed end shares trade. That work is done conscientiously by our adviser and others; but knowing that independent auditors, with no axe to grind, come in annually to review our internal controls, income statement and balance sheet gives the investing public and us directors great confidence in the integrity of our operation. But with our annual audit fees of less than $40,000 could PricewaterhouseCoopers be considered independent given its involvement with our adviser and its affiliates?
I asked our lawyer, who wondered the same thing. Nonetheless, I was informed that even if we were inclined not to approve PricewaterhouseCoopers as our independent auditor, we would accomplish nothing because the other four Big 5 firms would reflect similar intertwining with our adviser. In other words, so long as we wanted to be audited by a Big 5 firm (an absolute necessity in a world in which only these behemoths can provide the generally accepted Good Housekeeping seal of approval) we had no real alternative. With only five choices, sometimes you have no choice at all.
2. PricewaterhouseCoopers Infractions.
The same meeting produced a second story line. The PricewaterhouseCoopers' engagement partner in charge was required to discuss that firm's recent difficulties with the Securities & Exchange Commission relating to firm partners, employees and their relatives owning shares in companies PricewaterhouseCoopers audits. A press release from the SEC had announced that half the partners of PricewaterhouseCoopers, including 31 top executives, had violated the auditor independence rules that prohibit investment in audit clients of the firm. The SEC found "widespread" noncompliance which reflects "serious structural and cultural problems in the firm."4 The statistics regarding the PricewaterhouseCoopers' violations were just staggering. A total of 1,885 staffers committed a total of 8,064 violations, "owning investments in 2159 of the firm's 3170 SEC registrant corporate audit clients - including almost half of all partners and 6 of the 11 senior managers who oversee the firm's independence program."5 The SEC suggested that 52 companies hire another firm to replace PricewaterhouseCoopers.6
While the public response from the offending firm had been alternatively dismissive ("'the vast majority of [the] infractions resulted from an honest failure to appreciate the importance of compliance, failure to check' restricted investments, and a 'lack of understanding of the intricacies of the rules'"),7 defensive ("the integrity of our audits was not compromised"),8 and apologetic (we are making "sweeping changes to our processes"),9 our partner was clearly embarrassed that these transgressions had taken place. Forced to confront us - his clients - his remarks reflected remorse, regret and renewed determination that PricewaterhouseCoopers was taking all the necessary steps to assure it did not happen again. I felt sorry that because of the conduct of his colleagues our PricewaterhouseCoopers partner was placed in this awkward position to have to apologize to us.
But whatever comfort I took from that presentation quickly disappeared when I learned that while PricewaterhouseCoopers might be acting contrite, anonymous leaders of the accounting business were reacting to the SEC action against one of the colleague firms by attacking the regulations themselves as outmoded, antiquated and annoying. The growth of the Big 5 firms, it was argued, made it ridiculous to imagine that it was important that everyone at a Big 5 firm (and their families) avoid owning shares in clients the firm audited. It was quite enough, went the litany, that those directly involved in the audit refrained from owning shares in the audited company, and that the famous accounting firm "firewalls" would safeguard independence.10 Instead of prosecuting PricewaterhouseCoopers for its violations, these accounting industry spokespersons asserted, the SEC should be examining its regulations and revising them to comport with the reality of the modern world.11
In recent months, one of these individuals finally was willing to be quoted for attribution on this explosive topic. In going public, Stephen Butler, Chairman of KPMG, threw down the gauntlet. "What I see is [Arthur] Levitt, [Chairman of the SEC] waking up to the realization that these rules are outdated .... You can pound people for technical violations, but there will be a backlash if these rules are not fixed quickly."12 What Mr. Bulter means by a "backlash" was not made clear.13
In other words, just like the way the accountants wish to repeal the legal profession's imputation rules governing conflicts of interest ("if we impute conflicts beyond the individuals working on the engagement we'd have to turn down so much business"), which is the legal profession's core value governing loyalty, they also hope to repeal the rules governing the independence of their own profession so that no one will look askance at the millions in non-audit services they are billing their audit clients, and everyone will be comfortable with accountants and their families investing in companies their firms audit.
3. PricewaterhouseCoopers Break-Up.
The third story line discredits one of the principal arguments invoked by the supporters of multidisciplinary practice argument which is that the economic forces at work are so powerful that the only choice the profession has is to lie supine on the beach, let the tsunami sweep over us, and get drenched by the new paradigm of one-stop shopping, open competition for services, and lawyers working for non-lawyers - our once great profession reduced to the lowest common denominator role as just another profit center at a department store for consulting services. Yet on February 16, 2000, as predicted by our PricewaterhouseCoopers partner, it was reported that PricewaterhouseCoopers was splitting off its tax and auditing work from its other consulting business, which in turn might be split into two or more entities.14 Of course, the devil is in the details, which have not been announced (and how the ownership is allocated among the principals of these new firms will determine whether what we are dealing with is form over substance); yet, it does appear that this one Big 5 firm recognizes that the SEC will not tolerate the threat to auditors' professional independence caused by its offering of so many other services to audit clients of the firm.
The second shoe dropped when on March 1, 2000 the accounting firm of Ernst & Young announced that it would be selling its non-audit business to Cap Gemini S.A. of France, a public company with its headquarters in Paris.15 Again, we do not yet know how "independent" these various businesses will be - one from the other - but it would appear that Ernst & Young audit clients will have to go to the great inconvenience of making a second call if they want to secure other services from the auditing firm's former colleagues.16
Nor have the other three firms gone untouched by these events. Everyone knows about the on-going feud between Arthur Andersen and Andersen Consulting that on August 7 ended in an arbitrator's decision that will result in a divorce.17 KPMG Consulting will split from KPMG, LLC, the accounting house, and has filed to sell approximately $2.5 billion of its stock to the public.18 Finally, Deloitte & Touche is said to be prepared to maintain an integrated firm unless "it was placed under extreme pressure from regulators."19
The lessons from these recent and planned divestitures are profound. Consolidation, we have been told, is as inevitable as it is irreversible. But these announcements prove both of those propositions wrong. There are centrifugal (albeit non-market) forces at work that are more powerful than the centripetal forces that brought all this "consulting" together.20 And if PricewaterhouseCoopers can be split into a number of enterprises, the civil disobedience of the accounting firms in employing thousands of lawyers can be reversed as well. The fait accompli with which our profession has been presented ("now that we've hired 5,000 lawyers we dare you to do something about it") is far more easily undone than the splitting off of all of Ernst & Young's consulting business will turn out to be.21
* * * *
These stories tell our profession a little about lawyers and the practice of law. But they speak volumes about Dean Fischel's "market" and about what we can expect from multidisciplinary practice, if we lawyers succumb to this movement.
First, we learn that without regard to its affect on independence, the Big 5 accounting firms have long ago aggressively embarked on a campaign to capitalize on their audit entrée into the entire world of public companies to sell a broad range of non-audit services with little or no regard to whether the dollars generated by these other endeavors vastly outstrip the audit fees or even whether the audit partners are compensated for the consulting fees they help generate.
Second, we learn, that without any limitations on concentration, these firms have managed to consolidate, first by buying up literally hundreds of practices around the country and then, merging down from the Big 8 to the Big 522 so that the entire public company world is divided among them, almost like omnia Gallia, in quinque partem.
Third, these five firms can set the rules anyway they want - on independence, on loyalty, on fees - because the consumers, as powerful as they are, have no choice. You want a Big 5 firm that provides a higher level of customer loyalty than the rules presently offer, even if you are in the market buying, no one is selling.
Fourth, accounting professional independence is a fragile commodity that will be seriously compromised by the announced intention that auditors and their consulting partners be permitted to buy shares in clients, a result that means if one wanted a higher level of independence one would be required to go outside of the Big 5.
Fifth, we must rely on the clout of the SEC to impose a more stringent role on share ownership in audited enterprises by auditing firm employees. Indeed, the only thing that will save the current concept of independence of the accounting profession is regulation by a determined and effective Securities and Exchange Commission.
Which leads to the question, given the foregoing will our clients be better off if we lawyers all end up as employees of Arthur Andersen or KPMG? The answer to that has to be a decided "no." If the Big 5 take such an aggressive attitude toward undermining their own important concept of professional independence, if they treat the idea of regulation with such disdain that, instead of complying with the existing rules, they ignore them and, when caught, scream that the rules should be changed, then what chance do our profession's unique principles and policies of client protection have of surviving where the law business becomes just another product extension evaluated on the sole basis of how it affects the bottom line?
Indeed, as I have argued elsewhere,23 we do not need to extrapolate what would happen to lawyer values at the Big 5 if they became MDPs offering legal services. These firms have already hired 5,000 lawyers who systematically engage in civil disobedience, not only disingenuously arguing they are not practicing law to escape the effects of Rule 5.4's prohibition on sharing fees, but also ignoring many of our other rules including those governing confidentiality, conflicts of interest, limitation of liability and solicitation of clients.
Alas, this last fact does not carry the day with Dean Fischel. In his world none of these rules or the principles they reflect are worth protecting or perpetuating. Most of his May article was dedicated to a series of sustained salvos designed to demonstrate that these values, many of which he claims are simply imagined anyway, should be jettisoned along with the podium pounding rhetoric that surrounds them. Thus to me falls their defense, an assignment I gleefully accept, starting with a discussion of professional independence.
II. Professional Independence: A Rally Cry or a Substantive Concept?
What a treat to get an opportunity to explain professional independence to Dean Fischel. Having accused us apologists for Rule 5.4 as having "goals ... no different from any other trade union or interest group pursuing economic protectionism," but "cloaking our arguments in rhetoric about ... professional independence," I leave it to you, kind reader, to decide whether lawyer professional independence means anything or is it, as Dean Fischel suggests, simply a null set? Then, if you conclude that the former is true, you must determine whether any aspects of "professional independence" might be threatened by the MDP movement. It is my thesis that professional independence in fact reflects a number of different client-centered values and that each of those is far more at risk - some mortally at risk - if we abandon Rule 5.4.
1. Just Say No or, Worse, Resign.
"In representing a client," Rule 2.1 mandates, "a lawyer shall exercise independent professional judgment and render candid advice." Some would argue that telling the client what the client may not want to hear is the very essence of the lawyer's duty. As the comment to Rule 2.1 provides:
"A client is entitled to straightforward advice expressing the lawyer's honest assessment. Legal advice often involves unpleasant facts and alternatives that a client may be disinclined to confront. In presenting advice, a lawyer endeavors to sustain the client's morale and may put advice in as acceptable a form as honest permits. However, a lawyer should not be deterred from giving candid advice by the prospect that the advice will be unpalatable to the client."
This concept has often been summed up in "the old counselors' dictum that about half the practice of a decent lawyer consists in telling would-be clients they are damned fools and should stop."24
Is this an easy mandate to accomplish? Practicing lawyers know that is not the case. To appreciate fully this point one must start not with the lawyer, but with the client. One of the biggest problems faced by lawyers is the clients' inclination not to tell all to their lawyers, because clients worry about the consequences of such candor. The lawyer might criticize the client; the lawyer might not show sufficient ardor for the client's cause; the lawyer might not be willing to help the client accomplish the client's goals. So the lawyer must nurture a feeling of trust, explain how much better fully informed advice from the lawyer will be for the client, and describe the importance of confidentiality and the attorney-client privilege, all to convince the client to "open up."
Having coaxed the client into sharing her greatest hopes and fears, the lawyer is not yet over the hump. The lawyer has to overcome the lawyer's reciprocal natural reluctance to share bad news with the client. The difficulty of this task is compounded when the lawyer recognizes (as any experienced lawyer must) that the client tends to "not to hear" that which the client does not want to hear. How many times have lawyers been confronted with the disappointed client who failed to hear (or remember) the lawyer's early warnings that the IRS might challenge the client's tax position, that a jury might reject the client's version of the facts, or that the SEC might not approve the client's public offering statement in a certain form? Thus, the obligation is not just telling the client something that will not be welcomed, but telling it convincingly and repeatedly so that it is clear that the client has in fact received and processed the message.
All of this has to be accomplished without provoking the shooting of the messenger. That, of course, is what makes fulfilling this responsibility so difficult. We do not want to deliver bad news, disappoint our clients, or lose their trust, let alone scold or remonstrate with them, and we fear the consequences of doing so. Will the client stop paying? Will the client switch lawyers? Will the client sue the lawyer for malpractice? All are possible consequences of fulfilling our duty of candor to our clients - and they come with the lawyers' territory.
Will the lawyer be less likely to fulfill this duty in the context of an MDP? The answer has to be, sad to tell, a ringing affirmative. If the client who is about to be disappointed or worse when the client learns bad news is also receiving a broad range of other services or products from the lawyer's MDP employer (and, of course, that will be the MDP's goal, indeed its reason for being) how much pressure will the lawyer be under to keep the client happy, pressure exerted by the lawyer's MDP colleagues who are providing the client with lucrative consulting services, investment advice, insurance, financial products and other goods and services. Suddenly the fulfilling of an ethical mandate becomes not just the risk of the loss of a client but the destruction of the MDP's business plan, the loss of commissions, the cutting off of the consulting fee spigot, financially jeopardizing the lawyer's non-lawyer colleagues who are not schooled in, subject to, or sensitive about the lawyer's obligation to independently provide candid advice to the client. Perhaps, Lynn Turner, the Chief Accountant of the SEC, in discussing this same problem in the context of professional independence of auditors, put it best. "When [audit partners] are a marketing channel, they can't piss off the client; otherwise they can't sell the other services."25
The pressure on the lawyer gets even more intense when the lawyer has to demonstrate the ultimate act of professional independence - firing the client. Our rules of professional conduct mandate lawyer withdrawal when the continued representation would result in a violation of the rules of professional conduct or law.26 This includes, of course, when a representation becomes a violation of our rules governing conflicts of interest, when the lawyer may find her services are aiding and abetting client fraud or perjury, or when the services of the lawyer may require disclosure of client confidential information.
Again, the lawyer in an MDP will be confronted with a decision that in this case will end a representation, but one that will also result in the inevitable jettisoning of a "profit center" for the MDP, if the legal client is also a consumer of the other services and products the MDP offers. Will the pressure on the lawyer not to take such drastic action from her non-lawyer colleagues at the MDP be greater than if the lawyer were only part of a law firm that offered legal services? Anyone who thinks that will not be the case still believes in the tooth fairy.
One foundation stone of professional independence is our duty of loyalty. When lawyers promise our clients professional independence one of the guarantees we are delivering is that our zealous representation of our client will not be compromised by our obligations to other clients, third parties or our own interests. We provide this guarantee, not just as a personal matter as to the lawyers actually working on the client's engagement, but as to all lawyers with whom we are affiliated. To implement this rule, we agree, before undertaking an engagement, to disclose to the client any possible conflicts, to seek informed consent to waive any waiveable conflict and to abide the client's decision if a waiver is sought.
This is far from a trivial or immaterial matter. The legal profession recognizes how important it is to provide our clients with confidence that their confrontation with the confusing, complicated and threatening world of law will be one where they can count on the unfettered advocacy of their counsel. We know all too well how clients can feel insecure and uncertain when facing a major transaction or a litigated matter. The last thing we want to add to that calculus is doubt about how committed the lawyer and law firm is to the client's matter.
Our role governing imputation is the highest embodiment of that commitment. Not only are the independent lawyers assigned to the matter free from any undisclosed outside influences, but so too are all of the other lawyers with whom the clients' lawyers practice. If punches are pulled, they are pulled because that is in the best interest of the client - not because divided loyalty is interfering with good judgment.
Does an MDP practice compromise lawyer loyalty? On this point we need not engage in prognostication in which both sides of the debate can claim the ability to predict alternative visions in the future. No, here we have already seen what would happen in the MDP setting because the Big 5 have provided us with a living laboratory for client "loyalty." And the first casualties in that endeavor are imputation of conflicts among all firm personnel, the concept of non-waiveable conflicts and an objective standard for measuring impairment, all of which have ended, if you'll pardon the mixed metaphor, on the Big 5 cutting room floor. When clients go to the Big 5 for services they never learn whether the Big 5 firm is even performing non-audit services for adverse parties, unless the conflict is one in which the accounting firm seeks to represent both sides of a matter (a conflict that lawyers, but not accountants, consider non-waiveable). No conflicts memos are ever circulated. Each decision on loyalty is made by the individuals assigned to the matter who ask themselves, applying a totally subjective standard: how do I feel about taking on this engagement? While the service providers next door or across the hall or in another office are receiving huge fees from adverse enterprises, the client only gets to hope that loyalty to the other entity will not interfere with the Big 5 firm's loyalty to it. No objective standards; no imputation. How independent can these service providers be?
I should note that the accounting firm rules governing loyalty were probably precisely the correct formulation for them at a time when they were still minding their knitting, not disparaging their birthright and just providing auditing services. For that role, conflict of interest rules should be irrelevant. Since the last thing the SEC or the investing public wants from auditors is advocacy and the services were provided outside of the context of competition among aggressive enterprises, it should have made no difference that Peat Marwick audited all of the oil companies.
The problem is that the Big 5 have sought to maintain the same rules governing loyalty as the firms' work has evolved into advising on mergers and acquisitions, consulting with enterprises competing for same broadcast channels or cell phone franchises, litigation consulting, testifying as expert witnesses and a myriad of other fields where the services are anything but objective, advocacy is the commodity that is being purchased and the clash of competing interests is real. One recent, almost incredible example will demonstrate how tone deaf the Big 5 can be.
Without informing either client of the other representation, two lawyers from HSD Ernst & Young, the French law firm, agreed to testify as expert witnesses on French law for each side in a proceeding in the U.S. Court of Federal Claims between IBM and the federal government. When the attempt to double the firm's pleasure, double its fun became known and the clients' protested, HSD Ernst & Young promptly dropped the work for the government, for which it had been working for three years, even though the IBM expert work had only began one month earlier. This odd choice of who to drop was reached on the basis that IBM was a longstanding client of Ernst & Young, the accounting firm, though apparently, up until that point, no one had ever bothered to inform IBM that HSD Ernst & Young was working against IBM's interests.27 On motion by the government, HSD Ernst & Young's selection of preferred client was overruled and, the French law firm was disqualified from working on behalf of IBM.28
The case speaks volumes about the inability and unwillingness of MDP's to establish and maintain conflict checking systems and the questionable loyalty MDP's can be expected to offer their clients. In addition, it raises the curious question why any professional firm would get itself in a position where it could never bat more than .500 unless being profitable becomes a higher value than being right.
3. You Can Pay Me/You Don't Control Me.
The representation sounds fascinating. The directors of the bio-tech company have been sued in a derivative claim that they should never have approved applying to the FDA for field trials of a controversial new method of cloning dogs. Their D&O carrier has retained your firm to defend the outside directors. Your first meeting with them suggests that your new clients, a university president, an investment banker and a entrepreneur are a fascinating and conscientious lot. Then you receive the letter from the carrier. "No expert witnesses shall be retained without our prior permission, which shall not be granted until a firm trial date is less than 60 days away. No dispositive motions shall be filed until they are cleared by our claims adjuster," who you know is paid a bonus for keeping defense costs down, and "all invoices for professional services must be sent to an outside auditor for its approval prior to payment."
The way the lawyer deals with these directions defines one aspect of professional independence. Can a lawyer accept instructions from someone other than the client because that person or entity is responsible for paying all or part of the lawyer's fee?
The rules of professional conduct provide the current ethical requirements in this regard. Rule 1.8(f) provides, "A lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client consents after consultation; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6". Rule 5.4(c) amplifies the point: "A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services."
These rules, we all recognize, are written against a reality backdrop that cannot be ignored. While these lawyers are enjoined from letting the third party interfere with the lawyer's professional judgment as to what is in the best interests of the client, typically in the insurance context, the insured client is a one-time client of the lawyer; meanwhile the insurance company is the source of a steady stream of new engagements. Moreover, the insurance company has the power to refuse to pay for the services the lawyer recommends, either forcing the lawyer to undertake the work pro bono or requiring the insured to go out of pocket to fund litigation for which she thought she was insured.
The lawyer must be courageous, despite these pressures, and refuse to accept any direction from the third party and only act on recommendations that are consistent with the independent professional judgment of the lawyer. And indeed, the defense lawyers have sought, through ethics committee opinions29 and the institution of proceedings in Montana,30 to establish the impropriety of such insurance company intermeddling. Whether these efforts are successful and whether, in the guerrilla war between defense counsel and insurance companies, both clients and professional independence will come through intact, there is no doubt that one measure of professional independence is the extent to which lawyers are able to resist this third-party interference.
Does this discussion give real content to professional independence? For sure. Is this kind of interference likely to occur in an MDP in which lawyers are hired by the likes of American Express, Jacovini's Funeral Home or Travelers to provide legal services to third-party customers of these enterprises? Of course. If legal services become a profit center for the employers this is not only likely, it is inevitable. The more the lawyers cut corners, the higher the profits and the higher their bonuses. In addition, because the services will be provided by an MDP which maintains an entire Turkish Bazaar of products and other services to be cross-sold to these "clients" as part of the MDP's business plan (one-stop shopping providing, by the way, convenience for the customer but, far more importantly, business extensions for the entrepreneurs), all of the incentives will be diverted away from the legal problem at hand and toward capitalizing on the capture of one more customer to be "sold" all the MDP has to offer. As poor Mrs. Hutzyclutz sits there explaining how she wants to set up a trust for her grandchildren, the lawyer will be recalling how in sales training he was instructed to cross-sell limited partnerships, insurance products, financial advice and burial plots, and how his ability to do so will be amply rewarded.
Nor is this far fetched. H&R Block, one of the most oft-mentioned candidates to form an MDP with lawyers, became a "trusted tax preparer" for millions of Americans. But that "carefully constructed" image did not stop the firm from promoting tax refund loans to its customers at "roughly what mafia loan sharks in New York charge their best customers" ("more than 500 percent on an annualized basis") instructing their return preparers to sell "two day refunds," not to call these advances loans, and covering up entirely the kickback H&R Block was receiving on this business from the statutorily mandated "independent" lender31 who was generously sharing with H&R Block the abundant cash flow generated by this program.32
Closer to home, I was recently consulted about a young lawyer who had just resigned from her first permanent position as a lawyer. The law firm she had joined marketed itself as experts in living trusts. An initial interview was held with the prospective clients and the data elicited thereby was plugged into a living trust form which was then presented to the client by an insurance salesman who worked with the firm, who used this opportunity to sell annuities to the clients, and who rebated a portion of his commissions to the law firm, a fact that went undisclosed to the "client."
The newly minted lawyer's assignment was to plug the information into the living trust forms. Her concern was that, in many cases, the information elicited from the client indicated that the living trust form was then not appropriate because of various factors like the client's marital status, age or financial position. When the young lawyer raised this issue with the owner of the firm, she was told in no uncertain terms that her job was not to question why but to proceed in the most efficient way possible since the goal of the enterprise was to sell annuities. The provisions of Rules 1.1 and 1.3, governing competence and diligence, and Rule 1.8(a), governing doing business with clients, were all systematically ignored to sell products to the customer of this stealth MDP. When MDPs are fully authorized, such horror stories will come out of the underworld and become common-place events.
4. Leave Your Clients At The Door.
The American Law Institute, a collection of carefully nominated and selected judges, professors and members of the practicing bar, has produced "Restatements" since 1932. These books of "black letter" law, explanatory comments and supporting Reporters' Notes are developed through a lengthy (some would say interminable) drafting process featuring meetings of advisers and consultative groups, numbering in the hundreds, and then finally brought before the full membership, most often in the historic ballroom of Washington, D.C.'s Mayflower Hotel where the texts are finally approved, after discussion and debate, before the hundreds who gather at the Spring meeting of the ALI.
Restatements are said to be attempts to "restate" the law, though lawyers all recognize "the law," particularly in some areas, presents not just one choice. Examples abound, but think of whether contributory negligence can bar any recovery for injuries caused by a negligent defendant, whether there should be strict liability as to a manufacturer for the non-negligent production of a product with a latent defect, whether a derivative complaint may be dismissed by the action of a board of directors that includes many of the named defendants, or whether lawyers are free to disclose confidential information to prevent or rectify a client fraud in which the lawyer's services were innocently employed. To put together a Restatement requires making choices, often controversial choices, choices about which the client community sometimes cares deeply. And once a choice is made for a Restatement it can, but only by dint of the prestige of the participants and the integrity of the decision making process, have a profound effect on the course of our law.
As a result, the ALI operates on a principle that its members are to leave their clients at the door. These members, in reaching their individual decisions on how to vote on these matters, are not to debate or vote in the ALI deliberations as client representatives, but rather as independent individuals bringing their years of experience and best judgment to the deliberative process.33
The principle has not always worked as hoped by its most ardent adherents. The ALI Corporate Governance project found the deliberations badly infected by lawyers paid by a corporate coalition who sought to hobble the continuing viability of derivative suits,34 and the ALI's Restatement of the Law of Product Liability was assaulted by lawyers whose clients lobbied members on attempts to limit manufacturer liability.35 Similarly, in the Restatement of the Law Governing Lawyers, the insurance industry sought to eliminate the professional independence requirement for lawyers hired by these enterprises to represent their insureds.36 Fortunately, these efforts were largely unsuccessful, even generating their own backlash, prompted in part by the heavy handedness of the interference.
But despite the fact that not all ALI members have been as true to the principle as one would hope, the fact is that this principle - leaving your clients at the door - represents another important example of lawyer independence. One of the obligations of all lawyers as members of the profession is to work to improve the law. If lawyers are not committed to the system's improvement, who will be? And the ALI example is but one manifestation of what goes on in similar organizations, like Sections of the ABA, and in state and local bar associations all the time. The development of rules of professional responsibility, evidence codes, procedural rules amendments, and standards for representation of the indigent are but a few of numerous examples of issues lawyers should and do tackle informed by this principle.
Would this change with the development of MDPs? It would certainly get far worse. As lawyers become beholden not to their clients but their employers, can we imagine a full-time lawyer for H&R Block leaving her employer at the door and urging expansion of consumer rights, or a full-time lawyer for American Express urging an expansion of the class action remedy, or a full-time lawyer for Nationwide taking an independent view of tort damages for pain and suffering? No. The only way these lawyers will leave their clients at the door is if they do so to represent their full-time employers. At MDPs, the search for truly independent lawyers will become a futile one.
5. The Myth Of Self-Regulation; The Reality of Court Regulation
Lawyers regularly invoke the mantra that one aspect of lawyer independence is the fact that we, as a profession, are self-regulated. It is true that we are self-regulating in the sense that most of our conduct is not reviewed by regulators and we rely on lawyers' natural inclination to conform their conduct to our professional rules on a voluntary basis to assure compliance. As many commentators have noted, however, that mantra of self-regulation recites what is largely a myth.37 Lawyers only really self-regulate to the extent that state Supreme Courts and other members of the judiciary choose to delegate that authority to the profession. The real power to regulate lawyers is inherent in the judicial function.38 But lawyers have generally gotten the first crack at recommending rules for professional conduct, first at the ABA level where the basic Model Code and then Model Rules that form the greater part of the rules actually adopted by every jurisdiction (except California) have received their first promulgation, and then in each state where bar committees have taken the ABA "Models" and amended them to be recommended to their respective state Supreme Courts. Lawyers, too, fulfill essential tasks in the disciplinary systems of the various jurisdictions, acting as hearing officers to adjudicate alleged violations of the rules of professional conduct.39 Thus, we have not self-regulation in the sense that lawyers have the power to set the rules and determine violations, but an image of self-regulation in that at the sufferance of the real authorities - the highest appellate court in each jurisdiction - the profession enjoys a significant but circumscribed role.
But while the foregoing may dash the idealized version of lawyers as members of a profession that determines its own fate, it does include a point that may be even more important to our professional role - it is the court's, not the state legislature's role to regulate the profession.40 Admittedly the extent of that power varies from state to state,41 and has been criticized as overstated,42 but the effect of court regulation on the independence of the profession is profound. Lawyers are being regulated by lawyers (now judges) who recognize the role lawyers play as officers of the court, essential to the vindication of their clients' rights and just as critical to helping their clients conform their conduct to what the law requires.43
Could the growth of MDPs cause a loss of this professional regulation for lawyers? Once again the answer is a certain affirmative. When lawyers become just another set of service providers in a department store of financial and other services, when MDPs offer multiple profit centers - the sale of annuities; investment-advisory services, insurance, burial plots, checking accounts and loans - and all those other services and products are regulated by executive branch agencies established by the legislature, what will be the argument why court-centered lawyer regulation should be preserved?
In this context my obligation of candor forces me to admit that the failure to accommodate the MDP movement carries its own risks that court-centered regulation will be abolished. Many have argued that if we do not bend to the will of the Big 5, these economic (and political) behemoths will run to the legislatures for relief, just as they demonstrated their awesome political power in securing an accountant-lawyer privilege over the vigorous objection of the ABA.44 This risk is real - despite the fact that in many states such statutes would likely be declared unconstitutional45 - but nonetheless I conclude it is better to lose on the principle of defending professional independence than to endure a professional death by a thousand cuts as we let professional independence be taken away from us through ill-advised compromise.
6. Unpopular Causes and Pro Bono Representation.
Back in the early 1950s when McCarthyism was so rampant in the land and "Communists" were being uncovered in every area of human endeavor, Henry W. Sawyer, the late partner of my firm, Drinker Biddle & Reath, undertook to represent teachers in Philadelphia who had been accused of being "fellow travelers" or worse and whose jobs were in jeopardy. Sawyer was young, fearless and articulate, and prepared to do battle on behalf of these beleaguered educators, a fact that gained wide publicity because of the paranoia of the times.
Out of the notorious nature of this representation came a protest directed to Henry Drinker, the Chairman of our firm, from a significant long-standing client. The client was outraged that his law firm was defending these "pinko commie sympathizers," and he wanted Drinker to do something about it. To call Drinker conservative would have been an understatement, and his anti-Communist sentiments were probably as strong as those of his troubled client. But Sawyer's defense of the teachers reflected a more important principle than where one's ideas fell on some political spectrum. So Drinker rejected the client's imprecations and, when the client protested further and threatened to take his business elsewhere, Drinker made it quite clear that threat would not change his mind.
Will that ferocious professional independence to rush to the defense of the unpopular be affected by MDPs? Again, we need not speculate about what a future they may bring. As Chair of the ABA Death Penalty Representation Project, I already know what that answer will be. A number of times lawyers in corporate America have told me they would love to help but their company's shareholders would be "up in arms" if it came to light that they were representing the despicable denizens of Death Row. This tells me all too well that an early casualty of the MDP movement will be the loss of this precious aspect of professional independence.
Dean Fischel, in his eloquent piece, tries to argue that this is okay because who is to say that a greater contribution to society would not be maximizing profits, paying more in taxes and supporting the Art Museum by serving on its board.46 My response is this: anyone can try to increase his or her income; anyone can attend fancy, high cost parties, charity balls, glitzy benefits, supporting the orchestra or the opera; only the Henry W. Sawyers and lesser lights who seek to emulate his commitment (even if we cannot come close to his eloquence) can represent those under sentence of the ultimate sanction, or the Ku Klux Klan as it seeks to march through Skokie, Illinois, or the young student who does not want to be forced to listen to the prayers of another religion while attending a high school graduation. Just as lawyers are not merely another set of service providers, so too are they not just another set of charitable donors. Only through their dedication of time, knowledge, experience and role as officers of the court can the poor, the downtrodden and the despicable receive the representation they require.
7. A Note On Lawyer Independence v. Accountant Independence.
No discussion of this topic can conclude without a short discussion of how badly the proponents of MDPs misunderstand completely any similarity between our professional independence and that of the accountants. Despite the accountants' most fervent wishes, we are not twins separated at birth, still united by our common ethical birthright. Their "independence" is independence from the client. As my discussion regarding my service as a director indicates, when we read that PricewaterhouseCoopers has opined on the financial statements of some company, we want to know that PricewaterhouseCoopers was free of influence from its client, able to bring healthy skepticism to its work to protect the public from relying upon financial statements that have not been prepared in accordance with generally accepted accounting principles after an audit conducted in accordance with generally accepted auditing standards. Like the SEC, we want no advocates here, but rather professional distance and objectivity.
For lawyers, professional independence is a completely different concept (as I hope this article demonstrates). Yes, it means, we give our clients our best advice, even if it is not what the client wants to hear and in that sense, and in that sense alone, we adopt the accountant's version of independence. But it also means that we are as free as possible from outside influences -- especially the government, other clients, third party payers and our own self-interest -- to permit us to exercise unbridled loyalty and zealous advocacy on behalf of our clients. Samuel DiPiazza, of PricewaterhouseCoopers, betrays his (and I suspect his accounting colleagues') misunderstanding when he asserts "To suggest that the threat to independent judgment is unacceptably higher when a non-lawyer has an economic interest in a law firm[,] than when a lawyer is under pressure from a long-standing client to take a particular position[,] or is encouraged by a senior partner in his own firm to accommodate a client's interests, strikes me as a doubtful proposition."47
It may be doubtful to him, but it is anything but that to us. Being "under pressure" from a long time client is exactly where the pressure should be. Being "encouraged" by a senior partner is exactly who should be doing the encouraging. We are quite properly beholden to our clients (so long as the suggested conduct is lawful and ethical) and we are supervised by other lawyers (whose guidance we follow unless the ethical or legal violation is clear). The former is our client to whom we are ethically committed and the latter is a lawyer, similarly conversant with our values, subject to our rules and liable to the same disciplinary sanctions as we. It is pressure from others that we must be ever vigilant to guard against and it is precisely those influences that will compromise our professional independence. The irony that Mr. DiPiazza's quoted statement proves this point, I trust, is not lost on those who worry about MDPs.
8. Lawyers Have Lapsed
Have lawyers acted as committed professionals to the principle of lawyer independence? The report card is decidedly mixed. Lawyers have served as directors of their clients. Lawyers have invested in their clients and some, if recent stories are correct, have gone much further and made that a condition for providing the services.48 Lawyers have started ancillary businesses and, though for awhile it seemed that the trendy opening of law firm subsidiaries was just a passing fancy, it now seems to have reaccelerated, perhaps in light of the fact that MDPs, like sneeze-inducing pollen in the spring, are in the air. Lawyers also have succumbed to the pressure from insurance companies. Large numbers have even gone to work as salaried employees providing legal services to insureds who, because these lawyers have stationery that to all the world represents that they work for a partnership using a fictitious firm name, remain blissfully ignorant of the relationship between their lawyers and the insurance company that employs them on salary.49 Undoubtedly, lawyers compromise their independence everyday in myriad other ways like failing to "just say no," cutting corners, overbilling, charging unreasonable fees and otherwise failing to observe our ethical precepts.
But that is no reason to abandon the principle of professional independence or conclude there is no principle there at all. To the contrary, the courageous, quiet conduct of a great super-majority of the bar, dedicated to these principles, is a testimonial to how much we can achieve as independent professionals. Their example should provide great encouragement that we can lasso in our lapsed brethren and sisters. When one considers a profession whose ranks approach one million, we can almost be giddy with how professional independence abounds, how much it contributes to the common weal and how rewarding it could be to use the savage attack on our professional values by the Big 5 and their supporters as a way of galvanizing the rest of us into a rededication to these values and concerted action to protect them.
III. Confidentiality and Privilege: Eternal Protections.
News Item: WALL STREET JOURNAL, OCTOBER 4, 2002
GENERAL ENTERPRISE ANNOUNCES BOLD INITIATIVE
(New York) Wendy Fineman, General Counsel of the General Enterprise Company, announced at a press conference yesterday in front of the New York Stock Exchange that henceforth all outside counsel for GE would be encouraged to share otherwise privileged or confidential information with the financial community. Each month GE plans to publish a list of the company's outside counsel and a description of the matters they are handling, to facilitate the desired disclosures. Ms. Fineman's in-house counsel staff will also be available for the purpose of divulging similar information to the press, shareholders or the public.
When asked whether GE did not consider it dangerous to share such sensitive information outside the company, Ms. Fineman explained that she had recently read an article by Dean Daniel Fischel, of the University of Chicago Law School, that argued companies "with nothing to hide" were received better by the marketplace. "If privilege is invoked [by a company] and this is disclosed [to the public], investors will rationally conclude that negative information is being withheld because the firm has something to hide, why else withhold the information?" Since Fischel believes, like Jeremy Bentham, that the attorney-client privilege "protects the guilty," GE wanted to escape any negative implications the company's invoking the privilege or having its lawyers maintain confidentiality might convey.
GE hopes that in taking this leadership role in jettisoning antiquated notions of confidentiality, other public companies will similarly make full disclosure to the investing public, a move that will give these companies, in the view of Dean Fischel "a comparative advantage in attracting capital."
The role of confidentiality in the practice of law is vastly overstated, Ms. Fineman observed, again relying on Dean Fischel. "The concern about information sharing is probably exaggerated. Information about business plans and strategies, for example, often depreciates rapidly and is frequently available from other sources," observes Fischel. It is in that spirit that General Enterprise has made this leadership decision.
The quotes of Dean Fischel, if not the news conference, are accurate, believe it or not. The critics of MDPs asserted that, because the auditors' attest function is inconsistent with the lawyers' obligation of confidentiality, accountant-controlled MDPs threaten our clients. Dean Fischel responds not only that the advantages of the privilege are vastly overstated, but he goes further to assert that in fact, at least in the case of public company clients, the elimination of these protections would prove beneficial. Don't bemoan the auditing firm's threat to your secrets, Dean Fischel argues, you will be better off when the investment community knows you aren't hiding behind such outmoded protections.
I know Mr. Fischel put this argument in his paper just to test the limits of his approach, but it demonstrates to me how much he has lost his way. The fact that we have emphasized the importance of both the privilege and confidentiality to the health of the lawyer-client relationship for more than a century diminishes not one wit how critical it remains. Some truths are not only self-evident but endure across time. We may be living in a world of e-commerce, e-mail and even e-law, but to argue that as a result our fundamental values should change is as flawed as the suggestion that my rabbi should change the content of his sermons now that they are being posted on our synagogue website.
Every day major public companies consult their lawyers regarding a broad range of matters, some involving litigation, others transactions, still others tax, human resources or other areas of corporate concern. The only way these representations can be effective is if the clients are free, and indeed encouraged, to share their innermost concerns with the lawyer, free from the threat that the lawyer or the client can be compelled to disclose the content of those discussions. Similarly the lawyer has to be free to explore alternatives, offer tentative advice and candidly discuss the matter with the client. There is nothing wrong with that process nor should anyone be defensive about invoking the privilege to maintain the sanctity of the lawyer-client relationship. There is plenty of capital to be raised by companies who are wise enough to purchase Class A legal services delivered with confidentiality and the attorney-client and attorney work product privileges intact.
Nor should anyone doubt that confidentiality would be compromised in multidisciplinary practice settings. The Big 5 provide a particular problem in that regard because of the total inconsistency between the auditor's attest function duty of disclosure and the lawyer's obligation to maintain client secrecy.50 But other professionals, like social workers and investment bankers, have no duty of confidentiality and also, by other law, may have legal requirements of disclosure, for example to report child abuse, from which lawyers are exempt.
A recent example demonstrates the low regard other professionals might place on maintaining confidences (and loyalty). KPMG was the personal accounting firm for Garth Drabinsky, the founder and CEO of Livent, the live theatre production company. When Drabinsky sold the company to Michael Ovitz, KPMG conducted the due diligence for Ovitz. KPMG having given Livent a clean bill of health, Ovitz proceeded with the purchase and appointed a KPMG partner to the Board. When that partner heard of alleged financial irregularities at Livent, he retained a Toronto law firm which in turn hired KPMG to look into the allegations. When Drabinsky complained that KPMG was not only investigating Livent, but also Drabinsky, its own client, KPMG ignored his plea and litigation ensued. On an interim ruling the Canadian court concluded that KPMG had duties not to disclose, as well as of loyalty and not to act against the interests of its on-going client. Then on the eve of trial, KPMG was forced to accept a consent order that declared KPMG had "breached its fiduciary duty to the Plaintiff [Drabinsky] in allowing" the investigation and restrained KPMG from disclosing any confidential information of Drabinsky.51
IV. The Death of Loyalty.
Not content to disparage the role of confidentiality and the critical importance of the attorney-client privilege, Dean Fischel cynically proceeds to dispatch loyalty to a similar dust heap of antiquated notions. "Imputed disqualification,"52 Mr. Fischel writes, "is obsolete and should be discarded," because the rule is "much costlier" in a world of very large firms (he means they have to turn down a lot of new business) and a "major barrier to mobility" for lawyers. The Dean therefore concludes "the rule should be discarded altogether," so that "MDPs could then grow to their efficient size."53
Wow! The questions, raised by this salvo, gentle reader, are multiple. First, is Dean Fischel correct that imputation is designed simply to protect confidential information? Is he correct in arguing that the rule's effect is "draconian" when it is applied to a situation in which a "junior partner" in a firm's L.A. office is hired to do a "small matter" for a "minor subsidiary of a major corporation,"54 thereby precluding a different client from hiring presumably a senior partner in the firm's Washington office on a major matter against the parent of the junior partner's client? Putting aside for a second, as undoubtedly a momentary lapse on his part, any suggestion that the loyalty we owe clients turns on how important in the firm their lawyer is (where, Dean Fischel, is it written that the clients of junior partners really deserve less fealty?), how large the client is (beware small clients who venture within these hallowed walls, because the loyalty you shall receive is marginal), how large the matter is (bring us your mega merger and we'll be real loyal) or whether you go to the firm's headquarters or an outlying branch, Mr. Fischel really misses the point of the rules.
While it is true imputation is designed to protect confidential information, equally important is the fact that imputation reflects the higher standard of loyalty we promise our clients. The legal profession tells our clients that we not only will protect the information they share with us by assuring that no one in the firm will have an opportunity to use it, but we also assure them that, without their informed consent, we will not take positions adverse to them even if the matter is totally unrelated. Then, if a conflict situation arises, and we wish to take on the new engagement, we promise we will call the client, seek a waiver, and abide by the client's decision whether the waiver will be granted. It is this loyalty component that the Dean ignores entirely, even to the point of never mentioning the word anywhere in his essay.
Perhaps Dean Fischel's suggestion that richer, bigger clients with more significant matters and clients of more important partners would receive a better level of loyalty stems from his unstated recognition of the real world effects of abandoning imputation. If lawyers are free to take positions directly adverse to their current clients on unrelated matters, then the only questions the law firm will ask itself (since it never, under this regime, has to tell or ask the client anything) is "How upset will the client be when it learns what we have done?" "Will we be fired?" And most important, "Do we care?" In other words, the law firm will be asking itself the totally unseemly questions that determine whether it is prepared to incur the wrath of a current client to take on a new one, questions whose answers will not turn on values like loyalty and confidentiality, but rather on the size of the respective engagements, the power within the firm of the lawyers with the competing engagements, and the future prospects for cross-selling firm services to the competing clients.
Another construct the Dean relies upon to justify abandoning imputation is his willingness to have law firms erect fire walls or screens. Mr. Fischel suggests that clients really should not be upset when we tell them, on a take it or leave it basis, that, we are taking on matters directly adverse to them because, like the accounting firms, we will erect screens to protect their confidential information. The problem with this assurance is how will the client ever know? All the padlocks and legended files in the world will not prevent A from talking to B - perhaps inadvertently, perhaps intentionally - sharing information the client is entitled to have protected, and whose sharing will never be disclosed.
The accountants use the term firewalls for their attempts to protect client information as if to lend gravity and solidity to their efforts in this regard. But their metaphor is not nearly as in touch with reality as the use of the term screens, which of course refers to those contrivances we install in windows and doors in the spring that keep out the bugs, but otherwise permit the entry of light, air and sound! Suffice it to say that telling a client not to be concerned under these circumstances, ("don't worry, the law firm to which your opposing lawyer just moved is screening your former counsel") is anything but reassuring.
Of course in a world where the hidden hand of Adam Smith prevails, perhaps quaint values like client fealty have no place. There it is acceptable to place a client in a position where it either fires its disloyal lawyer or proceeds with the representation, gnashing its teeth and wondering how vigorous its representation will now be. But in my view what would be "Draconian" would be the change in our profession if we permitted lawyers, without client waiver, to take on matters adverse to their own clients. Just as bad would be a rule that only let big firms take on such representations simply because the adverse matter was being handled by a different office (or lawyers on a different floor). Any surface appeal that limiting imputation within a geographical practice setting may suggest is completely undermined by the way these mega-firms hold themselves out to the prospective client world. As one great national firm puts it
Communicate with any lawyer in any Morgan Lewis office and you will have access to the firm's worldwide depth and diversity of experience. The firm's more than 1,000 lawyers are organized into sections and practice groups that cut across our 12 offices and connect lawyers with related fields of practice.
For decades, the firm has prized its culture of teamwork. Lawyers at every level place top priority on responding to calls for support from colleagues anywhere in the firm. Every client receives that level of institutional support.
Such teamwork and service have been greatly enhanced by leading-edge communications technology. Through telephone and computer linkages, lawyers function with fully integrated efficiency. Draft documents are exchanged instantly among practice groups and offices, allowing interactions among lawyers whose skills create the best client team.55
Moreover, these firms' partners gleefully share the fees generated by these far-flung offices.
Another question raised by Dean Fischel's dispatching of imputation to the ancient archives of our profession is whether we think there is some advantage to have law firms - either stand alone or as part of MDPs - in the Dean's phrase, "grow to their efficient size." We have learned the painful lesson of the "benefits" of a no imputation rule from the growth of accounting firms. Their race to roll-up local accounting firms has left the world (literally) with a mere five choices. Competition is virtually eliminated and working together they are able to order their affairs so that, absent the intervention of the SEC, clients are given all the "protection" they are ever going to receive on a take it or leave basis.
Nor is there anything efficient about the size of the largest accounting firms. Rather they are simply an example of the oligopoly that will always result if antitrust laws are not enforced; they stand as living proof that markets left unchecked yield results that are anything but models of free enterprise competition. A world with five law firms would be bad enough; a world in which these law firms were part of MDPs is too depressing to contemplate.
V. No Rules for the Rich and High Falutin'.
1. The Rich Don't Need Protection.
One of the problems with Dean Fischel's approach is his working assumption that clients of MDPs will be rich and sophisticated (like the enterprises who hire him (and me)) and that therefore the protections some of us value are paternalistic and unnecessary. As he writes, "the need for consumer protection in this market is non-existent."56 Let the free enterprise system flourish, knock down all "barriers to entry" and only the best and the brightest will succeed because the clients are so discerning and well informed. In the Dean's view, we are to assume the University of Chicago would still produce brilliant lawyers, Illinois would still administer a bar examination and review character and fitness, mandatory CLE would be required for those duly admitted, but anyone, even those who learned law from an extension school that recruits students on matchbook covers, or who didn't learn law at all, could hold themselves out as providing legal services with the great unseen hand of Adam Smith sorting the market out.
There are multiple problems with this construct and, thus, its potential adoption presents important public policy issues for the profession and society to confront. First, we must wonder how far Dean Fischel is prepared to go? Today we license lots of occupations because we make judgments that without specific qualifications (education, examinations, licensure, continuing education) we don't want just anyone performing open heart surgery, doing root canal, opining on financial statements, designing jet airplanes, or installing garbage disposals. Does the practice of law present any challenges in its execution and potential harm in its misdelivery that suggest we ought to have what he calls "barriers to entry" and I characterize as minimum qualifications to undertake these difficult assignments? I would hope, despite the Dean's rhetoric, that the leader of what is one of this country's greatest law schools, one that offers a $100,000 education to the best and brightest, would lend some support to the radical notion that asking those who practice law to receive a specialized education would be viewed not as just a way to differentiate in a crowded marketplace those who are better qualified, but as a necessary prerequisite to participating in the marketplace at all.
2. Can The Profession Afford Two Different Sets Of Rules?
a. Consenting Adults.
The truth is, Mr. Fischel's hyperbole notwithstanding, that consumer protection will be required for many clients of MDPs. This means that the Dean, though he does not say so, would have us develop different rules for different clients, depending on their sophistication. This idea is deeply troubling on many levels, not least that to go down this road represents a break from a long tradition. Our profession has had one set of rules since codes of ethics first were established. But this concept has more than history on its side; it springs from several principles.
First, our rules trump what can take place between consenting adults, i.e. some protections simply cannot be waived, even by the most well informed client, or even when the client is a lawyer or separately represented by a lawyer. A few examples can demonstrate this point. A client cannot waive a non-waiveable conflict.57 We as a profession have concluded that some conflicts are so disabling and so likely to affect the integrity of the system of justice itself that we will prohibit the lawyer from even broaching the subject. Nor can a client be asked to sign an open-ended prospective waiver.58 Who knows where the representation will evolve over time, who knows what confidential information will be shared and who can anticipate what the future adverse representation will be? Lawyers also may neither seek nor accede to a scope limitation of their services that is unreasonably narrow in time or subject matter.59
So too a lawyer may not seek waiver from the client for the lawyers' unlimited liability for malpractice.60 As a public policy, lawyers stand behind their work as a safeguard for the public. Similarly the client cannot be asked to waive the protections of Rule 4.2.61 Even the worldly wise represented client who initiates the communication with the other side's lawyer will be saved from the consequences of her conduct unless and until her lawyer grants permission for the unguarded contact.
The lawyer who charges an unreasonable fee will also find the defense that the client was sophisticated unavailing if the fee in fact was unreasonable.62 This is because all lawyers may only charge all clients reasonable fees, even those who should be smart enough to know better. Preserving these values, we have decided, is far more important than providing lawyers and sophisticated clients the opportunity to create exceptions, and I would argue they ought to be preserved. What makes us a profession is the fact there are some standards that we do not compromise, no matter how successful we are in persuading the well-heeled client to do so.
b. How Informed Are The Rich?
The second reason we don't adopt a consenting adults approach is because, for good reason, even if the client is sophisticated, we do not trust how informed and voluntary that consent may turn out to be. I, for example, have personally been privy to the tales of too many in-house counsel who were asked for waivers they did not want to provide and who felt helpless not to accede to the wishes of an outside lawyer in a position of power. One example will suffice and how you, learned reader, respond to this tale will tell everything about your willingness to travel down Dean Fischel's "survival of the fittest super highway" or Larry Fox's "paternalistic pathway."
In this case, my client, despite my disappointment, wished to hire a prominent New York law firm to address some threats to current management's corporate control. That law firm was happy, even flattered, to get the assignment, but not so delighted that the firm did not present in-house general counsel with one of those classic blanket prospective waivers of future conflicts of interest that I view as hopelessly unenforceable but, if I were wrong, that would permit this law firm, in the future, to take positions adverse to its new client on almost any matter, including litigation, up to and including a different battle for corporate control.
Ethics allegedly being my field, the client asked me what I thought of this from a professional responsibility point of view. I told the client to reject the waiver out of hand. "But the firm may not agree to represent us" the conversation proceeded. "Fine," I responded, thinking how good ethics and my self interest would come together and the client would hire my firm directly. "But we want this firm to represent us" came the reply. "We'll see what happens" I advised, hiding my disappointment that the New York firm's disloyalty did not immediately result in the hiring of my "loyal" firm for this engagement. A day later I was informed the prospective waiver was there on a take it or leave it basis, and our client, to my regret, took it.
Now the questions were twofold. Should the law firm have been free to demand what in my view (a view formed long before these events unfolded) and the view of the ABA Standing Committee on Ethics and Professional Responsibility63 was an unethical request? And if so, was the client's reluctant acceptance of the waiver, through its general counsel, knowing and voluntary? I have no doubt that, as simple as this question is, it defines the two different worlds inhabited by Dan Fischel and me. In my view, lawyers should not ask; if they do ask, no client in its right mind would or should agree; and if they do agree, the agreement should be unenforceable.
Of course, we could be like the unhinged entrepreneurial juggernauts of the marketplace - hawking goods and services - at whatever the market will bear with no core values. Or we, as lawyers, could offer something different, protections of client loyalty that last beyond the individuals involved and the engagement undertaken. It is a fundamental question. Two answers of course are possible. But only one reflects the best our profession has to offer.
c. How Do We Decide Who Is Rich?
Third, line drawing between sophisticated and unsophisticated is a very dangerous enterprise. Does every client with in-house counsel automatically qualify as sophisticated? The presence of in-house counsel says nothing of the relative bargaining power or knowledge of the two sides. Moreover, doesn't a double set of rules simply invite unseemly and destructive post hoc litigation between former client and lawyer over this issue? Is that really where we want our ethics rules to land? Do we really want the dialogue to center on whether the client was sufficiently sophisticated that it was free to waive what would otherwise be a non-waiveable conflict, to accept what would otherwise be an unreasonable fee, to allow a communication from the other side's lawyer that would otherwise be impermissible? I think not, I hope not and I implore Dean Fischel not to lead us down that road.
3. All Service Providers Are High Falutin!
In Dan's world all of the service providers are high falutin! We have Ernst & Young, Salomon Smith Barney, and American Express hiring lawyers to provide legal services to the customers of the MDP. But we cannot write rules that just apply to tassel-toed service providers either. If KPMG gets to have an MDP, so does Tony's Ambulance Service and Montesanto's Funeral Parlor. While I know, from our unfortunate experience with lawyers going to work for the Big 5 that even the most pretentious of MDPs has the capacity to destroy our professional values, there is no reason to expect that those with less lofty airs will not act at least as badly, and perhaps even worse.
Dan Fischel and I, I hope, have joined issue. We really do describe two very different worlds. Dan Fischel's is swashbuckling, populated by behemoth multi-national enterprises and service providers of equal scale and scope. The market will reward the good and punish the bad, and officious intermeddling by regulators has no place. Mine insists on black letter rules and effective enforcement, would reject that which the marketplace offers us as, perhaps, in the best interests of the service providers, but certainly not in the best interest of the clients. It also celebrates the lawyers as something special, not because we are brighter or have an unwarranted sense of entitlement, but because we have special responsibilities and special roles to play in our society.
It is my wish, kind reader, that after you have read this far you will endorse the latter approach. But if you do so, your hard work is not at an end. Because this is not just a question of choosing one value system or another. The forces of the economic model are real. They have many adherents and those adherents are determined to tear down all that we have built. Some, like Dan Fischel, are in the academy. Others include our lapsed brethren and sisters at the Big 5 accounting firms. Still others are those who would profit from a breakdown in our system of justice, a withering away of the organized bar, a disappearance of our commitment to pro bono, an end to professional independence.
So a vote for our core values is not enough. We need to raise money, launch a campaign, enforce our rules, explain our position, take nothing for granted and commit ourselves to the preservation of that which we treasure. Otherwise just as the Grinch tried to steal Christmas, Dean Fischel and his colleagues will steal our profession. And we will have no one to blame but ourselves.
1 Partner, Drinker Biddle & Reath; Member, ABA Commission on Evaluation of the Rules of Professional Conduct (Ethics 2000); Chair, ABA Death Penalty Representation Project; Former Chair, ABA Section of Litigation; Former Chair, ABA Standing Committee on Ethics and Professional Responsibility. Professors Susan Martyn of the University of Toledo School of Law and Jonathan Macey of Cornell Law School, without endorsing any of the views of the author, were kind enough to review this paper, and provide astute editorial comments for which I am grateful.
2 Though one does oppose Dean Fischel with some trepidation. See "Milberg Weiss' $50 Million Dollar Mistake" National Law Journal, April 26, 1999, at A1 (describing how the law firm, rather than risk an outsized punitive damage award, settled with Dean Fischel for $5,000,000 more than the initial verdict in Fischel's lawsuit against Milberg Weiss alleging abuse of process.)
3 Rule 5.4, Professional Independence of a Lawyer, (a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that: (1) and agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons; (2) a lawyer who purchases the practice of a deceased, disabled or disappeared layer may, pursuant to the provision of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price; and (3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement. (b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law....
4 Wall Street Journal, February 28, 2000, at A3.
5 CFO, May 1, 2000, at 43.
6 Wall Street Journal, February 28, 2000, at A3.
7 See Elizabeth MacDonald & Michael Schroeder, Report by SEC Says Pricewaterhouse Violated Rules on Conflicts of Interest, WALL ST. J., Jan. 7, 2000, at A3 (quoting letter from PricewaterhouseCooper's chairman, Nicholas Moore, and Chief Executive Officer, James Schiro).
8 Id. (quoting Kenton Sicchitano, PricewaterhouseCooper's global managing partner of regulatory and independence issues).
9 Id. (quoting Kenton Sicchitano, PricewaterhouseCooper's global managing partner of regulatory and independence issues).
10 Regarding firewalls see discussion at , infra.
11 See Elizabeth MacDonald & Michael Schroeder, Report by SEC Says Pricewaterhouse Violated Rules on Conflicts of Interest, WALL ST. J., Jan. 7, 2000, at A3.
12 CFO, May 1, 2000 at 54.
13 Not long after these remarks, the rest of the Big 5 reversed an earlier decision not to fund a probe by the Public Oversight Board into their own stock ownership issues. Financial Times, May 20, 2000, at 8.
14 Wall Street Journal, February 16, 2000, at C11.
15 New York Times, March 1, 2000, Section C, at 1.
16 An advertisement in the June 2, 2000 New York Times suggests that the firms will not be totally independent from each other, for example, using the same name.
17 New York Times, August 8, 2000, at A1.
18 "KPMG Consulting in Filing Gives Details of Stock Offering," New York Times, August 8, 2000, at C22.
19 "Big 5 Launches SEC Fightback", Accounting Age, March 16, 2000, at 1.
20 Indeed the SEC recently announced new proposed rules "tightening standards on what additional services accounting firms could sell to those whose books they audit." New York Times, June 28, 2000, at C1.
21 For further thoughts on what may lie ahead for the Big 5, see "After Andersen War, Accountants Think Hard About Consulting," New York Times, August 9, 2000, at C1.
22 Some have predicted we may even see the Big Three in a few years. See "Dealing With Rifts at Accounting Firms," M&A Journal, May 1, 2000, at .
23 Hearings Before the Commission on Multidisciplinary Practice (Feb. 4, 1999) (written remarks of Lawrence J. Fox, Drinker Biddle & Reath LLP), available at http://www.abanet.org/cpr/fox1.html; Hearings Before the Commission on Multidisciplinary Practice (Feb. 4, 1999) (oral testimony of Lawrence J. Fox, Drinker Biddle & Reath LLP), available at http://www.abanet.org/cpr/fox3.html.
24 Mary Ann Glendon, A National Under Lawyers, at 75 (1994). The quotation is usually attributed to Elihu Root.
25 CFO, May 1, 2000, at .
26 Rule 1.16(a)(1) provides: (a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if: (1) the representation will result in violation of the rules of professional conduct or other law."
27 Tax Notes Today, July 28, 2000, at 146-4.
28 International Business Machines v. United States, 95-828, T. (July 18, 2000), available at 2000 TNT 146-17.
29 See, e.g., Alabama State Bar Disciplinary Comm'n, Op. RO-98-02 (October 27, 1998); Indiana State Bar Ass'n Legal Ethics Comm. Op. 3 of 1998 (both rejecting litigation guidelines).
30 In Re Rules of Professional Conduct and Insurer Imposed Billing Rules, 57 Mont. 433, 2000 MT 110 (2000).
31 Federal law prohibits tax preparers from making loans to clients, "a rule intended to prevent collusion between taxpayers and tax preparers." "New Questions About Block's Lucrative Tax Loans," New York Times July 2, 2000, Section 3, at 1.
32 See id.
33 One ethics committee has written an opinion addressing this topic. The Committee on Prof'l and Judicial Ethics, Association of the Bar of the City of N.Y., Formal Opinion 97-3: Lawyer's Right to Engage in Activity or Express a Personal Viewpoint Which Is Not in Accordance with a Client's Interest, 52 REC. 874 (1997).
34 See Roswell B. Perkins, Call to Order by the President, 68 A.L.I. PROC. 10 (1991); Kenneth Jost, Business Lawyers Win Showdown Vote in ALI, LEGAL TIMES, May 18, 1992.
35 James A. Henderson, Jr. and Aaron D. Twerski, the Politics of the Product Liability Restatement, 26 Hofstra L. Rev. 667 (1998).
36 Compare William T. Barker, Lobbying and the American Law Institute: The Example of Insurance Defense, 26 Hofstra L. Rev. 573 (1998), with Lawrence J. Fox, Leave Your Clients at the Door, 26 Hofstra L. Rev. 595 (1998).
37 See, e.g., David Wilkins, Who Should Regulate Lawyers, 105 Harv. L. Rev. 801 (1992); Charles Wolfram, Lawyer Turf and Lawyer Regulation, 12 U. Ark, Little Rock L.J. 1 (1989).
38 Restatement of the Law, The Law Governing Lawyers [Restatement] §1, comment C (Proposed Final Draft No. 2 (April 6, 1998)).
39 "The legal profession's relative autonomy carries with it special responsibilities of self-government. The profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar. Every lawyer is responsible for observance of the rules of Professional Conduct. A lawyer should also aid in securing their observance by other lawyers. Neglect of these responsibilities compromises the independence of the profession and the public interest which it serves." Preamble, ABA Model Rules of Professional Conduct.
40 Restatement §1, Reporter's Note, c.
41 Compare Mississippi Bar v. McGuire, 647 So.2d 706 (Miss. 1994) (striking down statute that excluded disbarment based on IRS violations as in conflict with lawyer code with no similar exception) and with Heslin v. Connecticut Law Clinic, 461 A.2d 938 (Conn. 1983). (Connecticut Unfair Trade Practices Act can be applied to the conduct of lawyers).
42 Restatement § 1, Reporter's Note, c.
43 The Preamble to the ABA Modes Rules captures the point in another way. "The legal profession is largely self-governing. Although other professions also have been granted powers of self-government, the legal profession is unique in this respect because of the close relationship between the profession and the processes of government and law enforcement. This connection is manifested in the fact that ultimate authority over the legal profession is vested largely in the courts. To the extent that lawyers meet the obligations of their professional calling, the occasion for government regulation is obviated. Self-regulation also helps maintain the legal profession's independence from government domination. An independent legal profession is an important force in preserving government under law, for abuse of legal authority is more readily challenged by a profession whose members are not dependent on government for the right to practice."
44 See IRS Restructuring and Reform Act, Pub. L. No. 105-206 (1998). The ABA opposed the legislation, an amendment to the Interval Revenue Code, because, inter alia, any such change should go through the evidence rules committee, concerns about the application and scope of the new privilege, and the inconsistency between the accountants' auditing function and the concept of confidentiality. See letter from Jerome J. Shestack, President of the ABA, and House and Senate Committee Members, dated March 23, 1998 (on file with author).
45 See, e.g., Commonwealth v. Stern, 549 Pa. 505; 701 A.2d 568 (1997) (striking penal statute that criminalized the conduct of lawyers as infringing Supreme Court's exclusive jurisdiction to regulate the professional and ethical conduct of lawyers).
46 Dan Fischel, Multidisciplinary Practice, 55 Bus. Law. at 957.
47 See Hearings Before the Commission on Multidisciplinary Practice (Mar. 11, 1999) (written remarks of Sam DiPiazza, Jr., Managing Partner, Tax Services-Americas PricewaterhouseCoopers LLP), available at http://www.abanet.org/cpr/dipiazza.html.
48 The Venture Law Group "insists on having an opportunity to buy in at the idea stage." Wall Street Journal, March 22, 2000, at B1. Though investing in clients by lawyers does raise two concerns, objectivity and potential liability, such investments can be accomplished consistent with lawyers' ethical obligations, (see ABA Formal Opinion 00-418, July 7, 2000) a fact that is not true of those accountants who seek to invest in firms for which they act as auditors where pristine objectivity is the sine qua non of the engagement.
49 See, e. g., American Insurance Ass'n v. Kentucky Bar Ass'n, 917 S.W. 2d 568 (Ky. 1996); Gardner v. North Carolina State Bar, 316 N.C. 285, 341 S.E. 2d 517 (1986).
50 Congress has also mandated auditor disclosure totally inconsistent with the attorney-client privilege and the lawyer codes' injunctions against lawyer breaches of confidentiality.
51 "Joint News Release," Canada NewsWire, Ltd., July 14, 2000; see New York Times, July 15, 2000, at C4; The Toronto Star, July 15, 2000, Edition 1; The National Post, June 24, 2000, at D02.
52 Imputed disqualification, i.e. the notion that each lawyer in a practice setting is subject to the conflicts of every other lawyer, has already been discussed. See , supra.
53 Dan Fischel, Multidisciplinary Practice, 55 Bus. Law. at 966. Anticipating Dean Fischel's argument, The Business Law Section's Ad Hoc Committee on Ethics 2000, has presented the ABA commission evaluating the Model Rules an extraordinary proposal that would abolish imputation, permit law firms to take positions directly adverse to current clients so long as different teams undertook the work, and limit "loyalty" to the lawyers actually working on the client's matters, a concept the Committee characterizes as consistent with "undivided" loyalty. See letter from Ad Hoc Committee to Ethics 2000 Commission dated October 5, 1999 re proposed Rule 1.10 (on file with the Commission). It is a good thing the Committee did not ask any clients whether they shared this cramped view on loyalty.
54 Dan Fischel, Multidisciplinary Practice, 55 Bus. Law. At 965.
55 Morgan, Lewis & Bockius website.
56 Dan Fischel, Multidisciplinary Practice, 55 Bus. Law. at 961.
57 Comment  to Rule 1.7 provides: "When a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances, the lawyer involved cannot properly ask for such agreement or provide representation on the basis of the client's consent."
58 ABA Formal Opinion 93-372, observed: "Given the importance that the Model Rules place on the ability of the client to appreciate the significance of the waiver that is being sought, it would be unlikely that a prospective waiver which did not identify either the potential opposing party or at least a class of potentially conflicting clients would survive scrutiny. Even that information might not be enough if the nature of the likely matter and its potential effect on the client were not also appreciated by the client at the time the prospective waiver was sought." Id. at 6.
59 Comment  to Rule 1.2 provides: "An agreement concerning the scope of representation must accord with the Rules of Professional Conduct and other law. Thus, the client may not be asked to agree to representation so limited in scope as to violate Rule 1.1 [the rule governing competence], or to surrender the right to terminate the lawyer's services or the right to settle litigation that the lawyer might wish to continue."
60 Rule 1.8(h) provides: "A lawyer shall not make an agreement prospectively limiting the lawyer's liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement ...."
61 The rule itself provides that a lawyer may not communicate with a person known to be represented in the matter "unless the lawyer has the consent of the other lawyer." Model R. Prof. Conduct 4.2.
62 The rule's admonition is unequivocal. "A lawyer's fee shall be reasonable." Model R. Prof. Conduct 1.5(a). "Although a lawyer and client may have executed a written fee agreement, courts are always free to make their own inquiries about the reasonableness of legal fees as part of their inherent authority to regulate the practice of law. See Pfeifer v. Sentry Ins., 745 F. Supp. 1434 (E.D. Wis. 1990) (court has inherent power to review reasonableness of fees and to refuse to enforce any contract calling for excessive or unreasonable fees) ...." Annotated Model Rules of Professional Conduct, at 48 (ABA 1999).
63 See, ABA Formal Opinion 93-372.