MCLE Self Study

By Stephen M. Bundy

Bundy

In today’s economic environment, many lawyers and law firms are interested in pursuing business opportunities that do not involve the provision of legal services. Those activities may draw on the lawyer or law firm’s own non-legal background and skills or they may involve investing in or partnering with non-lawyers.

For lawyers, an important consideration in deciding whether and how to pursue non-legal business opportunities is whether they will be subject to professional discipline or to regulation under the California Rules of Professional Conduct, including rules that set strict requirements of confidentiality, loyalty and professional independence.

By definition, a non-legal business does not involve the practice of law. One might therefore think that the State Bar would lack jurisdiction to impose discipline regarding such activities and that the California Rules of Professional Conduct would not apply. In fact, however, some statutory grounds for professional discipline are clearly applicable to the provision of non-legal services. In addition, the Rules of Professional Conduct may apply to non-legal services where their provision is sufficiently intertwined with or related to the practice of law. Lawyers who want to avoid that outcome must be careful to separate their provision of non-legal services from their provision of legal services and must take reasonable measures to ensure that clients understand that in providing non-legal services the lawyer is not engaging in the practice of law or forming a lawyer client relationship.

This article explores these issues through two hypotheticals.

1. Before going to law school, Lawyer A was a licensed real estate broker. Now that Lawyer A has graduated, she wants to provide both legal representation and brokerage services in real estate transactions. She wonders if there are any circumstances in which her provision of brokerage services will be subject to the Rules of Professional Conduct.

2. Law firm B has developed expertise in electronic discovery. It is considering establishing a separate business to provide e-discovery services to other law firms and corporations with a need for such services. The firm wonders whether the new e-discovery business will be bound by the Rules of Professional Conduct in its dealings with customers. Several lawyers at Law Firm B have expressed an interest in taking an active role in both the marketing and service aspects of the separate e-discovery business, and Firm B wonders how their assuming such a role would alter the analysis.

Background

A non-legal service is any service that “is not performed as part of the practice of law and which may be performed by non-lawyers without constituting the practice of law.” California Formal Opinion 1995-141. It is well-settled that a lawyer or law-firm has the right to provide non-legal services and that those services may be provided from the same office. Los Angeles County Bar Association, Opinion 384, Los Angeles County Bar Association Opinion 413. A lawyer or law firm may engage in the provision of non-legal services either directly, through a non-lawyer, or through an entity in which the lawyer or law firm has an ownership interest. California Formal Opinion 1995-141.

Professional discipline and professional rules come into play in at least four situations involving a lawyer’s non-legal services.

First, even when the lawyer’s sole business involves non-legal services that are not performed as part of the practice of law, she is subject to professional discipline for “the commission of any act involving moral turpitude, dishonesty or corruption.” Business & Professions Code § 6106; State Bar of California, Formal Opinion No. 1995-141 at 2. For example, a lawyer’s fraudulent conduct in the operation of a non-legal business can support the imposition of discipline under Section 6106.

Second, when a lawyer’s non-legal services involve the assumption of a fiduciary or confidential relationship whose duties overlap with those fiduciary obligations typically assumed by lawyers, the lawyer is subject to professional discipline for breach of the duties arising out of that relationship, even though no legal services were rendered. Id.; Simmons v. State Bar, 70 Cal, 2d 361, 365-66 (1969) (lawyer acting as real estate broker).

Third, non-legal services can also become subject to the Rules of Professional Conduct when they are rendered in connection with legal services. For example, if a lawyer or law firm provides legal services to an estate while simultaneously serving as an executor of that estate, the services that they render in that dual capacity all involve the practice of law, and the Rules of Professional Conduct apply to them. Layton v. State Bar, 50 Cal.3d 888, 904 (1990); State Bar Formal Opinion 1982-69 (serving as lawyer and broker with respect to the same real estate transaction). This principle may apply even if the non-legal services are provided through a separate entity devoted primarily to the provision of such services. For example, a lawyer who establishes a separate entity through which they primarily intend to provide investment advice (a non-legal service) is nevertheless subject to the Rules of Professional Conduct if they also provide legal advice (a legal service) in connection with their services as an investment advisor. State Bar Formal Opinion 1999-154.

Finally, when the lawyer is providing only non-legal services, the Rules of Professional Conduct may apply if the services are sufficiently related to the practice of law that the lawyer’s direct or indirect involvement in providing those services could “reasonably lead prospective clients to misperceive the nature of the services being offered,” and to assume that the services are legal services and that the protections of the lawyer client relationship apply. State Bar Formal Opinion 1999-154. The central question in deciding whether the Rules apply is whether the non-legal service has a sufficient resemblance or relationship to the practice of law that the client could misperceive the nature of the service being provided. For example, a lawyer investment advisor who creates a separate business to provide such advice, but who uses their J.D. credential to advertise that business, creates a sufficient risk of confusion to trigger the application of lawyer advertising rules given the fact that investment advising is a so closely related to the practice of law. Id.; Kelly v. State Bar, 53 Cal.3d 509, 517 (1991) (lawyer acting as client’s agent for sale of client’s airplane); Priamos v. State Bar, 3 St. Bar. Ct. Rptr. 824 (investment advisor). On the other hand, some service businesses, like a stand-alone restaurant or a stand-alone dry cleaning business, are so clearly both unconnected to and dissimilar to the practice of law that there is no risk of functional overlap or customer confusion between the lawyer’s legal and non-legal activities; the Rules of Professional Conduct do not apply to them, though, as noted, the lawyer may still face discipline for certain types of misconduct under Business and Professions Code § 6106.

Where the potential for application of the Rules of Professional Conduct to non-legal activities is based upon the risk that the client will misunderstand the nature of the services being offered, the lawyer can often avoid the application of the Rules by taking timely measures to ensure that the person obtaining the services understands that the non-legal activity is not the practice of law and that no lawyer-client relationship exists. While no California case deals directly with such measures, California law is clear, first, that a lawyer can avoid the formation of an implied lawyer-client relationship through words and actions making it unreasonable for a putative client to believe that such a relationship exists and, second, that the sophistication of the putative client is relevant in assessing the reasonableness of the client’s belief. Sky Valley Ltd. Partnership v. ATX Sky Valley, Ltd., 150 F.R.D. 648, 651-52 (N.D. Cal. 1993) (applying California law). These same principles support the validity both of disclaimers that an attorney-client relationship exists and of disclaimers that legal services are being provided, particularly when those disclaimers are directed to sophisticated customers or those represented by independent counsel. So long as the potential for misunderstanding has been eliminated, there is no reason why lawyers and their customers should not realize the potential benefits of the lawyer’s ability to provide non-legal services on the same terms as non-lawyer providers.

The analysis above is also supported by other collateral sources, notably by ABA Model Rule of Professional Conduct 5.7, which deals directly and extensively with these issues. While that Rule has no direct effect in California, California attorneys may look to it as a collateral source given the lack of directly applicable California rules or cases so long as its approach is not in conflict with California public policy. California Formal Opinion 1983-71 . That Model Rule defines “law-related services” as those “that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a non-lawyer.” Model Rule 5.7 (b). Examples of such services, which provide a useful supplement to the limited number of activities discussed in California cases and opinions, include “providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax preparation, and patent, medical or environmental consulting.” Id. Comment [8].

As in California, the Model Rules subject law-related services to the Rules of Professional Conduct unless the lawyer provides them in circumstances that are distinct from the lawyer’s provision of legal services and takes “reasonable measures to ensure that the person obtaining the services understands that the law-related services are not legal services and that the protections of the lawyer client relationship do not exist.” Id. 5.7 (a) (1)-(2). There may be circumstances where distinctness may be achieved even if the services are provided through the same entity—for example if the law firm provides legal and non-legal services through separate units of the firm that are organizationally and functionally distinct. See Model Rule 5.7 (suggesting that distinctness may be shown by using different support staff for legal and non-legal services). Where services are distinct, the question whether the lawyer has acted reasonably to clarify the absence of a lawyer-client relationship will depend on their clarity, on the sophistication of the customer, and on the circumstances of the representation, including whether the services are being provided in the same matter and whether the customer has engaged separate legal counsel in the matter. Model Rule 5.7, Comments [6]-[8].

The forgoing analysis does not mean that a lawyer providing non-legal services will invariably be able to avoid the application of the professional rules through consultation and disclosure. In some situations, particularly those involving the provision of legal and non-legal services in the same matter or to unsophisticated customers, the legal and non-legal services may be “so closely entwined” that even a very clear disclaimer may not be effective. See Model Rule 5.7, Comment [8].

DISCUSSION

Hypothetical 1

Lawyer A wants to provide both legal services and real estate brokerage services. They are entitled to provide both, from the same office if they wish. But if Lawyer A provides both services in circumstances that are not distinct from each other, they will be fully subject to the Rules of Professional Conduct for both services because real estate brokerage services are law-related and involve the assumption of fiduciary duties. Thus, if they provides the services from the same office and in the same transaction, the Rules of Professional Conduct will apply. California Formal Opinion 1982-69. Moreover, in those circumstances, where legal and non-legal services are intertwined, Lawyer A may find it difficult to effectively disclaim lawyer-client obligations for the non-legal portion of their work. Even if they conducts their brokerage activities in a manner that is wholly distinct from their law practice, such as through a separate office, those activities will be subject to the Rules of Professional Conduct unless they have made it sufficiently clear to brokerage clients that Lawyer A is not providing legal services and that they are not in a lawyer-client relationship. Such a disclaimer is more likely to be effective if it is in writing and if the clients are sophisticated.

Hypothetical 2

Law Firm B wants to provide electronic discovery services through a separate firm. Because electronic discovery services are closely related to the practice of law (among other things because law firms frequently perform such services in the course of their practice), those activities will be subject to the Rules of Professional Conduct unless they are conducted in a manner that is distinct from the law firm’s practice. Even if conducted through a separate entity controlled by the law firm, the separate entity will need to make it clear that it is not providing legal services or entering into a lawyer-client relationship with the law firm or business that is retaining it. Such disclaimers are probably more likely to be effective in the electronic discovery setting, because the direct consumers of such services are likely to be lawyers or persons represented by lawyers who are more likely to understand both the disclaimer and the nature of the services being provided.

In the hypothetical, the law firm has expressed an interest in having one or more of its lawyers take an active role in directing, performing, or delivering the services in question, as opposed to simply being a passive investor in the entity. Lawyers may be fully as capable of providing non-legal services as their non-lawyer counterparts. But the direct involvement of lawyers in providing such services increases the risk that the client may believe that the services involve legal services, and are subject to the protections of the Rules of Professional Conduct. Assuming that the lawyer provides no legal advice, the lawyer’s legal credentials are not used in the marketing of the non-legal services, and the separate entity expressly disclaims that it is providing legal advice or that an attorney-client relationship is being formed, there is no categorical reason why such involvement should give rise to a risk of client misunderstanding, at least when the client is sophisticated.

Stephen Bundy is Professor of Law Emeritus at the University of California at Berkeley and an attorney at Taylor & Patchen in San Francisco. He is a member of the State Bar Committee on Professional Rules and Conduct.