"A specter is haunting the ABA," says AAI FTC:WATCH column about multidisciplinary practice

Apr 27 1999

The aai column:

On Multidisciplinary Practiceby Albert A. Foer

A specter is haunting the American Bar Association. The practice of law has long been limited to certified lawyers, and the ABA has worked diligently to keep things that way by, for example, forbidding a lawyer to work for or share fees with a non-lawyer. Now, in the face of a changing world, the ABA (through its Commission on Multidisciplinary Practice) is taking another look at its position toward lawyers participating in multidisciplinary practice (MDP) firms.

The immediate challenge is the growth in other countries (and here with respect to tax lawyers) of arrangements whereby lawyers become part of, or closely affiliated with, accounting firms. Clients involved in international operations often face complicated questions whose answers require the integration (and possibly the rapid integration) of various types of expertise (law, accounting, economics, finance, etc.) across traditional professional lines. In a global environment, professional service firms that can provide the integrated services may have a major competitive advantage over those which -largely as a result of professions' self-regulation-cannot. The Bar recognizes that self-regulation which falls too far out of step with market conditions will likely prove suicidal. But the Bar also fears that improvident change can harm clients.

The MDP and deregulation

From the mid-1970's, the learned professions became increasingly viewed as having a strong commercial element mixed in with the special service characteristics that were traditionally emphasized by the professions themselves. One facet of the deregulation movement was a series of legal challenges to the anticompetitive aspects of the professions' ethical codes. The U.S. Supreme Court made it clear that the learned professions, starting with the practice of law, were subject to the antitrust laws.

In this light, it is important to determine whether it would be anticompetitive for the Bar to maintain a position that may constrain the emergence of new business mechanisms for delivering competitive professional services.

There are parallels to earlier efforts at deregulation. First, a common thread in the history of deregulation has been the emergence of similar, but unregulated services on the fringe of the regulated market, presenting regulators with the claim (both from the regulated and the unregulated sectors) that the playing field was not level. The Bar can try to treat its emerging competitors as the Interstate Commerce Commission once treated truckers when they began to compete with the regulated railroads - bring them under the regulatory umbrella. But this would probably be beyond the Bar's power, would certainly flow against the tide of deregulation and would not serve the public interest.

Deregulation does not occur when everyone is happy with the existing situation. Part of the demand for more competition in professional services is fed by recognition that additional competition will probably result in lower prices. In a world economy where competition plays an ever-increasing role, the price of professional services necessarily becomes more important to business clients.

Finally, it is important to note that deregulation has generally been accompanied by some degree of continued regulation, albeit pared down to protect consumers and deal with foreseeable problems. The self-regulation of law and accountancy should not be abolished, but rather changed. The protection of consumers from conflicts of interest, misrepresentation, inadequate representation, and abuse of confidentiality all remain important missions of self-regulation. In approaching the reformation that is required, the learned professions must continually remind themselves and the public that the only legitimate goal is protection of consumers. Protection against competition would be illegitimate and indeed illegal.

The Bar should move away from its focus on who owns what and who pays whom, and instead focus on assuring that consumers of legal services are provided with a wider range of options among which they can choose effectively. Self-regulation of the profession should focus on what the professional does vis a vis the client, rather than on the institutional setting.

For those clients who, with full disclosure of the relevant information, prefer to retain a multidisciplinary practice, that should be their choice to make. For those who feel that, despite the ethical requirements that apply to professionals within an MDP, they will get better service or more confidentiality from a lawyers-only group or an accountants-only group, that should be their choice.

Additional competition concerns

As we view the emergence of the MDP, it is important to be sure that nothing is done to limit MDPs to the largest accounting firms. The fact that there is now a Big Five, to which most public corporations turn for auditing, is itself disturbing. An oligopoly structure of this nature located at the gateway to capital resources may not be conducive to an adequate level of competition. The path should be open for the creation of MDPs that may eventually grow out of law firms, financial institutions, or even economic consulting firms. By affiliating with or even absorbing accounting firms, these powerful organizations could eventually enter into direct competition with the Big Five, thereby offering a wider range of professional service options to clients. .. But there are other potential antitrust issues in addition to market entry. My understanding is that there have been only a few reported instances of firewalls being breached within accounting firms such that confidential information was abused. Whether this is true is an empirical issue that could be determined by a survey of accounting firm clients and a review of complaints filed with accounting authorities. If firewalls in accounting firms have indeed proven effective, this will give us more confidence in our ability to minimize confidentiality problems within MDPs.

Another, perhaps more important question from a public perspective, is whether internal firewalls will be sufficient to protect the public against sharing competitively sensitive data within an MDP for purposes of collusion or coordination. This question can arise within a law firm today because conflict of interest standards would not ordinarily preclude situations in which competitors are represented by the same firm, unless their particular interests being represented are adverse. It would be even more of a problem, at least theoretically, in a Big Five accounting firm or in a MDP that more routinely takes on clients who compete with one another. Two professionals in a MDP who represent competing clients and thus have access to important proprietary financial and strategic information could -on behalf of their clients-share information that would facilitate coordinated activity. Although quite likely a violation of the antitrust laws, this form of collusion could be executed in ways that would be extremely difficult to discover, much less prove.

How might the Bar and society protect against this? Indeed, how might the Bar, lacking jurisdiction over MDPs, assure that attorneys uphold the best values and traditions of the profession? An appropriate first step would be for the Bar to establish that lawyers would operate within MDPs as a law department, and that the department itself would have to be licensed. Licensing would be dependent upon training in, e.g., ethics, conflicts, and antitrust, and the department would be subject to periodic audits. A principal drawback to this approach would be that it could disadvantage small MDPs, which would find it impractical to comply. To deal with this criticism, the Bar could exempt small MDPs or have reduced requirements that are tailored to smaller organizations.

To summarize, the emergence of MDPs should be viewed by the Bar as an opportunity to serve segments of the consuming public through new competitive mechanisms that provide additional options for the delivery of professional services. A creative, pro-consumer approach toward solving the potential problems of conflicts, confidentiality, and misrepresentation can be consistent with the evolution toward new institutions.