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The proliferation of law firm ancillary businesses, as described in our Feb. 24 articles [" Ancillary Business Advice," Page 36; " An Annotated History," Page 37], suggests that many firms are actively considering the use of law-related subsidiaries or affiliated companies as one means of achieving their strategic objectives. Before launching such a venture, however, firms should pay particular attention to marketing issues and ethical considerations. Marketing has many roles to play in the formation of an ancillary business. At the outset, a marketing analysis is helpful to determine the viability of the contemplated business. This analysis should obviously look at external factors, such as the range and availability of prospective clients, the proposed service offerings, geographic range, pricing, promotion, tie-in with the law firm’s marketing goals and objectives, and competition. But an internal analysis is warranted as well, to determine the marketing resources that will be needed (whether supplied by the law firm itself or an outside firm) including staff, tools, systems, budgets, knowledge management, technology, sales programs, etc. As soon as discussions begin about possibly launching a new business, the law firm needs to decide who will handle the marketing aspects of the ancillary business. If the firm decides that its existing marketing department or marketing manager will be responsible for this new endeavor, then consideration must be given to how the firm’s marketing program will be affected by this drain on its resources. (For example, is the firm willing to hire additional personnel?) If, on the other hand, the firm chooses to outsource the marketing function or to hire someone dedicated to the ancillary business, then care must be taken to ensure close coordination between the marketing functions of the ancillary business and those of the firm. Next, it is best to create a comprehensive marketing plan that (1) sets goals, tactical and implementation steps, time lines, and budgets, and (2) assigns tasks and overall responsibilities to specific individuals. The plan should take into consideration the short- and long-range goals of both the law firm and the ancillary business so as to make the best use of resources and leverage opportunities. A well-crafted plan for an ancillary business should set out specific actions for each major area of marketing: promotions and communications, business development and sales, client service and feedback, and marketing administration. PREPARE FOR QUESTIONS Before the firm lifts the “veil of secrecy” and informs the world of its new venture, marketing personnel should prepare statements for responding to media, client, and staff inquiries — and all employees and lawyers should be reminded of the firm’s media policies, especially concerning who is permitted to serve as an official spokesperson. By the time the business is launched, all collateral and marketing materials should also be ready to go, including brochures, sales materials, Web site(s), press releases, target prospect dossiers and lists, media lists, and biographies of key personnel. Finally, marketing also has an important role in making the ancillary business successful by: • Maintaining media coverage; • Working with outside agencies and/or staff hired by the ancillary; • Communicating successes; • Monitoring disclaimers and engagement language; • Sustaining cross-selling of services; • Taking the pulse of clients; and • Gaining market advantage. The promotion of an ancillary business, as well as the day-to-day operations of the business, raise interesting ethical questions. ETHICAL CONSIDERATIONS Although all U.S. jurisdictions permit law firms to own and operate ancillary businesses, the governing rules vary from state to state. Over the past 20 years, a great deal of debate has centered around (1) how lawyers engaged in ancillary businesses can fulfill their ethical obligations to existing law firm clients, (2) whether lawyers providing ancillary services have special ethical obligations to clients of the ancillary businesses who are not law firm clients, and (3) whether lawyers operating ancillary businesses have special ethical obligations to preserve the integrity of the legal profession. These questions were greatly clarified with the American Bar Association’s adoption of Rule 5.7 of the Model Rules of Professional Conduct in 1994. That rule specifically addresses the question of the extent to which the Model Rules apply to ancillary businesses operated by lawyers or law firms, providing a “safe harbor” in cases where (1) the nonlegal services offered are “distinct” from legal services, and (2) where appropriate disclosures are made to nonlegal clients. The required disclosures include an explicit statement that the ancillary services being offered are not “legal services” and that the protections of the client-lawyer relationship do not exist in respect of them. Model Rule 5.7 has been adopted in nine jurisdictions around the country (Indiana, Maine, Massachusetts, New York, North Dakota, Oklahoma, Pennsylvania, Vermont, and the Virgin Islands). Even in those states that have not yet adopted it, however, Rule 5.7 serves as a useful guide to what is permitted and prohibited. Nonetheless, law firms considering establishing or affiliating with ancillary businesses should carefully review the ethical requirements in every jurisdiction in which the firm or the proposed businesses will be operating. In some cases, it might also be advisable to seek advice from state bar committees on ethics or discipline. BASIC PRINCIPLES Generally speaking — and again, subject to the caveat that local rules may differ — law firms operating ancillary businesses should adhere to the following basic principles to ensure compliance with ethical requirements in most jurisdictions. First, keep the ancillary services that are offered “distinct.” Preferably, this means that ancillary services should be offered through a separate entity — a corporation or partnership or limited liability company that is separate and apart from the law firm itself. If such services are offered through the law firm, care should be taken that clients of the ancillary business are not confused about the nature of the services they are receiving. Second, make full disclosure of the law firm’s interests in, or relationship to, the ancillary business to all clients and potential clients of the ancillary business. Such disclosure should be made in all marketing and promotional materials used by the ancillary business, as well as in all advertising, all presentations and proposals, and all retainer agreements or contracts for services. Third, give written warning that no client-lawyer relationship exists between the ancillary business and its clients. This warning should be given to all clients and potential clients of the ancillary business, and explicitly set out in all retainer agreements or contracts for services. Fourth, in respect of each client of the law firm that retains or considers retaining the services of the ancillary business, provide full written disclosure of the interests of the law firm in the ancillary business, advise the client of the desirability of seeking the advice of independent counsel regarding the use of the law firm’s ancillary business, and obtain the written consent of the client to the terms of the work to be provided and an acknowledgement of the law firm’s interest in the ancillary business. These disclosures and consents should be included in all retainer agreements or contracts for services. Fifth, avoid any tying arrangements or exclusive referral agreements between the law firm and the ancillary business. Make clear to all clients and potential clients of the ancillary business that using the services of the law firm is not required in order to use the services of the ancillary business, and vice versa. Include these representations in all retainer agreements or contracts for services. And finally, check local rules of practice for other potential requirements, specifically rules that may apply to advertising, solicitation, and other issues. Advertising and solicitation rules vary considerably. Ancillary businesses can provide significant benefits to law firms, but only if they are strategically sound and carefully structured. Above all, the business should be one that’s consistent with the firm’s own strategic plan and vision. Second, it must be structured and operated in compliance with the governing ethical rules. And third, every ancillary business must be marketed effectively. Many firms have creatively combined these elements to enhance and support their core business strategies. James W. Jones is a director of Hildebrandt International and a former managing partner of D.C.’s Arnold & Porter. Terri Pepper Gavulic is Hildebrandt’s marketing director and senior marketing consultant.

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