715 Adoption of Rule 5.7 of the Rules of Professional Conduct Regarding a Lawyer's Responsibilities for Nonlegal Services; notice of proposed rulemaking

Title 204--JUDICIAL SYSTEM GENERAL PROVISIONS

PART V.  PROFESSIONAL ETHICS AND CONDUCT

[204 PA. CODE CH. 81]

Adoption of Rule 5.7 of the Rules of Professional Conduct Regarding a Lawyer's Responsibilities for Nonlegal Services; Notice of Proposed Rulemaking

[26 Pa.B. 2090]

   Notice is hereby given that The Disciplinary Board of the Supreme Court of Pennsylvania is considering recommending to the Pennsylvania Supreme Court that it adopt a new Rule 5.7 of the Pennsylvania Rules of Professional Conduct to read as set forth in Annex A.

   Proposed Rule 5.7 was prepared by the Committee on Legal Ethics and Professional Responsibility (Committee) of the Pennsylvania Bar Association. An explanation by the Committee of its proposal for the adoption of new Rule 5.7 is set forth below.

I.  Background Information About ABA Model Rule 5.7:

   The topic of a lawyer's involvement in the provision of nonlegal services has been a heated one over the last few years. In 1991 the ABA House of Delegates voted 197 to 186 to adopt ''Rule 5.7 Provision of Ancillary Services.'' As summarized by Professor Hazard:

   Rule 5.7 as adopted by the ABA in 1991 largely--but not entirely--shut off the option of using independent business organizations to provide law-related ancillary services. Law firms could not establish or operate such entities as subsidiaries, but it was permissible for a law firm to invest, so long as its interest was not a ''controlling'' one. Otherwise the Rule assumed that ancillary services must be delivered only by traditional law firms, only to clients of the firm in connection with legal matters currently being handled, and only by employees of the firm.

Hazard & Hodes, 2 The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct § 5.7:101 at 8.26.5 (1994 Supp.). One year later, however, the ABA repealed Rule 5.7 by a vote of 190 to 183. A year and a half later, in February 1994, the ABA adopted the current version of Model Rule 5.7. Professor Hazard has summarized the current rule by stating:

   The new rule no longer draws its main distinction between what services may and may not be provided; instead, the key divide is whether a lawyer providing law-related services will or will not also have to comply with all of the other Rules of Professional Conduct. In effect, Rule 5.7 generally permits lawyers to act as nonlawyers when they are providing law-related rather than legal services.

   Id.

   The current text of Rule 5.7 as adopted by the ABA reads as follows:

   RULE 5.7  Responsibilities Regarding Law-Related Services

   (a)  A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:

   (1)  by the lawyer in circumstances that are not distinct from the lawyer's provision of legal services to clients; or

   (2)  by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure that a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.

   (b)  The term ''law-related services'' denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.

II.  Comments on ABA Model 5.7

   As a general rule the Committee believes that it is desirable to have a new Pennsylvania Rule of Professional Conduct track the language of any recently adopted ABA Model Rule. The advantages can include national uniformity and the ultimate availability of a wider body of opinions and commentary to draw upon.

   However, the Committee has found ABA Model Rule 5.7 of limited utility. In a survey of 20 past inquiries to the Committee's Hotline, the Committee found the rule would have applied or afforded guidance in less than half. The rule applies in just two situations: first, when the providing of nonlegal services is not distinct from the providing of legal services and, secondly, when the nonlegal services are provided by a separate entity controlled by the lawyer. Of the 20 surveyed inquiries, none involved the first category, and less than half involved the second. Furthermore, ABA Model Rule 5.7 does not address the special questions that the Committee believes arise when the lawyer, even though the lawyer may not control the separate entity, acts as an employee or agent thereof in providing the nonlegal services; over two-thirds of the surveyed inquiries involved that situation.

III.  Goals With Respect to Rule 5.7

   The Committee believes that the goals of Rule 5.7 are twofold: first, the rule should ensure that the Rules of Professional Conduct apply in those situations in which that is appropriate; and second, the rule should ensure that if a lawyer is somehow involved with a nonlegal services business, the customers of that business understand that they are not receiving the protection of a client-lawyer relationship.

   The Committee believes that these two goals are consistent with the goals of ABA Model Rule 5.7. See ABA Model Rule 5.7, Comment ¶1 (''Principal among these [potential ethical problems] is the possibility that the person for whom the law-related services are performed fails to understand that the services may not carry with them the protections normally afforded as part of the client-lawyer relationship.''); Comment ¶7 (''The risk of such confusion is especially acute when the lawyer renders both types of services with respect to the same matter. Under some circumstances the legal and law-related services may be so closely entwined that they cannot be distinguished from each other, and the requirement of disclosure and consultation . . . cannot be met. In such a case a lawyer will be responsible for assuring that both the lawyer's conduct and, to the extent required by Rule 5.3, that of nonlawyer employees in the distinct entity which the lawyer controls complies in all respects with the Rules of Professional Conduct.'') Professor Hazard's comments, quoted earlier, reinforce the Committee's conclusion that the main goal of the current ABA Model Rule 5.7 is to identify those situations in which the Rules of Professional Conduct apply, rather than trying to prohibit a lawyer from engaging in certain ancillary businesses.

   In sum, although the language of Rule 5.7 as proposed for adoption in Pennsylvania is very different from the language of ABA Model Rule 5.7, the Committee does not believe that the goals of proposed Pennsylvania Rule 5.7 are significantly different from the goals of ABA Model Rule 5.7.

IV.  Implementing the Goal of Having the Rules of Professional Conduct Apply Where Appropriate

   As stated above, the first goal is to make sure the Rules of Professional Conduct apply to nonlegal services where appropriate. After identifying this first goal, the Committee studied the circumstances under which a lawyer's conduct should always be subject to the Rules of Professional Conduct.

   The Committee did not find that the factor used by ABA Model Rule 5.7--who provides the law-related services--to be most significant. Instead, the Committee concluded that the most significant variable is whether the recipient is receiving services that are distinct from legal services, or whether the recipient is receiving services that are not distinct from legal services.

   In the latter situation, where the recipient is receiving services that are not distinct from legal services, the Committee believes the Rules of Professional Conduct must apply. (By stating the issue in this fashion, the Committee limited the rule to situations where a lawyer, although not necessarily the same lawyer, is providing legal and nonlegal services; the critical issue for deciding whether proposed Rule 5.7(a) applies is whether these services are distinct.) Similar to the approach used in ABA Model Rule 5.7(a)(1), the Committee believes that if the legal and nonlegal services are indistinct, the client/recipient probably will not know, for example, which comments are protected by attorney/client privilege and the lawyer's duty of confidentiality. Therefore, because the risk of confusion is unavoidable where legal and nonlegal services are indistinguishable, the Committee concluded that all of the Rules of Professional Conduct should apply in this situation to everything the lawyer does. Furthermore, the Committee concluded that this was the only situation in which it was appropriate to apply, without exception, the rules of Professional Conduct to the provision of nonlegal services.

V.  Implementing the Goal of Ensuring that if a Lawyer is Somehow Involved with a Nonlegal Services Business, the Recipients of the Nonlegal Services Understand that They Are not Receiving the Protection of a Client-Lawyer Relationship.

   The Committee also considered the situation of a lawyer who provides nonlegal services in a context that is distinct from the provision of legal services. (ABA Model Rule 5.7 simply does not address the situation of a lawyer who provides law-related services that are distinct.) The reason why the Committee thought it important to cover this situation is that even if the lawyer concludes that the provision of nonlegal services is distinct from the provision of legal services, there is still a risk that the nonlegal services recipient will be confused about the role and implications of the lawyer in the nonlegal services business. The Committee concluded that proposed Rule 5.7 should address this risk of confusion by imposing on the lawyer a duty to educate the recipient if there is a chance the recipient will misunderstand the implications of the lawyer's presence.

   The Committee analogized this situation to the situation covered by Pennsylvania Rule of Professional Conduct 4.3(c). If a lawyer is dealing with someone who is not represented by counsel, and the lawyer knows or reasonably should know that the person misunderstands the lawyer's role, then the lawyer must make reasonable efforts to correct the misunderstanding. Similarly, if the lawyer knows or reasonably should know that there is a risk that the recipient of the nonlegal services will misunderstand the lawyer's role, then the lawyer should undertake reasonable efforts to educate the recipient.

   Once the Committee identified as a concern the risk of confusion on the part of the recipient, the Committee determined that it did not matter whether the lawyer's involvement with the nonlegal services business was that of owner, controlling party, employee or agent. Furthermore, the Committee determined that it was not necessary to draw any lines about how large an ownership interest was needed to trigger the rule. The proposed rule is simply that if a lawyer is somehow connected with the provision of nonlegal services, and if the lawyer should know that the recipient might be confused about the implications of the lawyer's presence, then the lawyer has a duty to educate the recipient. Hence, proposed Rule 5.7 states that the Pennsylvania Rules of Professional Conduct apply unless the lawyer takes reasonable measures to assure the recipient understands the role of the lawyer, including the fact that the lawyer is not providing legal services and that the protections of the client-lawyer relationship do not apply.

   The Committee considered this to be a fairly modest burden to impose on the lawyer, but a burden that could reap a substantial benefit in avoiding confusion, misunderstanding, ill will and loss of legal rights such as the attorney-client privilege. Thus, although the Committee initially thought that it might be important to include ''owner,'' as well as ''controlling party,'' and although it grappled with the issues of ''how big an owner should be covered?'', the Committee ultimately determined that this issue was not significant.

VI.  Ensuring that Proposed Rule 5.7 Does Not Cancel Other RPC Provisions

   There are some Rules of Professional Conduct to which a lawyer is subject 24 hours per day, regardless of whether the lawyer is providing legal services. Thus, a lawyer violates Rule 8.4(c) if the lawyer engages in dishonesty, fraud, deceit or misrepresentation, regardless of whether that occurs in the context of providing legal representation to a client. Compare Office of Disciplinary Counsel v. Passyn, 644 A.2d 699 (1994) (applying DR 1-102(A)(4)); Office of Disciplinary Counsel v. Ewing, 436 A.2d 139 (1981) (applying DR 1-1-2(A)(4)). Similarly, a lawyer engaged in any kind of business with a client must consider both Rules 1.7(b) and 1.8(a).

   The Comment to Proposed Pennsylvania Rule 5.7 confirms that even if Rule 5.7 does not require a lawyer to be subject to all of the provisions of the Rules of Professional Conduct with respect to his or her involvement in the provision of nonlegal services, the lawyer is already subject to some of the Rules of Professional Conduct with respect to everything he or she does, including the provision of nonlegal services.

VII.  Concepts in ABA Model Rule 5.7 that are Omitted From Proposed Rule 5.7

   In addition to using different language, the Committee dropped several of the concepts in ABA Model Rule 5.7 from the proposed Pennsylvania Rule 5.7.

   The current version of ABA Model Rule 5.7 uses the term ''law-related services,'' which it defines in Model Rule 5.7(b). The Committee decided that it does not make sense to use the term ''law-related services.'' The reason is that the proposed rule requires lawyer disclosure to avoid confusion even if the client is provided nonlegal services that in fact are wholly distinct from legal services. In this situation, the Committee thought it might be confusing to call these distinct nonlegal services ''law-related services.'' The issue is whether there is a risk of recipient confusion by virtue of the lawyer's involvement, not whether the services in fact are or are not related to the legal services. If the nonlegal services are completely unrelated so that there is no risk of confusion (e.g., the lawyer runs a gas station) then the rule simply is not triggered. The term ''nonlegal services'' is defined in the first paragraph of the Comment as ''those not prohibited as unauthorized practice of law when provided by a nonlawyer.'' While the Committee recognizes that there is not always a bright line between legal and nonlegal services, the Committee believes that this line may be the clearest line available and that some line is necessary if there is to be a rule on this topic. Furthermore, to the extent that the line is fuzzy in a particular case, that may suggest that the legal and nonlegal services are indistinct, so that Rule 5.7(a) applies.

   A second difference between ABA Model Rule 5.7 and proposed Pennsylvania Rule 5.7 is that the proposed rule is triggered in situations beyond the situation where a lawyer has a controlling interest in an entity providing law-related services. The Committee concluded that ABA Model Rule 5.7 probably uses the concept of ''controlling interest by a lawyer'' for two reasons. First, the predecessor to the current ABA Model Rule 5.7 talked about controlling interests; thus, there may have been some political pressure to draft alternative language which nevertheless used the same frame of reference. Second, the comment to ABA Model Rule 5.7 demonstrates the drafters' view that where a lawyer controls a separate entity, there is a risk of recipient confusion. The Committee believes that it is more useful for the rule to directly address the underlying goal of avoiding recipient confusion about the role of the lawyer and that this confusion might occur whenever a lawyer has some connection with the provision of nonlegal services. Accordingly, proposed Rule 5.7 puts the onus on the lawyer to educate the recipient about the lack of a client-lawyer relationship.

   Interested persons are invited to submit written comments regarding the proposed new Rule 5.7 to the Office of the Secretary, The Disciplinary Board of the Supreme Court of Pennsylvania, First Floor, Two Lemoyne Drive, Lemoyne, PA 17043, on or before June 3, 1996.

By the Disciplinary Board of the Supreme Court of Pennsylvania

ELAINE BIXLER,   
Secretary

Annex A

TITLE 204.  JUDICIAL SYSTEM
GENERAL PROVISIONS

PART V.  PROFESSIONAL ETHICS AND CONDUCT

Subpart A.  PROFESSIONAL RESPONSIBILITY

CHAPTER 81.  RULES OF
PROFESSIONAL CONDUCT

LAW FIRMS AND ASSOCIATIONS

Rule 5.7.  Responsibilities Regarding Nonlegal Services.

   (a)  A lawyer who provides nonlegal services to a recipient that are not distinct from legal services provided to that recipient is subject to the Rules of Professional Conduct with respect to the provision of both legal and nonlegal services.

   (b)  A lawyer who provides nonlegal services to a recipient that are distinct from any legal services provided to the recipient is subject to the Rules of Professional Conduct with respect to the nonlegal services if the lawyer knows or reasonably should know that the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship.

   (c)  A lawyer who is an owner, controlling party, employee, agent, or is otherwise affiliated with an entity providing nonlegal services to a recipient is subject to the Rules of Professional Conduct with respect to the nonlegal services if the lawyer knows or reasonably should know that the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship.

   (d)  Paragraph (b) or (c) does not apply if the lawyer makes reasonable efforts to avoid any misunderstanding by the recipient receiving nonlegal services. Those efforts must include advising the recipient that the services are not legal services and that the protection of a client-lawyer relationship do not exist with respect to the provision of nonlegal services to the recipient.

Comment

   For many years, lawyers have provided to their clients nonlegal services that are ancillary to the practice of law. Nonlegal services are those that are not prohibited as unauthorized practice of law when provided by a nonlawyer. Examples of nonlegal services include providing title insurance, financial planning, accounting, trust services, real estate counseling, legislative lobbying, economic analysis, social work, psychological counseling, tax return preparation, and patent, medical or environmental consulting. A broad range of economic and other interests of clients may be served by lawyers participating in the delivery of these services. In recent years, however, there has been significant debate about the role the Rules of Professional Conduct should play in regulating the degree and manner in which a lawyer participates in the delivery of nonlegal services. The ABA, for example, adopted, repealed and then adopted a different version of Rule 5.7. in the course of this debate, several ABA sections offered competing versions of Rule 5.7.

   One approach to the issue of nonlegal services is to try to substantively limit the type of nonlegal services a lawyer may provide to a recipient or the manner in which the services are provided. A competing approach does not try to substantively limit the lawyer's provision of nonlegal services, but instead attempts to clarify the conduct to which the Rules of Professional Conduct apply and to avoid misunderstanding on the part of the recipient of the nonlegal services. This Rule adopts the latter approach.

The Potential for Misunderstanding

   Whenever a lawyer directly provides nonlegal services, there exists the potential for ethical problems. Principal among these is the possibility that the person for whom the nonlegal services are performed may fail to understand that the services may not carry with them the protection normally afforded by the client-lawyer relationship. The recipient of the nonlegal services may expect, for example, that the protection of client confidences, prohibitions against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of nonlegal services when that may not be the case. The risk of such confusion is especially acute when the lawyer renders both types of services with respect to the same matter.

Providing Nonlegal Services That Are Not Distinct From Legal Services

   Under some circumstances, the legal and nonlegal services may be so closely entwined that they cannot be distinguished from each other. In this situation, confusion by the recipient as to when the protection of the client-lawyer relationship apply are likely to be unavoidable. Therefore, Rule 5.7(a) requires that the lawyer providing the nonlegal services adhere to all of the requirements of the Rules of Professional Conduct.

   In such a case, a lawyer will be responsible for assuring that both the lawyer's conduct and, to the extent required by Rule 5.3, that of nonlawyer employees, complies in all respects with the Rules of Professional Conduct. When a lawyer is obliged to accord the recipients of such nonlegal services the protection of those Rules that apply to the client-lawyer relationship, the lawyer must take special care to heed the proscriptions of the Rules addressing conflict of interest (Rules 1.7 through 1.11, especially Rules 1.7(b) and 1.8(a), (b) and (f)), and to scrupulously adhere to the requirements of Rule 1.6 relating to disclosure of confidential information. The promotion of the nonlegal services must also in all respects comply with Rules 7.1 through 7.3, dealing with advertising and solicitation.

   Rule 5.7(a) applies to the provision of nonlegal services by a lawyer even when the lawyer does not personally provide any legal services to the person for whom the nonlegal services are performed if the person is also receiving legal services from another lawyer that are not distinct from the nonlegal services.

Avoiding Misunderstanding When A Lawyer Directly Provides Nonlegal Services That Are Distinct From Legal Services

   Even when the lawyer believes that his or her provision of nonlegal services is distinct from any legal services provided to the recipient, there is still a risk that the recipient of the nonlegal services will misunderstand the implications of receiving nonlegal services from a lawyer; the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship. Where there is such a risk of misunderstanding, Rule 5.7(b) requires that the lawyer providing the nonlegal services adhere to all the Rules of Professional Conduct, unless exempted by Rule 5.7(d).

Avoiding Misunderstanding When a Lawyer is Indirectly Involved in the Provision of Nonlegal Services

   Nonlegal services also may be provided through an entity with which a lawyer is somehow affiliated, for example, as owner, employee, controlling party or agent. In this situation, there is still a risk that the recipient of the nonlegal services might believe that the recipient is receiving the protection of a client-lawyer relationship. Where there is such a risk of misunderstanding, Rule 5.7(c) requires that the lawyer involved with the entity providing nonlegal services adhere to all the Rules of Professional Conduct, unless exempted by Rule 5.7(d).

Avoiding the Application of Paragraphs (b) and (c)

   Paragraphs (b) and (c) specify that the Rules of Professional Conduct apply to a lawyer who directly provides or is otherwise involved in the provision of nonlegal services if there is a risk that the recipient might believe that the recipient is receiving the protection of a client-lawyer relationship. Neither the Rules of Professional Conduct nor paragraphs (b) or (c) will apply, however, if pursuant to paragraph d, the lawyer takes reasonable efforts to avoid any misunderstanding by the recipient. In this respect, Rule 5.7 is analogous to Rule 4.3(c).

   In taking the reasonable measures referred to in paragraph d, the lawyer must communicate to the person receiving the nonlegal services that the relationship will not be a client-lawyer relationship. The communication should be made before entering into an agreement for the provision of nonlegal services, in a manner sufficient to assure that the person understands the significance of the communication, and preferably should be in writing.

   The burden is upon the lawyer to show that the lawyer has taken reasonable measures under the circumstances to communicate the desired understanding. For instance, a sophisticated user of nonlegal services, such as a publicly-held corporation, may require a lesser explanation that someone unaccustomed to making distinctions between legal services and nonlegal services, such as an individual seeking tax advice from a lawyer-accountant or investigative services in connection with a lawsuit.

The Relationship Between Rule 5.7 and Other Rules of Professional Conduct

   Even before Rule 5.7 was adopted, a lawyer involved in the provision of nonlegal services was subject to those Rules of Professional Conduct that apply generally. For example, Rule 8.4(c) makes a lawyer responsible for fraud committed with respect to the provision of nonlegal services. Such a lawyer must also comply with Rule 1.8(a). Nothing in this rule is intended to suspend the effect of any otherwise applicable Rule of Professional Conduct such as Rule 1.7(b), Rule 1.8(a) and Rule 8.4(c).

   In addition to the Rules of Professional Conduct, principles of law external to the Rules, for example, the law of principal and agent, may govern the legal duties owed by a lawyer to those receiving the nonlegal services.

Code of Professional Responsibility Comparison:

   There is no counterpart to this Rule in the Code.

[Pa.B. Doc. No. 96-715. Filed for public inspection May 3, 1996, 9:00 a.m.]