The Inquirer represents an attorney (the "Attorney") who is planning to form a new Corporation (the "Corporation"), which would provide both legal and nonlegal services. The Corporation would provide a variety of anti-fraud services to insurance carriers, including: fraud analysis, review and opinion; claim investigation (including witness location and interviews, photography, damage estimates, receipt verifications, background and credit investigations, examinations under oath, medical records/treatment review, and medical facilities inspection); denial or settlement of suspected claims; legal review of cases for proof of fraud; legal defense of suspected fraudulent claims; training to insurer personnel on fraud indicators/investigations; preparation of referrals to law enforcement for possible fraud prosecution; preparation of anti-fraud plans required by state law; and preparation of annual fraud reports required by state law.
The proposed Corporation would be divided into four departments: claims, investigation, training, and legal. Initially, the Client intends to supervise all departments. According to the Inquirer, all legal services would be provided through the legal department. All materials describing the Corporation's services, as well as any service agreements, would state that the attorney-client relationship applies only to legal services provided by the Corporation. The Corporation intends to market its services to prospective insurance company customers through mailings and in-person visits.
The proposed Corporation would be a subchapter S Corporation, and would be owned by several shareholders. The Attorney would hold a controlling majority of the shares, while the remaining shareholders will be non-attorneys. The by-laws and operating policies of the Corporation would provide that no non-attorney has the right to direct or control the professional judgment of any lawyer.
The Inquirer seeks this committee's opinion on three distinct issues in order to determine whether the proposed structure and practices of the Corporation comply with the Pennsylvania Rules of Professional Conduct. Specifically, the Inquirer asks whether:
1) the Attorney fulfills his obligations under Rule 5.7 if the Corporation communicates to its insurance company clients that the attorney-client relationship applies only to the provision of legal services; 2) the restrictions of Rule 5.4 prohibit the Attorney from owning the Corporation together with non-attorneys; and 3) the requirements of Rules 7.2 and 7.3 prohibit the marketing of the legal and non-legal services to prospective insurance company customers through written materials and in-person visits. Each issue will be considered in turn.
I. Rule 5.7
The first issue raised by the Inquirer is whether the concerns of Rule 5.7 will be satisfied if the Corporation provides its customer clients with notice that the attorney-client relationship extends only to the provision of legal services. Rule 5.7 provides that:
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 does not exist with respect to the provision of nonlegal services to the recipient
The critical question is whether the legal and nonlegal services provided to a recipient are "distinct" from each other.1 As set forth in Rule 5.7(a), if the legal and nonlegal services provided by an attorney are not distinct, then the attorney is subject to the Rules of Professional Conduct with respect to both types of service. .2 Significantly, this would mean that the provision of all such services would be subject to the Rules, including but not limited to those addressing conflicts of interest (Rules 1.7-1.11), limiting disclosure of confidential information (Rule 1.6), and requiring supervision of non-attorneys (Rule 5.3). Legal and nonlegal services are not distinct if, under the circumstances, they are "so clearly entwined that they cannot be distinguished from each other." Given the fact-intensive nature of this examination, the committee is unable to determine whether all of the legal and nonlegal services providing by the Corporation's attorneys would be "distinct" within the meaning of Rule 5.7. Consequently, the Inquirer must make his or her own determination regarding whether each service is or is not "distinct," applying the above-articulated standard. Nevertheless, the committee notes that although the Inquirer has characterized the proposed work of the Corporation as "mostly investigative and claims services," some of the services described by the Inquirer certainly appear to be closely related to legal services, including, for example, examinations under oath, legal review and defense of fraud claims, and preparation of referrals to law enforcement for possible fraud prosecution.
With regard to distinct nonlegal services, subsections (b) and (d) are intended to protect the reasonable expectations of the recipient while enabling an attorney to provide those services outside the strictures of the Rules. Specifically, subsection (d) makes clear that (b) and do not apply if an attorney makes reasonable efforts to avoid misunderstanding by the recipient of distinct nonlegal services as to the existence of the attorney-client relationship. Those efforts must include, at a minimum, advising the recipient that the services are not legal services, and further, that the protections of the attorney-client relationship are not applicable. Id.
According to the Inquirer, the Corporation intends to state in its written materials and agreements that the attorney-client relationship applies only to legal services. Under the text of Rule 5.7(d), the written materials must further state that the protection of the attorney-client relationship does not exist with respect to the provision of the nonlegal services. Moreover, the materials must make clear which services are legal (and are therefore covered by the protection of the attorney-client relationship) and which services are not legal. Finally, the Corporation must ensure that any additional communications with a recipient are fully consistent with the written disclosure.
II. Rule 5.4
The second issue is whether the Attorney may be a part-owner and employee of the proposed Corporation with persons who are not attorneys. Rule 5.4(d) squarely addresses this issue.
Rule 5.4 Professional Independence of a Lawyer
(d) A lawyer shall not practice with or in the form of a professional corporation or other form of association organized for profit, if:
(1) a nonlawyer is the beneficial owner of any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;
(2) a nonlawyer is a corporate director or officer thereof or occupies a position of similar responsibility in any form of association other than a corporation;
(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer; or
(4) in the case of any form of association other than a professional corporation, the organic law governing the internal affairs of the association provides the equity owners of the association with greater liability protection than is available to the shareholders of a professional corporation.
Subparagraphs (1), (2) and (4) shall not apply to a lawyer employed in the legal department of a corporation or other organization.
The restrictions in Rule 5.4(d)(l) prohibit an attorney from sharing ownership of a Corporation that performs legal services with non-attorneys.1 However, the Inquirer questions whether the restrictions of (d)(1)are applicable in light of the last sentence of subsection (d) which relates to a "lawyer employed in the legal department of a Corporation." This excepton does not apply to the Attorney in this inquiry. The exception to Rule 5.4(d)(1) applies to those employed in a Corporation's in-house legal department, who directly serve the Corporation or its affiliates. In contrast, the proposed Corporation's "legal department would provide services to non-affiliated third parties. Accordingly, Rule 5A(d)(1) prohibits the Client from sharing ownership of the Corporation with nonattorneys as proposed.4
III. Rules 7.2 & 7.3
Finally, the Inquirer raises the issue of whether the proposed Corporation can market its legal and nonlegal services through written and/or in-person visits with prospetive insurance company clients. As the Inquirer acknowledges, Rules 7.2 and 7.3 govern this inquiry. The relevant sections of these Rules are as follows:
Rule 7.2 Advertising
(a) Subject to the requirements of Rule 7.1, a lawyer may advertise services through public media, such as telephone directory, newspaper or other periodical, outdoor, radio or television, or through written communications not within the purview of Rule 7.3.
Rule 7.3 Direct Contact with Prospective Clients
(a) A lawyer shall not solicit in-person or by intermediary professional employment from a prospective dient with whom the lawyer has no family or prior professional relationship when a significant motive for the lawyer's doing so is the lawyer's pecuniary gain. The term "solicit" includes contact in person or by telephone, but, subject to the requirements of Rule 7.1 and Rule 7.3(b), does not include written communications, which may include targeted, direct mail advertisements.
(b) A lawyer shall not contact, or send a written communication to, a prospective client for the purpose of obtaining professional employment if:
(1) the lawyer knows or reasonably should know that the physical, emotional or mental state of the person is such that the person could not exercise reasonable judgment in employing a lawyer;
(2) the person has made known to the lawyer a desire not to receive communications from the lawyer; or
(3) the communication involves coercion, duress, or harassment.
The Inquirer is correct that Rule 7.2(a) permits the Corporation to market its services - both legal and nonlegal - through written materials (subject to the limitation set forth in Rule 7.3(b)). The specific contents of the written advertisements are governed by the requirements of Rules 7.1,7.2, and 7.3.
However, Rule 7.3(a) prohibits an attorney from soliciting legal business through in-person visits or telephone calls absent a family or prior professional relationship. The Rule applies equally to third parties acting on behalf of an attorney. Thus, whether the legal services offered by the Corporation may be discussed during in-person presentations depends entirely on whether there is a prior professional relationship between the prospective client and the Attorney (in his/her capacity as an attorney). Similarly, representatives of the Corporation may not discuss non-distinct nonlegal services during in-person presentations absent a prior professional relationship between the prospective client and the Attorney. Accordingly, only distinct, nonlegal services may be the subject of in-person and/or telephone presentations to prospective client/customers who lack a prior professional relationship with the Attorney.
1. Nonlegal services "are those that are not prohibited as unauthorized practice of law when provided by a nonlawyer. Examples of nonlegal services include providing the 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." Rule 5.7, comments.
2. The comments to Rule 5.7 indicate that "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."
3. Ownership of the proposed Corporation by nonattorneys also raises significant issues under Rule 5.5, which prohibits the unauthorized practice of law. The committee notes that while it is unclear, the facts presented by the Inquirer could be interpreted to suggest that legal services may be provided by nonattorneys, which would violate Rule 5.5.
4. Given that the proposed ownership arrangement violates Rule 5 .4(d)(1), the committee does not reach the issue of whether the concerns of Rule 5.4(d)(3) would be satisfied under the facts of this case.