Proposed Rule 5.4: Professional Independence of a Lawyer

1. A lawyer shall not permit a nonlawyer or any person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.


2. A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
   1. An agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;
   2. A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer;
   3. A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and
   4. Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (c).


3. A lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by one or more nonlawyers who perform professional services on behalf of the organization or its clients, but only if:
   1. Lawyers who perform legal services on behalf of the organization assume responsibility for nonlawyer participants engaged in legal representations as provided under Rule 5.3, and such lawyers make reasonable efforts to ensure that the organizations in which they practice do not intentionally or inadvertently lead their clients or customers receiving nonlegal services to believe that those services are subject to the professional conduct standards and confidentiality protections applicable to legal services.
   2. At the outset of a legal representation on behalf of a new client for legal services, a lawyer practicing law in such an organization makes full disclosure to the prospective client of information sufficient to permit the prospective client to make an informed decision whether to retain the lawyer to provide legal services, including (i) the nature of the lawyer's interest in other services provided by the organization; (ii) that some of the services provided by the organization are not legal services and are not governed by the standards and confidentiality protections applicable to legal services; (iii) that nonlawyer participants in the organization may undertake to provide nonlegal services to the client or to adversaries of the client; (iv) that actual or potential conflicts of interest may arise from the lawyer's interest in services provided by nonlawyer participants in the organization; (v) that the form of partnership or organization may create risks with respect to the attorney-client privilege and of precautions necessary or appropriate to protect confidences and secrets of the client; and (vi) that legal services are available from sources that do not present the same risks.
   3. In considering the acceptance or retention of a legal representation, the lawyer complies with Rule 1.7 with respect to conflicts of interest and, where required, obtains from legal services clients such informed consent as may be required by Rule 1.7(c) to permit the acceptance or continuation of such a representation.

Comment

Independent professional judgment
[1] This Rule permits lawyers to share both legal and nonlegal fees with nonlawyers within a single organization. A lawyer offering legal services is subject to all the Rules of Professional Conduct, whatever the form or nature of the organization in which the lawyer practices. A lawyer must resist any effort by any nonlawyer (other than a client) to interfere with the exercise of the lawyer's independent professional judgment in rendering legal services to another. An arrangement in which a person other than a client pays the lawyer's fee or salary, or recommends employment of the lawyer, does not modify the lawyer's obligations to the client. As stated in paragraph (a) of this Rule, a lawyer must not permit any such person or arrangement to interfere with the lawyer's professional judgment. See also Rule 1.8(e).

Conflicts of interest, disclosure and consent
[2] A lawyer participating in an organization owned or managed in part by nonlawyers must make full disclosure at the outset of a legal representation sufficient to permit a prospective legal services client to make an informed decision whether to retain the lawyer to provide such legal services. For example, the lawyer should discuss (i) the implications, if any, that the form of the business organization might have with respect to the attorney-client privilege and any precautions appropriate to protect confidences and secrets of the client; (ii) the possibility that nonlawyer participants in the organization might undertake to provide nonlegal services for the client or its adversaries; and (iii) actual or potential conflicts of interest that might arise from the lawyer's financial interest in revenues earned by the provision of nonlegal services. If the lawyer's financial interest in income derived from nonlegal services is more than trivial, informed consent to engage in a representation that would create a conflict between a legal client and a nonlegal client or customer must be obtained from the legal client. The lawyer must also inform the client that legal services may be obtained from sources not presenting the same risks. Additional disclosures may be required, for example, if (i) in the course of providing legal advice, a lawyer recommends that a client also purchase nonlegal services from other professionals with whom the lawyer is affiliated or (ii) a client is referred by an affiliated nonlawyer to a lawyer for legal services. Although not required, a lawyer should consider providing the necessary disclosures in writing to assure that the client appreciates the significance of the disclosure and to document the scope of the disclosure provided.

Duty to nonlegal clients
[3] This rule does not impose any obligation to obtain consent upon the organization's nonlawyers in their dealings with clients for nonlegal services. It does, however, impose a duty on lawyers practicing in an organization providing both legal and nonlegal services to take reasonable steps to assure that clients for services other than legal services are not misled into misapprehending that they or the services provided to them are subject to professional conduct standards or privileges applicable to the provision of legal services.

Differentiating legal and nonlegal clients
[4] In determining whether a given client is a legal or nonlegal services client, a functional rather than formalistic approach should be employed. If the client has an objectively reasonable expectation that a lawyer, acting as such, is to provide services which are legal in nature, then the client must be deemed a legal services client for purposes of applying these rules. This approach will provide assurance that lawyers practicing as part of a multidisciplinary organization that offers an array of legal and nonlegal services will not, either purposefully or unwittingly, overlook their professional responsibilities to clients that engage the organization to provide services of which legal services are a component.

Confidential information
[5] Rule 1.6 limits a lawyer's use or disclosure of client confidences or secrets. Disclosure of confidences or secrets to nonlawyers who are owners, managers or employed by the organization in providing non-legal services could violate the requirements of Rule 1.6 and result in the loss of the attorney-client privilege if the nonlawyers are not assisting a lawyer in providing legal advice to the lawyer's client. A lawyer, therefore, must take reasonable precautions to assure that no such information is disclosed to such nonlawyers. See generally D.C. Legal Ethics Committee Opinion No. 303 (describing measures that might be necessary to avoid inappropriate disclosure of confidences and secrets when unaffiliated lawyers share office space and support staff).

Nonlawyers who assist in providing legal services
[6] If nonlawyer owners or managers or other nonlawyers assist the lawyer in providing legal services, the lawyer must take reasonable measures to assure that those persons understand the lawyer's professional obligations and take no actions that would result in a violation of the lawyer's obligations. See Rule 5.3 (responsibilities regarding nonlawyer assistants). In particular, such nonlawyer assistants must be instructed that confidences and secrets imparted to the lawyer by or on behalf of the lawyer's client may not be disclosed within the organization beyond other lawyers in the organization and those nonlawyers employed or retained by, or associated with, the lawyer in connection with the legal representation. See Rule 1.6, and cf. D.C. Bar Legal Ethics Comm., Op. No. 303 (Feb. 20, 2001) (preserving confidentiality of client secrets and confidences within non-partnership office-sharing arrangements).

Passive investment
[7] Rule 5.4 does not permit an individual or entity to acquire all or any part of the ownership of a law partnership or other form of law practice organization solely for investment; such an investor would not be performing professional services within the organization or on behalf of clients of the organization as required under paragraph (c). Instead, sharing of financial interest and managerial authority is confined to "nonlawyers who provide professional services on behalf of the organization or its clients." The Rule is not intended to affect the interest of a person who performs professional services for the organization or on behalf of clients of the organization in (i) receiving payments pursuant to a bona fide retirement plan or (ii) providing for the payment of money, over a reasonable period after the person's death, to the person's estate or other designees.

Providers of professional services
[8] The Rule does not attempt to provide a precise definition of "professional services," but that term is intended to encompass learned callings that require mastery of a recognized field of academic knowledge and practice, encompassing, for example, law, medicine, architecture, engineering, accounting, economics, psychology, finance and similar fields. "Professional services" would not include such activities as ordinary retail or wholesale sales of consumer goods or ordinary trades, notwithstanding possible licensure. The determination whether a given activity qualifies as a "professional service" for purposes of the Rule is left to a "common law" process of inclusion and exclusion, as determined initially by appropriate decisional bodies such as the Legal Ethics Committee and the Board on Professional Responsibility and, ultimately, by the District of Columbia Court of Appeals.

Lawyer control
[9] The Rule does not require that all organizations that offer legal services be controlled by lawyers. The Rule also does not require that lawyers be segregated within any organization owned or managed in part by nonlawyers. Nonetheless, organizing the lawyers in one or more defined units within a firm or organization would minimize direct nonlawyer supervision of lawyers, encourage professional oversight and collegiality conducive to the maintenance of the standards of the Rules, and minimize privilege disputes or other disputes turning on the capacity in which a lawyer acts for a client. Such organization also would tend to facilitate the mechanics by which lawyers protect the secrets and confidences of their clients. Cf. Rule 1.6(e). Separation of the legal function and the lawyers engaged in legal practice within multidisciplinary organizations is, therefore, one means of facilitating adherence to lawyer obligations to preserve independence of professional judgment, maintain client confidences and secrets and to conform to other professional standards applicable to legal practice.

Public service
[10] Rules 6.1, 6.2 and 6.4 codify the aspiration that every lawyer participate in pro bono publico service, accept court appointments, or engage in law reform activities, and Rule 6.3 authorizes participation in legal services organizations. Participation by a lawyer in a multidisciplinary practice organization and sharing of legal fees with non-lawyers does not diminish any of these responsibilities. Public service is a professional responsibility of any lawyer, whether an owner or employee of a partnership, corporation, government agency or a sole practitioner, and whether the lawyer's practice is confined to law or includes other disciplines. These obligations do not turn on the status of the persons who control the organization in which the lawyer practices. They are personal professional obligations of every individual lawyer.

History of the Rule
[1] Following the American Bar Association's adoption of the Model Code of Professional Responsibility in 1969, nearly all jurisdictions adopted legal ethics rules that prohibited lawyers from practicing law in a partnership that includes nonlawyers or in any other organization in which a nonlawyer is a shareholder, director, or officer. Notwithstanding these strictures, the governing authority in all jurisdictions implicitly recognized exceptions for lawyers who work for corporate law departments, insurance companies, legal services organizations, government agencies, and other entities owned, managed or effectively controlled by nonlawyers.
     [2] As demand increased for a range of professional services from a single source, lawyers employed professionals from other disciplines to work for them. So long as the nonlawyers remained employees of the lawyers, these relationships did not violate the applicable ethics rules. However, when lawyers and nonlawyers considered forming partnerships and professional corporations to provide a combination of legal and other services to the public, they faced serious obstacles under the former rules.
     [3] The District of Columbia was the first United States jurisdiction to reject the absolute prohibition against lawyers and nonlawyers joining together to provide collaborative services. However, the circumstances in which such services could be offered by a single organization were severely limited by the District of Columbia Rule. As adopted in the District of Columbia in 1991, Rule 5.4 permitted a lawyer to practice law in an organization where nonlawyers held a financial interest or exercised managerial authority, but only if (1) the "sole purpose" of the organization was to provide legal services to clients, (2) the nonlawyer owners and managers of the organization agreed to be bound by the ethics rules applicable to lawyers, (3) the lawyer owners and managers undertook to be responsible for the conduct of the nonlawyer owners and managers about which they knew or should have known, and (4) each of the first three conditions was affirmed in a writing.
     [4] Nearly a decade of experience under the 1991 version of Rule 5.4 has produced no evidence in the District of Columbia that lawyers are unable to honor their professional obligations when they offer legal services within the framework of organizations in which nonlawyers hold an ownership interest or exercise managerial authority. Further, although lawyers in every jurisdiction in the country work for corporate law departments, insurance companies, legal services organizations, and other entities owned, managed or controlled by nonlawyers, and some of these lawyers provide legal services to clients other than their employers, there is no evidence that the form of business entity in which these lawyers practice prevents them from meeting their professional responsibilities to clients.
     [5] Accordingly, Rule 5.4 has been amended to permit a lawyer to practice law in an organization owned in whole or in part by nonlawyer professionals who participate in the organization by managing the organization or providing services to clients of the organization. This grant of authority is subject to the explicit requirement, applicable to all lawyers without regard to the form of the entity in which they practice, that a lawyer must not permit any nonlawyer to direct or regulate the lawyer's professional judgment in rendering legal services on behalf of another. Rule 5.4(a) reiterates the requirement that a lawyer must not permit any person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services. See also Rule 1.8(e).