ABA Section of Business Law
Business Law Today
May/June 1999
Excuse me, are you authorized to practice here?
California builds a wall against out-of-state law firms
By KATHRYN A. TONGUE and JOHN A. MARZULLO
Tongue is a first-year law student at Northwestern University in Chicago. Marzullo is an associate at McGlinchey Stafford in New Orleans.
Imagine that you are a lawyer who is admitted to practice law in Nevada. Your principal client is a utility company with business occurring primarily in Nevada, but the company also has some dealings in the neighboring state of California. Some of these dealings involve government licensing and regulation.
Now suppose that, at your client’s request, you travel to California to deal with the regulators and with dissatisfied consumers. According to a February 1998 decision handed down by the Supreme Court of California, you might have just engaged in the unauthorized practice of law.
The opinion holds that the New York law firm of Birbrower, Montalbano, Condon & Frank engaged in the unauthorized practice of law when it handled the settlement of a dispute between the sister company of a New York-based client and a computer company, both based in California.
The court ruled that out-of-state lawyers without California licenses are engaging in the unauthorized practice of law if they participate in "sufficient activities in the state" or create a "continuing relationship with the California client that included legal duties and obligations." With the help of a fax machine, computer or telephone, lawyers need not even be physically present in California to violate unauthorized-practice-of-law restrictions, the court stated in its decision in Birbrower, Montalbano, Condon & Frank, P.C., et al. v. The Superior Court of Santa Clara County (17 Cal.4th 119, 70 Cal.Rptr.2d 304, 949 P.2d 1 (Feb. 25, 1998)).
This decision, which many lawyers argue could substantially affect lawyers’ efforts to represent clients with multi-state interests, is provoking a great deal of debate about the increasingly interstate practice of law. Birbrower’s lawyer, Scott R. Mosko of Hoge, Fenton, Jones & Appel in San Jose, Calif., hoped that this debate would wind its way all the way to the U.S. Supreme Court.
On May 5, 1998, Mosko filed a petition for a writ of certiorari with the U.S. Supreme Court. Three organizations — the Federal Communications Bar Association, the Securities Industry Association and the American Corporate Counsel Association — joined Birbrower in its challenge of the California decision, and they all filed amicus curiae briefs with the court in early June 1998 in support of certiorari.
"The decision is unjustified and it substantially impacts interstate commerce," Mosko said. "The California Supreme Court’s decision effectively prevents out-of-state attorneys from representing their clients in matters involving interstate commerce and gives an advantage to California entities competing for interstate commerce, and it also interferes with a client or an individual or a company’s right to use its own selected counsel." However, the U.S. Supreme Court declined to grant certiorari on Oct. 5, 1998. See Birbrower, Montalbano, Condon & Frank, P.C. v. ESQ Business Services Inc. ( No. 97-1798, 119 S.Ct. 291, 114 L.Ed.2d 226).
The case originated in 1990 when the owner of ESQ Business Services Inc., one of Birbrower’s long-standing New York clients, asked the firm to review a proposed software development and marketing agreement between ESQ and Tandem Computers, a Delaware corporation with its principal place of business in California. In the meantime, the brother of the owner of ESQ-New York formed a second business, also named ESQ Business Services Inc., and incorporated it in California. In 1992, ESQ-California and ESQ-New York jointly hired Birbrower to resolve a performance dispute with Tandem Computers, including the investigation and prosecution of claims against Tandem if necessary.
As a result, Birbrower sent lawyers to California on several occasions, despite the fact that the firm’s lawyers were not licensed in California and did not associate themselves with local counsel. During these trips, Birbrower lawyers met with officers of both ESQ-New York and ESQ-California and with representatives of Tandem. They filed a claim with the American Arbitration Association in San Francisco and interviewed potential arbitrators. They also participated in negotiating the eventual settlement of the dispute with Tandem.
The owners of ESQ, apparently unhappy with the settlement, then sued Birbrower for malpractice, alleging in part that Birbrower had practiced without a license. Birbrower countersued to recover its fees under the fee agreement, and ESQ moved for summary adjudication, arguing that the fee agreement was unenforceable because Birbrower had engaged in the unauthorized practice of law in California.
The trial court agreed, and the court of appeals upheld the trial court’s ruling. The majority decision made by the California Supreme Court also agreed that Birbrower’s activities violated California’s unauthorized-practice-of-law statute, and it ruled that Birbrower could not collect legal fees for the work it had performed in California. However, the court did permit the firm to receive fees for work performed exclusively in the state of New York.
In the 6-1 decision, Justice Ming Chin wrote that "other states’ laws may differ substantially from California law" and that "competence in one jurisdiction does not necessarily guarantee competence in another." While Chin acknowledged "the interstate nature of modern law practice" and said that the court was aware of "the reality that large firms often conduct activities and serve clients in several states," he held that these facts did not excuse Birbrower from complying with California Business and Professions Code § 6125, California’s unauthorized-practice-of-law statute.
Chin went on to describe how engaging in the unauthorized practice of law did not necessarily depend on the unlicensed lawyer’s physical presence in California. "Physical presence here is one factor we may consider in deciding whether the unlicensed lawyer has violated Section 6125, but it is by no means exclusive," Chin wrote. "For example, one may practice law in the state ... although not physically present here by advising a California client on California law in connection with a California legal dispute by telephone, fax, computer or other modern technological means." See Birbrower, 17 Cal.4th 119, 128-129.
This viewpoint is very troublesome, according to S. White Rhyne, a member of the Federal Communications Bar Association, a specialty bar association of more than 3,000 lawyers. "It would stop what our attorneys do every day," said Rhyne, a sole practitioner in Washington, who filed the association’s amicus curiae brief in support of certiorari on June 4, 1998. "Communications law by its nature is interstate. This is a real restriction on the practice of communications lawyers and on the ability of our clients to be served by the lawyers that they choose to be served by."
The Securities Industry Association, an organization of more than 800 major investment brokers, dealers, institutions and financial service companies, also is concerned about the decision’s potential effect on interstate commerce.
"You have a major commercial center in California. You’ve got a booming economy that is growing not only nationally but globally, and you are going to tell an admitted out-of-state lawyer that he or she can’t come to California to do anything?" asked Reece Bader, a securities litigator with Orrick, Herrington & Sutcliffe in Menlo Park, Calif., who wrote and filed the Securities Industry Association’s amicus curiae brief. "You can’t even send a fax if you read the opinion literally. That’s crazy. Instead of moving forward to the 21st century, we are moving back to the 19th century."
ESQ’s counsel Jon Michaelson, a lawyer with Hopkins & Carley in San Jose, Calif., disagrees. He claims that Birbrower does just the opposite. "The language of this decision is not sending us back 200 years," Michaelson said. "It’s finally opening the door to acknowl-edge that maybe there are some other issues here that we ought to look at when the cases arise in the future."
Michaelson argues that the California Supreme Court merely mentioned the issue of engaging in the unauthorized practice of law by modern technological means in order to look a few years ahead at what the courts might be facing in the future. He points out that the court stated that each case should be decided on an individual, case-by-case basis. He also said that people are overreacting to the reach of this decision.
"You’ve got a couple people in New York who are going to lose a lot of money because they made some serious mistakes and they are raising a fuss," Michaelson said. "That’s all this is about."
Michaelson did not believe the U.S. Supreme Court would grant certiorari because he says the federal issue of interstate commerce was not previously raised or presented to the California Supreme Court, and he argues that California was well within its power in licensing and regulating lawyers within its borders.
"There’s a reason why every state has laws like this," Michaelson said. "The reason is to protect people from folks like the Birbrower firm who go off and do things that they are unqual-ified to do."
Frederick J. Krebs, president of the American Corporate Counsel Association, does not agree that restrictions like those delineated in Birbrower are necessary to protect multi-state corporate clients.
"The underlying rationale for an unauthorized-practice-of-law statute is consumer protection," Krebs said. "In this situation or at least in the situation in the corporate practice setting where you have in-house counsel who are hired and retained or employed by a corporation, really that rationale just doesn’t apply. They certainly are well aware of the individual’s qualifications, unlike the general public."
Krebs said that the American Corporate Counsel Association decided to file an amicus brief in support of certiorari because it is very concerned by the potential widespread implications of the decision for both lawyers and clients, who Krebs says may face increasing legal fees because of the cost of hiring local counsel. Krebs says he is also particularly concerned by the fact that "California is frequently a bellwether for other states," and he fears that other courts may be inclined to follow suit.
In fact, Hawaii’s highest court and a California appellate court have indeed already taken note of Birbrower. Just a few weeks after Birbrower was filed with the Supreme Court of California, the Hawaii Supreme Court cited it in an unauthorized-practice-of-law case, Fought v. Steel Engineering and Erection (87 Hawaii 37, 951 P.2d 487 (Feb. 11, 1998). The Hawaii court, however, came to a different decision than did the California Supreme Court, and it found that the unauthorized practice of law did not occur because the out-of-state counsel in the Hawaii case associated with local counsel in the jurisdiction where the negotiations were taking place.
In a decision entitled Michael R. Condon et al v. Caroline M. McHenry (No. A074636, 65 Cal.App.4th 1138, 76 Cal.Rptr.2d 922 (July 30, 1998)), regarding the probate of a California resident’s estate and the payment of legal fees to counsel for the estate’s co-executor, the California Court of Appeal for the First District, Third Division, on an order by the California Supreme Court to vacate and reconsider a prior decision in light of Birbrower, addressed the issue of whether the members of a Colorado law firm, none of whom was admitted to practice in California, violated §§ 6125-6126 by performing legal services in California on behalf of their client, Michael Condon, a Colorado resident and the co-executor of his mother Evelyn Condon’s estate.
In holding that there was no violation of Sections 6125 and 6126 of the California Business and Professions Code, and thus ordering payment of the law firm’s ordinary and court-approved extraordinary legal fees and expenses earned in connection with their representation of the co-executor, the court analyzed three issues.
First, the Condon court looked to the California Probate Code and found that it allows a nonresident to serve as an executor over a California estate. The court noted that prior decisions have granted an executor with the clear authority to select counsel to perform legal services on behalf of the estate, and further noted that this executor chose the law firm who originally drafted the decedent’s estate plan. The court finally noted that the California Probate Code mandates compensation for the lawyer(s) chosen to represent the estate and does not distinguish between in-state and out-of-state lawyers.
This court next examined § 6126 and found that it does not prohibit the payment of legal fees to an out-of-state lawyer for services rendered to an out-of-state client regardless of whether the lawyer was either physically or "virtually" present in California at any time during the repre- sentation. The court defined "virtual presence," for the purposes of this opinion, as entry into California by means of telephone, fax, e-mail or other mechanism permitting communication between a person outside of the state and a person residing in California.
After a discussion of the Birbrower opinion, and noting that the California Supreme Court stated the underlying rationale of §§ 6125-6126 to be the protection of California citizens from incompetent or untrained lawyers, the Condon court found that an inquiry into whether a representation violates § 6125 must include a determination of the client’s residence or principal place of business. The policy rationale of §§ 6125-6126 simply does not apply to the representation of a client who neither is a California resident nor a California business.
Finally, the appellate court distinguished Birbrower both on the facts and the attendant issues as presented in Condon. Since this court found Michael Condon not to be a California citizen, it ruled that § 6125 was inapplicable, notwithstanding the "virtual presence" of the Colorado firm in California during the course of its representation of Condon. In contrast, Birbrower focused on the representation of a California client by an out-of-state law firm and the performance of legal services in California.
The court further found that the record did not reflect the practice of "California law" by the Colorado firm, a factor the Birbrower court cited as relevant to the determination of a § 6125 violation. The Colorado firm’s primary representation of Michael Condon focused on the implementation of various agreements the firm drafted in Colorado, while California counsel apparently addressed any California Probate Code issues.
"I would have thought it [Birbrower] would have been one of those opinions that people would absolutely laugh at, despite the prominence of the court that wrote it," said Charles Wolfram, a law professor at Cornell University who specializes in legal ethics and the multi-jurisdictional practice of law. "But the case in the Supreme Court of Hawaii seems to treat it seriously and cites it and doesn’t even distinguish it in a hostile way."
Wolfram, who has followed legal ethics since the mid-1970s, says he never would have imagined that a court would write a decision like Birbrower, "particularly not a major court in a state where commerce is as important as it is in California," he said. "I was just stunned as I read the opinion," Wolfram said. "It’s just one of those blockbuster cases. People are walking around dazed by it."
Wolfram served as the chief reporter for the American Law Institute’s Restatement of the Law Governing Lawyers, which was adopted in final form on May 12, 1998 at the Institute’s annual meeting. While the restatement has no force of law, it represents the thinking of numerous impartial scholars and lawyers, and it states that lawyers practicing outside their home jurisdiction are not engaging in the unauthorized practice of law if the matter arises out of or is otherwise reasonably related to the lawyer’s practice in the lawyer’s home jurisdiction.
The restatement was in final draft form at the time of the Supreme Court of California’s decision in Birbrower; however, subsequent to the court’s decision and prior to the restatement’s adoption last May, Wolfram and the other reporters added a reporter’s note that cited Birbrower as "unduly restrictive."
"We had to cite it," Wolfram said. "It’s such an earth-shattering case that people would wonder where we stand on Birbrower. We didn’t want to leave any doubt about it. We treat Birbrower as an outlier and a case that we think is inconsistent with the approach we are taking and one that we recommend courts not follow."
In order to minimize the impact that the case could potentially have on multi-state business and law, the Securities Industry Association initiated the drafting of legislation that would amend the Uniform Arbitration Act of California to allow out-of-state lawyers to represent clients in arbitrations and to conduct work in California stemming from preparation for the arbitration. Assembly Bill 2086, initially introduced in February, 1998, passed both houses of the California legislature by a wide margin and was signed into law by the governor on Sept. 28, 1998. This legislation enacted amendments to the California Code of Civil Procedure to permit persons admitted to the bar of any state to represent a party to an arbitration proceeding in California or to provide legal services in California in conjunction with an arbitration proceeding outside of California. See California Code of Civil Procedure § 1282.4.
This legislation does not, however, address the issue of day-to-day contact between multi-state lawyers and their clients outside of an arbitration proceeding. In fact, the amendatory provisions — with language that specifically references the Birbrower decision and the California legislature’s intent to provide a procedure for nonresident lawyers, who are not admitted in California, to appear and participate in California arbitration proceedings — are subject to a sunset clause effective Jan. 1, 2001.
"What we are trying to do is go back to the status quo," said the bill’s author Paul Dubow, senior deputy general counsel for Morgan Stanley Dean Witter and Co. in San Francisco. "Basically, in the real world, lawyers go all over the country, so I am trying to have California face this reality." Dubow further notes that the sunset provision was not a feature of the originally filed AB 2086, but an amendment approved during the legislative process. Unless there is subsequent action by the California legislature, which is being contemplated at this time according to Dubow, the law will revert back to its pre-1998 form, with no reference to these Birbrower provisions, in January, 2001.
Given the enactment of legislation in California in response to the Birbrower decision and the decision of the U.S. Supreme Court to deny certiorari, the debate that this case has incited is sure to rage on in the future. The Internet, computers and other technological tools will certainly only continue to break down geographical borders, and the boundaries separating states will inevitably continue to blur as time and technology progress. Furthermore, although the Condon court’s opinion has, at least within the jurisdiction of the First Appellate District of California, apparently narrowed the applicability of §§ 6125-6126 to only those engagements concerning California resident clients or those entities that principally conduct their business within California, Birbrower still erects a substantial barrier to the representation of a California-based client by an out-of-state lawyer who is not a member of the state bar of California, and that might involve any aspect of California law and regulation.
"There’s a real problem in this area, and it’s very hard to have a fixed set of rules because the ways in which clients and attorneys interact is so varied," said ESQ’s lawyer Michaelson, who insists that the California Supreme Court’s case-by-case approach presents a practical and flexible solution to the problem. "We cannot invent one set of rules that’s going to apply to every situation in a way that makes sense. You can invent a hypothetical that will take any set of rules and turn it on its head."
Details, I want details!
Interested in obtaining a copy of the Supreme Court of California’s actual opinion in Birbrower, Montalbano, Condon & Frank v. Superior Court of Santa Clara County? Visit either http://www.voltz.com/emplaw/cases/birbrower. or http://lw.bna.com/lw/19980120/57125.htm on the World Wide Web. Copies of the actual text of the decision can be found on these Web sites.
A copy of California Assembly Bill AB 2086 and its legislative history can be found at http://www.leginfo.ca.gov.
