State Bar of Arizona Ethics Opinions

96-05: COnflicts; Business Transactions; Chiropractic Referrals; Business Activities; Personal Injury; Referrals
2/1996

There are significant potential conflicts in an attorney referring a legal client to a chiropractic clinic in which the lawyer owns an interest such that the Committee discourages such arrangements. [ERs 1.7, 1.8, 5.4]

FACTS[1]

 

The inquiring attorney requests a formal opinion regarding the ethical propriety of owning a partial or complete interest in a medical/chiropractic clinic to which his law practice refers clients.  He more explicitly sets forth the issue in the following scenario:

 

          Attorney A owns a professional corporation which operates as a law firm that represents injured plaintiffs in personal injury suits.  Attorney A subsequently purchases a partial or complete interest in another corporation that is organized as a medical/chiropractic clinic.  May Attorney A refer clients from his personal injury practice to the referenced clinic for medical/chiropractic treatment in relation to injuries sustained that are the subject of the attorney's representation?  This assumes, of course, that the client/patient receives fair and adequate medical treatment and legal representation, just as he/she would if sent to an independent clinic.  If such a scenario is not contrary to any of the ethical rules, what, if any, disclosure requirements are necessary before referring the client to the medical/chiropractic clinic?

 

Relevant Ethical Rules

 

ER 1.7. Conflict of Interest:  General Rule

 

(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:

(1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and

 

(2) each client consents after consultation.

(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest, unless:

(1) the lawyer reasonably believes the representation will not be adversely affected; and

 

(2) the client consents after consultation.  When representation of multiple clients in a single matter is undertaken, the consultation shall include

explanation of the implications of the common representation and the advantages and risks involved.

ER 1.8  Conflict of Interest:  Prohibited Transactions

 

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership possessory, security or other pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquire the interest are fair and reasonable to the client and are fully disclosed and transmitted in

writing to the client in a manner which can be reasonably understood by the client;

 

(2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

 

(3) the client consents in writing thereto.

* * * * *

ER 5.4. Professional Independence of a Lawyer

 

(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

 

(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after

the lawyer's death, to the lawyer's estate or to one or more specified persons;

 

(2) a lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of

the total compensation which fairly represents the services rendered by the deceased lawyer; and

 

(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a

profit-sharing arrangement.

(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.

 

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the

lawyer's professional judgment in rendering such legal services.

 

(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:

(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;

 

(2) a nonlawyer is a corporate director or officer thereof; or

 

(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.

Relevant Prior Ethics Opinions

 

There are no pertinent opinions from Arizona or any other jurisdiction.

 

OPINION

 

Underpinning the general conflict of interest ethical rule set forth in Ethical Rules 1.7, 1.8 and 5.4 is the principle that an attorney's loyalty to his/her client is essential to the attorney-client relationship.  Comment to ER 1.7; Matter of Evans, 113 Ariz. 458, 556 P.2d 792 (1976).  Concomitantly, the lawyer is required to closely scrutinize his/her professional and personal conduct to insure that a conflict of interest does not arise.  Cf. Gomez v. Superior Court In and for Pinal County, 149 Ariz. 223, 177 P.2d 901 (1986).

 

It appears clear from the scenario that ER 1.7(a) is not relevant to the facts because nothing is alleged that adversely juxtaposes one client against another client.

Moreover, the facts do not raise the spector of a violation of ER 5.4, which is broadly titled "Professional Independence of a Lawyer" but in particular addresses prohibiting a lawyer from sharing legal fees with a nonlawyer; forming a partnership with a nonlawyer; a third party directing the legal services or paying the fees of the client; and practicing or forming a professional corporation with a nonlawyer.

The facts expressed in the scenario, however, do imply the potential for a conflict pursuant to ER 1.7(b) which states in pertinent part:

 

         A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to ... the lawyer's own interest unless:

 

            (1)   the lawyer reasonably believes the representation will not be adversely affected; and

 

            (2)    the client consents after consultation ... (emphasis added).

 

The Comment to the Rule offers helpful guidance in interpreting this Rule in two respects.  First, it is clear that the focus of the Rule is on prohibiting actual conflicts not potential conflicts.  It is stated:

 

         A possible conflict does not itself preclude the representation.  The critical questions are the likelihood that a conflict will eventuate and, if its does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.  Consideration should be given to whether the client wishes to accommodate the other interest involved.  (emphasis added).

 

Furthermore, the Comment reads:  "The lawyer's own interest should not be permitted to have adverse effect on representation of a client .... A lawyer may not allow related business interest to affect representation..."

 

The facts also imply a violation of ER 1.8 because in referring a client to a medical clinic in which she has an interest she is entering into a business transaction with the client.

 

Generally, the possibility of a conflict is not enough to create an ethical violation but where, as here, circumstances are fraught with substantial potential conflicts the Committee concludes that an ethical violation would exist.  The Committee concludes that the referral cannot be "fair and reasonable to the client" under ER 1.8(a)(1).  Moreover, the lawyer cannot reasonably believe that the representation will not adversely affect her relationship with the client under ER 1.7(b).

 

Those anticipated conflicts include the fact that the clinic may not offer the best medical treatment but the attorney will be tempted to refer each client to the clinic because she receives not only her fee but a portion of the medical expenses incurred by the client as well.  The potential for regular conflict also will occur at the conclusion of each case when the attorney has to determine whether to ask the clinic to reduce its bill or lien.  The attorney would be faced with the dilemma of her obligation to obtain a reduction, if appropriate, for the client and jeopardizing the interests of the clinic in which she owns an interest.

 

Similarly, if there are any claims by the defense that the medical practitioner over-treated or over-billed, this would create an impermissible conflict for the attorney.  Again, she would be faced with the dilemma of attempting to resolve the issue for the benefit of her client and jeopardizing the interests of herself and the partners in the clinic.  The Committee is aware that arbitrators and judges customarily allow defense attorneys to inquire into the source of the referral of the client to a medical practitioner.  The judge or arbitrator may allow the defense to establish that the plaintiff's attorney in fact has a financial interest in the clinic, which may allow the defense to argue that the plaintiff's case is a sham and the subject of collusion between the medical practitioner and attorney on behalf of the plaintiff.  At a minimum, such a financial interest would pose a potential impeachment basis for opposing counsel.

 

Conclusion

 

These examples of the significant potential for conflicts inherent in the referral system have persuaded this Committee that the inquiring lawyer cannot reasonably believe that the representation with the referral will not adversely affect the relationship with the client or be fair and reasonable to the client.

 



    [1]Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings.  ã State Bar of Arizona 1996