Lawyers Doing Business with Their Clients: Identifying and Avoiding Legal and Ethical Dangers

A Report of the Task Force on the Independent Lawyer

The issue of lawyers investing in their clients and client transactions is not a new one. However, the topic has been prominent recently, as law firms look for ways both to increase their partners' profitability and to attract and retain associates. The study of this issue by the American Bar Association's Section of Litigation reflects the completion of the Section's examination of three issues identified more than a decade ago as requiring special consideration by the organized bar.

In the mid-1980s, in the wake of the Kutak Commission's examination of the old Model Code of Professional Responsibility (Model Code) and the ABA's adoption of the Model Rules of Professional Conduct (Model Rules), a task force chaired by former ABA President Justin Stanley, known as the Stanley Commission, looked “beyond ethics” and into more fundamental issues of professionalism. In its report, the Stanley Commission identified three issues as requiring further study: Ancillary business activities of lawyers; lawyers serving on the boards of directors of their clients; and lawyers investing in their clients and client transactions. The Litigation Section has spent more than a decade pursuing the examination recommended by the Stanley Commission and has been in the forefront of the debate over whether and in what circumstances the activities in question should be permitted.

In 1989, the Section created a Task Force on Ancillary Business Activities and undertook an exhaustive inquiry into that subject, which had not been the focus of any Model Code or Model Rule provision. The Section's work on the issue prompted an in-depth examination and vigorous debate that culminated in the adoption in 1991 of Model Rule 5.7, strictly regulating ancillary business activities. Although the ABA Board of Governors later repealed that specific rule, the issue is now addressed by yet another version of Rule 5.7. 3 The extensive analysis of the issue by all segments of the organized bar plainly increased attorneys' understanding of the serious issues and risks entailed in ancillary business activities – to the bar as a whole, as well as to individual firms, practitioners, and clients – and provided significant guidance to those who choose to engage in such endeavors.

The views expressed herein have been approved by the Council of the Section of Litigation. However, they have not been approved by the House of Delegates or the Board of Governors of the American Bar Association, and accordingly should not be construed as representing the policy of the American Bar Association.