By Roy Simon [Originally published in NYPRR September 2001]
In July 23, 2001, the Appellate Divisions approved new “multidisciplinary practice” or “MDP” rules for New York lawyers. The new rules will take effect on Nov. 1, 2001. This article provides an overview of the new rules.
What Did the Appellate Divisions Do?
The Appellate Divisions adopted two new Disciplinary Rules, DR 1-106 and DR 1-107, and amended three existing Disciplinary Rules, DRs 2-101, 2-102, and 2-103. They also adopted a new 22 NYCRR Part 1205 that expands on DR 1-107.
The new and amended rules will be explained by an amended EC 2-10 and 10 brand new Ethical Considerations, ECs 1-9 through 1-18. As always, the ECs will be adopted only by the New York State Bar Association, not by the courts — but the courts give considerable weight to ECs when interpreting Disciplinary Rules. (The State Bar adopted the new ECs last Nov. 2000. subject to the judicial approval of the Bar’s proposals for new and amended Disciplinary Rules. Because the courts slightly modified the State Bar’s MDP proposals, the Bar will modify the proposed new ECs, probably by early September.)
Five forms of permissible multidisciplinary practice
The new and amended rules permit five forms of formal relationships between lawyers and non-lawyers:
1. A law firm may directly provide non-legal services that are bound up with (“not distinct from”) the legal services it is providing to its clients;
2. A law firm may directly provide non-legal services that are distinct from the legal services it is providing to its clients;
3. A law firm may provide non-legal services through a separate entity that it owns or controls;
4. A law firm may enter into contractual relationships with non-legal professionals for the purpose of offering both legal and non-legal professional services on a systematic and continuing basis — but such contracts are permissible only if the non-legal professionals are on a list of professions maintained by the courts based on strict criteria; and
5. A law firm may enter into reciprocal referral agreements or understandings with non-legal professionals whether or not the non-legal profession is on the list maintained by the courts.
The new rules continue to forbid other forms of multidisciplinary practice. Lawyers still may not share legal fees with non-lawyers, or form a partnership with non-lawyers which offers legal services, or allow non-lawyers to own an interest in a law firm, or allow non-lawyers to supervise or manage a law firm. Those prohibitions, which are already stated in existing DRs 3-102, 3-103, and 5-107(C), are reiterated in DR 1-107 for good measure. As elaborated upon in proposed EC 1-13:
The non-legal professional … may not play a role in, for example, the decision whether to accept or terminate an engagement to provide legal services in a particular matter or to a particular client, determining the manner in which lawyers are hired or trained, the assignment of lawyers to handle particular matters or to provide legal services to particular clients, decisions relating to the undertaking of pro bono publico and other public-interest legal work, financial and budgetary decisions relating to the legal practice, and determining the compensation and advancement of lawyers and of persons assisting lawyers on legal matters.
Now for a closer examination of the new and amended rules.
DR 1-106: Providing Non-Legal Services
DR 1-106 concerns a law firm’s provision of legal services either directly or through an entity that the law firm owns, controls, or is affiliated with. The rule has three major sections.
DR 1-106(A) attempts to sort out the confusion that may arise when the law firm or its non-legal affiliate provides non-legal services. As proposed EC 1-9 states: “Whenever a lawyer directly provides non-legal services, the lawyer must avoid confusion on the part of the client as to the nature of the lawyer’s role, so that the person for whom the non-legal services are performed understands that the services may not carry with them the legal and ethical protections that ordinarily accompany an attorney-client relationship.” Examples: Are communications about the non-legal services protected by the duty of confidentiality set forth in DR 4-101? Is a separate non-legal entity owned by a law firm subject to the same conflict of interest rules that govern law firms? If a person receiving non-legal services mistakenly thinks the services are subject to the Disciplinary Rules, how can the lawyer clear up the misunderstanding? These questions are the subject of DR 1-106(A)’s four subparagraphs.
Subparagraph (A)(1) addresses non-legal services provided directly by a law firm that “are not distinct” from the legal services the law firm is providing to a client. The Disciplinary Rules governing attorney client relationships always apply to such non-legal services, even when they are provided by a non-lawyer employee instead of a lawyer.
“The risk of confusion is especially acute,” EC 1-9 adds, “when the lawyer renders both legal and non-legal services with respect to the same matter.” Some legal and non-legal services may even be “so closely entwined that they cannot be distinguished from each other.” In those situations, the lawyer providing the non-legal services must “adhere to all of the requirements of the Code of Professional
Responsibility with respect to the non-legal services,” says EC 1-9. This is true even if other lawyers in the firm are doing the legal work. For example, if a lawyer/CPA at Smith & Jones gives a client accounting advice about a contract while a partner at Smith & Jones gives the same client legal advice regarding the same contact, then the lawyer/CPA is bound by the Disciplinary Rules while giving accounting advice even though he is not personally giving the client any legal advice. And if disciplinary charges are brought against any lawyer providing non-legal services that are “not distinct” from the legal services, it will be no defense to say, “I gave only non-legal advice — my partner did all of the legal work.” If a law firm simultaneously provides a client with closely intertwined legal and non-legal services, then the law firm must adhere to the Disciplinary Rules for all services, legal and non-legal.
Proposed EC 1-9 does not say so, but when a law firm’s non-lawyer employee is providing non-legal services to a client that are “not distinct” from legal services the firm is providing to that client, then DR 1-104(C) requires the firm’s partners and supervisory lawyers to ensure that the non-lawyer conforms to the Disciplinary Rules.
Subparagraph (A)(2) addresses non-legal services the law firm directly provides to a client that “are distinct” from the legal services the law firm is providing to the same client. For example, a lawyer with an M.B.A. may give non-legal business advice to a client that the law firm simultaneously represents in a totally unrelated personal injury action. Under DR 1-106(A)(2), the DRs apply to the non-legal services if the client “could reasonably believe that the non-legal services are the subject of an attorney-client relationship.” Even when the lawyer thinks the legal and non-legal services are distinct from each other, proposed EC 1-10 notes that the client receiving the non-legal services may still reasonably believe that he or she “is receiving the protection of an attorney-client relationship.” The lawyer must either correct the client’s mistaken belief by making the disclosures outlined in DR 1-106(A)(4), or must comply with the Disciplinary Rules while providing the non-legal services.
Subparagraph (A)(3) addresses non-legal services provided by an entity that the lawyer or law firm owns, controls, or is otherwise affiliated with. As in subparagraph (A)(2), these non-legal services are governed by the DRs if the recipient “could reasonably believe that the non-legal services are the subject of an attorney-client relationship.”
Subparagraph (A)(4) covers the non-legal services dealt with in subparagraphs (A)(2) and (A)(3) — services provided directly by the lawyer or law firm that “are distinct” from any legal services the lawyer is providing, and services provided by an entity the law firm owns, controls, is affiliated with, or is an agent of. In either case, DR 1-106(A)(4) presumes that the recipient “believes the services to be the subject of an attorney-client relationship” unless the lawyer or law firm has satisfied the burden of advising the recipient in writing that (i) the services are not legal services, and (ii) the “protection of an attorney-client relationship” does not apply to the non-legal services.
Proposed EC 1-11 urges lawyers to make these disclaimers “before entering into an agreement for the provision of non-legal services,” and to make them “in a manner sufficient to assure that the person understands the significance of the communication.” EC 1-11 also cautions that sometimes “additional steps may be required to communicate the desired understanding.” The written disclaimer set forth in subparagraph (A)(4) “will be adequate for a sophisticated user of legal and non-legal services, but “a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and non-legal services.” Thus, for an individual or corporate client who has frequently hired lawyers and non-lawyers, it will be enough to specify in writing which services are non-legal services and to state that the usual attorney-client protections will not exist for these non-legal services. But for a person or business that has seldom used lawyers in the past — e.g., a divorce client, a personal injury client, or a new company — the lawyer may need to spell out in more detail which services are not legal services and that attorney-client protections are absent from these non-legal services.
In addition, in the situations covered by (A)(3) only (where a separate entity rather than the law firm is providing the non-legal services), attorney-client protections will not be presumed if the law firm has only a de minimis interest in the entity providing non-legal services.
However, in the situations covered by (A)(1), where the law firm itself is providing non-legal services that are “not distinct” from the legal services the firm is providing to the same client, the disclaimers set forth in subparagraph (A)(4) are unavailing. When the law firm itself is providing “closely entwined” legal and non-legal services to the same client [EC 1-9], there is no escape from the Disciplinary Rules for the non-legal services.
Even when a lawyer makes appropriate written disclaimers regarding non-legal services, “the exemption is not absolute.” As proposed EC 1-12 makes clear:
A lawyer who provides… non-legal services may be excused from compliance with only those Disciplinary Rules that are dependent upon the existence of a representation or attorney-client relationship. Other rules, such as those prohibiting lawyers from engaging in illegal, dishonest, fraudulent or deceptive conduct [DR 1-102], requiring lawyers to report certain attorney misconduct [DR 1-103], and prohibiting lawyers from misusing the confidences or secrets of a former client [DR 4-101(B)], apply to a lawyer irrespective of the existence of a representation, and thus govern a lawyer otherwise exempt under DR 1-106(A).
Proposed EC 1-12 will also remind lawyers that they must not allow non-lawyer employees or non-legal entities under their control to solicit legal business in ways prohibited to the law firm. Nor may lawyers instruct non-lawyers to do anything else that the lawyers themselves could not ethically do. The new rule does not abrogate DR 1-102(A)(2) (a lawyer or law firm shall not “[c]ircumvent a Disciplinary Rule through the actions of another”); or DR 2-103(E) (a lawyer “shall not accept employment when the lawyer knows or it is obvious that the person who seeks services does so as a result of conduct prohibited under this Disciplinary Rule”); or DR 5-101(A) (a lawyer may not refer clients to a non-legal business owned or controlled by the lawyer unless the lawyer passes the “disinterested lawyer” test and the client consents to the referral after full disclosure).
DR 1-106(B) imposes special conditions on the situations covered by (A)(3) (i.e., when non-legal services are provided by an entity controlled by a lawyer) if the lawyer “knows” that an entity owned, controlled, or otherwise affiliated with the lawyer or his law firm is providing non-legal services to a person. In that case, the lawyer must not permit any non-lawyer affiliated with the non-legal services entity to do either of two things: (i) “direct or regulate the professional judgment of the lawyer or law firm in rendering legal services” to a client, or (ii) “cause the lawyer or law firm to compromise its duty” of confidentiality under DR 4-101 to a client receiving legal services from the law firm. These conditions merely reiterate, essentially verbatim, the requirements already stated in DR 5-107(C).
DR 1-106(C) defines “non-legal services” for purposes of DR 1-106 to mean services that (i) “lawyers may lawfully provide,” and that (ii) “are not prohibited as an unauthorized practice of law when provided by a non-lawyer.” In other words, DR 1-106 does not give lawyers the right to provide services through non-lawyers that the lawyers themselves would be prohibited from offering directly, and it does not authorize non-lawyers to engage in the unauthorized practice of law. The new ECs do not illuminate this abstract language, but I can think of some possible examples. The conflict of interest rules in the Code of Professional Responsibility prohibit lawyers from selling long-term care insurance to estate planning clients, and DR 1-106 does not lift that prohibition. Similarly, unauthorized practice laws prohibit non-lawyers from drafting legal forms except under the active supervision of lawyers, and DR 1-106 does not relieve lawyers of those supervisory responsibilities.
DR 1-107: Contractual Relationships with Non-Legal Professionals
DR 1-107, which complements DR 1-106, concerns situations in which the law firm itself is not providing legal services directly or through any entity that the law firm owns or controls. Rather, DR 1-107 envisions that the law firm has entered into a “contractual relationship” with a “non-legal professional” or “non-legal professional service firm.” Proposed EC 1-14 elaborates: “The contractual relationship permitted by DR 1-107 may provide for the reciprocal referral of clients … It may also provide for the sharing of premises, general overhead, or administrative costs and services on an arm’s length basis.” These relationships have sometimes been referred to as “strategic alliances” or “side-by-side” arrangements. Those terms are not used in the new rules, but new Part 1205 uses the phrase “cooperative business arrangements.”
The non-legal services contemplated by DR 1-107 are much narrower than the services contemplated by DR 1-106, because the non-legal services covered by DR 1-107 must be offered by non-lawyer professionals — and if the relationship calls for anything beyond mutual referrals, the non-lawyers must be members of a profession on the Appellate Divisions’ planned list of professions that meet the criteria set forth in DR 1-107(A)(1). We are not talking about auto mechanics and funeral directors here. True, those are honorable professions, but I do not think the Appellate Divisions will ever put them on their list of qualifying professions.
DR 1-107 has four major sections.
DR 1-107(A) begins with a kind of preamble that articulates the legal profession’s “core values” — “independent professional judgment and undivided loyalty uncompromised by conflicts of interest.” “Multi-disciplinary practice between lawyers and non-lawyers,” the rule continues, is “incompatible” with these core values. Nevertheless, a law firm may enter into a “contractual relationship with a non-legal professional or non-legal professional service firm” for the purpose of offering both legal and non-legal services to the public “on a systematic and continuing basis,” provided the contractual relationship meets the three conditions described in DR 1-107(A)’s three subsections.
Subparagraph (A)(1) requires that the non-legal professionals belong to a profession that is “included in a list jointly established and maintained by the Appellate Divisions.” That list does not yet exist, but new 22 NYCRR § 1205.3(a) provides that the Appellate Divisions jointly “shall establish and maintain a list of professions … with whose members a lawyer may enter into a cooperative business arrangement” as authorized by DR 1-107. The Appellate Divisions may either designate these professions “sua sponte” or approve them “upon application of a member of a non-legal profession or non-legal professional service firm.” Under 22 NYCRR §1205.3(b), a profession “shall be eligible for inclusion in the list if the profession is composed of individuals who, with respect to their profession, meet the requirements set forth in” DR 1-107(B)(1). I discuss these requirements below.
Subparagraph (A)(2) requires that the law firm must not do any of five forbidden things: (i) grant the non-legal professionals any “ownership or investment interest in, or managerial or supervisory right, power or position in connection with the practice of law by the lawyer or law firm,” or (ii) permit the non-lawyers to “obtain, hold or exercise, directly or indirectly,” any such interest, right, power, or position, or (iii) share legal fees with the non-lawyers, or (iv) receive any money or “other tangible benefit” from the non-lawyers for giving them a referral; or (v) give any money or other tangible benefit to the non-lawyers for making a referral to the law firm. Thus, although proposed EC 1-14 expressly states that lawyers may enter into contractual agreements that contemplate “reciprocal referral of clients” between the law firm and the non-legal professionals, DR 1-107(A)(2) makes clear that the law firm may neither take money or other benefits for referring business to the non-lawyers nor pay money or other benefits for referrals from the non-lawyers.
Subparagraph (A)(3) requires the lawyers to disclose “the fact that the contractual relationship exists” before (i) referring any client of the law firm to the non-legal professionals, or (ii) accepting any referral from the non-legal professionals. In addition, before the lawyers render any legal services to any client of the non-legal professional service firm, subparagraph (a)(3) requires the lawyers to (i) provide the legal client with a copy of the “Statement of Client’s Rights In Cooperative Business Arrangements” as set forth in new §1205.4 of the Joint Appellate Divisions rules, and (ii) obtain the legal client’s “informed written consent” to the referral to or from the non-lawyers, which is accomplished by having the client sign the Statement. These requirements do not apply to “ad hoc” referrals. As explained in proposed new EC 1-17:
A lawyer or law firm not wishing to affiliate with a non-lawyer on a systematic and continuing basis, but only to engage a non-lawyer on an ad hoc basis to assist in a specific matter, is not governed by DR 1-107… Thus, a lawyer advising a client in connection with a discharge of chemical wastes may engage the services of and consult with an environmental engineer on that matter without the need to comply with DR 1-107. Likewise, the requirements of DR 1-107 need not be met when a lawyer retains an expert witness in a particular litigation.
DR 1-107(B) has two subsections that elaborate on the restrictions in subparagraph (A).
Subparagraph (B)(1) says that for a profession to qualify for court approval under DR 1-107, the profession’s members must meet three criteria: (a) have a Bachelor’s or equivalent degree from an accredited college or university; (b) be licensed by an agency of New York State or the federal government; and (c) be required under penalty of license revocation to follow “a code of ethical conduct that is reasonably comparable to that of the legal profession.” The flash point here will be the non-legal profession’s code of ethics. What will it take to make the non-legal profession’s code of ethics “reasonably comparable” to the New York Code of Professional Responsibility? That is a topic for another article, but I think the non-lawyers’ ethics code should at least address confidentiality, conflicts, and competence.
Subparagraph (B)(2) defines the term “ownership or investment interest” to mean any ownership or investment interest in “any form of debt or equity,” including “any interest commonly considered to be an interest accruing to or enjoyed by an owner or investor.” This definition is intended to be virtually all encompassing. The reference to “debt” is somewhat jarring because banks and other lenders frequently make loans to law firms without becoming “owners” or “investors.” The import of DR 1-107(B)(2), however, is to eliminate any possibility that a law firm’s contractual partner will have leverage to influence or control the practice of law. Law firms may continue to borrow money from banks, but they may not enter into contractual relationships with entities to which they owe money.
DR 1-107(C) says that when lawyer-non-lawyer relationships consist solely of reciprocal referral agreements or understandings, the non-legal professionals need not be on the list referred to in DR 1-107(A)(1). Thus, a lawyer may ethically enter into a “reciprocal referral agreement” with any “non-legal professional” even if the non-lawyer’s profession is not on the list of professions maintained by the courts. The rules and proposed new ECs do not formally define the meaning of the term “professional,” but a fair reading is that “professional” must meet the first two criteria of DR 1 107(B)-a Bachelor’s Degree and a license from New York State or the U.S. government.
DR 1-107(D) says that despite DR 3-102(A)’s ban on sharing legal fees with non-lawyers, the lawyers and non-legal professionals in contractual relationships permitted by DR 1-107(A) may allocate costs and expenses “provided the allocation reasonably reflects only the costs and expenses incurred or expected to be incurred by each.” Proposed EC 1-14 explains that agreements to share costs and expenses with non-lawyers “are permitted notwithstanding that they involve the exchange of value for client referrals and, technically, a sharing of professional fees …” The key, of course, is to make an accurate accounting of the actual costs and expenses incurred by the non-legal professionals. If the lawyers pay more than that amount, they may violate both DR 1-107(D) and DR 3-102’s prohibition against fee sharing with non-lawyers.
Amendments to DRs 2-101, 2-102, and 2-103
The Appellate Divisions’ July 23rd Joint Order also amended DRs 2-101, 2-102, and 2-103 to reflect the changes created by the new Disciplinary Rules. The amendments to DR 2-101 and DR 2-102, which are minor, permit lawyers to advertise information relating to non-legal services. The most noteworthy amendment, DR 2-102(B), prohibits a law firm from including the name of a non-lawyer in its firm name, even if the law firm has a contractual relationship with the non-lawyer pursuant to DR 1-107. This is basically an extension of DR 3-102 and 3-103 — just as a lawyer may not share legal fees with a non-lawyer or include a non-lawyer in a partnership that offers legal services, so a lawyer may not share a law firm name with a non-lawyer. Proposed EC 1-14. reinforces this prohibition.
The change to DR 2-103 is far more significant. Amended DR 2-103(B) permits lawyers to enter into mutual referral agreements with non-legal professionals, or to agree to refer certain types of non-legal work to a particular non-legal professional “on a systematic and continuing basis …” This basically reinforces DR 1-107(C), which refers to “relationships consisting solely of reciprocal referral agreements or understandings …” However, DR 2-103(B)(1) echoes new DR 1-107(A)(2) by reminding lawyers that referrals “shall not otherwise include any monetary or other tangible consideration or reward for such, or the sharing of legal fees.” Lawyers may ethically trade referrals with non-legal professionals under the new rules, but they may not pay for referrals from non-lawyers or accept payment for referring business to non-lawyers.
New York’s new rules allow lawyers to provide non-legal services directly and to enter into formal relationships with non-legal professionals, including reciprocal referral agreements and expense sharing arrangements. This article has just touched the surface of the new rules. Many other issues, such as conflicts of interest and confidentiality, lie beneath the surface and remain to be addressed. Lawyers and law firms that want to take advantage of the new rules should study them carefully and deliberately.
Roy Simon is a Professor of Law at Hofstra University School of Law and the author of Simon’s New York Code of Professional Responsibility Annotated, published annually by West.
DISCLAIMER: This article provides general coverage of its subject area and is presented to the reader for informational purposes only with the understanding that the laws governing legal ethics and professional responsibility are always changing. The information in this article is not a substitute for legal advice and may not be suitable in a particular situation. Consult your attorney for legal advice. New York Legal Ethics Reporter provides this article with the understanding that neither New York Legal Ethics Reporter LLC, nor Frankfurt Kurnit Klein & Selz, nor Hofstra University, nor their representatives, nor any of the authors are engaged herein in rendering legal advice. New York Legal Ethics Reporter LLC, Frankfurt Kurnit Klein & Selz, Hofstra University, their representatives, and the authors shall not be liable for any damages resulting from any error, inaccuracy, or omission.