Out-of-state clients: an ethical minefield

By J. Randolph Evans, Shari L. Klevens and Suzanne Y. Badawi

As the practice of law has become more globalized, attorneys increasingly serve clients from around the U.S. and the world. This is especially true in areas like patents, tax law, mergers and acquisitions, bankruptcy law and admiralty law.

With the help of technology, risks once limited to the largest firms now reach virtually every firm. These include potential unauthorized practice of law, exposure to inconsistent ethics rules, and legal malpractice exposure under the tort and contract laws of multiple states.

Absent an office with licensed attorneys, if a law firm advises in a general consulting capacity to multijurisdictional clients or regarding federal or international law, then it may be engaging in the unauthorized practice of law, or worse yet, be sued in a state - or other foreign jurisdiction - where no employee of the law firm has ever set foot.

It happened earlier this year in Arizona. The Supreme Court of Arizona, in Beverage v. Pullman & Comley LLC, 234 Ariz. 1, 316 P.3d 590 (2014), affirmed a lower court decision finding that attorneys who worked for a law firm that had no offices in Arizona and employed no attorneys licensed in Arizona could be sued in Arizona state court. The court held that a Connecticut attorney and law firm retained by Arizona residents to provide a tax-shelter transaction opinion letter were subject to the specific jurisdiction of Arizona courts.

How? The court said the lawyer and law firm had "sought Arizona-specific information" and "used these pieces of Arizona-based information to craft an opinion letter." Even though these contacts did not relate to Arizona specifically, they were "Arizona-client-specific contacts."

Similarly, a California law firm was exposed to a legal malpractice lawsuit in New York even though the firm only had offices in California and represented the client in a California lawsuit. In Sands Bros. Venture Capital LLC v Burris, Schoenberg & Walden LLP, 2010 NY Slip Op. 51619(U) (2010), the New York court held that its long-arm statute extended to the California lawyers because the lawyers met with the client and developed the attorney-client relationship in New York. But in that case, the court also held that the arbitration clause in the fee agreement dictated that the arbitration of the malpractice claim take place in California.

California also has extended its long arm to out-of-state attorneys even if they don't have offices in the state. Business and Professions Code Section 6125 prohibits the unauthorized practice of law in California. In Birbrower, Montalbano, Condon & Frank v. Superior Court, 17 Cal. 4th 119, 127 (1998), the California Supreme Court explained that "the practice of law in California entails sufficient contact with the California client to render the nature of the legal service a clear legal representation" which does not necessarily require the unlicensed lawyer's physical presence in the state. "Physical presence here is one factor we may consider ... but it is by no means exclusive. For example, one may practice law in the state in violation of section 6125 ... by advising a California client on California law in connection with a California legal dispute by telephone, fax, computer, or other modern technological means."

In Birbrower, two New York attorneys with an office only in New York contracted with a client in California to provide legal services in a dispute over a contract governed by California law. The attorneys traveled to California where they met with their client and provided legal advice. The California Supreme Court held that the attorneys were not entitled to fees for the work performed in California because that work violated Section 6125, although the court permitted recovery of fees for services performed in New York.

A Massachusetts appellate court has held that specific jurisdiction over an out-of-state corporation that managed hedge funds in a professional negligence matter would not violate due process in Cannonball Fund Ltd. v. Dutchess Capital Mgmt. LLC, 84 Mass. App. Ct. 75 (2013). The court concluded that the corporation purposefully availed itself of the privilege of conducting business in the commonwealth by overseeing funds based in Massachusetts, acquiring data from those funds, and having an ongoing relationship with those funds. In addition, the court concluded that the corporation reasonably could have foreseen that significant management decisions would be made in the state, subjecting it to specific personal jurisdiction.

Several states have similar tests. Florida courts look at whether a tortious act was committed in the state or a tortious act arising out of an act or omission occurring outside the state causing injury to a person or property inside the state. If established, due process is assessed. The

Supreme Court of Mississippi has held that a single act targeted at that state is sufficient to confer specific personal jurisdiction if that act gives rise to the claim at issue. New York exercises long-arm personal jurisdiction if there is a sufficient nexus between the defendants' contacts with the state and the legal dispute at issue.

Other states apply different standards. A Texas appellate court held in Klenk v. Bustamante, 993 S.W.2d 677, 684 (Tex. App. 1998), that for specific personal jurisdiction to exist, the defendant attorneys must intend the harm at issue or the exercise of personal jurisdiction violates their due process rights. The court explained that the foreseeability of the injury occurring in Texas and an impact on that state alone cannot sustain personal jurisdiction. The court reiterated the interests of the state of Texas in protecting its citizens against torts is not sufficient to invoke personal jurisdiction against an out-of-state attorney who allegedly committed a tort outside of the state, even if that tort was intentional.

The risk of uncertainty regarding jurisdiction is not limited to the U.S. Attorneys often have clients located around the world.

The province of Ontario, Canada, considers an attorney to be practicing law if the attorney merely gives legal advice on the laws of Ontario or the laws of Canada applicable to Ontario. An attorney could be practicing law in Ontario even if she never physically enters that province. This includes giving legal advice regarding the laws of Ontario by telephone, email or other written correspondence that crosses provincial or international borders.

One thing is clear, in many states an attorney may be subject to the jurisdiction of a state or country in which a client is located, even if the legal services provided to that client have nothing to do with the laws of that government.

With these risks in mind, there are few options available. Attorneys can associate counsel in the jurisdiction at issue or employ attorneys licensed there. Under today's liberalized reciprocity rules, law practices can ask existing attorneys to become members of the bar in the state at issue. Beyond that, law firms can use disclaimers that exclude a reliance on state-specific facts or interpretation of another jurisdiction's law from the scope of the services rendered. Of course, with such disclaimers, there is a real question about the value of the opinion.

Before entering into an attorney-client relationship, attorneys should consider carefully the risks that the laws of another jurisdiction might apply and decide whether to assume those risks. If so, attorneys should familiarize themselves with the relevant rules of professional conduct and the risks of legal malpractice in the other state and be prepared to defend themselves there.

J. Randolph Evans is a partner in the Washington, D.C. office of McKenna Long & Aldridge LLP.

Shari Klevens is a partner in the Washington, D.C. office of McKenna Long & Aldridge LLP.

Suzanne Y. Badawi is a partner in the Los Angeles office of McKenna Long & Aldridge LLP.

* The sole California-admitted author is Suzanne Y. Badawi, and this article is not legal advice.

<!-- Out-of-state clients: an ethical minefield -->