Attorney Privilege

Customers love one-stop shopping. So why are lawyers dead set against it for their own profession?


"I am free to be protectionist," insisted Robert Ostertag, displaying a novel concept of freedom. Testifying against a measure to introduce competition into his industry, he continued, "What I see…is what you and I have witnessed in connection with the demise of our nation's neighborhood bookstores at the hands of Barnes & Noble and Borders [and] our neighborhood drugstores at the hands of the major pharmaceutical companies."

Why was Ostertag so alarmed? Around what victimized industry was he determined to circle the wagons? Farming? Small-town banking?

Amazingly, it was the legal profession.

Ostertag is a lawyer. And not just any lawyer: Besides practicing with a small Poughkeepsie law firm, he is a past president of the New York State Bar Association, a member of two association committees, and an adjunct professor at the prestigious Fordham Law School. Though most people don't fear that lawyers will disappear anytime soon, Ostertag is one of many attorneys waging a solemn battle on one side of what the American Bar Association calls "the most important issue to face the legal profession this century": multidisciplinary practice, or MDP.

Lawyers define MDP as the ability to share fees and join with nonlawyer professionals in a practice that delivers both legal and nonlegal professional services. Rule 5.4 of the Model Rules of Professional Conduct, adopted by every state, currently forbids the practice by providing that a lawyer "shall not" share legal fees with a nonlawyer, form a partnership with a nonlawyer that in any way practices law, permit a nonlawyer to direct the lawyer's professional judgment, or form a firm in which a nonlawyer owns an interest.

The self-aggrandizing majesty of the word professional aside, the MDP concept is hardly new. Seventy-five years ago, if you needed cough syrup, pork chops, and petunias, you also needed three different stores. Today, pharmacists, butchers, and florists commonly work under one roof in an aptly named "supermarket." Businesses have learned that consumers are happiest when they can buy more things on fewer trips for less money. Innovation by combination has given rise to companies that offer books and coffee, fitness and therapy, auto parts and baby clothes, and even that most American of combinations, laundry and bourbon.

The corporate marketplace is no different. Gone are the days when, say, employees at Arthur Andersen only counted beans. Today its Web site offers a nine-point list of "Market Offerings" for its clients, embodying the financial service industry's move toward one-stop shopping. The legal profession's edicts notwithstanding, firms like Andersen have recruited armies of attorneys in recent years. The trend is so pronounced that by one count, five of the world's nine largest nongovernmental legal employers are the Big Five accounting firms.

This trend has percolated for decades–especially in Europe, where the multidisciplinary practice rules are more liberal–but recent events have put the organized bar on high alert. Last year, the accounting firm KPMG International formed a nonexclusive alliance with several American law firms to provide tax assistance. Two months later, Bingham Dana LLP, a Boston-based law firm, formed a venture with Legg Mason Inc., an asset management firm, to provide integrated investment advice. And the month after that, Ernst & Young LLP "loaned" start-up capital to a law firm, McKee Nelson Ernst & Young in Washington, D.C., the only U.S. jurisdiction that permits (severely restricted) partnerships between lawyers and nonlawyers. In the press release announcing the venture, the accounting giant's vice chairman unabashedly declared that "the two organizations will work together to offer what effectively will be one-stop shopping."

Although recent events have drawn attention to MDPs, the handwriting on the wall was large enough two years ago that the ABA established a commission to study the matter. (The first anti-MDP measures were enacted as early as 1928, but the bar's rapidly shrinking power to derail the MDP train has created a renewed sense of urgency.) A year later the commission urged the ABA to accept a watered-down version of MDP, but resistance among the rank and file forced a deferral of the vote until last July, when the ABA House of Delegates voted to keep the MDP ban by a 3-to-1 margin. Even if the ABA eventually endorses pro-MDP rules, the state and local adoption process could take years. As someone close to the process told me, "they're arguing about this even while Rome is burning."

It is no mystery why many lawyers vehemently oppose a practice that offers clients greater choice, convenience, and savings. The legal profession is a cartel. Like any other cartel, lawyers erect barriers that restrict competition. Bar exams, law school accreditation, and "ethical" rules such as the MDP ban are so ingrained in American culture that one forgets lawyers practiced for centuries without them. Many barriers didn't even exist a century ago.

Those who respect markets would eliminate the barriers altogether. Ideally, a client should be free to contract with a firm for the provision of services, including a combination of legal and other services, with enough regulation only to prevent force and fraud. Plainly, MDPs would be permitted in such a system. And because few people take seriously the rare calls to eliminate other barriers to entry, such as bar exams, MDPs represent the most prominent threat to protectionism within the legal profession.

In the face of this threat, MDP critics defend the status quo with claims both transparent and subtle:

* MDPs threaten small firms. This was one of Ostertag's main concerns, and we should applaud him for his honesty. Though his protectionism on behalf of small firms may be nakedly self-serving, at least it shows that MDP critics worry about preserving the status quo more than serving their clients. His fears, however, may be unwarranted. Multidisciplinary practice does not necessarily imply large firms; an MDP can consist of just two people or, absent the rule forbidding the unauthorized practice of law, only one.

Furthermore, as Nobel Prize—winning economist Ronald Coase has pointed out, small and large firms can grow simultaneously: Specialization and technological advances allow large firms to contract out more work to small ones. Allowing MDPs to proliferate may thus lead to more small firms.

* MDPs' emphasis on the bottom line threatens the core values of the profession, such as independence and public service. MDP opponents often invoke, but rarely define, "core values." At bottom, this is an effort to justify a certain polite haughtiness about a lawyer's role in society. But lawyers are no more, and are often less, "independent" than other service providers. Similarly, the idea that lawyers are more devoted to "public service"–itself a slippery concept–is naive at best and overbearing at worst. Lawyers must confront the reality that a law degree is not a title of nobility.

Then, too, there is nothing inherently wrong with maximizing profits. Naturally, like any other firm, an MDP should not be allowed to profit through negligence or wrongdoing. But by the same token, an MDP–even one that is publicly owned–shouldn't be penalized for keeping costs low, doing its job efficiently, and working hard to meet its clients' needs.

*MDPs permit nonlawyers to practice law. "The practice of law" is a notoriously vague and largely outdated concept. The only place it makes sense is in the courtroom, but court appearances constitute only a tiny slice of the legal services pie. Most legal services relate to transactional matters in which many nonlawyer professionals know at least as much about the relevant law as lawyers. Even accounting for the courtroom context, clients aren't stupid. They don't need much to figure out whether a service provider has the minimum experience to do the job; they need only a little more to determine whether the provider will do it well. MDP critics should not so cavalierly dismiss their clients' initiative and judgment.

* MDPs would allow disbarred attorneys to oversee other attorneys. The principal flaw in this argument is its failure to account for a firm's reputational incentives. Firms have no interest in hiring personnel who will alienate clients. The argument also condones a form of double jeopardy by assuming that a disbarred attorney can never perform any task honestly. Nevertheless, the threat seems easy enough to cure with a rule that may be overkill but should certainly quell all fears: Disqualify from the practice of law for some period of time any firm, including an MDP, that knowingly employs an ineligible attorney in a professional service capacity.

* MDPs create conflicts of interest. Lawyers may not represent two clients with adverse interests, even on unrelated matters. This is a sensible rule, but it has been extended improperly by another rule: imputed disqualification, which forbids one firm from representing two clients with adverse unrelated interests even if the work is performed by two different attorneys. MDPs might be disqualified from many assignments as a result.

Procedures have long existed to address this issue. Conflicts in an MDP can be resolved exactly as they have been historically: by informed client waivers, structural separation, and Chinese walls (procedures that prevent information flows between firm members). Not only have law firms used these methods internally for decades, but so have accountants and consultants. The Big Five would never have attained their present size without these procedures; applying them to lawyers does not dilute their effectiveness.

* MDPs improperly combine legal and auditing services. MDP critics cite a tension between a lawyer's duty of confidentiality and an auditor's duty to disclose. The SEC has strictly disallowed auditors from certifying the financial statements of a client for whom their firm also provides legal representation, and as of this writing it has indicated that it will disallow multidisciplinary practice by administrative rule.

This concern, too, misunderstands the market process. Just because multidisciplinary practice is allowed does not mean every firm will engage in it. Some firms will choose to remain independent because their clients will pay extra for an added layer of apparent objectivity. In any case, the clients alone should be left to judge the wisdom and reputational effects of using a particular firm.

Furthermore, the obligations of both attorney and auditor remain fixed whether or not they belong to an MDP. Structural separation allows the attorney to invoke privilege; the auditor may qualify his opinion or even resign if the client tries to conceal fraudulent activity. Investors and other interested parties understand that such actions suggest problematic information and will adjust their expectations accordingly.

* MDPs are not in the best interest of the client or the public. The client should control his decisions. If the client prefers not to use an MDP, he can go elsewhere. Forbidding MDPs eliminates a host of possible synergies that could bring immeasurable benefits to the marketplace, such as those between environmental lawyers and engineers, divorce lawyers and psychiatrists, criminal defense lawyers and detectives, or labor lawyers and personnel firms.

* MDPs benefit mostly rich or sophisticated clients. My own experience as an attorney in a legal clinic for low-income entrepreneurs convinces me that exactly the opposite is true: Low-income individuals stand to benefit the most from MDPs. People who have limited resources or education, who distrust lawyers or the legal system, or who have no social network that includes professionals need the cheaper, more comprehensive, and more user-friendly service that MDPs can provide.

The transition to an MDP world may present some challenges, but the legal profession only hurts itself by resisting the inevitable. The bar can learn from last year's repeal of the Glass-Steagall Act, which for years prohibited the combination of banking and commercial enterprises until Congress finally realized that the ban dampened innovation, restricted client choice, increased costs, and hurt American competitiveness. Clients are calling for MDPs. The bar should listen.