Jones Lang LaSalle


Law Firms Get Green Light for Subsidiaries
Mary P. Gallagher
New Jersey Law Journal
05-02-2006

Law firms have just been handed a tool from the corporate playbook that marketing consultants predict will greatly enhance their ability to expand and tout their services.

Firms now have the go-ahead to form and own other law firms as subsidiaries, under an opinion issued jointly as Opinion 704 of the New Jersey Supreme Court Advisory Committee on Professional Ethics and Opinion 37 of the Committee on Attorney Advertising.

"Such an arrangement does not violate the general prohibition on the corporate practice of law," whose "central goal ... is to keep the rendition of legal services from being under the control and direction of nonlawyers," say the committees in their opinion, published Monday.

Moreover, Rule of Professional Conduct 5.4(a), which prohibits fee sharing with nonlawyers, does not bar a firm from turning over its net profits to a parent company also made up of lawyers, states the opinion.

The subsidiary firms, which could be organized as limited liability companies or professional corporations, would operate under separate names that would have to include the name of one or more of the lawyers working there.

To avoid misleading clients and the public, the relationship between the firms would have to be disclosed on initial contact between the subsidiary and a new client. The relationship would also have to be disclosed in the subsidiary's advertising and marketing. Specifically, the phrase "a subsidiary of X law firm" would have to appear beneath or next to the subsidiary's name.

The opinion responded to an inquiry from an unnamed firm that wants to form a subsidiary for a specialized practice area and plans to employ one or more existing shareholders in the subsidiary to direct its operations. The subsidiary might share office space with the parent, but it would keep its own books, records and files and maintain its own bank accounts and trust accounts.

The firm that made the inquiry also indicated it would cross-reference all conflict searches with the subsidiary and refrain from representation where it found a conflict.

While more law firms are operating such ancillary businesses as companies that do lobbying work and provide insurance-related services, the idea of subsidiary law firms is a novel one.

NEW TERRITORY

Ethics committee Chair Melville Miller Jr. calls the issue "absolutely a matter of first impression" and "not even hinted at" in previous inquiries.

Legal marketing consultants say they are not aware of any other jurisdiction to give the green light to subsidiary firms.
They see the opinion as a boo
n to lawyers and part of the increasing corporatization of the practice of law.

At a minimum, firms have more options, says Elizabeth Granoff, of Granoff Ethics Consulting in Chicago. A large firm with multiple areas of concentration could form subsidiaries for different practice areas, she notes.

The opinion "reflects what has been going on in legal markets for some time now, the real segmentation of the market, with firms competing around specialties," says James Jones, a consultant with Hildebrandt International in Washington, D.C., who specializes in ancillary businesses for law firms. "The idea of clients hiring one large firm to do everything is a thing of the past," at least for large sophisticated businesses, he says.

Probably the most enthusiastic response comes from law-firm marketing consultant Larry Bodine in Glen Ellyn, Ill., who terms the opinion "a potential gold mine."

For one thing, it means law firms can buy and sell other firms as investments, he says. They can pick up a firm in a hot practice area -- say, toxic torts -- and spin it off once the area cools, suggests Bodine.

The process of acquiring and jettisoning a boutique practice would be simplified not only from a business perspective but from a cultural one as well, he says. Keeping the entities separate would minimize disruptions associated with hiring and firing professional colleagues and allow retention of different fee and compensation structures that might be appropriate to different practice areas and clientele, he says.

In addition, there is "a lot of work that big firms leave on the table" that the subsidiary option might encourage them to pursue, says Bodine.

For example, some white-shoe firms averse to matrimonial work, even though their executive clientele might sometimes require those services, might handle such matters through a subsidiary, he says. Or a firm representing banks could also do collections work through the subsidiary.

Subsidiaries would broaden the marketing possibilities by allowing law firms to emulate companies like General Motors, which operates through different divisions, or General Mills, which sells its wares under various brand names.

"I expect to see a lot more states adopt this kind of approach," says Bodine, calling it "a logical extension of what law firms are doing already."

Managing lawyers at some of the state's largest firms who were asked their reaction to the opinion Friday had not seen it or were trying to digest its implications.

For instance, Mitchell Rait, chief operating officer for Budd Larner in Short Hills, N.J., says his first thought was how conflicts and malpractice issues would be handled.

Opinion 704/37 is predicated on the assumption of cross-firm conflict checks, but it does not address the question of whether a parent firm would be insulated from malpractice claims based on work done by the subsidiary.

If the separate structure does limit upstream liability, "it might be very attractive indeed," says consultant Jones.