August 5, 1988
A lawyer and a group of nonlawyer professionals may combine in business to form a corporation so long as the proposed activities of the resulting business do not constitute the practice of law.
A lawyer who performs legal services for customers of a nonlaw business in which a lawyer has an ownership interest or is a manager is presented with serious concerns of solicitation of business and conflicts of interest.
A corporation comprised of lawyers and nonlawyers may not act as a conduit for solicitation of business to a lawyer.
A lawyer may share office space with a nonlaw business so long as precautions are taken in order to prevent indirect or direct solicitation of business.
A lawyer may not divide legal fees with a nonlawyer, absent a recognized exception within ethics rules.
References: MCPR DR 2-103, DR 2-104, DR 3-101(A), DR 3-102(A), DR 3-103(A), DR 5-101(A), DR 5-107(C); MRPC 5.4, 5.5(b), 7.3; CI-236, CI-725, CI-954, CI-1006, CI-1099; ABA i-1482.
A lawyer wishes to form an association with and otherwise participate in an ownership capacity with a group of nonlawyer professionals, including a marketing consultant, a business management consultant, a personal and executive placement expert and an accounting firm, in order to provide management advisory services to businesses. Additionally, the lawyer would like to provide independent legal advice and services upon request to business customers of the nonlaw association, with full disclosure of the nature of the relationship. The legal services would run the gamut from initial organization to pensions, including individual tax and estate planning, and could include commercial collections, creditor bankruptcy and governmental regulation.
The lawyer's first choice of business form would be a separate corporation with all the professionals as principals and shareholders. This new corporation and the existing accounting firm would be separately identified, but would be physically located together. The lawyer would designate each entity within the newly established corporation as an independent contractor, each independently contracting with the newly-formed corporation. The contracts would delineate specific duties and responsibilities as well as set forth the details with respect to each entities' contribution to overhead, expenses, compensation, termination, etc. The lawyer would also maintain an independent professional corporation for law practice, which would act as general counsel for the accounting firm on an annual retainer basis.
The lawyer asks whether the proposed business violates any ethics rules.
The issues presented are: (1) whether a lawyer and a group of professionals, some or all of whom are nonlawyers, may ethically combine in business to form a corporation; (2) whether a lawyer may perform legal services for clients or customers of a nonlaw business in which lawyers and nonlawyers have ownership and/or managerial interest; (3) whether this committee may offer specific information to be included in a disclosure statement to be provided to clients by a lawyer to prevent conflicts of interest; (4) whether a lawyer's office, from which he will be practicing law to some extent, may be physically located with an accounting firm; and (5) whether the shared contribution to overhead, expenses, and compensation by a lawyer with a nonlaw business constitutes ethically prohibited division of legal fees with a nonlawyer.
It is our opinion that it would be ethically permissible for a lawyer to combine in business with other professionals to form a corporation in order to provide management advisory services to business, provided that none of the corporation's activities constitute "the practice of law." Where and to the extent that the activity and advice to be offered would involve the practice of law, the joint business endeavor by a lawyer and laymen would be ethically prohibited. CI-954. As MCPR DR 3-103(A) and MRPC 5.4(b) clearly state, "a lawyer shall not form a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law." A partnership is defined as an association of two or more partners in a business enterprise.
Also, MCPR DR 3-101(A) and MRPC 5.5(b) prohibit a lawyer from aiding a nonlawyer in the unauthorized practice of law. Generally, these provisions prevent a lawyer from performing services for a lay organization that, if performed by a nonlawyer, would constitute the unauthorized practice of law. While the unauthorized practice of law is generally defined as an act performed by a nonlawyer that involves legal advice or legal judgement, the determination of whether or not there exists unauthorized practice in any particular joint venture is a question of law, not ethics, and should be left to the courts. Hence, an inquiry into whether or not certain advice or participation constitutes "legal advice" or "the practice of law" is beyond the scope of this committee.
Performing legal services for clients of a nonlaw business in which a lawyer has ownership interest or is a manager, presents concerns of solicitation of business and conflicts of interest. MCPR DR 5-101(A) prohibits legal employment if the exercise of a lawyer's "professional judgment on behalf of his client will be or reasonably may be affected by his financial business, property, or personal interests," unless the client consents after full disclosure. It is clear that full disclosure is required if the lawyer wishes to provide legal advice to customers of the law-related business. As stated in ABA i1482:
"A lawyer who elects to engage in a law-related business while providing legal advice to customers of that business will, as a practical matter, have the substantial burden of establishing that any legal advice given has been free of the taint of any bias created by the dual capacities in which the lawyer acted."
See also MRPC 1.7, 6.3, 6.4.
MCPR DR 5-107(C) and MRPC 5.4(a) and (d) prohibit a lawyer from practicing law for a professional corporation or association if a nonlawyer owns any interest therein. In the proposed arrangement whereby the lawyer's P.C. would act as general counsel for the accounting firm on an annual retainer basis, the lawyer may provide services to the accounting firm directly in the capacity of general counsel. The lawyer may not be permitted ethically to act under the direction of the accounting firm with regard to a mutual client. Such a situation is prohibited by MRPC 5.4(d).
It is beyond the committee's jurisdiction and scope to offer legal advice, and therefore we may not offer specifics to be included within a disclosure statement. The committee may only properly address specific factual cases of proposed conduct. CI-1099. However, we may state that any disclosure statement should be drafted such that it will negative any presumption of conflict of interest and/or solicitation of business between the proposed client and the joint-venture lawyer.
A corporation comprised of lawyers and nonlawyers may not act as a conduit for solicitation of business to a lawyer. MCPR DR 2-103 and DR 2-104 and MRPC 7.3 are partly the result of fear that a lawyer engaging in a joint venture with nonlawyers would use the other business as a feeder operation for the purpose of soliciting clients for the lawyer's law practice. Direct and indirect solicitation is forbidden. As noted in CI-1099, a lawyer may associate with a business not involved in the practice of law so long as such a business does not engage in activities that might be considered to be the practice of law and the business does not hold out the availability of legal services as an inducement to prospective customers or clients. CI-236 states that a lawyer who has an interest, is an employee, or performs legal services for a real estate business or mortgage financing business may not accept referrals from such entities where such entities serve as vehicles for the referral of business whether directly or indirectly.
In close connection with the question of solicitation is the issue of physical proximity. The principal ethical concern over the physical closeness of a lawyer's office and the nonlaw business location is that such proximity will increase the chances of the law office being fed business by the nonlaw corporation in violation of MCPR DR 2-103 and MRPC 7.3 Generally, lawyers and nonlawyers may share office space so long as certain conditions are met to avoid indirect solicitation. CI-1006 states:
"What is desired is that the two operations be kept so distinct that there can be no suspicion that one is serving as a feeder for the other."
". . .
"The common areas must be physically arranged so that the two businesses remain separate and distinct in a manner which prevents the public's misconstruction of the affiliation of the lawyer(s) and non-attorney(s). For example, while reception areas which identify who the client will see may be a common area, waiting (areas) must be separate to avoid intermingling of those clients thereby giving the impression of an association between the professionals. Conference rooms may be shared so long as they are located in neutral areas; i.e., so long as it is not necessary to pass through a non-attorney tenant space to get to such conference rooms (or vice versa). Moreover, the common area should not be used by the attorneys as law libraries, etc. whereby the working papers and research tools are intermingled creating the appearance of a professional affiliation."
With respect to telephone lines, it was held in CI-725 that a lawyer may not ethically permit a certified public accountant who rents space from him to share the lawyer's telephone line where the telephone would be answered with the name of the lawyer. It is clear, that physical proximity of legal and non-legal business can create ethical violations. Great care must be taken to prevent direct as well as indirect solicitation.
The division of legal fees with a non-lawyer is ethically prohibited by MCPR DR 3-102(A), absent a recognized exception within the rule. MRPC 5.4 also prohibits the sharing of legal fees with nonlawyers and partnerships with nonlawyers where any of the partnership activities consist of the practice of law. As stated in CI-954, if any of the activities which generate fees to the corporation or individuals involved in its ownership consist of the practice of law, then the situation would involve a lawyer sharing fees with a nonlawyer outside the exceptions set forth for some and would be prohibited by MCPR DR 3-102(A). It is not ethically prohibited for a lawyer and a nonlawyer, who share a common office area, to split up the cost of expenses for maintaining that area. The provisions dealing with the illegality of splitting legal fees are the result of concerns of protecting the lawyer's professional independence of judgment. As long as the contribution toward expenses permits the lawyer independently to exercise professional judgment on behalf of the client and the other guidelines are followed, such a contribution to expenses is not ethically prohibited.
The Michigan Rules of Professional Conduct will supersede the Michigan Code of Professional Responsibility on October 1, 1988. The new rules will govern conduct occurring on or after that date. The Michigan Code of Professional Responsibility will govern conduct occurring before October 1, 1988. We have attempted to address this inquiry from both perspectives.
Therefore, a lawyer may combine in business with nonlaw professionals provided that none of the resulting corporation's activities consist of the practice of law, and that the other ethical safeguards are followed concerning solicitation, conflicts of interest and sharing of income.