The Decline in Lawyer Independence: Lawyer Equity Investments in Clients

Abstract

In the modern legal profession, lawyers have entered into business transactions with their clients. These dealings, however, have been highly regulated through the ethics codes and common law. The ethics codes have imposed procedural and substantive requirements for such transactions. The state courts have similarly applied rules of agency law and fiduciary principles to ensure that lawyers are properly dealing with clients in such transactions. In the last decade, law firms have increasingly taken equity interests in client ventures. This practice has been commonplace in the Silicon Valley and has spread to law firms in other regions of the country. Various state and local bar associations as well as the ABA have recently liberalized the application of the traditional business transaction rules in the client equity context. The authors offer a detailed examination of the law firm practices of taking equity in client ventures based upon two years of research and interviews with lawyers and clients throughout the country. They examine these practices in light of the ethics rules, ethics opinions, and common law and offer a critique of the current positions advocated by the organized bar. They further detail the ethics and securities concerns that arise when a law firm accepts equity interests in a client and continues to represent that client in general legal affairs. This article argues that the Bar's current position dramatically underestimates the actual and potential conflicts that arise when lawyers invest in client ventures. Such practices expose law firms to significant ethical, malpractice, and securities liability. Lawyer-client equity transactions have the potential to undermine the independence of the lawyers' advice to clients and thereby harm the attorney-client relationship.