Law firm ownership and lawyer independence

Malcolm Mercer, who’s been a driving force in the debate around legal service regulation changes in Canada, wrote a terrific post at Slaw titled “A Different Take on ABS – Proponents and Opponents Both Miss the Point.” Malcolm’s post galvanized a lively exchange in the comments section, to which I was drawn and compelled to add some thoughts on two separate but related aspects of legal market liberalization: (a) the affordability and accessibility of legal services, and (b) lawyer ethics, professionalism and independence.

I’ve already written about accessibility elsewhere at Law21, and you can refer to my comments on Malcolm’s article for more. But I thought I’d expand here in some more detail on the second point: the impact of regulatory change on lawyers’ professional conduct. The spectre of “non-lawyers” owning equity in law firms has led some practitioners to express grave concerns about the survival of our ethical standards, and about the wisdom of allowing “non-lawyers” to deliver legal services at all. I think that before we can dive too deeply into these questions, we need to step back and look at the bigger picture first.

Generations ago, lawyers were granted the privilege (not the right) of self-regulation. Using the powers assigned to us through that privilege, we developed, published, and strictly enforce on ourselves several behavioural codes that we refer to collectively as “legal ethics.” (For clarity, “ethics” here refers to explicit normative standards of conduct, rather than the more colloquial sense of “moral behaviour.”) Among the standards we enforce through ethical codes are:

  • service above all to the courts and the rule of law,
  • complete confidentiality of client information,
  • loyalty to client interests, as expressed through conflicts rules, and
  • independence of our counsel from outside influence.

These rules are meant to guarantee to clients and to society generally that we serve the greater good and advance the interests of our clients without partiality. They’re part of the quid pro quo of self-governance: we hold ourselves to very high standards so that no one else feels compelled to step in and hold us to theirs. Nobody, in the continuing debate over liberalization of law firm ownership rules, contends that these standards and goals are obsolete or unnecessary. (Indeed, in the multi-player market that’s coming our way, our ethical standards will nicely double as a competitive advantage.)

Lawyers tend to raise two ethical objections to the changes in legal regulation that have occurred in Australia and Great Britain and that have been proposed in the CBA’s Futures Report. The first is that “non-lawyers” are not bound by lawyers’ ethical standards, and therefore the risk is too great that their clients’ interests will not be protected and may even be abused. The second is that allowing “non-lawyers” to own equity in a law firm fatally compromises our duty of loyalty to the courts and to our clients, because the lawyer will be bound by an additional, higher duty to advance the interests of these “non-lawyer” shareholders. Let’s look at these objections in turn.

1. “Non-lawyer” unfitness: There is, to begin with, a strong case to be made that “non-lawyers” are fully capable of conducting themselves with the integrity and impartiality we expect from lawyers, not least because exploiting or abusing one’s customers is a terrible way to run a business and a good way to wind up in jail. I’ve written before about the specious and self-serving nature of the “non-lawyer” category into which lawyers place everyone in the world except us. But let’s assume, just for argument’s sake, that “non-lawyers” will pose a genuine risk to their clients’ and customers’ interests.

It’s not entirely clear to me why this would be something that should concern the legal profession. Those who hire “non-lawyers,” in the multi-participant legal market of the near future, are not our clients, and we owe them no professional duties. Nor are we their parents or guardians. They’ll have made a choice to hire someone who isn’t a lawyer, and they can reap both the rewards and consequences of that choice. Fundamentally, it’s none of our business.

Lawyers have been granted the privilege of regulating ourselves; nobody, however, has ever granted us the privilege or assigned us the duty to regulate anyone else. (With two exceptions: independent paralegals in Ontario and limited license legal technicians in Washington State.) In almost all cases, law societies, state bars, and other regulatory bodies are not directed in their founding documents to “protect the public.” They are directed to “govern the legal profession in the public interest.” Those are two different mandates. If someone wants to hire a “non-lawyer,” and the “non-lawyer” accepts the engagement, it seems to me that that’s their business, not ours.

2. Corruption of lawyer ethics. This objection, on its face at least, has more merit. It’s reasonable to be concerned that the presence of “non-lawyers” in the ownership structure of law firms could pose a threat to our duties to clients and our independence from outside interests. Even a small risk in this area should be taken seriously, because of the enormous importance of lawyer independence to our professional existence and to the rule of law. But simply because this risk is real and serious doesn’t automatically mean that identifying it is enough to end the discussion. If it’s a risk, let’s look at whether and how it can be managed.  [do_widget id=”text-7″ title=false]

We should isolate, for this discussion, the operation of in-house or public-sector law departments, which very clearly are owned and operated by “non-lawyers.” We’re concerned here with the private bar, providing services to lay clients for whom we assume (though not always correctly) a low level of sophistication. The principles at play in these workplaces are not fully applicable to this conversation — although it’s at least helpful to note that the mere presence of “non-lawyers” in the ownership and financial structure of their “clients” has not been fatal to the independence of these lawyers. “Non-lawyer” status is not an airborne disease.

As it happens, we have an example of a large, multi-national law firm with “non-lawyer” equity owners: Slater & Gordon. If you review the firm’s initial public offering prospectus, you’ll find that among the “risks” disclosed to potential share-buyers was their tertiary position in the firm’s loyalties: the courts first, clients second, shareholders third. Those who buy stock in Slater & Gordon acknowledge and accept that, unlike other businesses where “shareholder value” is (perversely, in my opinion) the only objective, investing in a law firm means accepting a much-reduced level of influence and importance.

I’m not aware of any ethical difficulties Slater & Gordon has experienced, or any accusations that have been made by clients or judges, that public ownership of the firm has corrupted its lawyers’ professional duties or harmed their clients’ interests. The emergence or revelation of such problems or accusations could indeed pose a serious challenge to advocates of “non-lawyer” ownership. But equally, the absence of such problems or accusations, over a period of several years, in two different countries, ought to be factor in the discussion as well.

It seems to me that whether a law firm is owned by lawyers, by “non-lawyers,” or by Martians, the lawyers in the firm still operate under the auspices of lawyer regulation. (Under “entity-based” regulation, which is already in place in Australia and the UK and appears to be coming to Nova Scotia, the firm itself will be bound as well.) If a  regulated lawyer breaks a professional standard, for whatever reason, she will be investigated and punished. Whether her cheques are signed by the managing partner lawyer or by a corporate payroll employee, she is still on the hook for what she does and doesn’t do to advance her clients’ interests and serve the rule of law. There will be no exception granted to a law firm owned in whole or in part by “non-lawyers”; if anything, I expect that ethical scrutiny of such a firm would be several degrees more intense than for lawyer-owned firms.

Now, it might be objected that the influence of a “non-lawyer” equity owner would be more subtle and pervasive than that. The “non-lawyer” would not directly order a lawyer to drop a case or reveal a client confidence on the record; instead, he or she would influence, by their very presence and through various innocuous but well-timed remarks, that perhaps the firm should pursue a different course or be more open about a client’s position. I have two responses to this objection.

First, if we’re now guarding against invisible, inaudible, and theoretical risks to lawyer independence — “this might happen and there’d be no way to prove that it didn’t” — then I think we can concede that the clear and present danger of this risk is not readily apparent. We’re now moving out of the zone of probability, which is a fair and legitimate battleground, to one of possibility, which is unanswerable: no one can ever prove that something undetectable will never happen. And secondly, the assumption at the heart of this objection is the same as the the one above: that “non-lawyers” are less trustworthy, less honourable, and more mercenary than lawyers are — and conversely, that lawyers have more integrity, character, and selflessness than “non-lawyers” do.  I don’t find this line of reasoning especially sound or especially attractive.

As I’ve already noted, I’m not dismissing out of hand the risks posed by regulatory overhaul to lawyer independence: the concern is legitimate, and the stakes for the legal profession are stratospherically high. The case for either side of the debate is not so slam-dunk obvious that further discussion is unnecessary. We should continue to engage on these issues. But let’s engage on probabilities, not possibilities; evidence, not worries; what we know and can reasonably, sensibly anticipate, rather than on what we fear. The right answer is out there. Let’s go find it.

Jordan Furlong is a lawyer, consultant, and legal industry analyst who forecasts the impact of the changing legal market on lawyers, clients, and legal organizations. He has delivered dozens of addresses to law firms, state bars, law societies, law schools, judges, and many others throughout the United States and Canada on the evolution of the legal services marketplace.

The trusted advisor

My collection of prized possessions is extremely small — the feature item is probably a ticket stub from Game 6 of the 1993 World Series (Joe Carter’s home run off Mitch Williams). Among that narrow collection, you’ll find a personally inscribed copy of David Maister’s last book, Strategy and the Fat Smoker, and if your passion is making the legal services marketplace better for both lawyers and clients (as mine is), you’ll understand why. A remarkable number of very successful lawyers and law firm leaders have a copy of one of David’s groundbreaking books, such as True Professionalism or Managing the Professional Services Firm or The Trusted Advisor (co-authored with Charles H. Green and Robert M. Galford), on their bookshelves. His status in law practice management circles can fairly be called institutional, and unfortunately for us, the new year has brought word of the institution’s closure: David is retiring from consulting, speaking and writing on professional service delivery.

My own interactions with David Maister have been only glancing — he contributed a fine article to a College of Law Practice Management e-zine on innovation that I edited in 2006, and he generously gave me a credit in his last book for some very slight suggestions I contributed. But his influence on me and his impact on a generation of legal professionals have been profound — not only through his practical guidance and his contributions to a rational law practice business model, but for the principles he constantly advanced as essential to excellent professional service. David exhorted lawyers and accountants to stay true to the highest standards of trustworthiness and ethics and to focus relentlessly on serving the client’s best interests. Continue Reading

E-document ethics and the rise of regulation

It’s been a great week for conversations with Law21 readers, because I’ve also had a terrific correspondence with John Gillies, head of Practice Support at Cassels Brock in Toronto. John brought to my attention an opinion issued this past summer by the New York City Bar Association regarding lawyers’ ethical obligations to retain and provide clients with relevant electronic documents.

The obligations set out in the opinion, while not unreasonable in any broad sense, set a markedly higher standard of conduct than many firms are currently maintaining. I think they’re noteworthy for two reasons: one, because firms with offices in New York (which include many global giants) are now bound by these standards (which could well become the de facto standard in other jurisdictions); and two, because we’re going to see a lot more of this: regulation of lawyers’ conduct regarding their work and their clients.

The NYC Bar asked itself the following questions:

What ethical obligations does a lawyer have to retain e-mails and other electronic documents relating to a representation? Does a lawyer need client permission before deleting e-mails or other electronic documents relating to the representation? When a client requests that a lawyer provide documents relating to the representation, may the lawyer charge the client for the costs associated with retrieving e-mails and other electronic documents from accessible and inaccessible storage media?

Read the whole opinion for the complete answer — it’s not long — but the gist is that standards that currently apply to storage and access of paper documents apply equally to e-documents. That might sound like common sense, but think about the impact. The electronic documentation that any given client matter produces is massive: emails to clients and colleagues, draft versions of memos, timekeeping records, Blackberry messages, and so on. If you printed out every e-document and added it to the case file (and please don’t), that file would be about ten times higher.

Here are some highlights of the opinion’s specifics (emphasis added throughout): Continue Reading

Conflicts and the law of unintended consequences

The Recorder reports this morning on the rising number of law firm requests that clients sign broad advance waivers (or blanket waivers) that would allow the firms to act against those clients on future unrelated matters. Firms, looking to maximize the amount of business they can take on, are trying everything they can think of to get around conflict of interest rules. Clients, reasonably enough, won’t sign anything that could impair their interests down the road if they can help it.

Clients’ responses to these requests vary according to the size and leverage of both firm and client. Large clients routinely blow them off, because they can — the lawyers need their business more than the clients need these particular lawyers. Smaller clients have less leverage, so if they want to hire big firms, they pretty much have to live by the terms those firms dictate. I can see a couple of trends emerging from this, neither of which is good for large firms and both of which reflect the unintended consequences of size.

First, when a firm is so big that it has to go begging for the right to sue the client in future, the client will correctly diagnose this as a vulnerability that can be exploited. Instead of simply refusing these requests, clients will start calculating just how much (or little) they actually risk by granting such a waiver, and how much the firm has to gain by it. The client might then say to the firm, “Sure, we’ll grant you the waiver — and in return, you’ll knock 15% off all your fees and pick up the costs of a new extranet system.” Large firms’ vulnerability to conflicts is going to cost them at the bargaining table. Continue Reading

Lawsuit investment and the limits of innovation

As you probably know by now, I’m a big fan of innovation in the law. But there’s good innovation and there’s bad innovation, and what’s emerging in the litigation field in the US and the UK looks to me like it belongs in the latter category.

LegalWeek reports that UK hedge funds are lining up to provide funding for lawsuits. This idea in itself isn’t breaking news: several US companies, often backed by massive hedge funds, already provide financing for plaintiffs in personal injury suits — and arguably, contingency fee arrangements in class actions accomplish the same end, providing funding in return for a piece of the expected damages award. Hedge fund investments in plaintiffs’ lawsuits has recently spread to the UK. But this newest British development contains a twist: the investors are looking to finance the defendant.

Here’s how LegalWeek‘s Editor’s Blog explains it:

The investor is likely to be a hedge fund or special situations fund looking to make high-risk investments. The investor gets a fee or premium and effectively offers to fund a substantial chunk of the defendants’ liability. The attraction for defendants is hedging and managing their exposure, despite higher upfront costs. And by introducing an outside investor that will look at a legal opinion to gauge the merits and risks of the claim, a company can effectively put a ‘market price’ on their litigation risk.

The concept of a market in plaintiffs’ lawsuits has its supporters, who contend that the benefits include creating a more level playing field between plaintiffs and defendants and bringing market-driven risk assessments to evaluate lawsuits’ chance of success. Opponents cite concerns about champerty and maintenance, though it seems to me these prohibitions have not been pursued enthusiastically by governing bodies and have lost some of their force over time (lawsuit investors argue that they’re not instigating lawsuits, which is forbidden, but financing suits already underway, which seems a distinction bordering on the specious).

There are access-to-justice arguments in favour of allowing plaintiffs to seek financial backing to bring a claim and sharing the rewards with those who do so, and reasonable people can differ on this. But when defendants start looking for investors as well, I start getting worried. Continue Reading

Professionalism revived

If you’re interested, here’s a version of the remarks I delivered this morning at the Chief Justice’s Colloquium on Professionalism here in Ottawa. Many thanks again to the organizers for inviting me to speak!

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When we talk about professionalism, we can start getting bogged down, because it’s a word that means a lot of different things to different people. Now, in my case, I’m an editor, I’m an English major, I’m basically a word geek – I gave up Scrabble for Lent, if that helps put it in perspective. So to prepare for this event, I did what word geeks do: I went out and looked up “professionalism” in the dictionary. And what I found there was that the Latin root of “professional” is profiteri.

Profiteri has two components: pro, which means “forth,” and fateri, which means “confess.” Taken together, they mean “to announce a belief.” It has religious roots – its original use was to bind yourself, publicly, by a vow or oath, to a vocation or higher purpose. When the word began to filter into wider use, it was applied to occupations, but only to those that involved the same sort of considerations as religious vows: service, selflessness, higher purpose – generally, making things better for others. Originally, only three occupations qualified as professions: ministry or theology, of course; medicine; and law.

So when we talk about traditional standards of professionalism, it’s important we remember we’re not talking about excellence, or good manners, or “total quality management” – or at least, not primarily about that kind of thing. We’re talking about serving the interests of others, prioritizing them above ours for a greater cause.

For a while now, we’ve been talking about a decline in professionalism in the law, or the loss of professionalism. And generally, these discussions have tended to center around things like uncivil behaviour by lawyers, or an unseemly focus on money, or a lack of proper respect for the court, that sort of thing.And it’s good that we’re looking at these things, because they’re real problems, and some of them are serious. But to my mind, they’re really all symptoms – they’re not the underlying disease. There’s a bigger cause behind these effects. Continue Reading

Conflicts for “sophisticated clients”

When Clifford Chance General Counsel Chris Perrin talks about conflicts of interest, lawyers pay attention. The man whom the Financial Times calls the “czar” of conflicts has been working on the subject for nearly a decade, most recently as chair of the City of London Law Society’s Committee on Professional Rules and Regulation. It’s in that capacity that he has now called for a “significant widening of client conflict rules,” according to a story in today’s edition of The Lawyer:

Currently the rules permit law firms to act on conflicting instructions only where the clients share a common interest and consent or where two clients are competing for the same asset, such as in an auction sale. “In addition to these two exceptions,” proposed Perrin, “there should be a wider exception to be used by sophisticated clients, which would enable them to waive conflict in any circumstances.”

Perrin argued that if two sophisticated clients want to get a deal done and both have historically used the same firm, it is impeding their desire to get the transaction done to prevent them from using that firm. And if both parties are happy that a firm will look after both their interests, he said, there is no reason why it should not. The proposed definition of ‘sophisticated clients’ would include clients, which have received independent legal advice or which have in-house legal departments and the exception would not apply in litigation matters.

This rang a bell with me, and sent me off into National‘s archives to find an article published in the March/April 2004 issue (not online, unfortunately) about a proposed change to the Law Society of British Columbia’s professional conduct handbook. Proposed Rule 6.3.1 would have enabled lawyers to act against current “sophisticated” clients without their consent if (a) the matters are substantially unrelated and (b) the lawyer has no confidential information that might reasonably affect the other representation. (The law society’s contemporary bulletin on the subject provides more information.) Continue Reading

Give up on anything but yourself

A thought-provoking post by Seth Godin today that isn’t really about politics, even though it asks whether Hillary Clinton should quit the Democratic race. What it’s really about is quitting, which Seth endorses in a book (that I endorse) called The Dip, and the danger of changing who you are in order to achieve your goal. Here’s the ending:

For a long time, we’ve created a myth in our culture that it’s worth any price to reach your goal, especially if your ego tells you that you’re the best solution. We’ve created legends of people and organizations that pursued transformative long shots to achieve great results.

I need to be really clear: pushing through the Dip and becoming the best in the world at what you do is in fact the key to success. But (and it’s a big but), if you’re required to become someone you’re not, or required to mutate your brand into one that’s ultimately a failure in order to do so, you’re way better off quitting instead.

This got me thinking about lawyers. Many lawyers are happy with their working lives — or at least they’re content, having decided happiness was too high a target to aim for. But a lot of lawyers are unhappy, sometimes deeply, with their job or career. A lot of them talk about quitting, and a growing number of them do — either to find another job in a more fulfilling environment, or to keep looking until they eventually leave the profession altogether. Neither the law, nor every job in the law, is for everyone.

But many others stay where they are and grow more unhappy by the day. Some do it out of financial necessity, especially recent graduates with mountains of debt or a family to support. Some stick it out in the stubborn hope that things will improve, despite the absence of supporting evidence. Some convince themselves that the intangible benefits (social status, professional prestige, family pride) cancel out the misery. And some subscribe to the fallacy of “sunk costs,” that they’ve invested so much time, money and soul into a legal career that they can’t give up now.

One way or another, the unhappy lawyers in this second group are going to wind up in the same place as the unhappy ones in the first group: in a different job or out of the profession. They don’t have a strategy for finding fulfillment where they are, and they probably don’t have the motivation to execute such a strategy if they had one. Sooner or later, they’ll have to give it up; from my perspective, it might as well be sooner, and I recommend The Dip for more on that subject.

But there are worse things than being in a career that goes against your grain; there’s changing your grain to go with your career. Continue Reading

Page 123, and More

It’s a holiday in many North American jurisdictions today (including mine — someone decided that a day off in mid-February needed the patronizing label “Family Day”), and I’m at home working on a couple of projects anyway, so this seemed like a good day for something a little lighter. From Michel-Adrien Sheppard at SLAW comes this neat meme about random wisdom: open the nearest book, turn to page 123, read down five lines and write out the three sentences that appear next.

As it happens, the book on top of the pile I’m consulting for my projects is The Lawyer’s Calling: Christian Faith and Legal Practice, a 1996 work by Joseph G. Allegretti. Page 123 finds Allegretti discussing the character of Thomas More in Robert Bolt’s play A Man For All Seasons :

Part of the reason for More’s appeal to lawyers is his legalistic (in the good sense of the word!) approach to the problem of the oath [More had refused to sign one attesting to the legality of the king’s divorce]. An oath is composed of words, he says, and he will sign it if he can, if the words permit him. He is no plastic saint: he very much wants to live, and he will use his mind to escape punishment if it is possible to do so.

Allegretti likes that part of the play because it points up More’s humanity: he has no wish to become a martyr and will use his God-given legal skills to avoid that fate, so long as doing so does not interfere with his primary loyalty to God. That, of course, does not turn out to be possible, and More suffers accordingly. There’s a lot to chew over there about a lawyer’s duty to a client conflicting with his duty to his conscience, a subject we should talk about more than we do.

I’m partial to the real Thomas More for a host of personal and professional reasons, but the literary More in Bolt’s play makes a fascinating study in lawyers’ moral responsibilities. He’s one of two fictional professionals who I think really illuminate lawyers’ lives in this regard: the other is More’s opposite number, Stevens, the butler in Kazuo Ishiguro’s The Remains of the Day, who represents the consequences of allowing your employer’s judgment to substitute for your own (if you’ve only seen the movie, do yourself a favour and read the book, too — it focuses less on the thwarted romance and more on the moral obligations of servanthood).

For all I loved To Kill A Mockingbird, I never actually found Atticus Finch to be that intriguing a character as a lawyer. He’s too idealized and heroic to serve as a realistic role model for lawyers — never makes a mistake, always does the right thing. For my money, he’s a far more compelling figure, and a better role model, when viewed solely as a father (and that’s as far as I’ll go to mark Family Day).

So: what’s on the nearest page 123 to you today?

Offshore reflections

It’s a few weeks late, but this article about offshore legal services published early last month in The Hindu is worth a read, although it’s not offered on the basis that all its contents should necessarily be taken at face value. It comes across rather as a corporate Q-and-A for SDD Global Solutions, an Indian legal services PKO, and some might differ with company president Russell Smith’s uncompromising opinions on the state of Western law practice. In fairness, not every shot he fires is accurate — but a lot of them sure are.

What’s particularly interesting about this article, however, is the unattractive picture of the Western legal profession that comes through — this is the image the profession has managed to develop for itself throughout the rest of the world. If your North American or European firm wants to be a global player in the law, you should be aware that your reputation is now preceding you.

Some highlights: Continue Reading