Holland & Knight – One-stop Law Firm Opens Door to Ethical Concerns

In 1 on January 21, 2009 at 12:47 am

Competition Sprouts One-Stop Law Firms; Diversification Means Higher Profits But Opens Door to Ethical Concerns


Need a private investigator? Try H & K Investigative Solutions. Want advice on how to win government subsidies for environmentally sound real estate projects? Turn to H & K Conservation Solutions. How about money management advice, a real estate feasibility study, evaluation of a merger or acquisition or documents translated into virtually any language in the world? H & K has business units to meet the need.

All of these enterprises, and several others, are not the work of some crazy-quilt conglomerate, but of a single law firm, Holland & Knight, based in Tampa, Fla.

''It was evident in the legal community four or five years ago that a multidisciplinary approach would be welcome by clients and was a cutting-edge issue,'' said Bill McBride, a managing partner at Holland & Knight. ''That's turned out to be correct.''

As competition among law firms has increased, associate salaries have skyrocketed and demand for ''one stop'' shopping has grown, a small but growing number of law firms are turning to nonlegal businesses as a way not only to serve their clients but also to lift the bottom line.

These businesses are the latest evolution in a legal market that has transformed law firms from small collections of general practitioners to highly specialized and global megafirms scrambling to generate more and more sources of wealth.

Firms engaged in such diversification have moved beyond the traditional fare of ''government relations,'' or lobbying, to a much broader array of businesses that were once entirely independent — everything from environmental consulting to human resources outsourcing, real estate title services to money management.

But some experts worry that the profession has not fully faced up to the potential consequences of this trend.

Advocates of this approach say that they can surmount any potential ethical concerns by ensuring that consultants and lawyers work on the same side of a transaction, and by carefully complying with rules that govern conflicts of interest and ethics.

But others are unconvinced. Lawrence J. Fox, a partner at the Philadelphia-based law firm Drinker Biddle & Reath, who was active in the decision by American Bar Association to deny law firms the ability to share legal fees with nonlawyers in so-called multidisciplinary practices, said that ancillary businesses posed a number of concerns.

If law firms provide nonlegal services, it weakens the assertion that nonlawyers should not provide legal services, he said, ''which would be a very, very bad thing.''

There is a further risk, he added, that clients — confused by the dual provision of services — will not realize that the attorney-client privilege and conflict-of-interest rules applicable to legal work do not apply to the business ventures.

Monroe H. Freedman, who teaches legal ethics at the Hofstra University School of Law in Hempstead, N.Y., agrees that problems may arise as the practice spreads.

''There is always the risk,'' Mr. Freedman said, ''that a court would find that a particular aspect of the work being done is not really legal work or not exclusively or sufficiently legal work, or that because nonlawyers are involved, the confidentiality privilege is lost.''

Mr. Fox points out that there is also the risk that lawyers will steer clients to their own business concerns, rather than fulfilling their obligation to lay out a range of options objectively. And economic incentives create the fear that firms with ancillary businesses may be less inclined to discourage clients from pursuing particular business transactions if the firm's own units stand to benefit from a deal.

''The hallmark of a lawyer is to tell a client no,'' Mr. Fox said. ''But the greater the number of sources of income, the greater the opportunity that services will not be delivered in the right way.''

Law firms are prohibited from having partnerships with nonlawyers to provide legal services. They can, however, pay salaried employees like secretaries, investigators, paralegals and others who assist in the provision of legal services.

Law firms are also not barred from running wholly separate nonlegal businesses, even if they are related to the practice of law and even if the profits flow back to the law firms, as long as they comply with applicable rules of professional conduct requiring the preservation of client confidentiality, loyalty and avoidance of client confusion.

Jay S. Zimmerman, managing partner of the Boston-based Bingham Dana, which has started three ancillary businesses in the last three years, acknowledged that some of his partners initially had concerns about forming the nonlegal ventures. It took more than two years, he said, to make everyone feel comfortable with starting a money management concern in a joint venture with Legg Mason, the Baltimore financial services company.

''People had a knee-jerk reaction that a law firm and an investment group can't have a joint venture,'' Mr. Zimmerman said. ''But we worked through the disciplinary rules and the law with respect to fiduciary responsibilities, and created a model that has worked.''

Bingham Dana also has a consulting firm that develops state-by-state strategies for companies in highly regulated industries, and a strategic advising company that helps small to midsize companies with mergers and acquisitions, joint ventures, business revamping and access to venture capital.

Mr. Zimmerman said the impetus for the ventures was the success of the Big Five accounting firms, which had diversified from the single service of auditing into highly profitable, multifaceted business services conglomerates.

The accounting firms ''took their two main assets — reputation and client base — and leveraged them by looking at the needs and effectively cross-selling, creating a whole line of businesses which became very lucrative,'' Mr. Zimmerman said. Law firms, he added, ''have the same assets,'' and can likewise provide ''a combined, integrated approach.''

Yet, while the accounting firms have amassed huge profits through diversification, their model is not without problems. In recent years, most of the major accounting firms, starting with Arthur Andersen, have moved to split off their consulting businesses, because of disputes over allocating profits and providing client services.

And like critics of ancillary law firm businesses, the Securities and Exchange Commission has expressed concern that auditors in a diversified company might not be truly independent from big clients that paid them more in consulting fees than they paid for their corporate auditing. Last year, the S.E.C. reached an agreement with four leading accounting firms on a new rule that would substantially reduce the amount of consulting work that the firms could do for their auditing clients.

But leaders at a number of law firms remain undaunted. In the last 18 months in particular, the interest of major law firms in ancillary businesses has boomed, according to Joel F. Henning, senior vice president and general counsel of Hildebrandt International, a consulting firm that is advising about two dozen law firms engaged in nonlegal operations.

To run their operations, law firms have hired a wide range of professionals. H & K Conservation Solutions, for instance, is headed by the former president of the Florida Audubon Society, William Clay Henderson. Don R. Zell, a former federal agent with the Justice Department's strike force and the Drug Enforcement Agency, leads the firm's investigative unit, which charges clients $90 to $170 an hour to do such things as look into suspected intellectual property infringements, examine sexual harassment claims, evaluate prospective merger partners and run undercover operations.

For many firms, existing clients are a fertile source of business for the nonlegal operations. John L. Harrington, chief executive of the Boston Red Sox, is one of them. The baseball team has used Bingham Dana lawyers for over 70 years, he said, so when he decided to sell the Red Sox, he turned to the firm's newly created strategic advice unit to handle the deal.

Another Bingham Dana client, Charles and Carolyn McCannon, signed up with the firm's money management concern after they sold their real estate investment company several years ago.

''We always kept our money under the pillow,'' Mr. McCannon joked recently, ''so it was quite a leap of faith to put it in the hands of somebody else. But we felt an immediate connection'' with the president of Bingham Legg Advisers.

Exactly how profitable additional business operations will be is unclear. ''The economic success is all over the lot,'' Mr. Henning of Hildebrandt International said.

Arnold & Porter, the Washington-based law firm, created a public affairs consulting unit, APCO Worldwide, in 1984 but spun it off in the early 1990's. James W. Jones, a former managing partner of Arnold & Porter who helped start APCO, said that while the unit enhanced the firm's services to its clients, ''it is fair to say the law firm didn't make an awful lot of money from APCO.''

But leaders at other firms maintain that profits will grow substantially over time, because of client demand and the ability to take percentages of deals and to use fixed fees, which they expect may be more profitable than the traditional practice of billing by the hour.

Thomas H. Dyer, chief executive of Holland & Knight Consulting, which oversees the firm's nine wholly owned subsidiaries, said that since its formation two years ago, ''we doubled our revenue over our first year, turned a profit on our operations, and are expecting to double our revenue again this year.''

Duane Morris, which is based in Philadelphia, has seven business concerns, which generated $7 million in revenue last year and a net profit of about $2.5 million, according to a managing partner, Sheldon M. Bonovitz. Out of a total revenue for the law firm of $160 million, that figure is small, he said, but ''in three to five years, if we can have $20 million in revenue, and $8 million in law firm income, at some point it gets to be significant.''

Perhaps one of the most successful is FirmLogic, a company started by Womble Carlyle Sandridge & Rice 15 years ago in Winston-Salem, N.C., to help law firms and corporations with document coding and review. It has since expanded to medical records and support for class-action settlements. Last year, it generated $23 million of the firm's $129 million, according to Hassel L. Parker, its chief executive, and will be ''north of $30 million this year.''

But creating the right business is difficult, firm leaders and industry experts say, particularly for lawyers not used to running a business.

''There are an awful lot of firms where I advise against it,'' Mr. Henning said. ''I can see the handwriting on the wall, the disaster, the culture and arrogance on the part of the lawyers, and the inability to understand management, what it means to invest in businesses, and take a long-term strategic view.''

And for some blue-chip law firms, ancillary businesses simply do not make sense.

''You are not going to see the Cravaths and Wachtels of the world going into ancillary businesses,'' Mr. Henning said. ''They have a good thing going with a huge potential client base of absolutely the most important bet-the-company transactions and cases.''

But, he added, there are ''only a handful of Wachtels and Cravaths out there.''

Posted via email from HKLaw Investigation


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