LAW FIRM MANAGEMENT & SUPERVISION: WHERE WE ARE & WHERE WE’RE HEADED

1. LAW FIRM MANAGEMENT & SUPERVISION: WHERE WE ARE & WHERE WE’RE HEADED 38th National Conference on Professional Responsibility Boston, Massachusetts June 2, 2012

2. TODAY’S SESSION • Management/Supervision Update • Recent Cases, Developments, and Trends • Global Developments: Management-Based Regulation • Australia • U.K. • Impact on U.S. Firms • Relevance (if any) to U.S. Regulation

3. PANELISTS • Art Lachman, Moderator • Henry Dinger • Susan Fortney • Doug Richmond

4. NO GOOD DEED GOES UNPUNISHED • You are a partner at Hale & Hardy LLP, and you serve as the firm’s pro bono coordinator • Two firm litigation associates, Josh Callenbach and Megan Riggs, defended Ralph Juhnke in a highly publicized criminal case • Although Josh & Megan performed admirably, Juhnke was convicted • Josh & Megan have since left the firm

5. NO GOOD DEED GOES UNPUNISHED • One day, the two firm partners who manage Josh & Megan’s departments when they worked at the firm come to your office & show you a letter they received from the state supreme court’s disciplinary administrator • The letters state that: • Josh & Megan failed to file a notice of appeal in Juhnke’s case prior to their departure from the firm • No one else in the firm assumed responsibility for the representation after they departed • As a result, Juhnke lost his appellate rights • The department heads are charged with violating RPC 5.1(a) & 5.1(b) • You begin to wonder when your mail will be delivered

6. NO GOOD DEED GOES UNPUNISHED • Which of the following correctly describes your potential exposure to discipline under the Model Rules? • Because this matter was handled without a fee, you face no exposure under the RPCs • If you were not directly involved in supervising the associates’ work on this project, you face no exposure under the RPCs • Assuming that the associates’ conduct violated the RPCs, you cannot be disciplined for that conduct unless you knew about the violation at a time when its consequences could be avoided • None of the above is correct

7. DUTY TO MANAGE & SUPERVISE LAWYERS • Duty to Manage Lawyers: RPC 5.1(a) • A partner in a law firm, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm, shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct. • Duty to Supervise Lawyers: RPC 5.1(b) • A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct.

8. RESPONSIBILITY FOR ANOTHER LAWYERS’ RPC VIOLATIONS • RPC 5.1(c): A lawyer is responsible for another lawyer’s violation of the RPCs if: • the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or • the lawyer is a partner or has comparable managerial authority in the law firm in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action

9. NO GOOD DEED GOES UNPUNISHED • When the associates left the firm, what, if anything, should the firm have done? • Nothing if the associates, not the firm, had actually appeared in the case on behalf of Juhnke • Nothing if the associates informed you that they were taking responsibility for Juhnke’s representation or obtaining new counsel for him after leaving the firm • If the associates would not be taking responsibility for Juhke’s representation after their departure, inform the client in writing of the associates’ departure and the firm’s intent to withdraw as a result • B. & C. • None of the above

10. SUBORDINATE LAWYER DUTIES • RPC 5.2 (a) A lawyer is bound by the Rules of Professional Conduct notwithstanding that the lawyer acted at the direction of another person. (b) A subordinate lawyer does not violate the Rules of Professional Conduct if that lawyer acts in accordance with a supervisory lawyer's reasonable resolution of an arguable question of professional duty.

11. NO GOOD DEED GOES UNPUNISHED • Which of the following correctly describes the potential legal liability of the firm (an LLP) and the partners in this scenario? • The partners may be liable for their negligent conduct in managing or supervising the firm’s associates • Vicarious liability of managing and supervisory partners for any legal malpractice of the associates is limited to the partners’ capital contributions to the firm • The firm itself is liable in full for any legal malpractice of the associates • All of the above • B. and C.

12. MANAGEMENT IS OVERRATED • One of your firm’s longest-serving secretaries, Roberta Nelson, embezzled $130,000 from the firm by creating fake invoices from fictitious companies & having the firm issue checks to those companies, all of which existed only as the owners of post office boxes she rented • As the firm’s GC, you reported Roberta’s crime to the DA, who obtained an order of restitution as part of Roberta’s plea bargain • She has paid back $87,000 she had not spent when caught • Roberta’s lawyer has filed a bar complaint against the firm’s Executive Committee, which includes the Managing Partner, alleging violations of RPC 5.3(a) & 5.3(b)

13. MANAGEMENT IS OVERRATED • You expect that once the local disciplinary committee, chaired by Bob Frye, receives the thoughtful and well-argued response of the firm’s outside counsel, Doug Bryans, the matter will be dismissed • Instead, Bob tells you that if the charges are proven, the committee will seek suspensions from practice for the firm’s Executive Committee members • And a longer suspension for the firm’s Managing Partner • Bob tells you that he sees no reason the charges won’t be proven • You call Doug again

14. DUTY TO MANAGE & SUPERVISE NONLAWYERS • Duty to Manage Nonlawyers: RPC 5.3(a) • A partner, and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm, shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the [employed, retained, or associated nonlawyer’s] conduct is compatible with the professional obligations of the lawyer. • Duty to Supervise Nonlawyers: RPC 5.3(b) • A lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the [employed, retained, or associated nonlawyer]'s conduct is compatible with the professional obligations of the lawyer.

15. RESPONSIBILITY FOR A NONLAWYERS’ RPC VIOLATIONS • RPC 5.3(c): a lawyer is responsible for conduct of a nonlawyer that would be a violation of the RPCs if engaged in by a lawyer if: • the lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or • the lawyer is a partner or has comparable managerial authority in the law firm in which the nonlawyer is employed, or has direct supervisory authority over the nonlawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action

16. MANAGEMENT IS OVERRATED • True or False: The Managing Partner and members of the firm’s Executive Committee have a heightened duty, in comparison to other firm partners, to comply with the obligation to manage nonlawyers set forth in RPC 5.3(a). • True • False

17. MANAGEMENT IS OVERRATED • True or False: It is a valid defense in the disciplinary proceeding against Managing Partner for allegedly violating RPC 5.3(a) and 5.3(b) that MP delegated supervision of Roberta to the firm’s experienced nonlawyer Executive Director. • True • False

18. THANK GOODNESS WE PRACTICE HERE • You serve as your firm’s Managing Partner • Jerry, a highly regarded partner at the firm with whom you’ve worked for 30 years, admits to you that he improperly paid himself $77,500 in conservatorship fees • He is distraught, telling you that his wife is divorcing him & that his son has been diagnosed with aggressive, untreatable cancer • He also tells you that between the alcohol and the antidepressants, he is barely able to function • After calming Jerry and telling him to say nothing to anyone about the purloined fees, you quickly summon Mary, your most trusted colleague on the firm’s Management Committee

19. THANK GOODNESS WE PRACTICE HERE • You make a plan: • Jerry will repay the fees over a 6-month period • You view this as a 1-time mistake, so you’ll tell the firm’s Executive Director & CFO but no one else • Jerry will take a leave of absence to be with his son • The firm will continue to pay his draws while he’s away • Mary says: “I agree with all of that, but shouldn’t we tell Chris? I mean, he’s our General Counsel.” • You respond: “We best leave Chris out of this. He doesn’t need to know about any of this and this is the sort of thing that should be handled on a need-to-know basis.”

20. THANK GOODNESS WE PRACTICE HERE • All is fine until 2 months later, when the firm’s Executive Director & CFO come into your office and close the door • “You don’t want to hear this,” says your CFO, “but I’ve done some discreet checking and it looks like there is another $85,900 that’s missing from accounts Jerry controls.”

21. THANK GOODNESS WE PRACTICE HERE • It would have been a good idea for you to consult Chris, the firm’s General Counsel, when you first heard about the purloined fees from Jerry because: • Chris might have proposed immediately conducting a full investigation to ensure that the firm knew the full extent of the problem & could promptly take any necessary corrective action. • Chris might have been able to offer objective, candid, and practical advice to minimize the harm to clients and to the firm of Jerry’s misconduct. • Chris might have explained the potential liability risks associated with Jerry’s professional misconduct • Chris might have explained professional duties to report misconduct to the bar, as well as dealing with impairment issues. • All of the above

22. THANK GOODNESS WE PRACTICE HERE • Did Managing Partner violate RPC 5.1(a), and if so, what should the sanction be? • No violation • Violation; diversion • Violation; public reprimand • Violation; suspension

23. BOARD OF OVERSEERS v. WARREN • Decision of “single justice” (12/29/10): • No violation of Maine Bar Rules • Decision of Maine Supreme “Law Court” panel (12/8/11): • No violation of duty to report • No violation of duty to prevent or rectify harm caused by rule violation when there is an opportunity to take corrective action • Partner members of the firm’s Executive Committee violated management duties • Remand for entry of judgment & “appropriate sanction” • On remand to same “single justice” (2/24/12): • “As to each of the named respondents, this proceeding is dismissed with a warning regarding the violation of the Bar Rule identified in the Law Court opinion.” [emphasis added]

24. PEOPLE WHO ARE GOOD AT MATH BECOME DOCTORS • Everyone liked Jack, although the young man never seemed happy as an associate at your firm, although he’s much less popular now that his fraudulent billing scheme has been discovered & publicly reported • Jack falsified 2,100 billable hours over 3 years (about a third of his time), & then succeeded in writing off the time before clients were billed • Unfortunately, his false entries for 1 invoice slipped through, & the client detected the overbilling • That sparked an internal investigation

25. PEOPLE WHO ARE GOOD AT MATH BECOME DOCTORS • Jack seemed relieved that he was caught • He was trying to keep his hours up to avoid the consequences of being viewed as unproductive • Also, he didn’t like practicing law, was depressed, & had expected to be caught & punished sooner • He didn’t even seem bothered by his 2-year suspension from practice • But now you’ve received an inquiry from the disciplinary board about Jack’s supervision • You call a meeting with the 2 partners whose clients were affected & the head of the firm’s litigation group

26. PEOPLE WHO ARE GOOD AT MATH BECOME DOCTORS • Meeting Agenda: • (1) “How the hell could this have happened?” • (2) “How the hell could this have happened?” • (3) “How the hell could this have happened?”

27. Australia Regulatory Developments • Catalyst: legislation allowing incorporation and nonlawyer ownership • Approach: (state/territory basis) Regulator as proactive consultant who works with Incorporated Legal Practices (ILPs) in developing firm ethical infrastructure

28. Requirements for ILPs in Australia • Must appoint a Legal Practitioner Director • Must identify and report professional misdeeds • Must implement and maintain Appropriate Management Systems

29. Appropriate Management Systems • Not defined in the legislation but regulators & professional groups identified 10 objectives of sound legal practice • ILPs use self-assessment forms to rate compliance with objectives

30. Positive Track Record of the ILP Regulatory Regime • Complaints rate for self-assessed ILPs dropped by two-thirds • Majority of ILPs assessed themselves to be in compliance on all ten objectives • Self-assessed ILPs had one-third the number of complaints as compared to non-incorporated firms

31. U.K. Regulatory Developments • Outcome-Focused Regulation Focus of regulation is on complying with principles rather than enforcing rules • Requires the designation of firm managers • COLP (Compliance Officer for Legal Practice) • COFA (Compliance Officer for Finance & Administration)

32. Using MBR in the U.S.? • Which of the following BEST describes your feelings about U.S. jurisdictions shifting to management-based regulation (putting aside the issue of nonlawyer ownership of law firms)? • It’s a great idea & we should work to make it happen. • We should incorporate some aspects of management-based regulation into the existing regulatory framework here. • It would represent an improvement over existing regulation, but such an approach is impracticable here. • It’s a bad idea & should not be adopted here.