Far-Reaching Changes to the Practice of Law in Arizona, Part III of III
Beyond ABSs and LPs: Conflicts rules amplified, referral fees no longer banned, and so very much more
The Arizona Supreme Court’s recent rule changes allowing non-lawyers to have ownership interests in law firms and creating legal paraprofessionals (LPs) understandably grabbed lots of attention. Non-lawyer ownership – alternative business structures (ABS) – has especially been the bright, shiny object that gets all the oohs and aahs.
ABSs and LPs are indeed huge developments, which I previously wrote about here and here. Many Ethical Rules, notably those that deal with conflicts, confidentiality and supervision, were amended to account for non-lawyer ownership and management. But of course all of those changes could apply to any appropriate situation. And to accommodate the existence of LPs, only ER 8.3 needed to be changed, as described below.
But the ER changes, which take effect January 1, 2021, included much more that lawyers need to absorb.
Changes include removing the ban on lawyers paying referral fees, allowing lawyers to solicit sophisticated users of legal services, and making it easier for lawyers to share legal fees. Other rules, such as the rule that governs selling law practices, were clarified. And, in many rules, operative language from comments was relocated into the rules themselves. (Can you hear me applauding that?)
The Supreme Court’s Task Force on the Delivery of Legal Services – I served it as an expert consultant – last year recommended all of the rule changes to help address the access-to-justice gap. If you haven’t read the task force’s report, you can get it here. If you haven’t read the rule-change petition and other documents that arose out of the task force’s report, you can read them here.
Because this article focuses on the changes to the Ethical Rules, here is a document that collects just those rules. Below, changes are noted by strikeouts (deletions) and underlining (additions) unless the text explains that an entire provision is new or eliminated.
ERs 5.4 and 5.7 eliminated
ER 5.4 currently bars non-lawyers owning any interest in a law practice and lawyers sharing legal fees with non-lawyers. In its report, the Task Force on the Delivery of Legal Services explained the history behind the rule:
ER 5.4, which prohibits sharing fees with nonlawyers and forming partnerships with nonlawyers if any part of the partnership’s activities include the practice of law, is “directed mainly against entrepreneurial relationships with nonlawyers” and aimed at “protecting a lawyer’s independence in exercising professional judgment on the client’s behalf free from control by nonlawyers.” The ABA Model Rule 5.4 and its predecessor rules as far back as the 1928 Canons of Professional Ethics, “originated in legislation aimed at forbidding lawyers from being employed by corporations to provide services to members of the public.” The prohibition was not rooted in protecting the public but in economic protectionism. There was “no evidence that the corporations then supplying lawyers to clients were harming the public, and the transparent motivation behind the legislation was to protect lawyers’ businesses.”
[Citations omitted.]
In addition to recommending that ER 5.4 be eliminated, the task force also recommended eliminating ER 5.7.
ER 5.7 has allowed lawyers to provide what are called “law-related services,” such as financial planning, real estate advice and legislative lobbying, either through a separate entity or “in circumstances that are not distinct from the lawyer’s provision of legal services to clients.” [ER 5.7(a); ER 5.7 comment [9]] Depending on the circumstances, a lawyer providing law-related services may be obligated to provide the recipient of those services with all ethical protections normally enjoyed by the lawyer-client relationship.
The ABA originally developed Model Rule 5.7 in the early 1990s when some lawyers began pushing to relax the decades-old ban on non-lawyers owning law firms and to reduce restrictions on lawyer-owned ancillary businesses.
ER 5.7 has been one of two rules that, in my humble opinion, were hot messes. (See below for my discussion about hot mess #2, ER 1.17.) It’s been confusing for most lawyers who wanted to establish law-related businesses to navigate. My personal opinion: good riddance, ER 5.7. The regular conflicts rules, particularly ER 1.8, already deal with the relevant issues.
What eliminating ER 5.4 and ER 5.7 means: Obviously eliminating ER 5.4 means lawyers can practice in a private law firm in which non-lawyers have an ownership interest. But eliminating ER 5.4 also means that lawyers, even if not in an ABS, may share legal fees with non-lawyers, such as paralegals in the law firm. Eliminating ER 5.7 really won’t change anything, because law firms that provide non-legal services to clients still will have to make disclosures and resolve conflicts.
ER 1.0 definitions added or amended
Many definitions were amended or created to address the issues allowing ABSs specifically raised. Other than the definition of “firm,” most of the new definitions are not technically new because they were created from language that already existed in rule comments. But having concrete definitions of operative terms will help lawyers navigate the Ethical Rules in all circumstances, not just those related to ABSs.
“Firm”
The definition of a “firm” or “law firm” (ER 1.0(c)) has been expanded to include any entity in which lawyers provide legal services:
"Firm" or "law firm" denotes a lawyer or lawyers in a law partnership, professional corporation sole proprietorship, or other association; or lawyers employed in a legal services organization or the legal department of a corporation or other organization any affiliation, or any entity that provides legal services for which it employs lawyers. Whether government lawyers should be treated as a firm depends on the particular Rule involved and the specific facts of the situationtwo or more lawyers constitute a firm can depend on the specific facts.
The comment has been amended to add this new example:
For instance, an organization that provides legal, accounting, and financial planning services to clients is a “firm” for purposes of these Rules for which a lawyer is responsible for assuring that reasonable measures are in place to safeguard client confidences and avoid conflicts of interest by all employees, officers, directors, owners, shareholders, and members of the firm regardless of whether or not the nonlawyers participate in providing legal services. See Rules 5.1, 5.2, and 5.3.
[ER 1.0 comment [2] as revised]
“Screened” (now ER 1.0(j))
The definition of “screened” has been amended to refer to isolating a lawyer “or nonlawyer.” The procedures for doing so must be “reasonably adequate under the circumstances to protect information.” Those “reasonably adequate procedures” must include:
(i) written notice to all affected firm personnel that a screen is in place and thescreened lawyer or nonlawyer must avoid any communication with other firm personnel about the screened matter;
(ii) adoption of mechanisms to deny access by the screened lawyer or nonlawyer to firm files or other information, including information in electronic form, relating to the matter;
(iii) acknowledgment by the screened lawyer or nonlawyer of the obligation not to communicate with any other firm personnel with respect to the matter and to avoid any contact with any firm files or other information, including information in electronic form, relating to the matter;
(iv) periodic reminders of the screen to all affected firm personnel; and
(v) additional screening measures that are appropriate for the particular matter will depend on the circumstances.
This definition was imported from the comments to ER 1.0 and is one of the many circumstances in which operative language was taken out of the comments and relocated in rules themselves.
Business transaction (new definition designated as ER 1.0(n))
When used in reference to conflicts of interests, “business transaction” includes but is not limited to:
(i) the sale of goods or services related to the practice of law to existing clients of a firm’s legal practice;
(ii) a lawyer referring a client to nonlegal services performed by others within a firm or a separate entity in which the lawyer or the lawyer’s firm has a financial interest; or
(iii) transactions between a lawyer or a firm and a client in which a lawyer or firm accepts nonmonetary property or an interest in the client's business as payment of all or part of a fee.
It does not include “ordinary” fee agreements or “standard commercial transactions between a lawyer and a client for products or services that the client generally markets to others and over which the lawyer has no advantage with the client.” [New ER 1.0(n)(2)]
This definition was created from language in the related existing ER 1.8 comments.
Personal interests (new definition designated as ER 1.0(o))
When used in reference to conflicts of interests, “personal interests” include but are not limited to:
(1) the probity of a lawyer’s own conduct, or the conduct of a nonlawyer in the firm, in a transaction;
(2) referring clients to a nonlawyer within a firm to provide nonlegal services; or
(3) referring clients to an enterprise in which a firm lawyer or nonlawyer has an undisclosed or disclosed financial interest.
This definition was created mostly from existing language in the comments to ER 1.7 and ER 1.8.
Confidentiality clarified
ABSs must keep all records of anyone receiving legal services confidential. [ACJA § 7-209(G)(2)(d)] But to drive the confidentiality point home, comment [5] to ER 1.6 has been amended to make clear that non-lawyers in a firm — regardless whether that firm is an ABS — must keep client information they learn confidential:
Except to the extent that the client's instructions or special circumstances limit that authority, a lawyer is impliedly authorized to make disclosures about a client when appropriate in carrying out the representation in some situations, for example, a lawyer may be impliedly authorized to admit a fact that cannot properly be disputed or, to make a disclosure that facilitates a satisfactory conclusion to a matter. Lawyers in a firm may, in the course of the firm's practice, disclose to each other, and nonlawyers in the firm,information relating to the legal representation of a client of the firm, unless the client has instructed that particular information be confined to specified lawyer. Any such shared information shall be subject to requirements of confidentiality
What amending this comment means: “Nonlawyers” means everyone other than lawyers, regardless whether a firm is an ABS, with a non-lawyer who has an ownership interest or decision-making authority. Example: If a law firm employs a CPA who provides services only to their CPA clients, that CPA must keep information relating to the representation of the firm’s legal clients confidential.
Conflict rules amplified
ERs 1.7, 1.8 and 1.10 have been amended to address the myriad of conflicts that may arise when non-lawyers own or have decisionmaking authority in law firms. But, of course, those changes will apply across the board to any relevant facts, regardless whether ABSs are involved.
ER 1.7(c) (current-client conflicts)
New ER 1.7(c) anticipates the possibility that two law firms may have common ownership interests. For example, a sole practitioner may own stock in an entity that owns a multi-lawyer law firm. What happens if the sole practitioner and the multi-lawyer law firm end up as opposing counsel on a matter?
The key will be whether the sole practitioner’s ownership interest rises to a certain level, as new ER 1.7(c) explains:
A lawyer may not represent a party in asserting a claim against another party represented by a firm if the same person or entity holds an ownership interest, directly or indirectly, of 10 percent or more, or has managerial authority comparable to that of a partner, in the lawyer’s firm and the other firm.
New comment 34 to ER 1.7 fleshes out this prohibition:
ER 1.7(c) parallels ER 1.7(b)(3) in barring certain concurrent representations of adverse parties, irrespective of consent. Where there is an overlap of ownership or management between law firms that does not involve effective control, ER 1.7(a) and (b) will determine whether the two firms can concurrently represent adverse parties….
What if the sole practitioner doesn’t own stock in the opposing law firm’s owner but instead owns stock in the opposing client? New comment 34 continues:
Moreover, where a lawyer or other owner of a firm has a financial interest in an opposing party, the interest will ordinarily be considered a “personal interest” as that term is used in ER 1.10(a) that may not be imputed to other lawyers in the firm, unless that personal interest would materially limit the other lawyers’ independent professional judgment. Even though the personal interest conflict will not be imputed to other members of the firm, the lawyer must disclose the interest to the firm’s client and obtain their informed consent, confirmed in writing, to proceed with the representation.
What these changes mean: Comment 34 certainly applies outside of the ABS context. Example: Lawyer’s spouse is a partner in the opposing party.
ER 1.8 (specific conflicts)
Because a non-lawyer may become partners with a lawyer in an entity that provides legal services, the lawyer may be in a position in which the lawyer refers legal clients to the non-lawyer for non-legal services.
For example, if a lawyer becomes partners with a non-lawyer real-estate agent, the lawyer could refer their legal clients to the real-estate-agent partner for real-estate services. This would be a business transaction. [New ER 1.0(n)(1)(ii) (“’Business transaction,’ when used in reference to conflicts of interests … includes but is not limited to … a lawyer referring a client to nonlegal services performed by others within a firm or a separate entity in which the lawyer or the lawyer’s firm has a financial interest…”)] The lawyer therefore would have to comply with new ER 1.8(m):
A lawyer wishing to engage in a business transaction with a client must comply with both ER 1.7 and 1.8(a) if:
(1) the client expects the lawyer to represent the client in the transaction; or
(2) the lawyer’s financial interest otherwise poses a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s financial interest in the transaction.
Current comments [1] and [2] have been eliminated. Comment [3] – redesignated as comment [1] – has been revised to explain new ER 1.8(m):
The risk to a client is greatest when the client expects the lawyers to represent the client in the transaction itself or when the lawyer’s financial interest otherwise poses a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s financial interest in the transaction. Here the lawyer’s role requires that the lawyer must comply, not only with requirements of paragraph (a), but also with requirements of ER 1.7. Under that Rule, the lawyer must disclose the risks associated with the lawyer’s dual role as both legal adviser and participant in the transaction, including when lawyers refer clients for nonlegal services provided in the firm by either the lawyer or nonlawyer in the firm or refer clients through a separate entity in which the lawyer has a financial interest, such as the risk that the lawyer will structure the transaction or give legal advice in a way that favors the lawyer’s interests at the expense of the client. Moreover, the lawyer must obtain the client’s informed consent. In some cases, the lawyer’s interest may be such that ER 1.7 will preclude the lawyer from seeking the client’s consent to the transaction.
What these changes mean: Beyond ABSs, these changes are important. They address common, long-standing issues that arise when lawyers refer clients to non-legal businesses in which lawyers have financial interests. Typical example: Lawyer refers client who needs real-estate services to a real-estate firm in which the lawyer has an ownership interest. These changes will be especially important now that ER 5.7 has been eliminated.
ER 1.10 (imputed conflicts)
The main subsection of ER 1.10 has been amended and new sections added.
Amended ER 1.10(a) now imputes conflicts to “nonlawyers” as well as lawyers associated in a firm, and covers “legal or nonlegal matters,” unless the prohibition is based on a personal conflict:
While lawyers and nonlawyers are associated in a firm, none of them shall knowingly represent a client on legal or nonlegal matters when any one of them practicing alone would be prohibited from doing so by ERs 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer or nonlawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers and nonlawyers in the firm.
New ER 1.10(f) allows nonlawyers to be screened for personal disqualifications unless the nonlawyer has an ownership or management interest in the firm:
If a nonlawyer is personally disqualified pursuant to paragraph (a), the nonlawyer may be screened and the nonlawyer’s personal disqualification is not imputed to the rest of the firm unless the nonlawyer is an owner, shareholder, partner, officer, or director of the firm.
New ER 1.10(g) allows a lawyer to be screened for disqualifying conduct that the lawyer engaged in before becoming licensed, unless the lawyer has an ownership or management interest in the firm:
If a lawyer is personally disqualified from representing a client due to events or conduct in which the person engaged before the person became licensed as a lawyer, the lawyer may be screened, and the lawyer’s personal disqualification is not imputed to the rest of the firm unless the lawyer is an owner, shareholder, partner, officer or director of the firm.
This was for the most part imported from the ER 1.8 comment [4] but amplified with the additional disqualifying factor of the lawyer’s financial and management interest.
Law-firm management rules revised and clarified to accommodate nonlawyer ownership and management
ER 5.1 (responsibilities of lawyers who have ownership interests or who are managers or supervisors)
ER 5.1 looks like it has been drastically revised. It has, but the significant concepts and language aren’t new because they were imported from the comment into the rule itself. As a result of the changes, the entire comment to ER 5.1 has been deleted.
ER 5.3 (responsibilities regarding nonlawyers)
This rule, which formerly focused on lawyers in ownership, managerial and supervisory roles, has been broadened.
Revised ER 5.3(a) now applies to “a lawyer in a firm,” not just to a lawyer having direct supervisory authority over a nonlawyer. “A lawyer in a firm” must make reasonable efforts to ensure that the firm has policies and procedures in place designed to “giv[e] reasonable assurance” that nonlawyers helping lawyers provide legal services and nonlawyers who have access to attorney-client information act in accordance with lawyers’ professional obligations.
In that section, “reasonable measures” are defined as including having and enforcing policies and procedures designed to
(1) to prevent nonlawyers in a firm from directing, controlling, or materially limiting the lawyer’s independent professional judgment on behalf of clients or materially influencing which clients a lawyer does or does not represent; and
(2) to ensure that nonlawyers assisting in the delivery of legal services or working under the supervision of a lawyer comport themselves in accordance with the lawyer’s ethical obligations, including, but not limited to, avoiding conflicts of interest and maintaining the confidentiality of all lawyer client information protected by ER 1.6.
ER 5.3(a)(1) was imported from ER 5.4 (one of the rules eliminated) and is intended to address concerns about non-lawyer owners having any control over lawyers’ professional judgment.
Perhaps the most significant part of ER 5.3 is new paragraph (d), which requires that lawyers (all lawyers) who practice in an ABS ensure that the firm has in place a compliance lawyer who will be responsible for establishing policies and procedures within the firm to assure nonlawyer compliance with the rules.
The entire ER 5.3 comment was replaced with a new one-paragraph comment explaining that paragraph (d) recognizes ABSs, that ABSs must be licensed, and any lawyer who practices in an unlicensed ABS is engaged in the unauthorized practice of law.
What this means: A lawyer can’t take on a non-lawyer partner without becoming an ABS and complying with all the ABS-related requirements.
Reporting obligation broadened
New ER 8.3(c) extends a lawyer’s reporting obligation to include ABSs and legal paraprofessionals:
A lawyer who knows that a legal paraprofessional or certified Alternative Business Structure entity has committed a violation of the applicable codes of conduct that raises a substantial question as to the person or entity’s compliance with the codes shall inform the appropriate authority.
What this means: Lawyers need to know the ABS and LP codes of conduct, just like ER 8.3(b) effectively means that lawyers need to know the Code of Judicial Conduct.
Fee-sharing rule simplified and expanded
ER 1.5(e) currently allows lawyers in different firms to share one fee only based on two options: either the fee is divided based on the proportion of services each lawyer performed or some other basis only if each lawyer takes joint responsibility for the representation. A workgroup of the task force concluded that this was too restrictive and impeded a lawyer’s ability to put together a team to handle a client’s matter. For example, a lawyer who only has a small role in a case might justify receiving more of a shared fee than the proportional option would allow, but might not want to take joint responsibility for the full representation.
As a result, the task force proposed – and the court has agreed – that ER 1.5(e)(1) be amended to remove the two-option limitation, thus effectively simplifying fee sharing. But clients need to be told (in writing) how the fee will be divided.
In another way, however, the rule also has been expanded. Because of concerns that responsibilities will slip through the cracks, ER 1.5(e)(1) will require that clients be told how the firms will divide responsibility for the matter among themselves and new ER 1.5(e)(4) requires that that division of responsibilities must be reasonable under the circumstances.
How could this play out? Maybe something like this: A business lawyer who only does transactional work teams up with a litigator (from a different firm) to handle, on a contingency basis, litigation for one of the business lawyer’s clients. It would be unreasonable for the litigator to expect that the business lawyer will be responsible for handling routine litigation matters if the business lawyer knows nothing about litigation.
The ER 1.5 comments related to fee division (comments [8] and [9]) also have been deleted.
Sale-of-law-practice rule clarified
In my humble opinion, ER 1.17 has been a hot mess – rivalled only by ER 5.7 – since it was adopted in 2003. A lawyer may sell a law practice, but the lawyer must stop practicing law. Or maybe not. Or stop practicing in geographic areas. Or maybe not. And what's a geographic area? Who knows. The comment was little help because it was never fully customized from the ABA Model Rule language.
But now the hot mess will be organized. ER 1.17(a) has been clarified to say simply that a firm may sell or purchase a law practice or a practice area, and significant concepts from the comment will be incorporated into the rule itself.
One particularly significant tenet is now ER 1.17(c): a lawyer cannot pay for a practice by increasing fees to the practice’s clients and must honor “[e]xisting arrangements between the seller and the client as to fees and the scope of the work.” While this concept appeared in the comments, it was often overlooked by lawyers who purchased law firms.
Because the significant concepts now are part of the rule, the entire comment has been deleted.
Advertising rules overhauled, including eliminating ban on paying referral fees
The rules dealing with lawyer communications about legal services have been revamped. Some of the changes, however, are simply form over substance, as I explain below. But some are definitely substantive.
Perhaps the most substantive change is that, with one exception, ER 7.2 – including all of its specific provisions about advertising fees – has been eliminated. This includes ER 7.2(b), the difficult-to-enforce ban (with some exceptions) on lawyers “giving anything of value to a person for recommending the lawyer’s services.”
Yes, this means that Arizona no longer will prohibit lawyers paying referral fees. This also may mean that lawyers who have relied on fee sharing (ER 1.5(e)) as a way to compensate other lawyers for referring cases may not have to do so any longer.
The sole surviving provision of ER 7.2 is ER 7.2(c) (communications must include at least one lawyer’s name and contact information), which has become ER 7.1(c).
ER 7.3, which put restrictions on soliciting clients, survives. But amendments to that rule expand the universe of who lawyers may solicit in at least three ways. Current ER 7.3(b)(3) – the 30-day moratorium on soliciting in personal injury or wrongful death matters – has been eliminated. Also, lawyers now may solicit “by live person-to-person contact” a person who “routinely uses for business purposes the type of legal services offered by the lawyer.” And, “live person-to-person contact” excludes chat rooms, text messages, or other written communications.
The changes to ER 7.3 also include eliminating all of the tedious, Arizona-grown special requirements for targeted written communications, including submitting copies to the State Bar and including the words “Advertising Material” on envelopes.
The form-over-substance changes involve ERs 7.4 (communication of fields of practice) and ER 7.5 (law firm names and letterhead), most of which have been incorporated into the comments to ER 7.1. [See, e.g., revised ER 7.1 comments [4], [7] and [8]] The theory is that ER 7.1 prohibits false and misleading communications, which encompasses the restrictions currently stated in ER 7.4 and ER 7.5.
One part of ER 7.4 has been incorporated into ER 7.1 as ER 7.1(b): the direction that lawyers cannot state or imply that they are certified specialists unless they are, indeed, certified specialists.
One part of ER 7.4 that has not been imported: Comment [1]’s direction that a lawyer can’t say the lawyer is a “specialist” in a particular field unless the lawyer is certified. New language in comment [6] to revised ER 7.1 says:
A lawyer is generally permitted to state that the lawyer “concentrates in” or is a “specialist,” practices a “specialty,” or “specializes in” particular fields based on the lawyer’s experience, specialized training or education, but such communications are subject to the “false and misleading” standard applied in this Rule to communications concerning a lawyer’s services.
Certified specialists may not be happy about this change. They’ve had a monopoly on the word “specialist.” When these rule changes take effect, other lawyers who are not certified but who may have the experience, specialized training or education, will be able to call themselves “specialists.”
Setting aside that gnarly issue, this is good for the rest of us who practice in areas for which there is no certification but who are experts. For example, there is no legal ethics specialty certification. With this change, I finally will be able to say I specialize in legal ethics. Yay!