Can a West Virginia law firm organize another law firm as its wholly-owned subsidiary, and how must the two firms hold themselves out and check conflicts?

Plain-English summary

The Lawyer Disciplinary Board addressed, as an issue of first impression, whether members of one law firm may organize a wholly-owned subsidiary law firm. The question arose from a merger structure in which Firm A wanted to purchase Firm B: Firm B's members would become members of Firm A, but not all of Firm A's members would become members of Firm B, and Firm B would keep advertising under its own name while indicating its affiliation with Firm A. The Board concludes the Rules of Professional Conduct accommodate this arrangement.

On authority to form the entity, the Board notes the Rules were amended in 1996 to permit lawyers to be members of a law firm organized as a limited liability company or registered limited liability partnership solely to render professional legal services, and that Rule 5.7 requires compliance with the West Virginia State Bar's registration rules. The Board therefore finds no prohibition on organizing a wholly-owned subsidiary law firm as an LLC or registered LLP solely to render professional legal services, as long as the firm complies with Rule 5.7 and other applicable statutes. In a footnote, the Board limits its opinion to the ethics question and declines to opine on whether the arrangement is permitted under the LLC/LLP statutes or its effect on malpractice liability, pointing to Rule 5.7(b)'s statement that organizing as an entity does not relieve a lawyer from personal liability for the lawyer's own acts, errors, and omissions.

On holding out to the public, the Board applies Rule 7.1(a) (a lawyer shall not make a false or misleading communication) and concludes that all letterhead and advertisements for the affiliated firms must designate the affiliation in each firm's letterhead and advertisements; failure to disclose the affiliation is misleading about the true character of the relationship and can violate Rule 7.1(a). The Board reminds that each firm's advertising must name at least one lawyer responsible for its content under Rule 7.2(d), and that Rule 7.5(a) (no firm name, letterhead, or professional designation that violates Rule 7.1) supports the same disclosure position.

On conflicts, the Board advises that firms organizing subsidiaries must comply with the conflict rules, particularly Rule 1.10. Rule 1.10(a) imputes one lawyer's conflict (under Rules 1.7, 1.8(c), 1.9, or 2.2) to all lawyers associated in a firm, and the comment treats lawyers who present themselves to the public as a firm as a firm for purposes of the Rules. Because the Board requires the affiliated firms to indicate their affiliation publicly, it concludes the imputed-disqualification rules apply, so the firms should have the means to run a "global" conflicts check between the firm and the subsidiary and refrain from accepting representation where a conflict exists. The Board adds that requiring a global conflicts check does not prohibit the firm and the subsidiary from each maintaining their own books, bank, and trust accounts, as long as all other Rules are met. The Board's conclusion: the Rules accommodate wholly-owned subsidiaries, but full disclosure of the relationship between the two firms is essential so as not to deceive clients and the public.

In practice

Under this opinion, and under the West Virginia rules as they stood in 2009, a law firm that organizes another firm as its wholly-owned subsidiary is operating in an arrangement the Board concludes the Rules accommodate. The opinion holds the firm may form the subsidiary as an LLC or registered LLP solely to render legal services if it complies with Rule 5.7 and applicable statutes, and it expressly does not address the LLC/LLP statutes themselves or malpractice-liability effects.

The opinion attaches conditions to how the firms operate. It holds that both firms must disclose their affiliation on all letterhead and advertising, framing a failure to disclose as misleading under Rules 7.1(a) and 7.5(a), and that advertising must name a responsible lawyer under Rule 7.2(d). It concludes the imputed-disqualification rule (Rule 1.10) applies because the firms hold themselves out as affiliated, so they should run a "global" conflicts check and decline matters where a conflict exists, while remaining free to keep separate books and accounts. West Virginia adopted comprehensive amendments to its Rules of Professional Conduct effective January 1, 2015; verify the current text and numbering of Rules 5.7, 7.1, 7.2, 7.5, and 1.10 before relying on the specific provisions described here.

Common questions

Q: Can a West Virginia law firm own another law firm as a subsidiary?

A: Yes. The opinion concludes, as an issue of first impression, that the Rules of Professional Conduct accommodate a wholly-owned subsidiary law firm organized as an LLC or registered LLP solely to render legal services, as long as it complies with Rule 5.7 and applicable West Virginia statutes.

Q: Do the two firms have to disclose that one owns the other?

A: Yes. The opinion concludes both firms must designate their affiliation on all letterhead and advertising; failing to disclose the affiliation is misleading about the true character of the relationship and can violate Rule 7.1(a) (and is supported by Rule 7.5(a)).

Q: How do conflicts of interest work between the parent and subsidiary firms?

A: The opinion concludes the imputed-disqualification rule (Rule 1.10) applies because the firms hold themselves out as affiliated, so they should run a "global" conflicts check between the firm and the subsidiary and refrain from accepting a representation where a conflict exists.

Q: Can the parent and subsidiary firms keep separate finances?

A: Yes. The opinion concludes the global conflicts-check requirement does not prohibit the firm and the subsidiary from each maintaining their own books, bank, and trust accounts, as long as all other Rules of Professional Conduct are met.

Background and rules framework

The opinion interprets the West Virginia Rules of Professional Conduct as they existed in 2009. It applies Rule 5.7 (the West Virginia provision on lawyers practicing through limited liability organizations and registration with the State Bar); Rule 7.1(a) (Model Rule 7.1, false or misleading communications about a lawyer's services); Rule 7.2(d) (responsible-attorney requirement in advertising); Rule 7.5(a) and 7.5(d) (Model Rule 7.5, firm names and letterhead); and the conflict rules, principally Rule 1.10 (Model Rule 1.10, imputed disqualification), which incorporates Rules 1.7, 1.8(c), 1.9, and 2.2. The factual context is a merger structured so that one firm becomes a wholly-owned subsidiary of another while keeping its own name.

Citations and references

Rules of Professional Conduct:

• WV RPC 5.7 (practice through a limited liability organization; registration with the State Bar; personal liability for the lawyer's own acts under 5.7(b))
• Model Rule 7.1 / WV RPC 7.1(a) (false or misleading communications about a lawyer's services)
• WV RPC 7.2(d) (advertising must name a lawyer responsible for its content)
• Model Rule 7.5 / WV RPC 7.5(a) and 7.5(d) (firm names, letterhead, and professional designations)
• Model Rule 1.10 / WV RPC 1.10(a) (imputed disqualification; incorporating Rules 1.7, 1.8(c), 1.9, 2.2)
• Model Rule 1.7 / WV RPC 1.7 and Model Rule 1.9 / WV RPC 1.9 (conflicts; former clients)

Cases:

• No cases cited.

Other opinions cited:

• None; the Board treats the question as an issue of first impression.

See also

• WV LEO 2018-01: Attorney-client matching services
• No other sibling opinions yet indexed.

Source

• Landing page: https://wvodc.org/Legal-Ethics-Opinion
• Original PDF: https://drive.google.com/file/d/1_tAtXEW-sMMC-8XMQ39CSu6CePpSEvuF/view?usp=drive_link

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

L.E.O. 2009-02

WHOLLY-OWNED SUBSIDIARY LAW FIRMS

The Lawyer Disciplinary Board has received a request to determine whether members of one law firm may organize a wholly-owned subsidiary law firm. The question arose when two separately owned and operated law firms decided to merge, i.e., Firm A wanted to purchase Firm B. The members of Firm B would become members of Firm A but not all of the members of Firm A would become members of Firm B. Furthermore, Firm B would continue advertising under its own name but would indicate its affiliation with Firm A in the advertisement. This question is an issue of first impression for the Lawyer Disciplinary Board.

Discussion

The Rules of Professional Conduct were amended in 1996 to permit lawyers to be members of a law firm organized as a limited liability company or registered limited liability partnership solely to render professional legal services under the applicable laws of West Virginia. Rule 5.7 also provides that a law firm shall comply with the rules of The West Virginia State Bar with regard to registration of limited liability organizations. See, Rule 5.7 of the Rules of Professional Conduct. Therefore, there does not appear to be a prohibition in the Rules of Professional Conduct for a law firm to organize a wholly-owned subsidiary law firm organized as a limited liability company or registered limited liability partnership solely to render professional legal services as long as the law firm has complied with Rule 5.7 and other applicable West Virginia statutes.[1]

The proposed arrangement impacts other Rules of Professional Conduct including but not limited to Rule 7.1(a) (Communications concerning a lawyer's services); 7.2(d) (Responsible Attorney Requirement); 7.5(a) and 7.5(d); 1.7 (Conflict of Interest); 1.9 (Conflict of Interest: Former Client); and 1.10 (Imputed Disqualifications).

Rule 7.1(a) states that "[a] lawyer shall not make a false or misleading communication about the lawyer or the lawyer's services. A communication is false or misleading if it: (a) contains a material misrepresentation of fact or omits a fact necessary to make the statement considered as a whole not materially misleading[.]" Accordingly, all letterhead and advertisements for law firms which organize wholly-owned subsidiary law firms must designate the affiliation with the other law firm in each of the two law firms' letterheads and advertisements. Failure to disclose the affiliation in all forms of advertising and on letterhead shall be considered misleading with regard to the true character of the relationship between the two. This can be considered a violation of Rule 7.1(a). Furthermore, attorneys are reminded that the respective advertisements for each law firm shall include the name of at least one lawyer responsible for its content in compliance with Rule 7.2(d) of the Rules of Professional Conduct. The Lawyer Disciplinary Board's position that all advertisements for law firms and their wholly-owned subsidiary law firms shall disclose their affiliation with each other is also supported by Rule 7.5(a) which provides, in pertinent part, that a lawyer shall not use a firm name, letterhead, or other professional designation that violates Rule 7.1.

Finally, the Lawyer Disciplinary Board advises that law firms which decide to embark upon organizing subsidiary law firms must keep in mind that they are required to comply with the conflict rules outlined in the Rules of Professional Conduct, particularly Rule 1.10. Rule 1.10(a) provides that "[w]hile lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7, 1.8(c), 1.9 or 2.2." The Comment Section to Rule 1.10 states, in part, that ". . ., if [two or more lawyers] present themselves to the public in a way of suggesting that they are a firm or conduct themselves as a firm, they shall be regarded as a firm for purposes of the Rules." Because the Lawyer Disciplinary Board has stated that law firms and their subsidiaries shall indicate their affiliations on their letterheads and advertisements, the Board believes that the imputed disqualification rules are applicable to this situation. Therefore, the Board advises that law firms and their subsidiaries should have in place the means to run a "global" conflicts check between the law firm and the subsidiary and to refrain from accepting representation where a conflict exists. While the Board believes a "global" conflict check is necessary under the Rules, this requirement does not prohibit the law firm and the subsidiary law firm from each maintaining their own books, bank and trust accounts as long as all other requirements under the Rules of Professional Conduct are met.

Conclusion

Few guidelines exist to define the parameters of wholly-owned subsidiary law firms for compliance with the Rules of Professional Conduct. The Lawyer Disciplinary Board finds that the Rules of Professional Conduct will accommodate the formation of wholly-owned subsidiaries. Nonetheless, we caution lawyers that, in order not to deceive clients and the public, full disclosure of the relationship between the two firms is essential.

APPROVED by the Lawyer Disciplinary Board on the 5th day of June, 2009, and ENTERED this ___ day of June, 2009.

David A. Jividen, Chairperson
Lawyer Disciplinary Board

[1] The Lawyer Disciplinary Board merely answers this question with regard to whether this arrangement is permitted under the Rules of Professional Conduct. The Lawyer Disciplinary Board does not make any comment with regard to whether the arrangement may be permitted under applicable West Virginia statutes governing limited liability companies or registered limited liability partnerships. The Lawyer Disciplinary Board also does not address what effect these arrangements may have on malpractice liability but does point out that Rule 5.7(b) provides that "[n]othing in this rule or the laws under which a lawyer or law firm is organized shall relieve a lawyer from personal liability for the acts, errors, and omissions of such lawyer arising out of the performance of professional legal services."