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When Hal Walker finally found a video deposition service company that fit his needs as a busy Texas litigator, he did more than become a loyal customer. He bought the company. Along with partner Martin Rose at Dallas’ Rose Walker, the two attorneys decided in 2000 to embrace the risky prospects of an ancillary business to form Exhibit A Legal Services. In 2003, they broadened their ancillary strategy and bought a litigation support software company in Lake Tahoe, Calif. “Initially, we were our own primary customer,” Walker said, adding that now the businesses have “found their own following” and have other law firms as customers. Like Rose Walker, many law firms see ancillary businesses as a way to supplement their practices and bring more services to clients. At a time when law firms are consolidating in record numbers to service an array of client needs, many firms view ancillary practices as another way not only to draw business from their own client pool but also to tap into a competitor’s. From investment management and information technology offshoots to insurance and human resources spinoffs, ancillary endeavors remain popular among law firms across the country looking to expand their reach. But these businesses can be chancy undertakings that require a keen awareness of the competition and business management acumen, say experts, who warn that a top-notch lawyer does not an entrepreneur make. Throwing off the jitters Despite some jitters among law firms about ancillary businesses in the wake of the accounting firm scandals, in which those firms mixed auditing and consulting services to their ultimate detriment, law firms remain committed to ancillary businesses and continue to look for new opportunities, said Harvard Law School Professor David Wilkins. As head of the school’s Program on Lawyers and the Professional Services Industry, Wilkins said that ancillaries have become more popular among law firms recently, and, in some cases, bring in more money than their law practices. “[Ancillary businesses] are a way for them to diversify their practices and to escape the tyranny of the billable hour,” Wilkins said. Distinct from multidisciplinary practices, which are prohibited by American Bar Association (ABA) ethics rules, ancillary businesses are ones in which a law firm owns all or part of a separate operation. By contrast, multidisciplinary practices, rejected by the ABA in 2000, are arrangements in which lawyers and nonlawyers share an equity interest in a firm that provides both legal and nonlegal services. Whether it is an investment management company in Boston, a lobbying firm in Washington or a technology support outfit in San Francisco, ancillary businesses operate as separate endeavors and generally are managed by nonlawyer professionals. Exactly how many law firms have ancillary businesses is unclear. A 2003 informal survey by Hildebrandt International, a law firm consultancy, found that 95 of the country’s top law firms were operating some 140 ancillary businesses. Hildebrandt consultant James Jones said he receives about one call each month from law firms wanting more information about ancillary businesses. Harvard’s Wilkins maintains that their popularity “exploded” at the same time that the ABA issued its prohibition against multidisciplinary practices. He said that they continue to grow steadily in popularity. But law firms may hesitate to publicize their ancillary businesses, Wilkins said, which is part of what makes it difficult to track their numbers. A typically conservative group, lawyers may not be entirely comfortable with their role as owners of other operations. “[Ancillary businesses] have kind of a funny status now” he said, adding that law firms tend to be “a little secretive” about them. Law firms that have lobbying ancillaries, which include several in the Washington area, often do not advertise their ancillary operation, said Hildebrandt’s Jones. Further, firms that own technology or litigation support companies may not publicize their interest in those businesses, especially if other law firms are their clients, Jones said. He also said that a law firm needs to disclose its ownership status of an ancillary before it takes on a client. One firm, however, that is vocal about its ancillary businesses is Philadelphia’s Duane Morris. Last month, the firm announced the creation of its ninth such endeavor, Implant Purchase Solutions. The company will handle the administrative tasks associated with hospitals’ finance and purchase of medical devices. Duane Morris’ other ancillary businesses include a physicians insurance company, a lobbying and government relations company and a complex litigation research and analysis firm. Unlike many law firms whose ancillary strategies are designed to enhance the services they bring to their existing clients, most of Duane Morris’ ancillaries have a connection with its clients that is “serendipitous,” said Sheldon Bonovitz, chairman of the firm. “We practice law. We don’t want to get sidetracked,” said Bonovitz. Even so, with nine companies employing about 65 people, the firm’s ancillaries are expected to bring in $30 million in revenue this year and $7.6 million in net income, he said. But not all of its ventures have been golden. The firm was not successful with an ancillary it launched several years ago. Its focus was assisting clients in registering as corporations in Delaware, said Bonovitz, who said the company no longer exists. In addition, San Francisco’s Littler Mendelson has seen healthy growth of its ancillary Employment Law Technologies. But a few years ago, the firm has considered maintaining another ancillary, Legal Learning Group (LLG), but those plans did not develop. LLG now functions as part of the services it offers from the firm’s labor practice. Unlike most of the ancillaries at Duane Morris, those at Littler Mendelson are developed to provide nonlawyer services, which are an extension of the firm’s practice, to its existing clients or to woo clients by offering the added services. Mrkonich said that for his firm, it is essential for the ancillaries to complement the firm’s core practice areas. “Those businesses that are truly stand-alone and are not tied to the expertise and reputation of a law firm face a much more competitive environment,” he said. Underestimating the extent and know-how of the competition is a common mistake for firms considering ancillary expansion, Wilkins said. Lawyers may be skilled at negotiating a contract or arguing before a jury, but launching a nonlegal business often is not part of their skill set. He predicts many ancillaries will fail. “There’s going to be shakeout,” he said. On the other hand, he said that firms that take risks and survive can make a bundle, and may get to a point where they can sell off the business for a tidy sum. A delicate balance Like Littler Mendelson, many firms use ancillary businesses to directly augment their firms. But maintaining an ancillary’s tie with the firm and simultaneously safeguarding the firm’s separation from it, as required by the ABA, is a balance. Under the ABA Model Rules of Professional Conduct, lawyers may provide law-related services through ancillary businesses as long as they explain to clients or potential clients that the ancillary services do not involve an attorney-client relationship. And if the ancillary business is located within the law firm’s offices, lawyers must ensure that the business’s nonlawyer employees are not providing legal services. In addition, lawyers must be attuned to potential conflicts created by providing ancillary services to a legal client’s competitor. While some of these situations may not create conflicts of interest per se, they may create business conflicts, Jones warned. The issue of conflicts can become particularly thorny when firms merge. When Washington-based Wilmer, Cutler & Pickering merged with Boston-based Hale and Dorr last year, the firms had to comb through Hale and Dorr’s ancillary, Hale and Dorr Capital Management, to make sure the merger did not spark conflicts, explained John Westcott, assistant managing partner of Wilmer Cutler Pickering Hale and Dorr. In the end, no conflicts turned up, he said. Besides the conflicts issue, the value of the business is also piece of the merger picture, Westcott said. “It’s part of the overall analysis that each firm makes about the strength of practices of the other firm,” he said. To create the necessary separation, law firms use a number of ways to set up their businesses. At Duane Morris, for example, the firm owns 100% of a holding company that has ownership interests in its ancillaries. Executives within the companies also own part of the ancillaries. Back in Dallas, 13-attorney Rose Walker and its subsidiaries have a different setup. There, the two name partners individually own the businesses, Walker explained. He said that other partners have an opportunity to acquire an interest, and that management of the ancillaries is handled by the ancillaries’ own executives. “We’ve chosen to stay out of it,” Walker said. “What we do best is practice law.”

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