LEGAL ETHICS OPINION #1658 ANCILLARY BUSINESS; NON-LEGAL
CONSULTING FIRM ESTABLISHED BY LAW
FIRM TO PROVIDE SERVICES TO LAW FIRM
CLIENTS AND OTHERS AND WHICH WOULD
SHARE LOGO WITH LAW FIRM
You are the principal owner of a law corporation ("Law Firm") which
limits its practice to labor and employment law representing
management. Your clients often seek human resource advice which in
many cases may be given by a non-lawyer with professional training,
background and certification in human resources and behavioral
science.
Law Firm proposes to establish a non-legal Consulting Firm
("Consulting Firm") with a non-lawyer to provide human resource
consultations and advice to clients. Consulting Firm would operate
as a separate business entity from Law Firm, however, the two firms
would share a common logo and similar letterhead trade name and
style. The name of Consulting Firm would nevertheless be different
from the name of Law Firm and would not suggest that it engages in
any activity that constitutes the practice of law. The names of
Law Firm and Consulting Firm are such that the average consumer or
client would not be confused as to the identity or purpose of the
two firms. Consulting Firm would offer those closely affiliated
non-legal services to Law Firm's clients (upon referral) as well as
to clients who do not require legal services.
As President of Law Firm, you would be a shareholder of Consulting
Firm and would serve as Chairman of its Board of Directors. As
such, you would have limited involvement in the day-to-day
operation of its business. Other partners in Law Firm may be
eligible to become shareholders and directors of Consulting Firm.
A non-lawyer shareholder would serve as CEO of Consulting Firm and,
as such, would have direct operational control of its business. If
required, the non-lawyer shareholder may employ additional non-
lawyer staff to operate Consulting Firm.
You and any other shareholders of Consulting Firm would be
compensated by dividends received from Consulting Firm and would
not engage in consulting services while employed by Law Firm. The
non-lawyer shareholder of Consulting Firm would be compensated by
dividends and a salary/incentive plan paid out of proceeds earned
by Consulting Firm. The non-lawyer shareholder of Consulting Firm
would not work for Law Firm nor would he/she receive any
compensation from Law Firm. The two firms would operate as
separate and independent business entities with no sharing of
profits or splitting of fees. Each firm would maintain separate
bookkeeping records and bank accounts. Each firm would also
maintain a separate client base, conflict records and confidential
files.
The two firms would maintain separate office space, however, they
would share a lobby. The two firms would initially share overhead
expenses such as secretarial support, library resources, etc., but
would intend to eventually become free-standing in all respects
other than proximate office space. To the extent that both firms
were marketed together, they would share marketing expenses.
Consulting Firm would refer any of its clients who desired or
needed legal representation to Law Firm and Law Firm would refer
any of its clients who desired/needed consulting services to
Consulting Firm. Consulting Firm would also advise referred
clients of other law firms which provide the same legal services,
and Law Firm would advise its referred clients of the existence of
other consulting firms.
All referrals would be made only after full disclosure of the
common ownership/relationship between the two firms. Additionally,
the common logo and similar letterhead trade name and style would
make common ownership apparent to the public.
On any occasion that Consulting Firm required legal advice or
counsel, it would use the legal services of Law Firm. Law Firm
would charge its regular rate for these services to Consulting Firm
and would treat all such services as ordinary legal services for
purposes of conflicts and confidentiality. Examples of such legal
services may include: (1) conducting research for Consulting Firm
on discreet issues; (2) reviewing Consulting Firm products such as
sample employee surveys, handbooks, literature, and seminar
materials from a legal perspective; and (3) giving specialized
legal advice in the areas of labor relations and human resource
management. Law Firm would not represent Consulting Firm in any
dispute or matter in which a current or former client was an
adverse party, or if Consulting Firm is adverse to a person
referred to Consulting Firm by Law Firm.
The nature of Consulting Firm's business would require that its
work be kept in strict confidence. Only with the knowledge and
consent of clients referred to Law Firm would confidential
information be shared with Law Firm and only after Law Firm
established an attorney-client relationship with the referred
client.
The controlling disciplinary rules are:
DR 2-101(A)(prohibiting publicity and advertising which is
false, fraudulent, deceptive or misleading);
DR 2-102(A)(prohibiting use of letterhead and professional
notices containing information which is false, fraudulent,
deceptive or misleading);
DR 2-102(B)(prohibiting use of trade name which is false,
fraudulent, deceptive or misleading);
DR 2-103(D)(prohibiting payment of compensation to another for
referral of client);
DR 3-101(A)(a lawyer shall not aid a nonlawyer in the
unauthorized practice of law);
DR 3-102(A)(prohibiting fee-splitting with a nonlawyer);
DR 3-103(A)(prohibiting formation of law partnership with
nonlawyers);
DR 4-101(B)(requiring attorney to protect client confidences
and secrets);
DR 5-101(A)(prohibiting attorney from accepting employment if
the exercise of his professional judgment may be affected by
his own financial, business, property or personal interests,
except with client consent after full and adequate
disclosure);
DR 5-104(A)(prohibiting business transactions with a client if
attorney and client have differing interests, unless client
consents after full and adequate disclosure); and
DR 5-105(A, B and C)(prohibiting representation of multiple
parties with conflicting interests unless obvious that
attorney can adequately represent multiple clients and each
consents after full disclosure).
Based upon these facts, you have asked the committee to address a
number of issues concerning the ethical propriety of this
arrangement.
1. Will the President of Law Firm violate the Code of
Professional Responsibility by establishing and having an
ownership interest in Consulting Firm?
The committee has previously opined that an attorney's dual
activities of practicing law and engaging in related business
endeavors is not per se improper. However, the committee has
opined that such activities must comply with the requirements of DR
5-101(A) and other applicable provisions in the Code of
Professional Responsibility. Arrangements of this sort have been
approved where practicing attorneys have established and held
ownership interests in non-legal ancillary businesses. See, e.g.,
LEO #1564 (title insurance agencies); LEO #1254 (bail bond
services); LEO #1198 (court reporting service); LEO #1163
(accounting service); LEO #1131 (realty corporation) and LEO #1083
(non-legal services subsidiary). Thus, the committee is of the
opinion that it is not improper for an attorney to acquire an
ownership interest in a non-legal business, provided that the
requirements under DRs 5-101(A) and 5-104(A) are met, including
full disclosure to clients of the attorney's financial interest in
such a business where related services or products of the business
are to be provided to the attorney's clients. In addition, there
are other ethical requirements which are applicable as discussed
below.
2. May the President of Law Firm occupy the dual roles of
President and practicing attorney and Chairman of the Board of
Directors at Consulting Firm?
The committee is of the opinion that the President may serve as
both President and practicing attorney and simultaneously serve as
Chairman of the Board of Directors and thereby have a managerial
role in the operation of the non-legal business. However, the
attorney must comply with the disclosure and consent requirements,
restrictions on compensation, and prohibitions against sharing
legal fees with the non-lawyer business. See, LEO #1564.
3. May Law Firm and Consulting Firm share a common logo and
similar letterhead trade name and style?
The committee believes that it is incumbent on the attorney to
insure that the public and clients are not misled by the use of
trade names, letterhead, advertising and other forms of public
communications so that the activities of Consulting Firm and Law
Firm are held out to the public as separate and distinct. Since
the two firms will occupy the same building, lobby space and share
support staff, the attorney must insure that the public is not
confused as to which business may lawfully give legal advice. The
common logo, letterhead trade name and style of the two firms must
not be so similar that the public may be confused or misled as to
the role of each firm. Consulting Firm cannot, through public
communications or advertising, suggest or imply that it provides
legal advice or services. Therefore, the committee is of the
opinion
that the use of a common logo, similar letterhead trade name and
style must comply with DRs 2-101(A), 2-102(A) and 2-102(B). These
requirements are met where the logo, trade name and style used by
the Consulting Firm make it clear that the Consulting Firm provides
non-legal services.
4. May Law Firm and Consulting Firm share overhead expenses such
as secretarial support, library resources, lobby space, etc.
?
Yes, however, in Legal Ethics Opinion #1564 the committee stated
that where an attorney conducts a law practice on the same premises
as the non-legal business, the attorney must maintain separate
signage and telephone listings, separate and secure client files,
and separated office space. In addition, where the two entities
employ the same support staff, great care must be exercised to
avoid any inadvertent disclosures of confidences and secrets. DR
2-102(A); DR 3-104 and DR 4-101. See also LEOs #754, #1318 and
#1564.
5. May Law Firm and Consulting Firm be marketed jointly to the
public as a total resource package (i.e., together they can
offer clients access to both consulting services and legal
services)?
The committee is of the opinion that the joint marketing of the
services of Law Firm and Consulting Firm as a total resource
package is not per se improper. However, the same concerns
discussed under Question #3 are pertinent here. Such conduct is
risky and great care must be exercised to avoid confusion and the
misperception that Consulting Firm is capable of providing legal
advice and counseling. Whether or not the joint marketing approach
is misleading as to the roles of the respective entities depends
upon specific facts and circumstances which are not available.
Thus, in the abstract, the committee believes that a joint
marketing approach for the two firms is not per se improper,
provided that the requirements of DR 2-101(A) are met and
Consulting Firm is not being held out as capable of practicing law.
Rules of Court, Pt. 6, I(A)(prohibiting non-lawyer from holding
himself out in any manner as authorized or qualified to practice
law).
6. If there is full disclosure to clients regarding common
ownership of the two firms, may Law Firm refer its clients to
Consulting Firm and vice versa?
The committee has previously opined that an attorney's referral of
clients to a related business in which he or she has a pecuniary
interest triggers the requirements of DR 5-101(A) and DR 5-104(A).
Since it is the attorney who is to profit by the client using the
services of the ancillary business, full and adequate disclosure is
required which will enable the client to make an informed decision.
DR 5-101(A); LEOs 1564, 1152, 939 and 886. In addition, since the
referral of a client to the Consulting Firm will create a business
transaction between lawyer and client, DR 5-104(A) requires that
the transaction must not be unconscionable, unfair or unreasonable
when made. You have also indicated that there is no fee or
compensation paid for the referral of a client by one entity to the
other, and no splitting of fees or income generated by the two
businesses. Thus the referral of clients under this arrangement
would not violate DR 2-103(D) or DR 3-102(A). Assuming these
requirements are met, it would not be improper for the one entity
to refer a client to the other.
7. What types of legal services may Law Firm provide to
Consulting Firm? For example, if a Law Firm client hires
Consulting Firm to oversee a union organizational campaign,
may Consulting Firm obtain legal advice from Law Firm
regarding legal aspects of the organizational campaign?
The committee is of the opinion that the Law Firm may provide legal
services to Consulting Firm or to Consulting Firm's clients where
legal advice, legal drafting or representation before a tribunal is
required, provided that adequate conflicts screening procedures are
adopted by both firms to avoid representation of parties adverse to
clients of the two firms. DR 5-101(A), DR 5-105(A), (B) and (D).
You have indicated that each firm will maintain separate conflicts
screening procedures. Also, Law Firm may not represent Consulting
Firm in a matter substantially related to a matter handled for a
former client, if the interests of Consulting Firm and the former
client conflict in any material respect, unless the former client
consents after disclosure. DR 5-105(D).
8. May Law Firm shareholders provide non-legal services for
Consulting Firm in the future if these shareholders continue
to be licensed to practice law but are no longer actively
practicing law or employed by Law Firm?
The committee is aware of no disciplinary rule in the Code of
Professional Responsibility that would prohibit this conduct.
However, the committee has previously opined that a lawyer must
comply at all times with applicable rules of the Code of
Professional Responsibility, whether or not the attorney is acting
in a professional capacity as a lawyer. See LEO #1185.
[DRs 2-101(A), 2-102(A) & (B), 2-103(D), 3-101(A), 3-102(A), 3-104,
4-101(B), 5-101(A), 5-104(A), 5-105 (A), (B) & (C); LEOs 754, 886,
939, 1083, 1254, 1131, 1152, 1163, 1185, 1198, 1318, 1564]
Committee Opinion
December 6, 1995
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