Lawyer ethics rules are public policy statements. Of course they are.

There is a lot of activity that can take place at the intersection of the lawyer ethics rules and public policy.  There can be issues that aren’t addressed by lawyer ethics rules (or at least not fully addressed) but that are addressed as a matter of state public policy.  What there really can’t be though are issues that are addressed by a state’s lawyer ethics rules but that are not addressed by state public policy.  At least, there can’t be in a state where the attorney ethics rules have been adopted as part of a court rule.

This is because, generally speaking, court rules are elevated in dignity to the equivalent of statutes.  Thus, using Tennessee as an example, the Tennessee Rules of Professional Conduct, enshrined as they are in Rule 8 of the Tennessee Supreme Court Rules, establish the public policy of our state on the issues they address.  Our Tennessee Supreme Court made this point plain in 2002.  Crews v. Buckman Labs, 78 S.W.3d 852 (Tenn. 2002) was an important decision on both questions of lawyer ethics and employment law where the Court explained that a lawyer claiming to have been fired for exercising her ethical duty to report another lawyer’s misconduct could challenge the employment action as an unlawful termination in violation of state public policy.

This point — that attorney ethics rules are state public policy — was a bit lost on one of the litigants in a piece of litigation in federal court in Virginia arising from a dispute among former law partners governed by the D.C. Rules of Professional Conduct.  The point was not lost on the district judge presiding over the litigation, however.

The Moskowitz v. Jacobson Holman, PLLC litigation came about after a lawyer departed his law firm for greener pastures.  The firm, exercising its authority under its operating agreement, denied the lawyer 50% of his equity interest on departure because he took some clients with him when he left.  In response to a counterclaim from the firm, the departed lawyer argued that the provision in the operating agreement allowing such forfeiture violated RPC 5.6 and was void.  On a motion for judgment on the pleadings, the district court ruled that if it is shown that RPC 5.6 was violated, then no additional showing would be required to find that aspect of the contract to be unenforceable.  (Though the suit was filed in Virginia federal court, the D.C. ethics rules applied to the firm’s agreement.)

There are, of course, other contexts where this kind of argument about public policy made by the law firm could be viable.  For example, courts are split about whether an agreement to share fees with a nonlawyer in violation of the attorney ethics rules can still be enforced by the nonlawyer.  Since the party seeking to enforce the terms of the contract is not a lawyer in those instances and the ethics rules do not apply to their conduct, it is not surprising to learn that some courts allow enforcement of such a contract even though the lawyer involved violated his or her ethical obligations under the relevant version of RPC 5.4(a).  In the context of an RPC 5.6 violation though, everyone involved is a lawyer and governed by the ethics rules.

To me, the closer question is the one that the court had to assume was true for purposes of resolving the judgment on the pleadings issue:  whether the kind of forfeiture provision in the law firm’s operating agreement actually violates RPC 5.6(a).

In Tennessee, our version of the rule is identical to the ABA Model Rule and provides that lawyers cannot “participate in offering or making a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.”

Nothing in our Comment to the Rule, nor the ABA’s, elaborates on what terms short of actual restriction on practice qualify as prohibited by the rule.  At least in my state, a robust argument could be had over whether a “financial penalty” alone is something that “restricts the right of a lawyer to practice after termination of the relationship.”  The fact that the “except” language in the dependent clause addresses a financial issue is certainly potentially persuasive evidence that this type of arrangement could be found to violate RPC 5.6(a).

Under the D.C. version of the rule, an additional paragraph exists in the Comment [numbered as Cmt. [2] in D.C.] that states:  “Restrictions, other than those concerning retirement benefits, that impose a substantial financial penalty on a lawyer who competes after leaving the firm may violate paragraph (a).” Yet, D.C.’s word choice leaves an opening.  D.C. went with “may violate” so the potential exists that you could have a provision that imposes a substantial financial penalty on a lawyer who competes after leaving the firm that would not violate RPC 5.6(a).

Kickstarter worked for the potato salad guy, but it is more like a nonstarter for fledgling lawyers.

It was about two years ago when a man from Ohio put up a Kickstarter to raise $10 to make potato salad and ended up receiving tens of thousands of dollars in donations.  I’m sure there were many people who were familiar with this concept before then, but for me that was the first I’d heard of the online phenomenon of crowdfunding.  Most recently, it seems like a good bit of the news on crowdfunding has been of the weird variety where people use it to raise money for police officers who shoot unarmed people.

I never thought I’d see lawyers interested in using crowdfunding to actually permit them to set up a law practice.  I didn’t think I’d see it for two reasons: (1) the ethics rules prohibiting nonlawyer investment in law firms would never allow something like that; and (2) if you are going to hope a collection of strangers with too much money on their hands will throw some your way, why wouldn’t you leverage it to do something much less stressful than practice law?

Yet, yesterday I read the stories about the new law school graduates drowning in student loan debt who were kicking around the idea and the resulting New York State Bar Association ethics opinion.   It is not entirely clear why this opinion, written and issued back on June 29, 2015, is just now surfacing in the news, but in tooling around and reading a few stories about the opinion I came across a second unexpected development —  much of the reporting on this opinion appears to be giving it a positive headline as if the newsworthy aspect of the opinion indicates that maybe a lawyer could pursue this.

Yet, thoughtful reading of the opinion demonstrates that is the wrong sort of headline.  The NYSBA opinion explains that from what it can decipher there are 5 types of crowdfunding endeavors.  One is sort of just syndicating a loan with many, many small loans from individuals for a project that might not get a large amount of funding from a bank or other institutional investor.  The committee spends no time talking about the ethical implications of that option because that still would just be more debt for these new law grads and the law grads making the request indicated that they were interested in crowdfunding to avoid being saddled with additional debt.

Two of the other five approaches, the investment model and a royalties model, are ones the committee explained are nonstarters from an ethics perspective because they involve either (the investment model) nonlawyer ownership in the firm in violation of RPC 5.4(d) or they amount to an arrangement in which there would be fee sharing between lawyer and nonlawyer in violation of RPC 5.4(a).  These obvious answers to the ethical issue are one of those two reasons stated above that I didn’t think I’d see lawyers exploring this model.

Finally, the two other types are the straight, no-strings-attached donation approach and the “reward” model, where you are overpaying for some small item in return approach.  As to the donation approach, the committee did not see any ethical problem with it.  (Also they were kind enough to not explicitly state that the only chance this would work is if you threw in an offer of some potato salad.  And, if you didn’t actually follow the potato salad story back when it happened, the guy did end up throwing a big party with the proceeds and giving some funds to charity so that at least had something of a happy ending.)

As to the reward model, the inquiring lawyers said that perhaps they would offer an informational pamphlet or agree to provide pro bono services to some charitable organizations.  The committee says that could be ethically viable but that there were some land mines, like making sure the informational pamphlet didn’t offer legal advice and complied with advertising restrictions and making sure that, if offers were made to do pro bono work for a charitable organization, that the lawyer could remain available to do so ethically.  In addressing this approach, the committee offered a call-back to a 2011 opinion it issued about “deal of the day” websites like Groupon.

What is really disappointing is, having gone to all of the trouble of putting out an opinion on this topic and even referencing its prior Groupon analysis, it might have actually been more helpful to address a variation on the reward approach which might be economically viable.  Could lawyers put up a crowdfunding offer where anyone who contributes say $50 today receives $200 in free legal services from this firm at any time in 2016?  Such an approach might just provide the level of seed money needed to start up the infrastructure of a law practice and might, assuming the lawyer can develop some regular clients (who weren’t also investors), allow the lawyer to eventually turn a profit.  Such an approach also would, in theory, be no more perilous from an ethics perspective than the Groupon situation.

But, really, the most valuable thing this ethics opinion does — in a fairly easy to observe way — is to lay bare how the absolute restriction on nonlawyer investment in a law firm goes way beyond what would be necessary to protect the espoused public interest being served — which it says in the Comment to the Rule is “to protect the lawyer’s independence of professional judgment.”  The regulatory concern is that if lawyers practice in a law firm that is controlled by non-lawyers then the lawyers will not adhere to their ethical obligations and will instead allow themselves to be directed to do whatever is necessary for the firm — and therefore the investors — to turn a profit.  Yet, if a law firm raised $50,000 in start up capital $25 at a time from 2,000 investors, would you really be worried that any of those 2,000 individuals would be in a position to control or direct the independent professional judgment of the lawyers in the law firm?  No, of course not.

Plaintiffs’ personal injury firm is to investment banker as . . . ?

A major issue that has dogged the legal profession in the past, and looks likely to dog it again in the near future (if you don’t happen to think it already does), is the debate over the restriction imposed under the ethics rules that prevents non-lawyers from having any ownership stake in a law firm.  In Tennessee, this prohibition is housed in two parts of RPC 5.4.  RPC 5.4(b) imposes a prohibition on partnerships with nonlawyers if any partnership activities involve the practice of law, and RPC 5.4(d) addresses restrictions on law practices taking other corporate forms.  “Third rail” analogies are overdone in general, but it would not be far from the mark to say that, at least for the American Bar Association, advocating in favor of changing the ethics rules to permit non-lawyer investment in law firms is the “third rail” of politics within that organization.  To some extent, this is not surprising as it is not a position that enjoys any sort of widespread popularity.  As but an example, in March 2015, the Tennessee Bar Association polled Tennessee lawyers and asked whether they supported or opposed allowing non-lawyer corporations to own and operate law firms and received a response that was 85% in opposition.

In 2015, D.C. is the only U.S. jurisdiction to permit such nonlawyer ownership to any extent.  There are multiple nations that now allow for such investment, including the U.K. and Australia, which has led even to public ownership in stock in publicly-traded law firms in those nations.  There are loud voices that insist that American lawyers should be empowered to obtain capital and investment from non-lawyer sources.

I do not think of myself as an advocate at this stage for the rules to shift from the current restrictions but I certainly acknowledge there is intellectual merit to arguments that, as long as certain other restrictions under the ethics rules remain, then it should not be dismissed out of hand.  For example, provided that the core concept that lawyers must not allow outside influences to interfere with their independent professional judgment set out in rules such as RPC 1.8(f) and RPC 5.4(c) survives, then the specter of a lawyer somehow being “beholden” to shareholders to “win at any cost” or to put the bottom line above client interests should not be viewed as any greater a concern or fear than when insurance companies retain and pay lawyers to represent insureds.  If those arrangements do not result in the eradication of the independent professional judgment of the lawyers hired in such an arrangement, then why should such eradication be presumed if a law firm were to be publicly-traded.  In fact, there are, in Tennessee and elsewhere, law firms that are essentially captive entities which provide only legal services to insureds of an insurance company.  If such an entity can exist without running afoul of the core tenets of RPC 1.8 and RPC 5.4, then there is no real intrinsic reason that non-lawyer investment in a law firm might not also be accomplished without eroding the attorney-client relationship or bankrupting the professional ethics of lawyers operating in such a structure.

One thing has always seemed clear to me, any significant change in the U.S. on this issue is not going to be brought about by the kind of lawsuit that was filed by Jacoby & Meyers seeking a ruling that New York’s ban on non-lawyer ownership was unconstitutional as a First Amendment violation.  That suit appears to have now received its death knell ruling earlier this month.  While I am not surprised by the outcome, I do admit to being surprised at the level of vitriol that seems to lurk beneath the surface in the district judge’s opinion.  In taking down the constitutional challenges presented to him, Judge Kaplan’s opinion seems to drip with antipathy toward the litigant as much as the litigant’s positions.  (And, worse yet, it also reads like the judge is perturbed as much by having been reversed previously in the case by the Second Circuit as anything else.)  Which is kind of a shame because some of the firm’s positions — for example, an equal protection argument with a premise that lawyers with Jacoby & Meyers and investment bankers are similarly situated — merited a real rebuke.  It isn’t quite “as a fish is to a bicycle” kind of stuff, but investment banker is not among the first things people would think of to equate with a plaintiffs’ personal injury law firm.

Washington decides to also let LLLTs share fees and have ownership interest in law firms

This news out of Washington state is an unfortunate development if you had hopes that the concept of Limited License Legal Technicians (LLTs) might be a more broadly adopted cure for the “justice gap” that ails the profession in many parts of the country.  Washington state’s decision to permit lawyers to share attorney fees with LLLTs and to permit LLLTs to have ownership interests in law firms is going to likely curtail just how easily this concept can be spread to other parts of the country.  For those new to this blog, I’ve written on a couple of occasions here and here about this concept of the equivalent of a “nurse practitioner for the legal profession.”

If there is something like a “third rail” in the legal profession in the U.S., it would be allowing ownership in law firms by people who aren’t lawyers.  Over the years, proposals to open up investment or ownership opportunities in law firms in the U.S. have stirred up anger and passionate opposition.  As a result, other than Washington, D.C.’s unique version of RPC 5.4, efforts to open up such opportunities have gone nowhere.  And, sometimes, even thinking out loud about the possibilities gets met with shouting.

My suspicion has been that the arguments against pursuing LLLTs most likely to gain real traction in other jurisdictions were always going to be of the “slippery slope” variety.  Washington state’s move to open up law firm ownership opportunities to the ranks of these legal technicians will only make it harder to knock down such concerns.  Even the headline of, and the tone of the ABA article linked to above, gives a feel for how this may very well shift the dynamic and the nature of the conversation in a direction that is simply not helpful if you were thinking LLLTs might be a viable answer other than in a handful of jurisdictions.