FTC Staff Comment to the American Bar Association Concerning Attorney Operation of Ancillary Business

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON , D.C. 20SSO
V~.lUUU':>
COMMIS~IUN 	AUTHDRiZED
March 	26, 	1991
George 	Kuhlman
Ethics 	Counsel
American 	Bar Association
541 N. 	Fairbanks 	Court, 	14th Floor
Chicago, 	IL 	60611
Dear Mr. 	Kuhlman:
The 	staff 	of 	the 	Bureau 	of 	Competition 	is 	pleased to 	respond
to 	your 	request 	for 	our views 	on 	the 	competitive 	effects 	of
proposed 	amendments 	to 	the 	American 	Bar Association's 	Model 	Rules
of 	Professional 	Conduct 	to 	address 	possible 	problems 	with
attorney operation 	of 	ancillary 	businesses. 1 As we discuss
below, 	we support 	the 	approach 	that 	the 	Standing 	Committee 	on
Ethics 	and 	Professional 	Responsibility 	Discussion 	Draft 	proposes:
narrowly 	tailored 	rules 	addressing 	the 	specific 	problems
associated with 	the 	provision of 	ancillary 	services 	by 	law
firms. 2 This 	approach 	avoids 	rules 	that 	broadly 	limit 	the
service 	options 	available 	to 	consUmers.
We 	will 	first 	describe 	the 	FTC 	staff's 	interest 	and 	previous
experience 	in 	this 	field. 	Next, 	we will 	summarize 	the 	proposals
that 	the 	ABA 	is 	considering. 	We 	will 	then 	discuss 	how law 	firm
diversification 	generally benefits 	consumers. 	Finally, 	we will
analyze 	some 	of 	the 	objections 	to 	law 	firm 	diversification~
Memorandum from 	Helaine 	Barnett, 	Chair, 	Standing
Committee 	on Ethics 	and 	Professional 	Responsibility, 	re
Discussion 	Draft 	of 	Proposed Revisions 	to 	the 	Model 	Rules 	of
Professional 	Conduct 	Governing Lawyers' 	Ancillary 	Businesses
(January 	10, 	1991) 	("Discussion 	Draft"); 	ABA 	Standing Committee
on 	Ethics 	and 	Professional 	Responsibility, 	Ancilla 	Business
Hearin 	Februa 	8 	1991 	- 	Seattle 	Washin 	on 	Some Issues 	for
Consideration.
2 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Bureau
of 	Competition 	of 	the 	Federal 	Trade 	Commission. 	They 	are 	not
necessarily 	the 	views 	of 	the 	Commission 	or 	of 	any 	individual
Commissioner.

George 	Kuhlman 	-- 	Page 	2
The 	Interest 	and 	Experience 	of 	the 	Staff 	of 	the 	FTC
Congress 	has 	empowered 	the 	Federal 	Trade 	Commission to
prevent 	unfair methods 	of 	competition and 	unfair 	or 	deceptive
acts 	or 	practices 	in or affecting commerce. 	15 	U.S.C. 	S 	41, 	et
seg. 	Pursuant 	to 	this 	statutory mandate, 	the Commission 	and 	its
staff 	encourage members 	of 	licensed professions 	to 	compete 	to 	the
extent 	competition is 	compatible 	with other 	legitimate 	goals. 3
For 	several 	years, 	the 	Commission 	and 	its 	staff, 	through 	law
enforcement 	proceedings 4 and 	studies,5 have 	been evaluating the
3 	For example, 	the 	Commission's 	staff 	has 	commented to
state 	governments 	and 	professional 	societies 	on 	the 	regulation 	of
professionals, 	including 	attorneys. 	~., 	Staff 	Comments 	on 	the
Arizona 	Rules 	of 	Professional 	Conduct 	(April 	17, 	1990); 	Staff
Comments 	on 	the 	Rules 	of 	Professional Conduct 	of 	the 	Florida
Supreme 	Court 	(July 	17, 	1989); 	Staff 	Comments 	on 	the American 	Bar
Association Model 	Rules 	of 	Professional 	Conduct 	(November 	22,
1988); 	Staff 	Comments 	on 	the 	Rules 	of Professional 	Conduct 	of 	the
New 	Jersey 	Supreme 	Court, 	(November 	9, 	1987); 	Staff 	Comments 	on
the 	Code 	of 	Professional 	Responsibility 	of 	the 	Alabama 	State 	Bar
(March 	31, 	1987).
At 	least 	two 	staff 	comments 	have addressed 	the 	issue 	of
diversification 	in other 	professional 	services 	markets. 	Letter
to 	the 	Honorable 	Chuck Hardwick, 	Speaker of 	the 	New 	Jersey
Assembly 	(May 21, 	1987)" 	(regarding 	proposed 	legislation 	to·
prohibit 	physicians 	from 	having 	financial 	interests 	in 	physical
therapy 	practices); 	Letter 	to 	Lin 	Ng, 	Nevada 	Deputy Attorney
General 	(October 	23, 	1986) 	(regarding proposed 	Nevada 	State 	Board
of 	Physical 	Therapy 	prohibition 	on physician 	employment 	of
physical 	therapists).
4 Massachusetts 	Board 	of 	Registration 	in Optometry, 	110
F.T.C. 	549, 	600 	(1988); 	Rhode 	Island 	Board of 	Accountancy, 	107
F.T.C. 	293 	(1986) 	(consent 	order); 	Louisiana 	State 	Board 	of
Dentistry, 	106 	F.T.C. 	65 	(1985) 	(consent 	order); 	American Medical
Association, 	94 	F.T.C. 	701, 	aff'd, 	638 	F.2d 	442 	(2d 	Cir. 	1980),
aff'd memo 	by 	equally divided 	Court, 	455 	U.S. 	676 	(1982) 	(nAMA");
American 	Institute 	of 	Certified 	Public 	Accountants, 	C-3297 	(July
26, 	1990) 	(consent 	order). 	We 	recognize 	that 	the ABA Model 	Rules
purport 	to 	be 	recommendations 	only and 	not 	to 	restrict ABA
members. 	Each state 	adopts 	enforceable 	rules 	governing 	the
practice 	of 	law, 	which may 	to 	a 	greater or 	lesser extent 	reflect
the 	Hodel 	Rules.
5 	~., 	Co Cox 	& S. 	Foster, 	The 	Costs 	and 	Benefits 	of
Occupational 	Regulation 	(FTC 	Bureau 	of 	Economics 	1990);
w. 	Jacobs, 	~ 	al., 	Improving 	Consumer Access 	to 	Legal 	Services:
The 	Case 	for 	Removing 	Restrictions 	on 	Truthful 	Advertising 	(FTC
Staff 	Report 	1984).

"
George 	Kuhlman 	-- 	Page 	3
competitive 	effects 	of 	public 	and 	private 	restrictions
on 	the 	business 	practices 	of 	state~licensed professionals,
including 	lawyers, 	dentists, 	optometrists, 	and physicians. 	Our
goal 	has 	been 	to 	determine 	whether 	particular 	restrictions 	impede
competition 	or 	increase 	costs 	without 	providing 	countervailing
benefits 	to 	consumers.
Proposed 	Responses 	to 	Law Firm 	Diversification
As 	commercial 	transactions 	have become more 	complex, 	clients
have 	required 	the 	services 	of 	non-lawyer professionals 	--
including 	investment 	bankers, 	economists, 	and 	accountants 	-- 	to
assist 	in 	areas 	where 	lawyers 	have 	traditionally played 	a 	primary
role. 	Law firms 	are 	generally 	free 	to 	provide 	non-legal
services, 	and 	some 	firms 	have 	found 	it 	advantageous 	to 	employ or
associate 	with 	these 	professionals. 	Clients 	are 	therefore
increasingly 	able 	to 	purchase 	both 	legal 	and 	non-legal 	services
from 	one 	source. 	Law firms 	have 	also 	started 	providing 	these
non-legal 	services 	to 	persons 	who 	are 	not 	legal 	clients. 	Some
ABA members 	are 	concerned 	that 	such 	law 	firm 	diversification 	can
create 	several 	potential 	problems, 	including 	conflicts 	of
interest, 	loss 	of 	client 	confidentiality, 	encouragement 	of 	the
unauthorized 	practice 	of 	law, 	and 	customer 	confusion 	as 	to 	the
lawyer's 	role. 	~., 	Discussion 	Draft, 	at 	3.
In 	response 	to 	these 	concerns, 	the 	ABA Litigation Section
has 	proposed 	to 	bar 	firms 	from 	providing 	ancillary 	services
except 	to 	their 	legal 	services 	clients. 	Further, 	the 	Section
would 	permit 	the 	provision of 	ancillary 	services 	only 	to 	the
extent 	that 	such 	services 	are 	"incidental 	to, 	in connection with
and 	concurrent 	to" 	legal 	services. 6
6 	Recommendation 	ang Report 	on Law Firms' 	Ancillary
Business 	Activities 	Prepared by 	the 	Section of 	Litigation 	of 	the
American 	Bar 	Association, 	at 	9-30 	(February 	8, 	1990) 	("Litigation
Section 	Report"). 	The 	Litigation Section also 	proposes 	that 	the
ABA 	reaffirm ' the Model 	Rules' 	general 	bar on 	non-lawyer 	ownership
of 	equity 	interests 	in 	law 	firms. 	We 	do 	not 	understand 	the
Ethics 	Committee 	to 	be 	seeking 	comments 	on 	this 	proposal 	and 	thus
do 	not 	address 	it.
The 	Section originally 	also 	recommended 	barring 	law 	firms
from 	providing 	non-legal 	services 	through 	separate 	subsidiaries
and 	affiliates, 	but 	the 	Section 	appears 	to 	have 	dropped 	this
suggestion. 	Letter 	from 	ABA 	Section of 	Litigation 	Task 	Force 	on
Ancillary 	Business 	Activities 	to 	Helaine 	K. 	Barnett, 	Chair,
Standing Committee 	on 	Ethics 	and 	Professional 	Responsibility, 	at
3 	(February 	5, 	1991) 	("Litigation 	Section Letter").

George 	Kuhlman 	Page 	4
The 	Standing Committee 	has 	proposed 	for 	discussion 	a
different 	approach. 	While 	acknowledging 	that 	law 	firm
diversification may 	have 	costs, 	including 	the 	problems 	noted
above, 	the 	Committee 	has 	concluded 	that 	the ABA 	can minimize
these 	problems 	by 	adopting narrowly 	tailored 	changes 	to 	the 	ABA's
Model 	Rules 	of 	Professional 	Conduct. 	Discussion 	Draft, 	at 	2-3.
The 	Special 	Coordinating Committee 	on Professionalism 	and 	its
Working Group 	have 	reached 	the 	same 	conclusion. 7
The Model 	Rules 	are 	designed to 	guide 	the 	states 	in 	their
adoption 	of 	rules 	that 	educate 	lawyers 	as 	to 	their 	ethical
responsibilities 	and 	deter 	them 	from 	engaging 	in 	unethical
conduct 	that 	harms 	their 	clients. 	The 	Standing Committee
recommends 	expansion 	of 	the 	Model 	Rules' 	protections 	to 	a 	new
class 	of 	consumers: 	customers 	of 	a 	diversified 	law 	firm's
ancillary 	businesses. 	The Committee 	recommends 	generally 	that
such customers 	(who 	purchase 	only 	non-legal 	services) 	receive 	the
same 	protections 	as 	legal 	clients, 	wherever 	such 	treatment 	is
practical. 	(Where 	a ,client 	receives 	both 	legal 	and 	non-legal
services 	from 	a 	firm, 	the 	Standing Committee 	recommends 	that 	the
Model 	Rules 	treat 	that 	person 	as 	a 	law 	client 	as 	to 	both 	types 	of
services.)
For 	example, 	in 	order to 	assure 	that 	a 	lawyer 	exercises
independent 	professional 	judgment 	on 	behalf 	of 	a 	client, 	the
Model 	Rules 	generally prohibit 	firms 	from 	simultaneously
representing clients 	whose 	interests 	conflict. 	The 	Standing
Committee 	proposes 	that 	customers 	purchasing 	ancillary 	services
receive 	similar protections 	so 	that 	(a) 	a 	law 	firm 	could 	not
provide 	legal 	services 	to 	clients 	whose 	interests 	conflict 	with
customers 	of 	the 	firm's 	ancillary 	businesses, 	and 	(b) 	the 	firm's
ancillary 	business 	could 	not 	represent 	customers 	whose 	interests
conflict 	with 	those 	of 	other 	customers 	or 	clients, 	although 	a
customer 	could waive 	these 	restrictions 	in 	some 	circumstances.
Similarly, 	just 	as 	the 	Model 	Rules 	presently require 	that 	a 	law
firm 	safeguard 	the 	secrets 	of 	a 	law 	client, 	the 	Committee 	also
would 	require 	that 	the 	firm 	keep 	confidential 	any 	such
information 	relating 	to 	customers 	of 	ancillary 	services. 	(The
attorney-client 	privilege, 	which 	is 	independent 	of 	the 	Model
Rules, 	would 	not 	apply 	to 	customers 	of 	an 	ancillary 	business; 	a
diversified 	law 	firm 	would 	have 	to 	disclose 	this 	fact 	to 	its
ancillary 	business 	customers.) 	Finally, 	the 	Committee 	would
7 	Special 	Coordinating Committee 	on -Professionalism,
Special 	Report 	to 	the 	House 	of 	Delegates 	on Ancillary 	Business
Activities 	of 	Lawyers 	and 	Law Firms, 	at 	10-11 	(December 	1990)
("Professionalism 	Committee 	Report"); 	Working 	Group 	of
Professionalism 	Committee, 	Final 	Report 	on 	the 	Ancillary 	Business
Activities 	of 	Lawyers 	and Law Firms, 	at 	12-16 	(November 	30, 	1990)
("Working Group 	Report").

,
George 	Kuhlman 	-- 	Page 	5
require 	that 	diversified 	law 	firms 	disclose 	to 	customers 	of 	their
ancillary businesses 	the 	relationships 	between 	that 	business 	and
the 	firm, 	and the 	extent 	to 	which 	such 	businesses 	will 	treat
their customers 	as 	clients 	of 	the 	law 	firm. 	Discussion 	Draft, 	at
3-4.
Given 	these 	safeguards, 	the 	Standing Committee 	proposes 	no
prohibitions 	on attorney 	operation 	of 	ancillary 	businesses 	and
would 	permit 	a 	law 	firm 	to 	provide 	non-legal 	services 	to
customers 	that 	are 	not 	legal 	clients 	of 	the 	firm. 	The 	Committee
notes 	that consumers 	could 	benefit 	from 	attorney 	provision of
ancillary 	services 	and 	that 	it 	"was 	not 	aware 	of 	any history 	or
evidence 	of 	any 	abuse 	or harm to 	the 	public 	arising 	from 	lawyers'
participation 	in 	ancillary 	business 	activities." 	Discussion
Draft, 	at 	3. 	The 	Professionalism Committee 	and 	its 	Working Group
agreed with 	these 	conclusions. 	Professionalism Committee 	Report,
at 	4; 	Working 	Group 	Report, 	at 	11-12.
Benefits 	of 	Law 	Firm 	Diversification
Diversification 	into 	related 	services 	can 	benefit 	consumers
by 	allowing 	firms 	most 	efficiently to 	provide 	a 	mix 	of 	services
that 	consumers 	seek. 	Conversely, 	rules 	that 	restrict 	the
services 	that 	firms 	may 	offer can 	harm 	consumers 	by 	restricting
consumer 	choice.' 	There 	is 	no 	reason 	to 	believe 	that 	these
generalizations 	are 	inapplicable 	to 	legal 	services 	markets.
. 	Indeed, 	the 	legal 	profession 	has 	long provided clients 	with
a 	variety of 	services. 	Many attorneys 	are 	part 	of 	multi-
specialty 	law 	firms, 	recognizing 	that 	such 	firms 	may 	offer
benefits 	to 	clients 	with complex, 	unusual, 	or 	diverse 	legal
problems. 	For example, 	a 	lawyer 	specializing 	in 	real 	estate 	may
be 	in 	a 	better 	position 	to 	assist 	a 	client 	encountering 	financial
difficulties 	if 	he 	or 	she 	works 	for 	a 	firm 	with 	in-house
bankruptcy 	expertise. 	Diversification outside 	of 	legal 	services
also 	has 	a 	long 	history. 	For example, 	real 	estate 	attorneys 	have
AHA, 	94 	F.T.C. 	at 	1016-18 	(restrictions 	on 	joint
business 	arrangements 	between physicians 	and 	non-physicians
harmful 	because 	they 	prevented 	adoption 	of 	more 	efficient
business 	formats). 	The 	Commission has 	issued 	two 	consent 	orders
barring 	restrictions 	on diversification. 	See 	Oklahoma 	State
Board 	of 	Veterinary Medicine, 	C-3283 	(January 	31, 	1990)
(prohibiting board 	from 	barring veterinarians 	from 	working 	for 	or
associating 	with 	non-veterinarians); 	Iowa 	Chapter 	of 	American
Physical 	Therapy Association, 	C-3242 	(November 	4, 	1988)
(prohibiting association 	from 	barring members 	from 	accepting
emploYment 	from 	physicians).

George Kuhlman 	-- 	Page 	6
traditionally 	provided 	escrow 	and 	title 	search 	and examination
services. 	See, 	~., 	Litigation 	Section 	Report, 	at 	11.
Diversified 	law 	firms 	may provide 	several 	specific 	benefits
to 	consumers. 	First, 	such 	law 	firms 	can offer 	"one-stop
shopping" 	and 	thereby 	reduce 	the 	cost 	to 	the 	client 	of 	searching
for 	and 	receiving 	a 	variety 	of 	professional 	services. 	For
example, 	a 	client 	that 	needs 	economic 	expertise 	may 	find 	it
advantageous 	to 	use 	a 	law 	firm's 	in-house 	experts. 	Not 	only 	does
the 	client 	avoid 	the 	cost 	of 	finding 	an economist 	with 	the
relevant 	skills, 	but 	it 	may 	save 	on 	the 	costs 	of 	contracting 	for
such 	services. 	A diversified 	firm 	may also 	be 	able 	to 	work more
efficiently with 	its 	in-house 	experts 	than with 	experts 	hired on
an 	ad 	hoc 	basis. 	The 	fact 	that 	law 	firms 	employ 	other
professionals, 	and 	that 	other 	firms 	that 	provide 	professional
services 	-- 	including 	lobbying, 	accounting, 	and 	economic
consulting 	-- 	employ 	lawyers, 	suggests 	that 	consumers 	value 	"one
stop 	shopping."
Second, 	diversified 	law 	firms 	can 	offer 	a 	distinct 	approach
to 	solving 	legal 	problems. 	A diversified 	law 	firm 	may 	be 	able 	to
analyze 	a 	client's 	problem 	from 	a 	variety of 	different
perspectives 	and 	blend 	them 	into 	a 	comprehensive 	and 	integrated
solution. 	In 	addition, 	lawyers 	in 	diversified 	firms 	assert 	that
they 	generally have more 	contact 	with experts 	from 	other
disciplines 	and 	thus 	have 	a 	broader perspective 	on 	legal
problems. 9 Although 	we take 	no 	position 	as 	to 	whether 	this
assertion 	is 	correct, 	consumers 	may 	find 	that 	such 	an 	approach
could 	suit 	their 	needs.
Although 	the 	Litigation Section's 	recommendation 	would 	allow
law 	firms 	to 	provide 	some 	of 	these 	benefits 	of 	diversification 	to
their 	legal 	clients, 	its 	effect 	could 	limit 	the 	growth 	of 	such
firms, 	which might 	impede 	the 	development 	of 	innovative 	forms 	of
practice 	from 	which consumers 	could 	choose. 	The 	proposal 	would
limit 	the 	volume 	of .a nc i l l ary services 	a 	firm 	could 	offer by
requiring 	that 	such 	services 	accompany 	legal 	services. 	Under
this 	rule, 	a 	firm 	might 	not 	have 	a 	sufficient 	incentive 	or volume
of 	ancillary 	services 	to 	justify a 	significant 	investment 	in
their development. 	In 	addition, 	if 	highly 	talented 	non-lawyers
are 	reluctant 	to 	work 	for 	law 	firms 	that 	may provide 	ancillary
services 	only 	in 	connection with 	legal 	services, 	because 	such 	a
limitation would 	reduce 	their potential 	customer 	base, 	then 	law
firms 	may 	be 	unable 	to 	provide 	high 	quality 	ancillary 	services.
9 	See 	Professional 	Affiliations 	between 	Lawyers 	and
Nonlawyers, 	Comments 	submitted 	to 	ABA 	Special 	Coordinating
Committee 	on 	Professionalism, 	from 	Akin, 	Gump, 	Strauss, 	Hauer 	&
Feld, 	~ 	al., 	at 	11-12 	(June 	5, 	1989).

George 	Kuhlman 	-- 	Page 	7
Thus, 	the 	Section's 	proposal 	may 	establish 	obstacles 	to 	law 	firm
diversification.
We 	are 	neither 	advocating 	that 	law 	firms 	provide 	ancillary
services 	nor 	claiming 	that 	all 	consumers 	prefer 	firms 	that 	do.
Rather, 	we are 	pointing out 	that 	law 	firm 	diversification may
benefit 	some 	consumers 	by providing convenient 	and 	cost-effective
services. 	Absent 	an 	offsetting 	risk of 	consumer 	harm, 	we believe
that 	consumers 	will 	benefit 	if 	permitted 	to 	choose ' from 	an 	array
of 	diversified and 	non-diversified 	law 	firms.
Addressing 	the 	Problems 	with Law Firm 	Diversification
There 	appears 	to 	be 	a 	consensus 	within 	the ABA 	that, 	absent
appropriate 	safeguards, 	law 	firm 	diversification may 	create 	some
risk 	of 	consumer 	injury. 	Analysts 	have 	identified 	two 	categories
of 	concern. 	The 	Standing Committee, 	Professionalism 	Committee,
Working 	Group, 	and 	Litigation 	Section 	all 	agree 	that 	certain
customers 	of 	ancillary 	businesses 	may suffer 	harm 	from 	conflicts
of 	interest, 	disclosure 	of 	confidential 	information, 	and 	similar
abuses; 	the 	Litigation 	Section 	terms 	these 	"ethical 	issues." 	The
Litigation 	Section, 	in 	addition, 	identifies 	a 	generalized problem
relating 	to 	the 	quality 	and 	regulation 	of 	the 	legal 	profession,
which 	it 	terms 	"professionalism concerns."lO 	As we discuss
below, 	we 	believe 	that 	the 	Standing Committee's 	proposals
effectively 	address 	these 	concerns.
Ethical 	Issues
We 	agree 	that 	diversified 	law 	firms 	raise 	questions 	about
possible 	conflicts 	of 	interest, 	loss 	of 	client 	confidentiality,
and 	the 	unauthorized 	practice 	of 	law. 	At 	the 	same 	time, 	it 	is
important 	to 	recognize 	that 	law 	firm 	diversification 	does 	not
make 	it 	more 	likely 	that 	consumers 	will 	face 	such 	problems.
Issues 	of 	this 	sort 	are 	inherent 	in 	any 	relationship 	between 	a
professional 	and 	a 	client. 	For 	example, 	a 	client will 	want 	to be
able 	to 	speak 	freely 	to 	his 	or 	her 	lawyer, 	accountant, 	or
investment 	banker without 	fear 	that 	the 	professional 	will
disclose 	the 	information 	or, 	perhaps 	worse, 	use 	the 	information
to 	the 	client's 	detriment. 	There 	is 	no 	reason 	to 	believe 	that,
for 	example, 	investment 	bankers 	affiliated 	with 	lawyers 	are 	more
10 	The 	Litigation 	Section also 	argues 	that 	diversification
threatens 	the 	financial 	stability of 	law 	firms. 	Litigation
Section 	Report, 	at 	16-18. 	Financial 	theory, 	however, 	generally
suggests 	that 	diversification 	should 	strengthen 	stability,
because 	it 	can make 	the 	firm. less 	reliant 	on 	income 	derived 	from
anyone 	source. 	Fama 	& Miller, 	The 	Theory 	of 	Finance 	239-40
(1972).

George 	Kuhlman 	-- 	Page 	8
likely 	to 	betray 	client 	confidentiality 	than 	those 	without 	such
an 	affiliation. 	In 	fact, 	if 	the 	Litigation Section 	is 	correct
about 	the 	bar's 	unique 	ability 	to 	maintain 	high ethical
standards, 	we would 	expect 	"affiliated" 	investment 	bankers 	to
behave 	more 	ethically than 	"independent" 	ones. 	And even 	if 	the
Litigation Section 	is 	correct 	in 	believing that 	lawyers 	in
diversified 	firms 	will 	not 	always 	be 	able 	to 	evaluate 	objectively
the 	services 	of 	their 	ancillary businesses, 	that 	suggests 	at 	most
that 	diversified 	law 	firms 	may not 	be 	optimal 	for 	some 	clients 	or
for 	some 	matters, 	not 	that 	a 	total 	ban 	is 	appropriate. 	As
discussed 	below, 	the 	adoption 	of 	certain proposed ethical 	rules
should minimize 	the,likelihood of 	consumer 	injury 	from
diversified 	firms.
Indeed, 	the 	ethical 	problems 	that 	the ABA 	has 	identified 	can
occur 	in 	"traditional" 	law 	firms 	as 	well 	as 	diversified 	firms.
For 	example, 	issues 	of 	independence 	arise 	where 	a 	firm 	provides
antitrust 	and 	tax 	advice 	to 	a 	client 	contemplating 	a 	merger, 	and
could 	provide 	the 	corporate 	and 	securities 	work 	necessary 	to
accomplish 	the 	transaction 	as 	well. 	The 	firm 	might 	be 	tempted 	to
minimize 	the 	antitrust 	and 	tax 	risks 	of 	the 	proposed 	deal 	so 	as
to 	induce 	the 	client 	to 	go 	forward 	with 	it, 	lest 	the 	firm 	lose
the 	revenues 	from 	consummating the 	merger. 	Working Group 	Report,
at 	17. 	Similarly, 	because 	managers 	can 	find 	it more 	difficult 	to
exercise 	quality control 	as 	an 	organization grows 	larger 	and more
complex, 	the 	dangers 	that 	a 	firm 	will 	reveal 	client 	confidences,
or 	allow 	its 	non-legal 	personnel 	to 	provide 	legal 	advice, 	may 	be
greater 	in 	a 	300-lawyer 	firm 	with 	no 	ancillary activities 	than 	in
a.IS-lawyer 	firm 	with 	a 	two-economist 	consulting 	business. 	In
sum, 	law 	firm 	d~versification is 	not 	very 	different 	from 	law
firms 	having 	specialists 	in multiple 	areas 	of 	the 	law. 	The 	ABA's
experience with multi-specialty 	law 	firms 	suggests 	that 	market
forces, 	malpractice 	suits, 	and professional 	regulation 	generally
can 	protect 	consumers 	from 	the 	problems 	that 	may 	arise 	when 	firms
provide 	services 	in multiple 	areas 	of 	specialization, 	whether 	the
specialized 	services 	are 	legal 	or 	ancillary.
The 	Standing Committee's 	proposal 	would 	impose 	on
diversified 	law 	firms 	the 	same 	obligations 	to 	non-legal 	customers
of 	their 	ancillary businesses 	as 	they 	currently 	have 	to 	their
legal 	clients. 	Given 	that 	these 	requirements 	appear 	to 	protect
legal 	clients 	from 	abuses, 	it 	seems 	likely 	that 	they 	are
sufficient 	to 	address 	the 	ethical 	problems 	that 	law 	firm
diversification may create. 	Indeed, 	the 	Rules 	may 	provide 	far
more 	protection 	to 	customers 	of 	ancillary 	businesses 	of 	law 	firms
than 	customers 	of 	non-affiliated 	businesses 	receive. 	Moreover,
the 	Litigation Section 	-- 	which 	at 	one 	time 	expressed 	great
concern 	about 	possible 	ethical 	problems 	-- 	now acknowledges 	that
the 	Discussion Draft's 	"Proposed 	Rules 	for 	the 	most 	part

George Kuhlman 	-- 	Page 	10
have 	benefitted 	from 	this 	practice. 	The 	Litigation 	Section 	cites
no 	evidence 	to 	the 	contrary. 	Litigation 	Section 	Letter, 	at 	9-16.
Moreover, 	other professions, 	including 	the 	medical 	profession,
increasingly 	practice 	in 	a 	wide 	variety 	of 	organizational
structures 	without 	an 	apparent 	decline 	in 	professionalism. 	Thus,
like 	the 	Standing Committee, 	we believe 	that 	possible 	harm 	from 	a
decline 	in professionalism 	is 	too 	speculative 	and 	too 	unrelated
to 	the 	provision 	of 	ancillary 	services 	to 	justify severe
restrictions 	on 	such 	services, 	particularly 	in view 	of
diversification's 	potential 	for 	providing 	immediate 	benefits 	to
consumers. 	Discussion 	Draft, 	at 	2-3. 	Proposed ethical 	rules
narrowly 	tailored 	to 	prevent 	consumer 	harm 	should 	address 	the
concerns 	raised 	adequately.
Second, 	even 	if 	professionalism 	concerns 	required 	some
remedial 	action, 	the 	Section's 	proposal 	is 	at 	once 	too 	broad 	and
too 	narrow 	a 	solution. 	It 	is 	too 	broad 	in 	that 	it 	restricts 	more
activity 	than 	necessary to 	address 	the 	problems 	that 	the 	Section
identifies. 	The Model 	Rules, 	particularly once 	amended 	along 	the
lines 	that 	the 	Standing Committee 	proposes, 	may well 	forestall
any 	"decline 	in professionalism" 	by 	extending 	the 	bar's 	relevant
ethical 	standards 	to 	the 	provision of 	ancillary 	services. 	For
example, 	an 	ancillary 	business 	would 	have 	to 	avoid 	conflicts 	of
interest 	among 	its 	customers 	and 	clients 	of 	its 	parent 	law 	firm.
As noted 	above, 	even 	a 	"traditional" 	firm 	must 	guard 	against 	the
temptation 	to 	compromise 	its 	indePendent 	judgment 	in 	an 	effort 	to
generate 	additional 	legal 	work. 	Similarly, 	the 	ABA 	can 	respond
to 	concerns 	that 	the 	public 	will 	perceive 	the 	bar 	as 	less
professional 	more 	directly, 	for 	example, 	through 	educational
efforts 	aimed 	at 	managers 	of 	diversified 	law 	firms 	that 	will
sensitize 	them 	to 	lawyers' 	professional 	obligations. 	Finally,
the 	bar's 	ability 	to 	maintain 	its 	responsibility 	for 	self-
regulation would 	appear 	to 	depend on 	the 	effectiveness 	of 	its
disciplinary 	system 	at 	maintaining ethical 	standards, 	not 	on
whether 	lawyers 	and 	firms 	elect 	to 	provide .anc i l l a ry 	services.
The 	Litigation Section proposal 	is, 	on 	the 	other 	hand, 	too
narrow 	in 	that 	it 	fails 	to 	address 	key 	components 	of 	the
Section's 	own critique 	of 	diversification. 	For 	example, 	the
Section's 	proposal 	would 	not 	address 	at 	all 	the 	possibility 	that
a 	lawyer would 	compromise 	his 	or 	her 	indePendent 	professional
judgment 	in 	connection with ancillary 	services 	that 	the 	firm
provides 	incidental 	to 	legal 	services. 	Indeed, 	the 	proposal
would 	bar 	firms 	from 	offering those 	services 	that 	present 	the
least 	danger 	of 	compromising 	a 	firm's 	independent 	judgment:
ancillary 	services 	unconnected with 	the 	firm's 	legal
representation. 	Similarly, 	as 	the 	Litigation 	Section 	observes,
the 	problems 	of 	sole 	practitioner 	diversification 	appear 	no 	less
serious 	than 	those 	of 	firm 	diversification. 	The 	Section 	would
nevertheless 	exempt 	sole 	practitioners 	because 	the 	problems 	"are

George 	Kuhlman 	-- 	pag7 11
not 	likely 	to 	result 	in 	widespread criticism 	of 	the 	legal
profession." 	Litigation 	Section 	Report, 	at 	12.
Conclusion
We 	cannot 	offer 	a 	definitive 	evaluation 	of 	the 	ethical 	and
professional 	challenges 	that 	law 	firm 	diversification 	poses, 	or
of 	the 	effectiveness 	of 	the 	proposed 	solutions 	to 	them. 	As we
have 	discussed, 	however, 	law 	firm 	diversification 	has 	the
potential 	to 	provide 	significant benefits 	to 	consumers. 	The
Litigation 	Section'S 	approach would reduce 	these 	benefits
substantially. 	The 	Standing Committee's 	approach, 	on 	the 	other
hand, 	would 	appear 	to 	preserve 	the 	benefits 	of 	diversification
while 	protecting consumers 	from 	the 	risk 	of 	harm.
We 	appreciate 	this 	opportunity to 	give 	you 	our 	views.
Please 	feel 	free 	to 	contact 	us 	if you 	have 	any 	questions 	or 	if 	we
can 	provide other 	assistance.
Sincerely,