April 2018

Non-Legal Services: Ethical Rules and Compliance

By Robert Bryson

Attorney at Law

Young lawyers are always looking for ways to increase their revenue. Most of us would like to rely solely on retaining clients but, as anyone with a small practice knows, there are spurts of intense work followed by lulls that can last weeks. Lawyers have a variety of skills that translate into other industries. For example, writing. Something I did to fill the gaps was online marketing and SEO through online content. There are three situations in which lawyers may provide non-legal services:

  1. The non-legal services are unconnected to the attorney’s practice of law (like owning rentals);
  2. The lawyer refers a client to a non-legal business in which he holds an interest (like a lawyer who refers a client to a medical clinic in which he holds an interest); and
  3. The lawyer provides non-legal services to a client that arose out of the attorney-client relationship.

Situation One: Non-Legal Services Unconnected to Practice of Law

As a rule, lawyers can engage in any lawful business, including providing non-legal services to clients. If the lawyer provides non-legal services unconnected to the practice of law, then he is not bound by any specific ethical rules regarding disclosure. However, lawyers are still required to conduct themselves “at all times with dignity, courtesy, and integrity.” Cal. Rules of Ct. 9.4.

Situation Two: Non-Legal Services Referred by Attorney’s Practice

Attorneys are required to comply with Rule 3-300 if the attorney refers a client from his legal practice to his non-legal business. One ethics opinion found that when a physician practicing personal injury and medical malpractice refers clients to a medical clinic in which the lawyer has an ownership interest, the referral is a business transaction that requires compliance with Rule 3-300 [LACBA Formal Opinion No. 477 (1994)]. The Rule applied because the referral related to a legal representation in which the lawyer was apt to have considerable influence over the client and where the lawyer’s own financial interests in the clinic might conflict with the client’s best interests.

Although the Los Angeles County Bar Association opinion focused on only one type of transaction, the rationale in that opinion would apply to most types of non-legal services provided by a lawyer or lawyer-controlled entity to a client when the service arises out of or is performed in connection with the rendition of legal services or involves the trust and confidence reposed by a client in the lawyer.

Situation Three: Non-Legal Services to Client that Arises Out of Attorney-Client Relationship

Another ethics opinion also addresses the situation in which a lawyer may render non-legal services that arise out of a lawyer-client or fiduciary relationship. Non-legal services, such as investment advice or accounting services, constitute business transactions with a client. Accordingly, the lawyer is required to comply with all applicable Rules of Professional Conduct, including Cal. Rules Prof. Conduct, Rules 3-300 and 3-310 [State Bar Formal Opinion No. 1995-141; see also Cal. State B. Formal Opinion Nos. 1999-154].

Under certain circumstances, it is ethically permissible for an attorney to advise a client to purchase insurance, refer the client to an insurance agent for that purchase, and accept compensation from the insurance agent for the referral. To avoid an ethical violation, the attorney must do all of the following [State Bar Formal Opinion No. 1995-140]:

  1. Make full disclosure in writing to the client under Cal. Rules Prof. Conduct, Rule 3-310(B)(4), of all relevant circumstances and all actual or reasonably foreseeable consequences to the client.
  2. Comply with Cal. Rules Prof. Conduct, Rule 3-300 regarding written consent.
  3. Be capable of competently advising the client under the circumstances.

Complying with Rule 3-300 and 3-310

Rule 3-300 does not prohibit a lawyer from entering into a business transaction with a client. However, before doing so, a lawyer must comply with what the Supreme Court has characterized as “an extensive protocol for gaining the client’s consent.” Santa Clara County Counsel Attys. Assn. v. Woodside (1994) 7 Cal. 4th 525, 545. A lawyer must meet five prerequisites under the rule before entering into the transaction:

  1. The transaction and its terms must be “fair and reasonable to the client.”
  2. The transaction and its terms must be “fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client.”
  3. The client must be “advised in writing that the client may seek the advice of an independent lawyer of the client’s choice.”
  4. The client must be “given a reasonable opportunity to seek that [independent] advice.”
  5. The client must consent to the terms of the transaction in writing after the first four requirements have been accomplished.

The burden of proof is on the attorney to show by extrinsic evidence that the transaction is fair and reasonable and fully known and understood by the client. Hunniecutt v. State Bar (1988) 44 Cal. 3d 362, 372–373; Beery v. State Bar (1987) 43 Cal. 3d 802, 812.

Fair and Reasonable Transaction

The fair and reasonable requirement applies both to the transaction as a whole and to its individual terms. The principal issue is whether the transaction is “an arm’s length business deal.” Beery, 43 Cal. 3d 815. The vast majority of cases has involved loans and investment transactions, not the performance of non-legal services. The primary requirement is that the transaction is comparable in the market. See Sodikoff v. State Bar (1975) 14 Cal. 3d 422, 429–430 (where lawyer provided unsubstantiated security value to client); see also Beery, 43 Cal. 3d 814-815 (lack of security unreasonable where investment involved settlement funds of a young man with a family who was paralyzed and unable to perform his previous occupation).

Full Disclosure in Writing

The rule requires that the nature of the transaction and its terms be fully disclosed to the client in writing and in a manner that should be reasonably understood by the client. The standard suggested is that the attorney “must make it manifest that he gave to his client all that reasonable advice against himself that he would have given him against a third person.” Beery, 43 Cal. 3d 813. It also requires a lawyer to disclose to the client “whatever information the attorney has or may acquire in relation to the subject matter of the transaction.” Id. In the first instance this obligation requires a lawyer to truthfully inform the client of the nature and terms of the transaction. Id.

The disclosure requirement includes informing the client about the lawyer’s role and compensation in connection with the transaction. Rodgers v. State Bar (1989) 48 Cal. 3d 300, 313. In addition, the disclosure must inform the client about how the lawyer’s interests in the transaction could conflict with the client’s interests and the adverse effect of that conflict on the client and the lawyer-client relationship. Rose v. State Bar (1989) 49 Cal. 3d 646; In the Matter of Lane (1994) 2 Cal. State Bar Ct. Rptr. 735, 745. The disclosure requirements also involve a duty to fully apprise the client of the risks associated with the transaction. Beery 43 Cal. 3d 813.

Written Advice to Seek Independent Counsel

The duty to advise a client to seek independent counsel is required even if the terms of the transaction are fair and reasonable and fully disclosed in writing in a manner reasonably understood by client. Ritter v. State Bar (1985) 40 Cal. 3d 595, 602. Pursuant to Rule 3-300, a client must be given a reasonable opportunity to consult with independent counsel. “The consent must follow the opportunity to consult with independent counsel; it is not an alternative to such consultation.” BGJ Associates v. Wilson (2003) 113 Cal.App.4th 1217, 1226–1227.

Reasonable Opportunity to Seek Advice

The requirement that the client be afforded a reasonable opportunity to obtain the advice of independent counsel appears to require at least some passage of time between when the client first receives the contract documents and when the client consents to the transaction. Ritter v. State Bar (1985) 40 Cal. 3d 595, 602–603 (discipline imposed when agreement signed in lawyer’s office within minutes after it was first presented to the client).

Client’s Written Consent

The client’s consent to the terms of the transaction must be in writing under the rule. In addition, it must occur only after all of the other four requirements have been accomplished. Rule 3-300 does not define what it means for a client to consent in writing to the terms of the transaction.

In summation, lawyers can provide non-legal services. If you own a separate business that operates independently of your legal practice, then you can act as any other business owner. However, if the providing of those services arose out of the attorney-client relationship, then you are required to comply with Rule 3-300 and the other ethical rules.