FTC Staff Comment Before the Supreme Court of North Dakota Concerning Proposed Rules of Professional Conduct on Lawyer-Non-Lawyer Business Associations and Lawyer Advertising and Solicitation

.; ... 	.. ,.1
.
UNrnD STATES OF AMERICA
FEDERAL TRADE COMMISSION
CLlV!UND RlGIONAL omcz
.......". 	......" 	CIIlIr .........
~0Me.."4
(2'" IDo4II1
February 	27, 	1987
The 	Honorable 	Ralph J. 	Erickstad
Chief Justice
Supreme Court 	of 	North 	Dakota
state 	Capitol
Bismarck, 	North 	Dakota 	58505
Dear Chiet Justice 	Erickstad:
The 	Federal 	Trade 	Commission 	statf 	is 	pleased 	to 	comment 	on
the 	proposed Rules 	ot·· Professional 	Conduct 	recommended 	to 	the 	court
for 	review by 	the 	state 	Bar Association 	of 	North 	Dakota. l 	Our
comments 	are 	limited 	to 	proposed 	Rule 	5.4, 	which 	concerns 	business
associations 	between 	lawyers 	and 	nonlawyers, 	and 	proposed Rule 	7.1,
which 	governs 	advertising and 	solicitation. 	We 	believe 	that 	these
proposed 	rules 	wi+l 	benefit 	consumers 	by 	removing 	unnecessary
restrictions 	on 	the 	business 	practices 	of 	attorneys. 	With 	the 	very
limited 	exceptions 	noted 	below; 	we 	urge 	the 	Court 	to 	adopt 	these
rules. 	.
INTEREST 	AND 	EXPERIENCE 	OF THE 	FEDERAL TRADE 	COMMISSION
The 	Federal 	Trade 	Commission 	is 	empowered under 	15 U.S.C. 	§ 	41
~ ~. 	to 	prevent 	unfair 	or 	deceptive 	acts 	or practices 	in 	or
affecting 	commerce. 	Under 	its 	statutory mandate, 	the 	Commission
enqourages 	competition 	among 	members 	of 	licensed 	professions 	to 	the
maximum 	extent 	compatible with 	other 	legitimate 	state 	and 	federal
goals. 	For 	several 	years, 	the 	Commission has 	had 	an 	ongoing
program examining 	the 	competitive 	effects 	ot 	public 	and 	private
1. 	These 	comments 	represent 	the 	views 	ot 	the 	Cleveland 	Regional
Office 	and 	the 	Bureaus 	of 	Consumer 	Protection, 	Economics, 	and
Competition 	of 	the 	Federal 	Trade 	Commission 	and 	do 	not
necessarily 	represent 	the 	views 	of 	the 	Commission 	itself 	or 	of
any 	individual 	~ommissioner. 	The 	Commission has, 	however,
voted 	to 	author~ze the 	staff 	to 	submit 	these 	comments.

,_.- _.--~---~-__'"-._---,-~_..~~ - _.~~._.~.-,- -' ~~~~-_.__.. ,--~-_.- _._ 	- ~-_ __.. - -~- ._ ..~ ~----_._ .
\-,	..
The 	Honorable 	Ralph J. 	Erickstad 	Page 	2.
restrictions 	on 	the 	business 	practices 	ot 	dentists, 	optometrists,
lawyers, 	physicians, 	and 	other 	state-licensed professionals. 	Our
goal 	i. 	to 	identify 	and 	seek the 	removal 	of 	restrictions 	tha~
impede 	competition 	or 	increase 	costs without 	providing
countervailing benefits 	to 	consumers.
As 	part 	of 	the 	Commission's 	etforts 	to 	foster 	competition
among 	licensed professionals, 	it has 	examined the 	effects 	of 	pUblic
and 	private 	restrictions 	that 	limit 	the 	ability 	of 	professionals 	to
engage 	in 	truthful, 	nondeceptive 	advertising 	and 	solicitation. 2
studies 	show 	that 	where 	truthful 	advertising 	by 	lawyers 	is
permitted, 	prices 	for 	legal 	services 	are 	lower 	than 	where
advertising 	is 	restricted. 3 	Empirical 	evidence 	indicates 	that
removing 	restrictions 	on 	lawyer advertising does 	not 	decrease 	the
quality 	of 	legal 	services 	available. 4 	The 	Commission has 	also
examined 	the 	effects 	of 	restrictions 	on 	business 	relationships
between professionals 	and 	non-professionals, 	and 	has 	found 	them 	to
be 	anti-competitive. 5 	As 	noted 	below, 	the 	evidence 	suggests 	that
such 	restrictions 	increase 	prices,' but 	do 	not 	affect 	the 	quality 	of
services 	provided.
For 	these 	reasons, 	we 	believe 	that 	re5trictions 	on
associations between 	lawyers 	and 	nonlawyers 	should 	be 	eliminated,
that 	only 	false 	and 	deceptive 	advertising 	by 	lawyers 	shOUld 	be
prohibited, 	and 	that 	in-person 	solicitation 	should 	be 	allowed
except 	in 	limited circumstances.
2/ 	~merican Medical 	Ass'o, 	94 	F.T.C. 	701 	(1979), 	~ff'd, 	638 	F.2d
443 	(2d Cir. 	1980), 	aft'd memo 	by 	an 	equally 	divided 	Court,
455 	U.S. 	676 	(1982).
3. 	Cleveland Regional 	Office 	and 	Bureau ot 	Economics, 	Federal
Trade 	Commission, 	Improving 	Consumer Access 	to 	Legal 	Services:
The 	Case 	for 	Removing 	Restrictions 	on Truthful 	Advertising
(1984) •
4. 	Muris 	and 	MCChesney, 	Advertising 	and 	the 	Price 	and 	Quality 	0t
Lggal 	Services: 	The 	Case 	for 	Legal 	Clinics, 	1979 	Am. 	B.
Found. 	Research J. 	179 	(1979).
5. 	American Medical 	Ass'n, 	supra 	n.1.

·.~
The Honorable 	Ralph 	J. 	Erickstad 	Page 	3.
RULE 	5.4
Proposed 	Rule 	5.4 	permits 	lawyers 	to 	Associate 	with 	nonla~er8
in 	providing 	legal 	services 	to 	consumers, 	except 	where 	prohibited
or 	restricted 	by 	law. 	We 	support 	the 	lifting 	of 	traditional
ethical 	limitations 	on 	the 	forms 	of 	business 	practice 	that 	lawyers
may 	adopt, 	and 	believe 	that 	RUle 	5.4 	will 	benefit 	consumers 	by
permitting 	potentially 	more 	efficient 	organization 	of 	professional
practice.
The 	Federal 	Trade 	Commission 	considered 	restrictions 	on
associations 	between 	professionals 	and 	non-professionals 	in
American Medical 	Association, 	94 	F.T.C. 	701 	(1979), 	afftd, 	638 	F.2d
443 	(2nd 	Cir. 	1980) 	atftd 	mem 	bv 	an 	equally 	divided 	Court, 	455 	U.S.
676 	(1982). 	In 	that 	case, 	the 	Commission 	found 	that 	AHA 	rules
prohibiting physicians 	from 	working 	on 	a 	salaried 	basis with
hospitals 	or 	other 	lay 	entities 	and 	from 	entering 	into 	partnerships
or 	similar 	arrangements 	with 	non-physicians 	unreasonably 	restrained
competition 	in 	violation 	of 	Section 	5 	of 	the 	Federal 	Trade
Commission Act. 	The 	commission 	concluded 	that 	such 	restrictions
prevented 	physicians 	from 	adopting 	business 	formats 	that 	might 	be
more 	economically 	efficient 	and 	precluded 	competition 	from
organizations 	not 	completely 	and 	directly 	under 	the 	control 	of
physicians. 	The 	Commission 	found 	no 	countervail!ng 	justifications
for'thesa 	restrictions.
Proponents 	ot 	restrictions 	on 	employment, 	partnership 	or 	other
business 	relationships 	between 	professionals 	and 	non-licensees 	have
often 	justified such 	restrictions 	as 	necessary 	to 	maintain 	a 	high
Level 	of 	quality 	in 	the 	professional 	services market. 	Some 	argue
that 	the 	profit motive 	of 	lay 	persons will 	lead 	to 	interference
with 	the 	independent 	exercise 	of 	professional 	judgment, 	causing 	a
decline 	in the 	quality 	of 	services 	rendered. 	Empirical 	evidence,
hdwever, 	suggests 	that 	restrictions 	on 	business 	relationships
between professionals 	and 	non-professionals 	do 	not 	improve 	the
quality 	of 	professional 	services, 	but 	do 	tend 	to 	increase 	prices. 6
6. 	Bureaus 	of 	Economics 	and 	Consumer Protection, 	Federal 	Trade
commission, 	A comparative Analysis 	of 	Cosmetic 	Lens 	Fitting 	by
ophthalmologists, 	optometrists, 	and 	Opticians 	(1983); 	Bureau
of 	Economics, 	Federal 	Trade 	Commission, 	Effects 	of
. Restrictions 	on 	Advertising 	and 	commercial 	Practice 	in 	the
professions: 	The 	Case 	of 	optometry 	(1980). 	The 	Presiding
Officer 	in 	the 	Federal 	Trade 	Commissionts 	Rulemaking
Pr~ceeding, 50 	Fed. 	Reg. 	598 	(1985), 	was 	critical 	of 	certain
aspects 	of 	these 	studies. 	Although 	he 	found 	that 	such
restrictions 	raise 	prices 	to 	consumers 	and 	limit 	access 	to
ophthalmic 	services, 	he 	did 	not 	believe 	that 	the 	evidence

, . 	, '.
The Honorable Ralph J. 	Erickstad 	Page 	4.
with 	regard 	to 	the 	legal 	profession, 	there may 	be 	a 	concern
that 	associations 	with 	non-protessionals 	will 	compromise 	the
confidentiality of 	the 	lawyer-client 	relationship. 	Proposed 	RUle
5.4 	adequately 	addresses 	legitimate 	concerns 	by 	reaftirming 	the
lawyer's 	professional 	responsibility 	to 	the 	client. 	Under 	the
rule, 	an 	association 	between 	a 	lawyer 	and 	a 	nonlawyer may 	not
interfere with 	the 	confidentiality 	of 	client communications, 	with
the 	lawyer's 	professional 	judgment, 	or with 	the 	lawyer-client
relationship. 	With 	these 	safeguards 	in 	place, 	an 	outright 	ban 	on
associations 	with 	nonlawyers 	is 	not 	necessary.
We 	are 	aware 	that 	certain 	provisions 	of 	North 	Dakota 	law 	~ay
still 	limit 	the 	extent 	to 	which 	lawyers 	may 	associate 	with 	non-
professionals and 	the 	business 	forms 	they may adopt. 	Therefore,
adoption of 	the 	rule 	would 	not 	lead 	to 	complete 	flexibility 	of
organizational 	forms. 	We 	believe, 	however, 	that 	proposed 	Rule 	5.4
may 	Ultimately 	benefit 	consumers 	by 	removing one 	barrier 	to 	the
development 	of potentially 	innovat~ve and 	efficient 	forms 	of 	legal
praotice.
RULE 	7.1
, 	Proposed Rule 	7.1 	differs 	in 	several 	respects 	from 	provisions
governing 	advertising 	and 	solicitation 	contained 	in 	the 	ABA 	Model
Rules 	of 	Professional 	conduct. 	We 	believe 	that 	Rule 	7.1 	represents
a 	significant 	step 	forward 	in 	permitting 	the· free 	flow 	of'truthful
information, 	while 	protecting 	consumers 	from 	deception 	and
overreaching.
I
cited 	in 	these 	studies 	providea 	an 	adequate 	basis 	for 	reaching
conclusions 	as 	to 	the 	quality 	of 	care 	issue. 	Federal 	Trade
Commission, 	Report 	of 	the 	Presiding 	Officer on 	Proposed 	Trade
Regulation RUle: 	Ophthalmic 	Practice Rules 	(1986). 	The 	staff
of 	the 	Bureau 	of 	Consumer 	protection 	has 	recently 	pUblished 	a
report 	analyzing 	the 	rulemaking 	record. 	They 	found 	that 	the
studies 	are 	valid 	and 	that 	they 	provide 	reliable 	evidence
concerning 	the 	effects 	of 	such 	restrictions. 	Bureau 	of
Consumer 	Protection, 	Federal 	Trade 	Commission, 	Ophthalmic
Practice Rules: 	state 	Restrictions 	on 	Commercial 	Practice
(1986). 	Both 	reports 	will 	be 	reviewed 	by 	the 	Commission 	soon.

•
The 	Honorable 	Ralph 	J. 	Erickstad
Ihe 	"False 	or Misleading" 	st4ndar~
Page 	5.
proposed Rule 	7.1(a) 	adopts 	a 	standard 	tor 	false 	or misleading
-lawyer 	communications. 	False 	or misleading 	communications 	are
defined 	in 	the 	subsections 	of 	the 	rule. 	Subsection 	(1) 	restates 	an
appropriate 	standard 	for 	determining 	what 	is 	misleading. 	Under
subsection 	(2) 	a 	communication 	is 	misleading 	if 	it 	contains 	"an
assertion 	that 	cannot 	be 	substantiated." 	We 	assume 	that 	this
provision 	is 	intended 	to 	prohibit 	only 	objective 	claims 	that 	lack 	a
reasonable 	basis 	and 	that 	are 	material 	to 	consumers. 	On 	its 	face,
however, 	this 	provision 	applies 	to 	all 	"assertions", 	whether 	or 	not
they 	are 	material.' 	As 	written, 	it may 	prohibit 	some 	truthful
statements 	and 	deter 	the 	use 	of 	attention-getting 	language, 	without
providing any 	countervailing benefit to 	consumers. 	We 	suggest 	that
subsection 	(2) 	be modified 	to 	require 	substantiation 	of 	material,
objective 	claims 	only, 	and 	that 	the 	comment 	to 	the 	rule 	indicate
that 	a-reasonable 	basis 	for 	making 	a 	claim 	constitutes
substantiation.
We 	tully 	endorse 	the 	application 	of 	a 	straightforward 	"raIse
or misleading" 	standard 	for 	all 	communications 	by 	lawyers. 	In
particular we 	ar~ 	pleased 	to 	see 	that, 	under 	proposed 	Rule 	7.1{a),
this 	standard 	will 	govern 	communications 	about 	fields 	of 	practice
and 	specialization, 	~hich are 	regulated 	under more 	~estrictive
proyis1ons 	in 	the 	ABA Model 	RUles-. 	Information 	that 	a 	l.3wyer has
limited his 	or 	her 	areas 	of 	practice, 	concentrates 	in 	particula~
fields, 	or 	specializes 	in certain matters 	is 	likely 	to 	be 	extremely
usetul 	to 	consumers. 	Such 	information 	may 	assist 	consumers 	in
locating 	lawyers 	who 	are 	experienced 	in 	particular 	areas 	of 	law 	or
who 	have 	expertise 	in 	particular matters 	or 	problems. 	We 	also 	note
that 	the 	comment 	to 	proposed Rule 	7.1 	specifically 	allows 	Client
endorsements 	and 	statements 	concerning 	damage 	awards 	and 	the
lawyer's 	record 	in 	obtaining 	favorable 	verdicts, 	which 	we 	fUlly
sl,lpport.
7. 	The 	Federal 	Trade 	Commission 	has 	defined 	materiality 	as
follows: 	"A 	'material' 	misrepresentation 	or 	practice 	is 	one
which 	is 	likely 	to 	affect 	a 	consumer's 	choice 	of or conduct
regarding 	a 	product. 	In 	other words, 	it 	is 	information 	that
is 	important 	to 	consumers." 	Letter 	from 	James 	C. 	Miller, III
Chairman, 	Federal 	Trade 	Commission, 	to 	the 	Honorable John 	D.'
Dingell, 	Chairman, 	committee 	on 	Energy 	and 	Commerce, 	U.S.
House 	of 	Representatives 	(October 	14, 	1983). 	~ 	~
Southwest 	SUDsites. 	Inc., 	105 	F.T.C. 	, 	(1985); 	Tnompsop
Medical 	co .. 	IncL, 	104 	F.T.C. 	660 	(1984).

.!
The 	Honorable 	Ralph J. 	Erickstad 	Paqe 	6.
Qirect 	Mail
If 	adopted, 	Rule 	7.1 	would 	allow 	the 	mailing 	of 	truthful~
nondeceptlve 	letters 	to 	persons 	known 	to 	need 	legal 	services. 	We
fully 	endorse 	this 	proposal. 	Targeted direct mailings 	can 	provide
important 	information 	to 	those 	persons who 	are 	most 	likely 	to 	need
legal 	services 	and 	to 	benefit 	from 	information 	about 	what 	services
are 	available. 	Further, 	by 	targeting 	mailings, 	lawyers 	are 	able 	to
supply 	information 	to 	prospective 	clients 	in 	an 	efficient 	manner.
Lawyers 	can 	focus 	such mailings 	to 	provide 	specific 	information 	on
a 	particular 	type 	of 	legal 	problem 	or 	area 	of 	law 	and 	send 	them
only 	to 	those 	consumers who may 	have 	a 	need 	for 	such 	information.
The 	comment 	to 	Rule 	7.1 	suggests 	that 	targeted 	mailings 	may 	be
regulated 	in 	the 	future 	under 	the 	more 	restrictive 	standards
applied 	to 	in-person 	contact, 	should 	application 	of 	those 	standards
to 	sucb mailings 	be 	found 	constitutionally permissible. 	We 	would
recommend 	against 	such 	a 	change 	in 	Rule 	7.1. 	Unlike 	in-person
contact with 	prospective 	clients, 	targeted 	mailings 	do 	not 	involve
the 	possible 	dangers 	of 	overreaching 	or undue 	influence. 	Consumers
may 	read 	materials 	received 	in 	the mail 	thoroughly 	or 	simply 	choose
to 	throw 	them 	aw~y. 	Further, 	mailings 	do 	not 	require 	an 	immediate
response. 	Consumers 	can 	re-read 	them 	and 	co~sider their 	contents
carefully beto~e deciding 	whether 	to 	contact 	the 	attorney.
The~efore,_we believe 	that 	targeted 	written 	communications 	shoUld
be 	governed 	by 	the 	same 	false 	and 	misleading 	standard 	applied 	to
other 	torms 	of 	advertising.
In-person 	Contacts
t 	Proposed Rule 	7.1(b) 	eliminates 	the 	existing 	broad
prohibitions 	on 	in-person communications 	with prospective 	Clients.
We 	strongly 	support 	this 	relaxation 	ot 	traditional 	bans 	on 	in-
person 	solicitation. 	Like 	advertising, 	in-person 	solicitation 	can
convey 	useful 	information 	about 	lawyers 	and 	the 	services 	they
provide. 	In most 	situations, 	in-person 	contacts 	with 	prospective
clients 	are 	unlikely 	to 	result 	in 	consumer 	harm. 	However, 	in-
person 	solicitation may 	lead 	to 	abuse 	under 	certain 	circumstances.
People who 	are 	injured 	or emotionally 	distressed 	may 	be 	vulnerable
to 	the 	exercise 	of 	undue 	influence 	when 	face 	to 	face 	with 	an
attorney, 	as 	noted 	by 	the 	Supreme 	Court 	in 	Ohralik y. 	Ohio 	State
ear Association, 	436 	U.S. 	447, 	465 	(1978).

J
Th- 	Honorable 	Ralph 	J. 	Erickstad 	Page 	7.
The 	Federal 	Trade 	Commission 	considered 	the 	concerns 	that
underlie 	the 	Qhral1k 	opinion 	in 	American 	Medical 	Association, 	94
FTC 	701 	(1979), 	aff'd, 	638 	F.2d 	443 	(2nd 	cir. 	1980), 	aft'd 	memo 	Qy
an 	equally 	divided 	court, 	455 	U.s. 	676 	(1982). 	Afte~ weighing 	the
possible 	harms 	and 	benefits 	to 	consumers, 	the 	FTc 	ordered 	the 'AHA 	-
to 	cease 	and 	desist 	from 	banning 	solicitation, 	but 	permitted 	the
AHA 	to 	proscribe 	uninvited, 	in-person 	solicitation 	of 	persons who,
because 	of 	their 	particular 	circumstances, 	are 	vulnerable 	to 	undue
influencG.
We 	believe 	proposed 	Rule 	7.1(b) (3) 	identifies 	the 	potential
abuses 	that 	may 	arise 	from 	in-person 	contacts 	and 	establishes 	an
appropriate 	standard 	for 	such 	solicitation. 	That 	rule 	prohibits
such 	contacts 	where 	the 	physical 	or 	mental 	state 	of 	the 	potential
client 	is 	likely 	to 	impair 	the 	exercise 	of 	the 	client's 	jUdgment 	as
to 	the 	selection 	of 	legal 	counsel.
The 	additional 	restrictions 	on 	in-person 	50licitation
contained 	in 	proposed 	Rule 	7.1(b) -and 	7.1(C) 	appear 	to 	be
reasonable. 	We 	note 	that 	proposed 	Rule 	7.1(b)(2) 	prohibit~ in-
person 	contact 	that 	involves 	the 	use 	of 	"undue 	influence, 	coercion,
duress, 	compulsion, 	intimidation, 	threat, 	or vexatious 	or 	harassing
conduct." 	We 	believe 	that 	potential 	abuses 	are 	adequately
addressed 	by 	proposed 	Rules 	7.1(b) (3) 	and 	7.1(c). 	~eparately and
specifically 	prohibiting 	solicitation 	that 	involves 	coercion,
harassment 	and 	the 	like 	may 	be 	appropriate, 	depending 	upon 	the
interpretation 	of 	these 	terms. 	Licensing 	boards 	and 	private
associations 	in 	other 	professions, 	however, 	have 	sometimes
interpreted 	such 	terms 	broadly 	to 	ban 	solicitation 	under
circumstances 	that 	pose 	no danger 	of 	harm 	to 	consumers. 	So 	long 	as
these 	terms 	are 	interpreted 	fairly 	and 	objectively, 	proposed Rule
7.1(b) (2) 	and proposed 	Rule 	7.1(d), 	which 	employs 	the 	same 	language
with 	respect 	to 	organizations 	that 	furnish 	or 	pay 	for 	legal
services, 	will 	adequately 	protect 	consumers, 	while 	allowing 	them 	to
receive 	truthtul 	information.
In-person 	contacts 	with 	prospective 	clients 	by 	paid
representatives 	of 	the 	lawyer 	are 	permissible 	under 	proposed 	RUle
7.1. 	We 	support 	this 	approach 	and 	believe 	that 	lifting 	traditional
bans 	on compensating 	persons 	that 	recommend 	the 	lawyer's 	services
may 	provide 	an 	efficient 	means 	ot 	reaching 	consumers 	and 	prOViding
them with 	usefUl 	information. 	For 	instance, 	under 	this 	provision,
lawyers 	could 	participate 	in 	for-profit 	lawyer 	reterral 	services
that 	direct 	consumers 	to 	lawyers 	who 	are 	located 	close 	by 	and 	who
provide 	the 	partiCUlar 	services 	that 	the 	consumers 	need. 	Because
solicitation 	by 	representatives 	is 	governed 	by 	the 	same 	standards
applied 	to 	the 	lawyer's 	own 	conduct, 	little 	risk 	of 	abuse 	is 	posed.

·.~
" \
	. ,
'.
The Honorable 	Ralph J. 	Erickstad
~9NCLUSIQN
Page 	8.
We 	believe 	the 	proposed 	rules 	will 	benetit 	both competition
- 	and 	consumer welfare 	by 	lifting 	ethlca~ r~strictions on
associations 	with 	nonlawyers 	and 	by 	removing 	many 	unnecessary
restrictions 	on 	the 	dissemination 	of 	truthful, 	nondeceptive
information 	by 	lawyers. 	We 	urge 	the 	Court 	to 	adopt 	proposed 	Rule
5.4. 	We 	strongly 	endorse 	the 	overall 	regulatory 	scheme 	outlined 	in
Rule 	7.1, 	and 	support 	its 	adoption 	with 	the 	very 	limited 	exceptions
we have 	addressed 	in 	our 	comments.
si~58rely, 	~,.::
'// 	""u/ 	//'
'if~//;;~~££J;'L
// John 	H. 	Mendenhall
/ 	Acting 	~egional Director
TilTClI 	0 	,10