Wolfram & Hart and…Legal Ethics?

The inspiration for this month’s column comes from a question from Arthur, who writes:

On Joss Whedon’s show Angel, the law firm Wolfram and Hart hire Angel as CEO. As far as I know, if you incorporate a law firm, it can only be owned by lawyers. Does any rule like this apply to officer positions as well? Would there be any legal ramifications of having Angel as their CEO without any business or legal experience?

There are a few different issues here.  First, can a law firm have a CEO?  Second, can a non-lawyer be the CEO of a law firm?

I. Law Firms and Business Organization

Traditionally law firms operated as partnerships between lawyers.  That approach works okay for a small number of lawyers working as more-or-less equals, but as law firms grew and became more complex, new forms of business organization were required.  Two common forms used today are the limited liability partnership (LLP) and the professional corporation (PC).  Often both are only available to groups of professionals such as lawyers, doctors, accountants, etc (i.e. professions that carry the risk of malpractice).

In general, an LLP shields the partners from personal liability from contract and tort claims brought against the partnership as a whole.  This is very attractive for law firms, since a malpractice claim brought against the firm won’t bankrupt partners that didn’t have anything to do with the alleged malpractice.  An LLP is still a kind of partnership, however, and while it may have a managing partner or executive partner, it is unlikely to have a CEO (although theoretically the executive partner could have Chief Executive Officer as a title).  So Wolfram & Hart is probably not an LLP.

A professional corporation is like a regular corporation in many ways, but it does not have quite the same limitations on liability that a corporation or limited liability corporation does.  In particular, the owners of a professional corporation are still liable for their own personal malpractice, although they are not liable for the malpractice of others.  In this way it is similar to an LLP.  As a kind of corporation, PCs have directors and officers, including potentially a CEO.  And California recognizes professional corporations, which is good, since Angel becomes the CEO of Wolfram & Hart’s Los Angeles branch.

II. Non-Lawyer CEOs

Now we come to the tricky part.  Most states have ethical rules that make it difficult or impossible for non-lawyers and lawyers to go into business together, particularly if a non-lawyer is meant to manage lawyers.  ABA Model Rule 5.4(d) is the most directly on-point:

(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 occupies the position of similar responsibility in any form of association other than a corporation ; or

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

It’s possible that Angel could be paid an ordinary salary (profit-sharing with non-lawyers is another no-no under 5.4(a)) and not have an ownership stake in the firm.  That would take care of subsection (1).  And it’s possible that procedures could be put in place such that he would not have the right to direct or control the professional judgment of Wolfram & Hart’s lawyers.  For example, his role could be limited to managing marketing, non-lawyer human resources, information technology, investments by the firm, etc, with no control over how the firm handles cases.  That could possibly take care of (3).  But (2) is a killer.  It strictly forbids a non-lawyer from being a corporate director or officer (in a professional corporation) or having a similar position (in a non-corporation).  The CEO is such a position.

But, all is not lost.  These are only the model rules.  What matters is California’s own rules.  And as it turns out, California doesn’t have an equivalent of Model Rule 5.4(d).  There is California Rule 1-310, which states that “A member shall not form a partnership with a person who is not a lawyer if any of the activities of that partnership consist of the practice of law.”  But Angel isn’t forming a partnership with the lawyers of Wolfram & Hart.  ”A partnership generally involves a joint ownership and can be evidenced by firm name, declarations of coownership, or sharing of profits.”  Los Angeles County Bar Association Ethics Opinion No. 518 (citing Crawford v. State Bar, 54 Cal. 2d 659, 667 (1960)).  As long as Angel does not share profits with the firm (i.e. is paid a fixed salary) or have any ownership interest in it, then it doesn’t appear to be a partnership.

While I couldn’t find any examples of California firms with non-lawyer CEOs, there is precedent in Pennsylvania.  Pepper Hamilton, a large law firm based in Philadelphia, made headlines earlier this year with the announcement that it was hiring a non-lawyer as its CEO.  Interestingly, Pepper Hamilton is an LLP, so the CEO is a management position but (I assume) not actually an officer of the company in the technical sense.  In any case, Pepper Hamilton apparently does not regard the position of CEO to occupy a similar responsibility as a corporate director or officer of a corporation.

III. Conclusion

True to form, Wolfram & Hart seems to be on slightly ethically shaky but technically legal grounds.  Although I don’t think this arrangement would work in many other states, it’s possible that it would work in California.  If I were Wolfram & Hart I would probably ask the State Bar of California for an advisory opinion before I hired Angel, though.