Ethics

The Real Deal-Breakers

Posted Aug 1, 2004 3:41 PM CDT
By Kathryn A. Thompson

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It is no longer a revolutionary notion for lawyers to be involved in ancillary businesses that are related in some way to their legal practices.

A decade after the ABA House of Dele­gates confirmed the association’s acceptance of ancillary business by adding Rule 5.7 to the ABA Model Rules of Professional Con­duct, fewer than a third of the states have incorporated the rule into their own professional conduct codes.

Nevertheless, most state-level jurisdictions permit lawyers to be involved in “dual-practice” arrangements. Law­yers may operate real estate offices, serve as financial planners, maintain mediation practices and sell insurance. Many jurisdictions even permit lawyers to refer their cli­ents to those other businesses.

But the ABA Model Rules and the state professional codes that directly regulate lawyers also impose limits on lawyers engaged in ancillary businesses.

Model Rule 5.7 creates a rebuttable presumption that the legal ethics rules apply whenever a lawyer performs law-related services or con­­trols an entity that does so. That means the whole cascade of legal ethics rules applies to the law-related service—from keeping information about the ancillary business’s customers confi­dential, to supervising nonlawyer employees and following the proscriptions of the conflicts rules for lawyers.

But Rule 5.7 also provides that the legal ethics rules will not necessarily govern a lawyer’s ancillary business if the lawyer assures that the ancillary business is separate and distinct from the law practice, and that clients understand that the services provided by the ancillary business are not legal services protected by the attorney-client relationship.

States that have not adopted Model Rule 5.7 typically presume that the ethics rules apply to ancillary businesses and subject the lawyer to the general conduct rules—which is much the same result that would occur if Rule 5.7 were in effect and the lawyer did not meet the test for avoiding application of the rules to the ancillary business.

THE CONFLICTS BARRIER

Regardless of whether a state has adopted Rule 5.7, the conflicts rules are the real deal-breakers when it comes to ancillary business activities.

Conflicts issues arise most clearly in dual practice situations in which a lawyer seeks to sell ancillary business products or services to a client, refers the client to a business in which the lawyer owns an interest, or receives a fee for referring a client to an ancillary business.

Under ABA Model Rule 1.7, a lawyer’s personal financial interest in an ancillary business may create a conflict of interest in such situations that requires the lawyer to make a choice between providing legal services or ancillary services. In some cases, the lawyer may obtain the client’s informed consent to provide both legal and ancillary services.

The lawyer who has an ancillary business relationship with a client also must comply with the disclosure and consent provisions of Model Rule 1.8. The provisions require that the trans­action be fair to the client, that the lawyer explain the terms of the relation­ship in writing, and that the client consent in writing and have the opportunity to consult with independent counsel.

Some jurisdictions permit a lawyer to provide ancillary services to a client only if they are unrelated to any current legal work being done for the client. Under these rules, for instance, it might be permissible for a lawyer to sell life insurance to a client he or she represents in a real estate transaction —but not an estate planning matter.

Keeping close track of the ethics rules and recent opin­ions in your jurisdiction will go a long way toward helping you avoid the battle scars that can result from engaging in “dueling” businesses.

Kathryn A. Thompson is research counsel for the ABA Center for Professional Responsibility.

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