Conflicts of Interest Under New DR 1-106

By Roy Simon

[Originally published in NYPRR November 2001]

Conflict of interest issues are likely to be the most frequent and difficult issues under New York’s new MDP rules, which take effect on Nov. 1, 2001. Last month, I asked how the rule on personal conflicts of interest [DR 5-101] applies to the contractual relationships with non-legal professionals envisioned by DR 1-107. This month I focus on conflicts of interest under DR 1-106.

What Does DR 1-106 Cover?

New DR 1-106 covers non-legal services that a law firm provides, directly or indirectly, to its clients or to others. The rule refers to three types of providers:

• A law firm (i.e., the law firm’s own non-lawyer employees)

• A lawyer who also provides non-legal services (i.e., a dual-profession lawyer)

• An entity that a lawyer or law firm owns, controls, is an agent of, or is otherwise affiliated with (i.e., an entity legally separate from the law firm itself).

The MacCrate Committee (which proposed the new rules last year) gave the following examples of non-legal services provided by non-lawyer employees of a law firm:

[P]atent lawyers routinely hire scientists and non-lawyer patent agents to work with them on client projects. Antitrust lawyers frequently employ economists to assist them in dealing with the economic issues and working with expert witnesses and other outside consultants. Many law firms have professional lobbyists on staff to assist them in governmental relations. Practitioners in the real estate tax certiorari or condemnation fields often employ appraisers who assist them in advocacy as to the values for specific properties. Elder law attorneys often employ social workers who serve their clients in conjunction with the legal services provided.…

Report of the NYSBA Special Committee on the Law Governing Firm Structure & Operation 98–99 (April 2000).

Regarding lawyers who personally provide both legal and non-legal services, the MacCrate Committee noted that “lawyers often practice … a wide variety of other professions and callings, including real estate brokerage, insurance brokerage, financial planning, medicine, nursing, social work, and so on.” The Committee specifically mentioned the American Association of Attorney-Certified Public Accountants, formed by lawyer-accountants back in 1964. [Id. at 99.]

My question is: When do the conflict of interest rules — especially DR 5-105 and DR 5-108 — apply to these non-legal services?

When either the law firm itself or a dual-practice lawyer within the firm directly provides the non-legal services, the new rule divides up the non-legal services into two categories — “distinct” and “not distinct” — to which I now turn.

Non-Legal Services that ‘Are Not Distinct’: DR 1-106(A)(1)

Under DR 1-106(A)(1), if a law firm simultaneously provides a client with legal and non-legal services that “are not distinct” from each other, then the Disciplinary Rules — including the conflict rules — apply to both the non-legal services (as well as the legal services, of course). New EC 1-9, which refers specifically to “prohibitions against representation of persons with conflicting interests,” states: “[W]here the legal and non-legal services are not distinct, DR 1-106(A)(1) requires that the lawyer providing non-legal services adhere to all of the requirements of the Code of Professional Responsibility with respect to the non-legal services.” Nothing in DR 1-106 allows a client to waive this protection.

To use an example, suppose a law firm represents Major Corp. in a merger transaction, and an economist on the law firm’s staff provides Major with a prediction of its post-merger market share. Because the legal and economic services in this example are “not distinct,” the economist’s services are governed by the conflict rules. Thus, the economist cannot offer his services to anyone else (whether or not that person is a client of the law firm) if the Disciplinary Rules would prohibit the law firm itself from providing legal services to that person.

As long as the economist is working on the merger for Major Corp., he may not simultaneously do any work for a litigation opponent or transactional adversary of Major Corp., even in a wholly unrelated matter, unless he satisfies the twin prongs of DR 5-105(C) — “a disinterested lawyer would believe that the lawyer can competently represent the interests of each [client]” and “each consents to the representation after full disclosure. …” Moreover, if Major becomes a former client, DR 5-108 will prohibit the economist from providing his non-legal services to any adversary of Major in a matter substantially related to the merger (e.g., an antitrust challenge to the merger) absent Major’s consent after full disclosure.

As a corollary, under DR 5-105(E), the economist must keep contemporaneous records of all of his engagements, and must check each proposed new engagement against those engagements for conflicts. If the conflict of interest rules would prohibit the law firm from representing or advising a given client, then the same rules will prohibit the economist from serving that client.

Finally, as new EC 1-9 explains: “DR 1-106(A)(1) applies to the provision of non-legal services by a lawyer even when the lawyer is not personally providing any legal services … if the person is also receiving legal services from another lawyer in the firm that are not distinct from the non-legal services.” Needless to say, when a lawyer is personally providing both legal and non-legal services to the same client, the lawyer must adhere to the Disciplinary Rules not only when providing the legal services but also when providing the non-legal services.

Non-Legal Services that ‘Are Distinct’: DR 1-106(A)(2)

On the other hand, under DR 1-106(A)(2), if the law firm itself provides non-legal services to a client that “are distinct” from the legal services the law firm is providing to that client, then the Disciplinary Rules do not apply to the non-legal services unless the client “could reasonably believe that the non-legal services are the subject of an attorney-client relationship.” Even that risk can be reduced or eliminated if the law firm, pursuant to DR 1-106(A)(4), “has advised the person receiving the services in writing that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the non-legal services …” (Of course, the disclaimer is effective only if the non-legal services really are non-legal services. The services must be neither the unauthorized practice of law by a non-lawyer nor the authorized practice of law by a lawyer who is also capable of providing non-legal services. A disclaimer cannot transform legal services into non-legal services; it can only dispel client confusion about non-legal services.)

New EC 1-11 elaborates on the disclaimer option as follows:

… Such a communication should be made before entering into an agreement for the provision of non-legal services, in a manner sufficient to assure that the person understands the significance of the communication. In certain circumstances, however, additional steps may be required to communicate the desired understanding. For example, while the written disclaimer set forth in DR 1-106(A)(4) will be adequate for a sophisticated user of legal and non-legal services, a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and non-legal services…

Unfortunately, DR 1-106 (A)(2) does not expressly cover the situation in which a law firm, through a non-lawyer employee, provides non-legal services to a person who is not a client of the law firm. The rule refers only to non-legal services distinct from “legal services being provided to that person by the lawyer or law firm.” In my view, when non-clients obtain services from a law firm’s staff employees, the services should be subject to the Disciplinary Rules if the person receiving the services “could reasonably believe that the non-legal services are the subject of an attorney-client relationship.” Accordingly, if a law firm allows its non-lawyer employees to serve the public, the law firm should always provide the non-client with a disclaimer, pursuant to DR 1-106(A)(4), stating that “the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the non-legal services …”

Non-Legal Services Provided By Affiliated Entities: DR 1-106(A)(3)

The MacCrate Committee listed the following examples of non-legal services provided by law firm affiliates:

• San Francisco’s Littler-Mendelsohn, which concentrates its practice in management-side labor relations, established a subsidiary called Employment Law Training, Inc. to train clients on how to minimize employment discrimination.

• Washington, D.C.’s Howrey & Simon has formed three subsidiaries: (1) Capital Environmental employs scientists and other specialists who provide risk analysis regarding environmental cleanup costs; (2) Capital Accounting employs accountants to assist the law firm’s litigation clients in measuring their damages and exposure; and (3) Capital Economics employs economists and accountants who perform market analysis for mergers and acquisitions.

• Detroit’s Dickinson Wright, using computer technicians that it had hired to meet the law firm’s internal needs, created a company called Technology Consulting Partners that helps businesses such as Chrysler Financial and Dollar Rent-a-Car manage their operations more efficiently.

• New York’s Anderson Kill & Olick, which represents clients in insurance coverage disputes, formed a company named Anderson Kill Insurance Services to advise companies on such subjects as choosing appropriate policies and securing maximum recoveries in policy disputes without litigation.

• Long Island’s Ruskin, Moscou, Evans & Faltischek formed an investment banking firm named Island Star Capital to advise Long Island companies regarding mergers and acquisitions, to help them raise capital, and to lend management expertise to early stage companies.

When law firm subsidiaries or other affiliates provide non-legal services, the services are governed by DR 1-106(A)(3), which parallels DR 1-106(A)(2). Thus, exactly as under DR 1-106(A)(2), the law firm is subject to the Disciplinary Rules with respect to the non-legal services provided by the affiliated entity “if the person receiving the services could reasonably believe that the non-legal services are the subject of an attorney-client relationship.” (However, there is an exception “if the interest of the lawyer or law firm in the entity providing the non-legal services is de minimis.”)

When a non-legal entity (rather than a law firm) provides non-legal services, the risk that the recipient will confuse the non-legal services with legal services is reduced. But some non-legal services look confusingly like legal services. Consider advice about how to minimize employment discrimination, or advice about mergers and acquisitions, or advice about securing maximum recoveries in insurance disputes. If the non-legal subsidiary uses an affiliated law firm’s name as part of its own name, or shares office space with a law firm, or engages in joint marketing efforts with the law firm, then the risks significantly increase that the recipient “could reasonably believe that the non-legal services are the subject of an attorney-client relationship.” Therefore, whenever possible, the law firm should provide the consumer of the non-legal services with a disclaimer pursuant to DR 1-106(A)(4).

Conclusion

Despite its cloudy language, the message of DR 1-106 is simple. When a law firm directly provides a client with both legal and non-legal services that are “so closely entwined that they cannot be distinguished from each other” (EC 1-9), then the non-legal services are always subject to the Disciplinary Rules, including the conflict of interest rules. When either a law firm itself or an affiliated entity provides a person with non-legal services that the law firm considers distinct from any legal services offered by the law firm, the law firm should always explain to the recipient that the services “are not legal services and that the protection of an attorney-client relationship does not exist with respect to the non-legal services…” A law firm that does not issue such a disclaimer regarding non-legal services must either scrupulously abide by the Disciplinary Rules or bear the risk of a reasonable recipient’s confusion.

Roy Simon is a Professor of Law and Director of the Institute for the Study of Legal Ethics 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.

[Editor’s note: Portions of the text below were quoted by Professor Simon in his article above. The text was obtained from the NYSBA with the understanding that it is subject to revision by the NYSBA until the effective date (Nov. 1, 2001).]

NEW YORK STATE BAR ASSOCIATION ETHICAL CONSIDERATIONS

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Provision of Non-Legal Services

EC 1-9: For many years, lawyers have provided non-legal services to their clients. By participating in the delivery of these services, lawyers can serve a broad range of economic and other interests of clients. 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. The recipient of the non-legal services may expect, for example, that the protection of client confidences and secrets, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of non-legal services, when that may not be the case. The risk of confusion is especially acute when the lawyer renders both legal and non-legal services with respect to the same matter. Under some circumstances, the legal and non-legal services may be so closely entwined that they cannot be distinguished from each other. In this situation, the recipient is likely to be confused as to whether and when the relationship is protected as a client-lawyer relationship. Therefore, where the legal and non-legal services are not distinct, DR 1-106(A)(1) requires that the lawyer providing non-legal services adhere tall of the requirements of the Code of Professional Responsibility with respect to the non-legal services. DR 1-106(A)(1) applies to the provision of non-legal services by a lawyer even when the lawyer is not personally providing any legal services to the person for whom the non-legal services are being per-formed if the person is also receiving legal services from another lawyer in the firm that are not distinct from the non-legal services.

EC 1-10: Even when the lawyer believes that the provision of non-legal services is distinct from any legal services being provided, there is still a risk that the recipient of the non-legal services might reasonably believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(2) requires that the lawyer providing the non-legal services adhere to the Disciplinary Rules, unless exempted. Non-legal services also may be provided through an entity with which a lawyer is affiliated, for example, as owner, controlling party or agent. In this situation, there is still a risk that the recipient of the non-legal services might reasonably believe that the recipient is receiving the protection of an attorney-client relationship. Therefore, DR 1-106(A)(3) requires that the lawyer involved with the entity providing non-legal services adhere to all the Disciplinary Rules with respect to the non-legal services, unless exempted.

EC 1-11: The Disciplinary Rules will be presumed to apply to a lawyer who directly provides or is otherwise involved in the provision of non-legal services unless the lawyer complies with DR 1-106(A)(4) by communicating in writing to the person receiving the non-legal services that the services are not legal services and that the protection of an attorney-client relationship does not exist with respect to the non-legal services. Such a communication should be made before entering into an agreement for the provision of non-legal services, in a manner sufficient to assure that the person understands the significance of the communication. In certain circumstances, however, additional steps maybe required to communicate the desired understanding. For example, while the written disclaimer set forth in DR 1-106(A)(4) will be adequate for a sophisticated user of legal and non-legal services, a more detailed explanation may be required for someone unaccustomed to making distinctions between legal services and non-legal services. The lawyer or law firm will not be required to comply with these requirements if its interest in the entity providing the non-legal services is so small as to be de minimis.

EC 1-12: Although a lawyer may be exempt from the application of Disciplinary Rules with respect to non-legal services on the face of DR 1-106(A), the scope of the exemption is not absolute. A lawyer who provides or who is involved in the provision of 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). A lawyer or law firm is always subject to these Disciplinary Rules with respect to the rendering of legal services.

Contractual Relationships Between Lawyers and Non-Legal Professionals

EC 1-13: DR 1-107 permits lawyers to enter into inter professional contractual relationships for the systematic and continuing provision of legal and non-legal professional services provided the non-legal professional or non-legal professional service firm with which the lawyer or law firm is affiliated does not own, control, supervise or manage, directly or indirectly, in whole or in part, the practice of law by the lawyer or law firm. The non-legal professional or non-legal professional service firm 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.

EC 1-14: The contractual relationship permitted by DR 1-107 may provide for the reciprocal referral of clients by and between the lawyer or law firm and the non-legal professional or non-legal professional service firm. It may also provide for the sharing of premises, general overhead, or administrative costs and services on an arm’s length basis. Such financial arrangements, in the context of an agreement between lawyers and other professionals to provide legal and other professional services on a systematic and continuing basis, are permitted subject to the requirements of DR 2-103(B)(1) and DR 1-107(D). Similarly, lawyers participating in such arrangements remain subject to general ethical principles in addition to those set forth in DR 1-107 including, at a minimum, DR 2-102(B), DR 5-105(A), DR 5-105(B), DR 5-107(B), DR 5-107(C), and DR 5-108(A). Thus, the lawyer or law firm may not, for example, include in its firm name the name of the non-legal professional service firm or any individual non-legal professional, or enter into formal partnerships with non-lawyers, or practice in an organization authorized to practice law for a profit in which non-lawyers own any interest. Moreover, a lawyer or law firm may not enter into an agreement or arrangement for the use of a name in respect of which a non-legal professional or non-legal professional service firm has or exercises a proprietary interest if, under or pursuant to the agreement or arrangement, that non-legal professional or firm acts or is entitled to act in a manner inconsistent with DR 1-107(A)(2) or EC 1-13. More generally, although the existence of a contractual relationship permit-ted by DR 1-107 does not by itself create a conflict of interest violating DR 5-101(A) whenever a law firm represents a client in a matter in which the non-legal professional service firm’s client is also involved, the law firm’s interest in maintaining an advantageous relationship with the non-legal professional service firm might, in certain circumstances, adversely affect the independent professional judgment of the law firm, creating a conflict of interest.

EC 1-15: Each lawyer and law firm having a contractual relationship under DR 1-107 has an ethical duty to observe these Disciplinary Rules with respect to its own conduct in the context of the contractual relationship. For example, the lawyer or law firm cannot permit its obligation to maintain client confidences as required by DR 4-101 to be compromised by the contractual relationship or by its implementation by or on behalf of non-lawyers involved in the relationship. In addition, the prohibition in DR 1-102(A)(2) against a lawyer or law firm circumventing a Disciplinary Rule through actions of another applies generally to the lawyer or law firm in the contractual relationship.

EC 1-16: When in the context of a contractual relationship permitted under DR 1-107 a lawyer or law firm refers a client to the non-legal professional or non-legal professional service firm, the lawyer or law firm shall observe the ethical standards of the legal profession in verifying the competence of the non-legal professional or non-legal professional services firm to handle the relevant affairs and interests of the client. Referrals should only be made when requested by the client or deemed to be reasonably necessary to serve the client.

EC 1-17: To assure that only appropriate professional services are involved, a contractual relationship for the provision of services is permitted under DR 1-107 only if the non-legal party thereto is a professional or professional service firm meeting appropriate standards as regards ethics, education, training, and licensing. The Appellate Divisions maintain a public list of eligible professions. A member of a non-legal profession or professional service firm may apply for the inclusion of particular professions on the list, or professions may be added to the list by the Appellate Divisions sua sponte. 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 1-107when so dealing with the non-lawyer. 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.

EC 1-18: Depending upon the extent and nature of the relationship between the lawyer or law firm, on the one hand, and the non-legal professional or non-legal professional service firm, on the other hand, it may be appropriate to treat the parties to a contractual relationship permitted by DR 1-107 as a single law firm for purposes of these Disciplinary Rules, as would be the case if the non-legal professional or non-legal professional service firm were in an of counsel relationship with the lawyer or law firm. If the parties to the relationship a retreated as a single law firm, the principal effects would be that conflicts of interest are imputed as between them pursuant to DR 5-105(D), and that the law firm would be required to maintain systems for determining whether such conflicts exist pursuant to DR5-105(E). To the extent that the rules of ethics of the non-legal profession conflict with these Disciplinary Rules, the rules of the legal profession will still govern the conduct of the lawyers and the law firm participants in the relationship. A lawyer or law firm may also be subject to legal obligations arising from a relationship with non-lawyer professionals who are themselves subject to regulation.

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EC 2-10: A lawyer should ensure that the information contained in any advertising which the lawyer publishes, broadcasts or causes to be published or broadcast is relevant, is disseminated in an objective and understandable fashion, and would facilitate the prospective client’s ability to select a lawyer. A lawyer should strive to communicate such information without undue emphasis upon style and advertising stratagems which serve to hinder rather than to facilitate intelligent selection of counsel. Although communications involving puffery and claims that cannot be measured or verified are not specifically referred to in DR2-101, such communications would be prohibited to the extent that they are false, deceptive or misleading. Special care should be taken to avoid the use of any statement or claim which is false, fraudulent, misleading, deceptive or unfair, or which is violative of any statute or rule of court, in disclosing information, by advertisements or otherwise, relating to a lawyer’s legal or non-legal education, experience or professional qualifications, the nature or extent of any non-legal services provided by the lawyer or by an entity owned and controlled by the lawyer, or the existence of contractual relationships between the lawyer or law firm and a non-legal professional or non-legal professional service firm, to the extent permitted by DR 1-107, and the nature and extent of services available through those contractual relationships. A lawyer who advertises in a state other than New York should comply with the advertising rules or regulations applicable to lawyers in that state.

Conflicts of Interest Non-Legal Professionals Non-Legal Services Roy Simon