Ethical Rules, Law Firm Structure and Choice of Law

Abstract

State regulation of lawyers has failed to keep pace with the increased complexity and geographic scope of law practice. A particular problem is that lawyers in the branch office of a multi-jurisdictional firm are subject to the ethical rules of the state in which the branch office is located. The firm therefore potentially is subject to differing regulations in each state where it has branches. This is particularly a problem concerning rules that apply to the firm as such, including rules regarding the firm's name and capital structure. As a result, firms must either accept uniform rules or the rules of the most restrictive state. This means that structural rules do not accommodate the many differences among firms as to size, structure, market, and other factors. It also produces a single rule from a flawed political process rather than allowing for competition or evolution of rules. If left free of constraints, law firms would seek to maximize the market value of their assets, particularly including reputational assets, including by finding ways to motivate the firm's members to devote efforts to serving its clients. Thus, forcing firms to comply with uniform or restrictive state ethical rules relating to such matters as capital structure and non-competition agreements may perversely hurt the very clients such rules are supposed to protect. This article proposes solving this problem by permitting law firms to agree to application of a single state's ethical rules that relate to law firm structure. This would offer the advantages of an "internal affairs" choice-of-law rule for non-professional firms.

JEL Classification: G3, H1, H7, K0, K2 and K4