Ancillary Businesses Growing,
with or without Ethics Rules
by Wendy R. Leibowitz
(Published in October 2001 issue of
ABA Law Practice Management magazine)
Your client comes to you with a major crisis that might make headlines. "How are we going to handle the media during this case?" the client might ask nowadays. Until recently, Swidler Berlin Shereff Friedman LLP would refer the client to a public relations agency or crisis control group outside the firm. But the quality of the publicists varied greatly, recalls Barry B. Direnfeld, a partner in the Washington, D.C. office. Plus, it was inconvenient and time-consuming for the client: "Clients had to explain their situation twice," he noted. The lawyers and publicists at the different firms sometimes didn't know each other, and when significant developments unfolded--either in the newspapers or during the litigation--some people serving the client were surprised.
So earlier this year, Swidler Berlin opened a separate, subsidiary business devoted to public relations, or "strategic communications," called The Harbour Group. The ancillary business joins Harbour Consulting, LLC, which is a multidisciplinary practice (MDP) housed within Swidler Berlin, to provide the firm's clients with technical advice on environmental, financial, and economic matters.
Washington, D.C. is one of the few jurisdictions whose local bar rules explicitly permit MDPs. In other areas, lawyers are establishing ancillary businesses--separate businesses with the law firm serving parallel needs of the law firm's clients.
Like parents of small children who are learning as they grow, law firms have started breeding and raising ancillary businesses, frequently making up the rules as they go along. And just as work and family can be a balancing act that requires great dexterity and effort, so can balancing legal services with the other needs of clients.
Ancillary businesses are proliferating at firms of all sizes. Fredrikson & Byron, a Minneapolis firm, launched a health care consulting practice, and followed up with a human resources consulting practice. Connie Laug, a marketer at the Cincinnati firm of Graydon Head Ritchey, left the law firm after 14 years to launch her own business, called Client InSight, consulting with the law firm's clients in strategic planning and professional development. Recently, the firm invited her--and her business--back in-house.
It's not just large law firms that employ non-lawyers to serve clients. Small firms in areas such as environmental law have long worked with engineers. Joseph M. Manko, an environmental lawyer, left a prominent law firm to establish Manko Gold & Katcher with two other lawyers in Bala Cynwd, Pennsylvania. An engineer, Darryl D. Borrelli, is also on staff. But under current ethical rules, Mr. Borrelli cannot join the firm as a partner, nor can the lawyers split fees with him.
"The clients love the engineer," said Mr. Manko. "Half of the time I think they come for the engineer, not for me. But to attract and retain such qualified professionals, the firm must offer them full partnerships. Otherwise, it always feels as if the engineers work for us."
British law firms, which are regarded as ahead of the American curve in cross-cultural and cross-professional areas, offer no solutions. "We have had pension experts, who are not lawyers, for a long time," said Judith Mayhew, a partner in the London office of Clifford Chance Rogers & Wells. "We call them directors, and we pay them a salary and a bonus, instead of a partnership draw, but it's an artifice really," she said.
Some other countries have an even tougher time trying to serve clients without violating ethics rules. In early August, a law society in South Africa decided that the rules of professional conduct barring sharing of fees with non-lawyers prevented attorneys from participating in a major South African legal Web site, www.legalopinion.co.za, which offered online legal advice to the public. The Web site may have to close in light of the ruling from the Cape of Good Hope Law Society. By contrast, an equivalent Web site based in the United States, MyCounsel.com, was honored by the American Bar Association for its service to the public.
But just because we in the U.S. can work with with non-lawyers in the real world or online, doesn't mean all is hunky-dory for non-lawyers.
For one thing, there is no clear career path for non-lawyers, and they can feel like second-class citizens in legal environments. Thomas Wrona, a patent agent and scientific advisor in Chicago's Brinks Hofer who works in the firm's biotech practice group, is going to law school at night to become a lawyer and join the firm as an equal.
Emphasizing that he is well-treated by the firm and that he hopes to continue practicing there, (the firm is even paying his law firm tuition), he says that non-lawyers can never become partners, and thus have no say in how the law firm is run. "If I had a suggestion and never had input, it would be frustrating," he says. "It would make going in-house look more attractive. There, you couldn't run the company, but you could run your [in-house] department." He notes that he is billed at a lower rate than a first-year associate, even though he has more experience, and that he works under tighter cost restraints than associates.
The ethical bars against making non-lawyers partners in law firms, and against splitting fees with non-lawyers, flow from the fear that non- lawyers will direct the legal decisions of the firm, and thus jeopardize the independent judgment of attorneys. This nightmare vision sees accountants or consultants seizing control of the client's legal case from the attorneys. There are also confidentiality concerns, though those arise whenever temporary lawyers, paralegals, or secretaries interact with the client.
But client demand for a greater array of services, and law firm's desires to deepen ties to clients, not to mention increase revenue sources, are causing the creation of ancillary businesses. Some states, prodded by the American Bar Association, have begun drafting guidelines to help firms balance the ethical and business questions raised by ancillary businesses. In late July, New York became the first US jurisdiction to address the issue when the state's Appellate Divisions adopted new provisions governing cooperative business relationships between the legal profession and non-lawyers.
Additional guidelines are emerging from those at the front. Here are a few from those in the trenches:
1. The ancillary business must be set up properly, and separately, from the law firm.
At Swidler Berlin, explains Ellen R. Katkin, director of marketing for the law firm and its subsidiaries, Harbour Communications was set up as an LLC (a limited liability corporation) by the law firm's board of directors, with the guidance of the firm's risk management committee, whose members are drawn from all practice groups, and capitalized with firm money. The firm consulted at every stage with Joe Lundy, a LAWYER who specializes in ancillary businesses with ALAS, the Attorneys' Liability Assurance Society (www.alas.com).
"It's not that hard to do correctly," says Mr. Direnfeld. "And if you do it right, you don't have to do it again." By establishing the ancillary business through the firm's risk management committee, explains Mr. Direnfeld, the firm avoided the appearance of one particular practice group--say, litigation or health care--claiming ownership of the ancillary business. "We did everything we could to gain the support and confidence of the entire law firm membership," says Mr. Direnfeld. "We avoided ethical problems by having our ethics experts run the train rather than stand in front of it." And speaking of ethics...
2. Ethical considerations must be paramount.
Preserving client confidentiality is something that many law firms take for granted. When setting up an ancillary business, a great deal of education must take place to shield client confidences and to preserve the attorney-client privilege. (Ironically, by making these efforts, some law firms can end up with a greater awareness of the importance of confidentiality than they had in the first place--and in this wired world, that's a good thing.)
Most ancillary businesses are established with a separate e-mail and voice mail system, their own computer and document management systems, as well as their own billing systems, to avoid law firm matters from appearing on the bills of the ancillary businesses.
At Swidler Berlin, the communications business is physically separated from the lawyers--a door and walls were constructed on the floor--and people need a separate key to enter the others' offices. "It's like an outside p.r. firm, but down the hall," explains marketing director Ms. Katkin. They don't share support staff or office space--they even have separate kitchens--though the firm does supply accounting services, since the paychecks come from the same source.
The communications firm also bills by the hour, but not through the firm. Separate invoices are sent to the clients, under the Harbour Group heading, and not that of Swidler Berlin. "The whole purpose was to avoid privilege and confidentiality issues completely," says Ms. Katin, who adds that the Harbour Group has a separate Web site and separate marketing materials from the law firm.
3. The same conflicts check must be undertaken at both businesses.
Rigorous conflicts screening can actually increase the level of professionalism in this area, which has been eroding, particularly in the high-tech sectors, as law firms ask for client waivers of conflicts. At Swidler Berlin, the media business doesn't take on any client that is averse to a client in the law firm, or is even objectionable to any client in the firm.
4. Educate your firm and the public.
"Lawyers are not practicing p.r., and p.r. agents are not practicing law," says Mr. Direnfeld. "But you'd be surprised as to how many people think that we are. And lawyers think they know everything anyway," he adds, so they may have little compunction about telling the non-lawyers what to do, especially when it comes to the media. Mr. Direnfeld says he reminds them that "the reason this [communications] group was established was because our lawyers saw this need and we couldn't fill it." Ongoing education and training in this relatively new relationship is important, in the form of lunches, seminars and articles--just as the launch of any new practice area or new business might be.
5. A clear career path for non-lawyers should be established and honored.
The lack of natural progression, or clear yard lines, for non-lawyers in a hierarchical profession is very problematic. Lawyers can mark their first client, their first deal closed, their advancement year by year towards partnership after seven years or so. But what of the statistician who advises the insurance group? The scientists in the biotech group? All those economists helping the antitrust lawyers? The technical people developing litigation support systems?
At Swidler Berlin, the non-attorneys are in their own area so they can develop their own esprit de corps, recruit their own people, and reward them accordingly. But Jay Jaffe, the name partner in Jaffe Associates, one of the largest public relations agencies with experience in advising law firms, says that lawyers have a great deal to learn about these personnel and management issues. After all, what good is establishing ancillary businesses--or even modifying ethical rules to allow MDPs--if non-lawyers bolt the law firm due to poor management practices?
"Accounting firms have their acts together better than law firms," says Mr. Jaffe, because they know how to manage people better. The management issues are the "soft underbelly" of the legal profession, he says, and accounting firms can zoom in to take advantage of the general unhappiness of many people working in law, and seize both lawyers,non-lawyer employees of firms, and clients.
"Lawyers are stronger in their knowledge of courts and law, but weaker in their management of people and willingness to invest time" in people, says Mr. Jaffe. "Accounting firms don't pay people only on the basis of time sheets. If you have too many billable hours at a senior level, in an accounting firm, you are a handicap. They want you to be selling the firm's services," he notes.
For ancillary businesses to thrive alongside law firms, says Mr. Jaffe, law firms will have to develop a business model that accommodates them. "How is profitability going to be measured? Who's going to manage the business? Where does it fits in with the core competencies of the law firm?" Lawyers are improving, he says, but they have a lot to learn from the ancillary businesses that they are helping to establish. "Law is a mature profession, but an immature business," he says. Lawyers haven't begun to explore the different potential models available. By working with mature businesses, perhaps both lawyers and non-lawyers--and their mutual clients--can benefit.