Unauthorized Practice of Law
AN IN-DEPTH LOOK AT THE ISSUE

May 2002

UPL, MDP, MJP How Irresistible Are These Changes?

By Gregory Huffman


Beneath the surface of the day-to-day practice of law are currents of change as to who can practice or profit from legal services and in how many states and countries those services can be provided. At no time in most of our lifetimes has the push for these changes been stronger. In the next 10 years, we can anticipate a significant evolution in the practice of the law.

Pushing these changes are the same forces which are changing the world around us — computerization and globalization. Just as the 20th century was radically changed by the labor-saving advances of mechanization, the 21st century will be radically changed by the thought-saving advances of computerization. We will see software programs like TurboTax become even more commonplace in medical diagnosis, business analysis, mechanical troubleshooting, and yes — legal problem-solving. Companies reaching worldwide through the Internet will take a global approach to solving their legal problems. Companies will weigh the advantages and disadvantages of one legal jurisdiction against another, as companies do now in choosing Delaware or Nevada as a state of incorporation. Jurisdictions which are considered backward will be disfavored as companies decide where to put their headquarters and operational facilities. The greater fluidity between states and countries will tend to level out legal differences, as we are seeing in the European Community and NAFTA, and can expect to occur in the current GATS round of treaty negotiations.(1) As jurisdictions become more uniform in their laws, the impetus for the easy practice of law across borders will become irresistible.

At least three reforms are currently in play — multidisciplinary practice (MDP), multijurisdictional practice (MJP), and the definition of the unauthorized practice of law (UPL). Each of these is technically a different dimension of change.

The unauthorized practice of law, or UPL, determines primarily the individuals who are allowed to practice law. In most instances, of course, only lawyers licensed in the jurisdiction are allowed to litigate and counsel on legal matters.

Multidisciplinary practice, or MDP, involves who can be an owner or co-owner of an entity which provides legal services. In almost all jurisdictions, only lawyers are allowed to be owners or partners in these entities. Some MDP proposals have proposed allowing accountants and others to become principals in these entities. MDP focuses on the ownership of the law firm or entity; UPL focuses on whether the individual practitioner in that firm or entity must be a licensed lawyer.

Multijurisdictional practice, or MJP, is the geographic dimension of the practice of law debate. MJP proposals generally seek to liberalize the ability of licensed lawyers to practice law outside their home jurisdictions. To the extent that individuals and firms other than lawyers or lawyer-owned firms are allowed to practice law through UPL and MDP reforms, those changes will need to be addressed in the MJP debate as well.MDP, MJP, and UPL have been hot topics nationwide and before the American Bar Association. The State Bar of Texas has been deeply involved in two of those issues. A State Bar task force, appointed at the suggestion of the Texas Supreme Court,(2) has published reports on both MDP and UPL.(3) Both UPL and MDP are discussed in more detail below. Because the American Bar Association has not yet issued a final report on MJP,(4) this article defers from an in-depth discussion of MJP.

The Unauthorized Practice of Law
There are several statutes currently regulating who can practice law in Texas. The most comprehensive statute is chapter 81 of the Texas Government Code, where the basic foundation for UPL regulation is laid out.

In this chapter, the “practice of law” means the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.(5)

This rather indefinite definition has been greatly refined by legal interpretations and ancillary statutes over the years.(6)

The State Bar task force found the current Texas UPL statutes on their face to be over-broad and unrealistic in certain respects. For example, laypersons who gratuitously comment on legal matters and in-house lawyers licensed in other states who advise their employers can be in violation of the statutes, literally-read. The statutes also do not reflect significant exceptions which have been read into the application of the statutes. Individuals have the right to represent themselves pro se and non-lawyers are allowed to represent clients in some federal and state agency proceedings.

Fortunately, the problematic nature of the UPL statutes has been largely circumvented in practice by the prosecutorial discretion of the Unauthorized Practice of Law Committee. That committee, which is appointed by the Texas Supreme Court, has chosen to read unwritten limitations into the statute’s explicit terms.

Texas’ current statutes are comparable to the UPL statutes of other states.(7) All of the statutes appear to suffer from similar problems of overbreadth and lack of precision. The difficulty of defining the scope of the unauthorized practice of law has been noted by the American Law Institute: “The definitions and tests employed by courts to delineate unauthorized practice by nonlawyers have been vague and conclusory ….”(8) In fact, the American Law Institute does not even attempt to formulate a definition for the unauthorized practice of law.

The State Bar task force reviewed virtually all of the UPL statutes in the nation and reached essentially the same conclusion as did the American Law Institute — there was none which provided a satisfactory model for improving and modernizing the Texas statutes.

The task force’s proposed revision seeks to re-tailor the existing law to fit the reality of how that law has been applied by the courts and the Supreme Court Unauthorized Practice of Law Committee, coupled with some changes to make the law more enforceable and workable. The proposed revision has three major parts.

New section 81.101 sets forth a general definition of the practice of law. The present statute’s definitional standard of “the giving of advice … requiring the use of legal skill or knowledge” is refined to include additional elements — the advice must be of specific rights or obligations of another person and the advisor must be acting in a professional capacity and as a personal advisor to the person receiving the advice. These changes are designed to reflect the reality of current enforcement, which of course is not directed at politicians and newsmen discussing the meaning of laws or at friends or social acquaintances making gratuitous comments about legal matters — circumstances which the listener would not consider to be professional advice.

New section 81.102 specifies which persons, in addition to licensed lawyers, are entitled to offer certain legal services. In most instances, this section merely centralizes in one place the exceptions already made by statute or interpretation — e.g., pro se representation by individuals, licensed real estate agents’ use of promulgated forms, conveyance of mineral interests by landmen, representation in small claims court, and representation before certain federal and state agencies. The new section also recognizes officially that in-house counsel and employees can advise their corporate employers on legal matters, broadens the current exception for software and forms books to apply also to real estate transactions which do not affect homestead rights, and allows pro bono providers approved by the Supreme Court (like Texas Rural Legal Aid) to send qualified paralegals to do uncontested prove-ups in divorce proceedings. Probably the most important change in Section 81.102 is that which imposes on any nonlawyer allowed to provide legal services the same standards of care and ethics as would be applicable to a lawyer. That change eliminates a possible loophole created by the legislature in 1999 when legal software programs were removed from the definition of the practice of law.

New sections 81.107 and 81.108 respectively allow the Supreme Court Unauthorized Practice of Law Committee to call on the Office of Attorney General for assistance in investigations and enforcement and provide for a private cause of action against those who engage in the unauthorized practice of law. These changes are designed in part to remedy the current regulatory scheme’s lack of clout to deal with well-financed violators of the UPL statutes.

In part, UPL reform is more than irresistible; it is already reality. The only question is whether the present statute will be amended to reflect that reality.

Multidisciplinary Practice
In August 1998, an ABA commission was appointed to study the issue of multidisciplinary practice. In June 1999, the commission recommended that the ABA Model Rules of Professional Conduct be revised to allow nonlawyers to become owners or co-owners in firms in which lawyers offer legal services to clients.(9) The ABA Commission proposal did not recommend any change in the definition of UPL, so nonlawyers would not have been allowed to practice law under the commission’s proposal. The ABA report occasioned a flood of comments, pro and con, from around the country. The State Bar task force was asked to analyze the ABA report.

The task force in its unanimous October 1999 report found both positive and negative aspects in the ABA Commission proposal. Overall, however, the task force felt that the ABA Commission had not yet sufficiently shown the need for such a significant change in the legal profession.

The task force believes that the ABA Commission’s June 1999 proposal to allow multidisciplinary practice groups to practice law has not been adequately justified. The task force recommends, for the reasons stated in the recommendation at the end of this paper, that the proposal not be approved unless and until empirical evidence is brought forward, the present proposal’s apparent deficiencies are addressed, and further study demonstrates that the public interest in fact will be furthered. The public interest includes providing legal services consistent with a high, enforceable level of ethics, confidentiality, and loyalty to the client in a cost-effective manner for all those needing legal services.(10)The task force was concerned about the ethical implications of MDP, particularly where lawyers were involved in representation of clients in adversarial litigation. In that latter type of representation, the issues of conflict of interest and confidentiality obviously are significant impediments to any one firm’s representation of multiple clients adverse to one another. But even for non-adversarial types of representation such as business advice, the ABA Commission’s proposal was considered to be problematic. Allowing a lawyer to be an adjunct, for example, to one of the Big Five accounting firms or to a doctor treating a patient could economically devolve into the equivalent of a referral fee. In such a situation, the client likely would either pay a higher fee for the same level of legal service or receive a lesser level of service from the lawyer.(11) Although the task force recognized the possibility that “one-stop shopping” might offer efficiencies for clients, the ABA Commission made almost no showing of those efficiencies or why those efficiencies could not be achieved by side-by-side joint ventures between law firms and others without the adverse consequences of fee-splitting or referral fees.

The ABA House of Delegates in July 2000 rejected the ABA Commission’s proposal.(12) That vote had no official impact on what action any state might take in allowing MDP, and in fact has not stopped the MDP issue from going forward. Currently, nearly a dozen states are in the process of finalizing MDP proposals.(13) State bar task forces which have taken pro-MDP stances so far include Arizona, California, Colorado, Georgia, Maine, Minnesota, North Carolina, South Carolina, Utah, Virginia, as well as the District of Columbia.

One of the greatest impediments for the acceptance of MDP has been the Securities and Exchange Commission. The SEC historically has opposed auditors acting also as counsel to a client.

A legal counsel enters into a personal relationship with a client and is primarily concerned with the personal rights and interests of such client. An independent accountant is precluded from such a relationship under the securities acts because the role is inconsistent with the appearance of independence required of accountants in reporting to public investors.(14)

The SEC in the last several years has forced auditing firms to reduce their non-audit business with audit clients to preserve the auditor’s independence of judgment.(15) Many of the Big Five have recently spun off their consulting businesses(16) and likely view MDP as a risky endeavor.(17) The Enron situation has brought these concerns into even sharper focus.

The future of MDP in the near term is unclear. With the Big Five auditing firms less aggressive about MDP, there is less impetus for change. There may also be less need for MDP. Absent the efficiencies which arise from the auditing relationship in which the auditing firm gains an in-depth knowledge of the client’s business, “one-stop shopping” will offer fewer advantages. On the other hand, there may now also be less risk in MDP, as the large auditing firms probably pose the greatest danger of being able to extract the equivalent of referral fees from the attorney-client relationship.

One possible scenario is that the recognition of MDP in one U.S. jurisdiction may cause a domino effect. Legal services, such as merger and acquisition work, might migrate to that jurisdiction so that major consulting firms could perform both the analysis and legal work for transactions. If clients were to divert a significant amount of legal work away from lawyers in other jurisdictions, those other jurisdictions would feel economic pressure to adopt MDP.

Whether MDP would benefit clients is unknown at this time. Little serious effort has been made empirically to justify MDP, and any MDP proposal would have to be carefully tailored to avoid the ethical and regulatory pitfalls which could arise.
Notes
  1. See, e.g., U.S. Schedule of Commitments Under the General Agreement on Trade in Services, at 32 (May 1997) (listing the United States government’s trade commitments as to Texas law concerning legal services).
  2. Presidents Pena, Aycock, and Liberato, at the request of the Supreme Court, appointed a task force to evaluate the State’s regulation of the unauthorized practice of law. The mandate of the task force was soon broadened to include the MDP proposal being debated by the ABA beginning in 1999. The members of the task force (Walker Arenson, Amanda G. Birrell, Jim Blume, Brent Clifton [chair], Terry W. Conner, Kelly Frels, Hon. Rodney Gilstrap, Gregory Huffman, Rebecca Lightsey, Vidal Martinez, Witcher McCullough III, Dick Miller, Lee Teran, Robert Valdez, Doc Watson, and Mark Witcher) were drawn from a variety of backgrounds — two were sole practitioners, four from firms of less than 20 lawyers, five from firms of more than 20 lawyers, and five from public interest, corporate, or governmental positions. The executive director, presidents, and presidents-elect of the State Bar also served ex officio.
  3. See State Bar of Texas Task Force, Preliminary Report on the ABA Commission’s Multidisciplinary Practice Proposal (October 1999), reprinted in 63 Tex. B. J. ff. 150 (Feb. 2000); Preliminary Recommendation of a New Statutory Definition for the Practice of Law (May 2000), reprinted in 63 Tex. B. J. 543 (June 2000); Recommendation of a New Statutory Definition for the Unauthorized Practice of Law (April 2001), reprinted in 64 Tex. B. J. 860 (Oct. 2001). Some of the language of those reports has been incorporated into this article.
  4. See American Bar Association, Interim Report of the Commission on Multijurisdictional Practice (Nov. 2001) (listing numerous preliminary recommendations, including six “safe harbors” for lawyers involved in pending and prospective litigation, ADR, other matters, and matters arising out of federal, international, and foreign law) . (www.abanet.org/cpr/mjp-home.html)The ABA Commission on MJP anticipates issuing a final report in May of this year.
  5. Tex. Gov’t Code § 81.101(a) (Vernon Supp. 2002).
  6. See Robert Ries, The Unauthorized Practice of Law, 60 Tex. B. J. 37 (Jan. 1997) (reviewing judicial interpretations of Texas’s UPL statutes and rules); Gregory Huffman, Unauthorized Practice of Law: A Texas Review, 47 Tex. B. J. 1220 (Nov. 1984) (same).
  7. See American Bar Association Center for Professional Responsibility, 1994 Survey and Related Materials on the Unauthorized Practice of Law/Nonlawyer Practice (1996) (summarizing the UPL laws and decisions of the fifty states). See also Washington State Bar Ass’n Committee to Define the Practice of Law, Report (July 30, 1999) (suggesting a new UPL statute for the State of Washington). (http://www.wasba.org/c/cdpl/report.html)
  8. Restatement of the Law Governing Lawyers 36 (2000).
  9. American Bar Association Commission on Multidisciplinary Practice, Report to the House of Delegates (June 1999). (http://www.abanet.org/cpr/mdpfinalreport.html)
  10. See, Executive Summary to State Bar of Texas Task Force, Preliminary Report on the ABA Commmission’s Multidisciplinary Practice Proposal, supra, note 4.
  11. See, e.g., Baumol and Blinder, Microeconomics Principles and Policy 98-101, 343-44 (5th Ed. 1991) (discussing the similar situation of an excise tax); Samuelson, Economics 562 (6th Ed. 1964) (discussing the theoretical effect of lower-than-market wages on job performance). Congress, for comparable reasons, passed the Stark Amendments (42 U.S.C. § 1395nn) restricting cross-ownership of medical facilities by medical doctors. See Fabrikant et al., Health Care Fraud § 4.05 (2000) (citing studies showing significantly increased rates of referral in cross-owned situations).
  12. American Bar Association House of Delegates Report 10F (July 13, 2000). (http://www.abanet.org/cpr/mdprecom10f.html)
  13. See American Bar Association, MDP Information (March 5, 2002). (http://www.abanet.org/cpr/mdp_state_summ.html)
  14. SEC Codification of Financial Reporting Policies § 602.02.e. See also Matter of Charles E. Falk, Exch. Act Rel. No. 41426, AAE Rel. No. 1136, 1999 SEC LEXIS 1013, 1999 WL 311802 (SEC) (May 19, 1999) (member of accounting firm censured for having also acted as counsel for an audit client).
  15. See Revision of the Commission’s Auditor Independence Requirements, Securities Act Release No. 33-7919 (Nov. 21, 2000) ; Qualifications of Accountants, 17 C.F.R. § 210.2-01 (2001). (http://www.see.gov/rules/find/33-7919.htm)
  16. See J. Bonasia, Initial Public Offers: KPMG Consulting Bucks Tech Trends With Weighty IPO, Investor’s Business Daily, Feb. 9, 2001, at A:6 (noting recent spin-offs of consulting businesses by KPMG, Arthur Andersen, and Ernst & Young).
  17. The SEC has continued its opposition to the mixing of audit and legal services. See Qualifications of Accountants, 17 C.F.R. § 210.2-01(c)(4)(ix) (2001) (specifically forbidding an auditor to provide legal services).

Gregory Huffman is a senior partner specializing in antitrust and commercial litigation at Thompson & Knight, L.L.P. in Dallas. He was the primary author of the State Bar task force’s reports on multidisciplinary practice and the unauthorized practice of law referenced in this special section.

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