In Defense of a Reasoned Dialogue About Law Firms and Their Sophisticated Clients
We write in support of the “Proposals of Law Firm General Counsel for Future Regulation of Relationships Between Law Firms and Sophisticated Clients,”1 submitted by the general counsel and risk managers of more than thirty large law firms to the American Bar Association (ABA) Commission on Ethics 20/20 in March 2011 (which we will hereinafter refer to as the “Law Firm Proposals” or “Proposals”), and in response to Larry Fox’s essay roundly condemning that submission.2 Sadly, Fox’s diatribe in response and opposition to the Law Firm Proposals was not only unpleasant in tone but, more importantly, unhelpful in its failure to address the underlying realities on which the Proposals were premised. Many of the propositions that he states as verities of proven and virtuous antiquity simply do not stand up to scrutiny—either as to their substance or their provenance. And the world of legal practice that he envisions bears little resemblance to the realities of modern law firms or the regional, national, and global clients they serve.
As persons who were directly involved in the preparation of the Law Firm Proposals, we know that they were generated in the hope of promoting a reasoned discussion on a topic of fundamental importance to clients as well as to their outside lawyers. The Proposals were based on two underlying premises: first, a conviction that the current ethical rules governing U.S.-based lawyers and law firms do not adequately address the needs or changing expectations of many clients or the lawyers who serve them; and second, that the lack of a single and uniform regulatory system for lawyers across the country is harmful to both clients and their outside counsel.
I. A Brief Review of the Proposals
Before we address the deficiencies of Fox’s arguments, it might be helpful to summarize briefly the actual Proposals that the group of law firm general counsel submitted to the ABA. Before doing so, however, it is also important to recognize the reasons the group felt compelled to make such a submission. The signatories to the Law Firm Proposals are all senior lawyers whose responsibilities within their firms are focused on ensuring compliance with the varied and often inconsistent rules of practice in the numerous U.S. and foreign jurisdictions in which their firms operate. Their task is made frustratingly difficult not only by the lack of a single, uniform set of rules governing professional conduct across the country—a lack that often results in conflicting, inconsistent, and unpredictable results from one jurisdiction to another—but also by a prevailing set of regulatory norms that simply do not match the realities of the world in which they live.3
In the words of the Proposals, the rules governing lawyer conduct imposed by the several states
|are primarily designed to protect individual consumers of legal services who may lack the experience or sophistication to protect themselves against unethical or otherwise improper conduct by the lawyers who represent them. While such rules may be perfectly sensible when dealing with such unsophisticated clients, the strictures and presumptions they impose do not work well when applied to relationships between large commercial enterprises and their outside counsel.4|
Accordingly, the Proposals suggest modifications to the current rules of practice governing (1) the relationships between law firms and sophisticated commercial clients and (2) the ability of lawyers to engage in practice across jurisdictional lines. Specifically, they recommend changing certain presumptions in the substantive rules insofar as they apply to sophisticated clients and offer a working definition of what might constitute a “sophisticated client.” The proposed changes address the mutual needs of sophisticated clients and their lawyers to be able—by mutual consent and when they choose—to determine with certainty how the conflict of interest rules should apply in their relationships. Thus, sophisticated clients and their outside lawyers could agree to permit:
Additionally, the Proposals suggest that sophisticated clients should be able to agree with their outside lawyers to limit the liabilities of such lawyers or to indemnify them in connection with the engagement.8 This would enable lawyers and their clients to agree in advance to the nature or extent of the lawyers’ potential liability to the client in connection with a given transaction or engagement, “the time within which the client may assert any claims against the lawyers, the forums where any disputes should be heard and determined, or the extent or kinds of damages for which the lawyers should be liable.”9
II. Fundamental Flaws in the Fox Critique
The lynchpin of Fox’s strident rejection of the Law Firm Proposals is an extreme view of client loyalty that is simply unworkable when wedded to the extreme view of imputation that he also embraces. While no one would dispute that a lawyer owes an unwavering duty of loyalty to his or her client, the nature of that duty is not as universally agreed upon—or nearly as unbounded—as Fox suggests. Although frequently invoking the traditions of the common law to support his position, Fox fails to acknowledge that the Proposals advanced by the law firm general counsel—for example with respect to outside lawyers being able to act directly adverse to an existing client in an unrelated matter—are fully consistent with the English common law and with rules of practice in England and Wales (as well as in Europe and much of the rest of the world).10 Indeed, the so-called “English rule” on conflicts of interest is the law in Texas as well.11
The simple fact is that in these jurisdictions (including Texas) the concept of client loyalty is interpreted to mean that a lawyer (1) should not represent two different clients in the same matter, (2) should always safeguard a client’s confidences, and (3) should never use a client’s confidential information to the client’s disadvantage.12 It does not mean that a lawyer should never be adverse in any conceivable way to anyone who is now or previously was a client.
The extremism of the Fox analysis is exacerbated, however, when coupled with his embrace of an unbridled version of the doctrine of imputation—i.e., the principle, embodied in Rule 1.10 of the ABA Model Rules of Professional Conduct, that the conflicts of one lawyer in a firm should be imputed to all others, regardless of the size of the firm or the location of the lawyers.13 Whatever the efficacy of such a rule in a two- or five- or ten-person law firm, its utility can certainly be questioned in firms of hundreds of lawyers representing clients in dozens of offices in multiple countries around the world (including jurisdictions that do not embrace the broad view of conflicts currently incorporated in the ABA’s Model Rules). The Proposals advanced by the law firm general counsel are premised on the assumption that law firms as institutions are capable of being “loyal” to different clients through different lawyers and that sophisticated clients are capable of understanding that. Whether one ultimately agrees with that view or not, it is certainly a topic worthy of serious debate. At a time when the average size of the 250 largest law firms in America is 497 lawyers and when the country boasts more than a dozen firms of 1000 lawyers or more,14 surely it is not frivolous to suggest that the time may have come to reconsider the appropriateness of the imputation rule, at least insofar as sophisticated commercial clients are concerned.
C. Consistency of Proposals with the Current Rules of Professional Conduct
Another major flaw in the Fox analysis of the Law Firm Proposals is that he overlooks the fact that—with the exception of the suggested consensual limitation on liability—there is nothing in the Proposals that is currently prohibited under the ABA’s Model Rules or the rules of the several states based on the Model Rules.15 All of the suggestions respecting conflicts of interest can, for example, already be voluntarily agreed to by clients and their lawyers, at least theoretically. But, therein lies the problem. The ABA’s Model Rules—as well as the state rules that reflect them—are premised on the assumption that clients are unsophisticated consumers of legal services who require the protection of the rules to shield them from unethical or otherwise improper behavior by their lawyers. Adopting this premise, courts are often inclined to interpret the rules very strictly, even in cases where a sophisticated client may have agreed to a different result.16 This approach leads, unfortunately, to inconsistent and unpredictable results, leaving both clients and their outside counsel uncertain whether the terms they negotiated will be honored.17 It also provides fertile ground for pretextual motions for disqualification, a serious problem that most courts would readily acknowledge.18 The fact is that a significant number of disqualification motions and conflict complaints filed in U.S. courts today are simply tactical attempts to gain an advantage in litigation rather than genuine efforts to protect client confidences or loyalty. The end result of these tactical schemes is often to inflate the cost of litigation, to delay the resolution of disputes, and to deny litigants the counsel of their choice.19
Under the Law Firm Proposals, in cases involving sophisticated clients, the presumptions under the conflict rules and certain other rules would be reversed, unless the parties specified otherwise. Thus, if a sophisticated client agreed to an advance waiver with a law firm to permit direct adversity on unrelated matters, or to provide waivers of conflicts resulting from lateral partner moves, there would be a strong likelihood that such agreements would be honored more uniformly by jurisdictions than under the present regulatory framework. Contrary to Fox’s suggestion, however, no client would be forced to accept any of these results and could easily avoid them simply by stipulating to the contrary.20 Moreover, it is important to remember that, insofar as sophisticated clients are concerned, the discussion between client and outside counsel is almost always a discussion between lawyers and not between outside lawyers and uninformed lay people. Large commercial clients typically have sophisticated and experienced in-house counsel who are more than capable of representing these clients’ best interests and fully understanding the agreements they reach.
D. Sophisticated Clients
Another line of attack by Fox is to belittle the notion that any client might actually be a sophisticated client, suggesting that we really have no choice but to view all clients as inexperienced and incapable of making intelligent decisions in respect of their legal rights, even with the assistance of experienced in-house counsel. In other words, he asserts that the rules governing lawyers must always be pegged to the lowest common denominator and that this denominator is always the unsophisticated client needing protection from his or her lawyer. As pointed out in the Law Firm Proposals, however, the notion of drawing distinctions between sophisticated and unsophisticated consumers of services is hardly novel. Examples of such distinctions in federal law can be found in the Consumer Credit Protection Act,21 the Consumer Leasing Act,22 and Regulation D of the Securities and Exchange Commission.23
Moreover, the Law Firm Proposals clearly acknowledge that reasonable people can certainly differ on the definition of a sophisticated client suggested in that submission.24 The important point is that the criteria used to identify sophisticated purchasers of legal services should be realistic and easily and objectively measureable. Surely, Fox would not deny that some clients are sufficiently sophisticated in dealing with outside counsel as to justify the conclusion that they are fully capable of protecting their own interests without the need for artificial presumptions tilted in their favor in the interpretation of applicable rules of practice. If Fox has a better suggestion for how the rules might define such clients, then he should put it forward for discussion.
Conclusion: The Need for Intelligent and Productive Debate
The suggestions set out in the Law Firm Proposals are grounded in the realities of today’s complex and highly competitive market for legal services. They seek to draw from and respond to the needs of major commercial clients and the law firms that serve them. Justice Holmes famously remarked, “The life of the law has not been logic; it has been experience.”25 Just like the law itself, the rules governing the conduct of lawyers must change with the times, always finding ways to preserve key values in the evolving marketplace in which lawyers actually live and work. A system that loses touch with the realities of the working environment in which its rules must be applied quickly loses both its credibility and its moral force. The Law Firm Proposals are intended to launch a serious conversation within the legal profession about steps that need to be taken to ensure that our rules of practice remain relevant and vibrant.
Another serious concern also underlies the Proposals. The burdens of unnecessarily restrictive regulations on the practice of law are currently being swept away in many parts of the world, most notably in England.26 Those changes will liberate clients with global businesses and law firms not constrained by the U.S. regulatory structure to engage with each other in many new ways—including all of the ways covered in the Law Firm Proposals. Unless the rules governing the practice of law in the United States can be modified to bring them more in line with the prevailing norms in the rest of the world, U.S.-based and qualified lawyers are likely to be constrained in their ability to compete globally for legal business. That, in our view, would be a serious setback—both for American lawyers and their clients.
In presenting their Proposals, the law firm general counsel make clear that they do not intend to undercut in any way the current rules of practice with respect to unsophisticated clients or to challenge the overall structure of lawyer regulation in the United States as it applies to such clients. Rather, they seek to maximize the ability of sophisticated clients to structure their relationships with their lawyers in ways that best serve their needs while accommodating the real needs of law firms that are increasingly required to deliver services across state lines and international borders.
We hope that those interested in this important topic will consider the Law Firm Proposals on their merits. We look forward to engaging in an intelligent and productive debate with anyone genuinely interested in addressing the actual issues raised in the Proposals. Meanwhile, after having a chuckle at Fox’s misplaced hyperbole, we also hope that thoughtful readers will close the lid on his noisy and unhelpful rant.
James W. Jones is Senior Fellow at the Center for the Study of the Legal Profession at the Georgetown University Law Center and moderator of the Law Firm General Counsel Roundtable that coordinated the recent submission to the ABA Commission on Ethics 20/20. He is a former Managing Partner of Arnold & Porter LLP, former Vice Chairman and General Counsel of APCO Worldwide, and former Managing Director of Hildebrandt International. Anthony E. Davis is a partner in the Lawyers for the Profession® practice group at Hinshaw & Culbertson LLP and served as a consultant to the Law Firm General Counsel Roundtable in connection with the submission.
Preferred citation: James W. Jones & Anthony E. Davis, In Defense of a Reasoned Dialogue About Law Firms and Their Sophisticated Clients, 121 Yale L.J. Online 589 (2012), http://yalelawjournal.org/forum/in-defense-of-a-reasoned-dialogue-about-law-firms-and-their-sophisticated-clients.