Ethics Opinion 362

Non–lawyer Ownership of Discovery Service Vendors

Discovery service vendors, such as e–discovery vendors, cannot both practice law within the District of Columbia and be partially or entirely owned by passive non–lawyer investors consistent with D.C. Rule 5.4(b). This Committee's jurisdiction does not include the definition of the practice of law, but the Committee on Unauthorized Practice of Law has recently issued a detailed opinion explaining what activities by these vendors constitute the practice of law.

The Rules of Professional Conduct do not reach non–lawyer owners of discovery service organizations; they are not subject to bar discipline. The Rules do reach lawyers who co–own or manage such vendors with or on behalf of non–lawyer passive investors. The Rules also could reach lawyer employees of such vendors who know of facts that constitute a violation of Rule 5.4(b) or lawyers who, with similar knowledge, retain such vendors.

In addition, lawyers who own, manage, work for or retain a discovery service vendor that engages in the practice of law in the District of Columbia and has passive non–lawyer investment may violate the prohibition in Rule 5.5(b) against assisting others in the unauthorized practice of law.

Applicable Rules:

• Rule 5.2 (Subordinate Lawyers)
• Rule 5.4(b) (Professional Independence of a Lawyer)
• Rule 5.5(b) (Unauthorized Practice)
• Rule 5.7 (Law Related Services)
• Rule 8.4(a) (Misconduct)

Inquiry

Discovery service vendors have become an increasingly important part of the legal marketplace. They can provide an efficient and effective way for clients and lawyers to handle the complex and expensive process of discovery (electronic and otherwise), providing technical expertise, facilities and trained personnel at rates that often are less than those charged by lawyers and law firms for similar services. When such organizations operate in conformity with the ethical mandates discussed herein, they may present a viable alternative to traditional marketplace offerings.

The Committee has received an inquiry from a lawyer familiar with the services provided by discovery service vendors to lawyers and clients. The inquirer states that these vendors provide temporary attorneys, manage the services of software providers, and supervise the review and production of documents in their own review centers. The inquirer asserts that some such vendors are owned and operated entirely by attorneys, others are partly owned by attorneys, and the remainder are owned and controlled by corporations and other non–attorneys. The inquirer asks whether these vendors are operating consistent with Rule 5.4’s prohibition on passive investment in law firms. Although the inquirer did not raise Rule 5.5’s prohibition on engaging or assisting in the unauthorized practice of law or Rule 5.7’s discussion of the provision by lawyers of law related services, we consider those issues as well.

Discussion

The threshold question is whether the discovery service vendors are, in fact, engaged in the practice of law. The practice of law is not defined in the District of Columbia Rules of Professional Conduct. See Comment [2] to Rule 5.5 ("The definition of the practice of law is established by law and varies from one jurisdiction to another.").

A. The UPL Committee’s Opinion Addressing Discovery Service Vendors

District of Columbia Court of Appeals Rule 49 ("Rule 49") governs who may practice law within the District of Columbia. The District of Columbia Committee on Unauthorized Practice of Law (the "UPL Committee") has recently examined when e–discovery companies or discovery service vendors are engaged in the practice of law in the District of Columbia and therefore subject to Rule 49. We accept, as we must, the conclusions of the UPL Committee and its Opinion, described in more detail below.

In its Opinion 21–12, issued January 12, 2012, the UPL Committee reviewed the activities of discovery service vendors.¹ It noted that "some companies offer not only attorneys to staff document review projects, but also offer the physical space where the document review will take place, computers for conducting the review, and servers for hosting the documents to be reviewed." Op. 21–12 at 4. Additionally, some vendors offer other services ranging from "e–discovery consulting to database management to the eventual production of documents." Id. Some vendors describe their services as "'one–stop shopping, comprehensive review and project management, [and] fully managed document review.'" Id. (also noting descriptions of “soup–to–nuts document project from process to production” and "comprehensive project planning, on–site review team supervision, privilege log preparation, e–vendor selection and more”). Finally, some vendors also tout the qualifications of the lawyers they employ (e.g., describing them as "seasoned litigators"), or promote the vendor’s expertise in various areas of the law such as intellectual property, patent litigation, class action lawsuits, and mergers and acquisitions. Id. at 5.

Opinion 21–12 provides guidance to allow discovery service companies to promote and provide services without falling afoul of Rule 49. First, the UPL Committee concluded that Rule 49 covers discovery service companies that are located in, use an address in, or otherwise conduct activities in the District of Columbia. In addition, Rule 49 covers those entities that "advertise themselves as available to assist with discovery projects in the District." Id. at 7.

Second, the UPL Committee, reiterating prior guidance from its Opinion 6–99, concluded that discovery service companies could handle "the administrative aspects of hiring and supervising a document review attorney" without violating Rule 49.² However, "the final selection of attorneys to staff a document review project must be made by a member of the D.C. Bar with an attorney–client relationship [and] the attorney’s legal work must be directed or supervised by a D.C. Bar member who represents the client." Id. at 8. The "discovery services company may not . . . attempt to supervise the document review attorney[’s legal work]." Id.

Third, the UPL Committee stated that "[t]o avoid running afoul of the holding out prohibition, discovery services companies must avoid" terms such as "document review" or "the discovery process" or other broad statements, such as "soup–to–nuts" or "end–to–end" services, implying that "a company can manage the entire document review or discovery process.” Id. at 9. The UPL Committee also stated that any vendor making "such broad statements … at a minimum must include a prominent disclaimer stating that the company is not authorized to practice law or provide legal services in the District of Columbia and that the services offered by the company are limited to the non–legal, administrative aspects of document review and discovery projects." Id. Statements about the legal expertise of staff must be accompanied by a similar disclaimer. Id.

B. Rule 5.4: Non–Lawyer Ownership and Discovery Service Companies

Rule 5.4(b) permits non–lawyer ownership of law firms under certain conditions. The entity in which the interest is held by the non–lawyer must have "as its sole purpose" the provision of legal services. Rule 5.4(b)(1). The non–lawyer owners must undertake to abide by the Rules of Professional Conduct. Rule 5.4(b)(2). The lawyers in the organization must accept supervisory authority over the non-lawyer as provided by Rule 5.1. Rule 5.4(b)(3). All of these conditions must be set forth in writing. Rule 5.4(b)(4).

Rule 5.4(b) does not allow for passive investment in law firms or the like by "a corporation, investment banking firm, an investor or any other person or entity" that seeks to "entitle itself to all or any portion of the income or profits of a law firm or similar organization." Comment [8] to Rule 5.4. To hold an interest in a law firm, a non–lawyer must be "an individual performing professional services within the law firm or other organization." Id.; see also Rule 5.4(b) (limiting non–lawyers who may own an interest in a law firm to those "who perform[] professional services which assist the organization in providing legal services to clients").

As stated above, we are bound by the conclusions stated in the UPL Committee’s Opinion 21–12 regarding those activities that do or do not constitute the practice of law. To the extent that discovery service vendors observe the limits on their work and related promotional activities set forth in that opinion, such vendors are not practicing law and the provisions of Rule 5.4(b) therefore do not apply.³ To the extent, however, that the discovery service organization is, in fact, engaged in the practice of law as set forth in Opinion 21–12, passive ownership of that organization violates Rule 5.4(b).⁴ Of course, the Rules of Professional Conduct only reach the conduct of lawyers, not corporations or non–lawyer investors. As a result, D.C. Bar admitted lawyers may not practice law within the District of Columbia or hold themselves out as able to do so for discovery service organizations when such organizations have passive non-lawyer investors. Under such circumstances, a D.C. Bar admitted lawyer cannot, consistent with Rule 5.4(b), share ownership in or participate in the management of a discovery service organization with non–lawyer passive investors.⁵

We do not find a basis to conclude that lawyer employees of a discovery service organization, whose sole or principal function is document review, have a duty to investigate how the organization promotes itself or whether the organization has passive non–lawyer ownership. However, where such a lawyer employee knows that the discovery service organization is (a) practicing law within the District of Columbia or holding itself out as prepared to do so and (b) owned, in whole or in part, by non–lawyer passive investors, such lawyer’s continued work for that entity may be inconsistent with Rule 5.4(b). See also Rule 8.4(a) ("It is professional misconduct for a lawyer to violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another.") (emphasis added). Under the Rules, the term knows “denotes actual knowledge of the fact in question.” The definition also states, however, that “[a] person’s knowledge may be inferred from the circumstances.” Rule 1.0(f).

Note, however, that whether an entity, either in a particular matter or generally, is practicing law is an issue that often may be unclear. Under Rule 5.2(b), subordinate lawyers do not violate the Rules of Professional Conduct when they “act[] in accordance with a supervisory lawyer’s reasonable resolution of an arguable question of professional duty.”⁶ “Although a lawyer is not relieved of responsibility for a violation by the fact that the lawyer acted at the direction of a supervisor, that fact may be relevant in determining whether a lawyer had the knowledge required to render conduct a violation of the Rules.” Comment [1] to Rule 5.2.

As we stated in Opinion 358, Rule 5.2 “protects a subordinate lawyer who acts at the direction of a supervising attorney so long as there is a reasonable argument that” the actions at issue are “permitted by the Rules.”⁷ In this regard, it may be prudent for the management of a discovery services organization to explain to its employees, preferably in writing, how its operations are consistent with the restrictions on the practice of law by non–lawyers and on the prohibition of passive non–lawyer ownership of entities that do practice law. Such a statement, when issued in good faith by a supervisory lawyer, can fulfill the requirements of the safe harbor described in Rule 5.2(b). Of course, if the subordinate lawyer knows that the statement issued by the discovery organization is or has become materially inaccurate, such lawyer may no longer come within the safe harbor of Rule 5.2(b).

Finally, a lawyer who is contracting for discovery services on behalf of a client can similarly risk falling afoul of Rule 5.4(b) if the lawyer knows that the discovery services organization has passive non–lawyer ownership. See Rule 8.4(a) (prohibiting a lawyer from “knowingly assist[ing] or induc[ing]” another lawyer to violate the Rules). A D.C. Bar admitted lawyer who retains a discovery organization with passive non–lawyer ownership and abdicates to that organization responsibilities that include the practice of law, without appropriate supervision or oversight, violates Rule 5.4(b). For example, a lawyer who simply gives a group of documents and a discovery request to a discovery service vendor and asks the vendor to select and organize responsive documents, produce a privilege log, and prepare the response to the request itself may put the discovery service organization in the position of practicing law under Opinion 21–12. Under such circumstances, instead of the broad delegation of work and responsibility described above, the lawyer hiring the discovery service vendor should ensure that the services being provided for that lawyer will not extend to the practice of law as outlined in Opinion 21–12. That is, the lawyer seeking to retain a discovery services organization should satisfy herself that the organization will not be engaged in the practice of law with respect to the matter for which the lawyer seeks to hire the organization. Alternatively, a lawyer seeking legal services from a discovery services organization could assure herself that such organization either is owned and controlled solely by lawyers or does not engage in the practice of law.

C. Rule 5.5: Discovery Services Organizations and Unauthorized Practice of Law

Rule 5.5(a) prohibits a lawyer from “practicing law in a jurisdiction where doing so violates the regulation of the legal profession in that jurisdiction.” Rule 5.5(b) prohibits assistance to a “person who is not a member of the Bar in the performance of activity that constitutes the unauthorized practice of law.” Comment [1] to Rule 5.5 indicates that these prohibitions “concern[] the unauthorized practice of law by District of Columbia Bar members in other jurisdictions and assistance by District of Columbia Bar members in the unauthorized practice of law by lawyers not admitted in this jurisdiction or by non–lawyers.”

A lawyer who works for, partially owns, or engages a discovery service organization with passive non–lawyer ownership may be assisting another “person” or “non–lawyer” in the unauthorized practice of law. Although “person” is not defined in the Rules, Rule 49 defines the term to include entities. See D.C. Ct. App. Rule 49(a) (1). Moreover, Rules 4.1 through 4.4 use the term “person” or “third person” in ways that include entities as well as individuals. For example, it would be anomalous to conclude that Rule 4.4(a)’s prohibition on the use of “means that have no substantial purpose other than to embarrass, delay or burden a third person,” applies only to individuals. The same logic applies to the provisions of Rule 4.3.⁸ See generally D.C. Code §45–604 (“The word ‘person’ shall be held to apply to partnerships and corporations unless such construction would be unreasonable. . . .”)

Conclusion

If discovery service organizations follow the guidelines set forth in the UPL Committee Opinion 21–12 and do not practice law, the activities of such organizations and the lawyers who work for them are consistent with the restrictions on non–lawyer ownership stated in Rule 5.4(b). However, the combination of the practice of law in the District of Columbia and passive non–lawyer ownership is not consistent with Rule 5.4(b). The non–compliance with the limitations on entities owned in part by non–lawyers should be particularly evident to those lawyers who create, own, and manage such organizations in conjunction with passive investors, but also may be evident to those lawyers who work at such organizations or the lawyers who engage such organizations. Lawyers in any of these circumstances should understand how Rule 5.4(b)’s requirements, and Opinion 21–12’s definition of the practice of law may affect their ability to own, manage, work for, or retain such an entity. Finally, a lawyer who partially owns a discovery service vendor with passive non–lawyer ownership engaged in the practice of law in the District of Columbia assists in the unauthorized practice of law in violation of Rule 5.5(b). Lawyers who knowingly work for or retain such an entity may also violate Rule 5.5(b).

Published: June 2012

1. The full text of the UPL Committee’s opinion can be found at www.dccourts.gov/internet/appellate/unauthcommittee/main_jsf
2. The administrative matters "could include interviewing individuals to create roster of attorneys available … providing the lawyer’s working space and equipment, ensuring that he or she works a regular day and works at an acceptable pace, providing salary and benefits, and similar supervisory activities that do not require the application of professional legal judgment." Id. at 8.
3. If a lawyer is involved in the provision of discovery services that do not constitute the practice of law, the lawyer may be still be required to comply with the provisions of Rule 5.7. Discovery services that are not legal services are likely “law related services” under Rule 5.7. As a result, a lawyer providing such services would be subject to the Rules of Professional Conduct with respect to such services unless the lawyer took steps to inform the person or entity obtaining the law related services that the “protections of the client–lawyer relationship do not exist.” See Rule 5.7(a)(2).
4. A discovery services organization could practice law and still have a non–lawyer owner if such owner were an active participant in the business and made the certifications required by Rule 5.4(b)(4).
5. A recent opinion of the New York State Bar Association concluded that New York’s version of Rule 5.4 prohibits New York–admitted lawyers from practicing law in New York as employees of a United Kingdom entity that includes non–lawyers in supervisory and ownership positions. NYSBA Ethics Opinion 911 (March 2012). Although New York’s version of Rule 5.4 differs from that of the District of Columbia, and does not permit non–lawyer ownership of any kind, the New York opinion nevertheless supports our broader conclusion that a lawyer cannot practice law with an entity that is constituted in a manner not authorized by Rule 5.4.
6. Rule 5.2 states in full:
  (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.
7. D.C. Legal Ethics Opinion 358 (2011); See also Comment [2] to Scope Note (“The Rules presuppose that disciplinary assessment of a lawyer’s conduct will be made on the basis of facts and circumstances as they existed at the time of the conduct in question and in recognition of the fact that a lawyer often has to act upon uncertain or incomplete evidence of the situation. Moreover, the Rules presuppose that whether or not discipline should be imposed for a violation, and the severity of the sanction, depend on all of the circumstances, such as willfulness and seriousness of the violation, extenuating factors and whether there have been previous violations.”)
8. Rules 4.1 and 4.2 specifically define “person” or “third person” to include entities. See Comment [1] to Rule 4.1 and Rule 4.2(c). The failure to repeat a similar definition in Rules 4.3, 4.4, and 5.5 does not appear to have been by design or otherwise to have been intended to distinguish the meaning of the term as between different Rules.