Point: Shootout Between Lawyers and Consultants

Five years ago, professionals who served the business world were actively seeking ways to blend across various professions. Accounting firms practiced law; law firms did consulting; and consultants practiced law. In large measure, the same still holds true today, but each of us is a little more reluctant to step out of his zone of comfort. In the post Enron/ Worldcom/Tyco environment, many professionals are on edge.

For lawyers and accountants, it is easier to define these zones. If your license permits you to engage in the practice, then so be it, regardless of your experience level. For consultants, the task is more difficult. What is the definition of a consultant? Who decides whether a self-professed consultant possesses the basic level of competency to engage in consulting services? To whom is the consultant accountable if he or she makes a mistake? And by what standards will his/her performance be measured should a transaction go bad? While all these questions are relevant for all types of consultants, they are particularly applicable for those specializing in the field of franchising.

Until recently, franchise consultants have been slipping noticeably, but silently, into areas many would view as reserved for licensed attorneys. In particular, I am referring to the preparation of franchise agreements and disclosure statements. Franchise consultants have been preparing these for years, and until recently no one has challenged their license to do so. However, a recent decision from the Northern District of Illinois, Franchise Corp., Inc. v. Siebert (Francorp, Inc. v. Mark Siebert, 2/1 F.Supp. 2d 1051) has brought to center court the question of what constitutes the practice of law in a franchising context.

Francorp is a franchise consultant that markets itself as a 'one-stop shop.' It advises clients on the benefits and drawbacks of franchising and formulates franchise programs for clients who wish to pursue franchising. It has attorneys on staff, and these attorneys prepare franchise agreements, franchise disclosure statements, and ancillary documents for Francorp's clients. They also supervise franchise filings and registrations. It appears from the Siebert decision that Francorp advises its clients to seek independent counsel to review its handiwork, although the decision suggests that those clients who do so do not typically ask for 'the full Monty' from these attorneys.

The defendant, Siebert, a former president of Francorp, had, since leaving the company, formed his own franchise consulting business and, unlike his former employer, did not engage in the preparation of franchise agreements and disclosure documents, or perform registration services. Siebert claimed that Francorp's engaging in such activities constituted an unfair trade practice under the Illinois Uniform Deceptive Trade Practices Act (' 15 Ill. Comp. Stat. Ann 510/2 (West 2001) because it permitted Francorp to offer a wider variety of services to its clients and thus gain a competitive advantage using unlawful means.

The court ultimately concluded that the unauthorized practice of law could constitute a deceptive trade practice and suggested that the creation of legal documents was practicing law, but the court ultimately failed to put the final nail in the coffin, noting that there were factual issues relating to 'the extent of Francorp's involvement in creating legal documents and whether those activities crossed the line from consulting into legal practice.' Id. One interesting aspect of Siebert is that, unlike many consulting situations, the documents prepared by Francorp were in fact prepared by licensed attorneys. The court's problem, however, stemmed from the fact that under Illinois law, in-house lawyers can give legal advice to their employer, but cannot give legal advice to their employer's clients. Id. Thus, the Siebert situation is distinguishable from the more common situation in which there is no franchise lawyer involved in the process, or the lawyer's involvement is secondary. Should franchise consultants be permitted to prepare franchise agreements and related documents for their clients on their own? The Siebert court, in my opinion, answered this question with little hesitation:

“One who drafts franchising agreements must exercise judgment with respect to franchise, trademark and contract law, among others, to ensure that the document produces the desired results and guards against undesired ones ' Drafting franchise agreements, offering circulars and license agreements and executing registration certificates is practicing law.” Id. at 1057.

The court's opinion clearly suggests that a franchise consultant acting on his/her own does so with great peril.

The more intriguing question is what happens when the consultant brings the lawyer into the process as an intermediary. What we typically see is that the consultant either hires an attorney to look over his handiwork or instructs the client to hire the attorney to perform that function. (Usually it is the latter, although the attorney selected often results from a recommendation by the consultant. In some cases, the client will simply use an attorney he/she has used for all of his/her matters.) If the attorney views the documents he or she is presented as fair game, such that the attorney adopts a de novo approach (ie, starting from the ground up) to his review, there is little about which the bar can complain. In this scenario, the attorney, as required under most ethics rules, approaches the documents zealously ' as though he/she were drafting them from scratch. How can a neutral observer say that the client's interests have been compromised? That is, until the economic factor is taken into consideration.

Does the attorney called in to review the consultant's end product have such free rein as was postulated above? I have been asked on occasions to review documents prepared by franchise consultants, but under the caveat that the client is not willing to pay twice for the same work product. Some consultants' documents are quite good and need only a few tweaks. I have found it more common, however, that the documents have significant deficiencies and that a tweak or two may not fulfill our professional obligation to serve our clients zealously.

In those circumstances, I then face the issue: Do economics require that the member of the bar compromise his ethical standards? Should this representation be quickly declined because, under our professional standards, we cannot fully protect the clients' interests because of the economic constraints? Or do we do as the attorney mentioned in Siebert did: limit the scope of representation in a very noisy manner ' so that the client cannot later claim that he or she did not know the limitations of the legal services he or she was accepting, and then go ahead and give the client limited advice? Are we, as members of the bar, suggesting that it is acceptable to provide less-than-needed representation for a client? Has the franchise consultant, by getting first shot at the client, created a situation that compromises the quality of franchise legal work that clients will receive? And, to be honest, can anyone tell or notice any difference in most circumstances?

I am personally troubled by this last series of questions. I think we all would agree that absent a risk of a claim of improperly abandoning a client, clients and their attorneys are free to knowingly limit the scope of engagement. In the context of a corporate acquisition, for example, the client and attorney can freely decide that the attorney will perform only a certain level of due diligence. The same proposition should hold true here. However, my concern is that with the intervention of the consultant, the client may not understand that he/she is not getting what is needed under the circumstances, at least not until the franchise lawyer is brought to the table. And under those circumstances, the dollars for document preparation may have already been spent. My concerns are exacerbated by the fact that frequently the consultant's deficiencies are errors of omission and less likely to be noticed.

Take, for example, an arbitration clause. We have all seen franchise agreements that have no such clause. Assuming (an assumption that many, myself included, will not accept at face value) that arbitration clauses are in the client's best interest, is the attorney required at this point, when the client comes to him/her with the consultant's work product in hand, to raise the issue with the client? For that matter, would the attorney have that obligation had the client first come to him or her? The problem I perceive is that the attorney, arriving on the scene after the play has begun, does not know precisely what advice has or has not been given to the client. Must the attorney, to protect himself/herself from later claims, go through the motions of advising clients on the desirability of an arbitration clause? If so, has the consultant's intervention again resulted in what may well be a duplication of efforts? And has this process ended up requiring the client to pay twice for the same services? What if the client says that the consultant has explained the merits and disadvantages of such a clause? Can the attorney rely simply on that statement, knowing that the consultant has no license to practice law? Or must he/she probe behind the consultant's counsel to determine the quality of advice?

The lawyer should also take into account whether the legal fees he/she will receive, under customary pricing policies, warrant the risk that he/she is undertaking. Preparation of a full franchise package can result in handsome compensation. A review of existing documents will likely result in a substantially lower fee from the client, since, in the client's viewpoint, he or she has already paid for the service and is now only looking for the lawyer to pour holy water on the consultant's offerings. Given the current billing mentality of lawyers toward hourly based fees, will the attorney adequately price his/her product to compensate for the risk he/she is underwriting? An invalid non-compete, for example, under either scenario (ie, lawyer prepares documents or lawyer reviews consultant's documents), could result in a malpractice claim. Will the attorney put a premium on his hourly rate so that the risk is adequately compensated where he/she is only being paid to review documents? I suspect this will not be the case.

On balance, the consultant's presence in the process of franchise document preparation is troublesome. The consultant has no license to do what the Siebert court clearly characterized as practicing law. (I should note that simply having a license to practice law does not mean that an attorney will adequately understand franchise issues. Often because of their years of experience, consultants will have a better handle on legal issues than the rookie attorney. On the other hand, it is frequently the case that consultants will include provisions in their documents the effects of which they do not comprehend, or, as noted above, they will omit clauses that would further the franchisor's interests.) The consultant tries to compensate for this deficiency by bringing in an attorney, but the attorney is often handcuffed and placed in a situation that injects less-than-zealous representation into the process. Is this what franchising should tolerate?

Rupert M. Barkoff, a member of this newsletter's Board of Editors, is a partner in the Atlanta-based law firm of Kilpatrick Stockton LLP, where he heads that firm's franchise practice team. He is also a former chairman of the American Bar Association's Forum on Franchising.

Five years ago, professionals who served the business world were actively seeking ways to blend across various professions. Accounting firms practiced law; law firms did consulting; and consultants practiced law. In large measure, the same still holds true today, but each of us is a little more reluctant to step out of his zone of comfort. In the post Enron/ Worldcom/Tyco environment, many professionals are on edge.

For lawyers and accountants, it is easier to define these zones. If your license permits you to engage in the practice, then so be it, regardless of your experience level. For consultants, the task is more difficult. What is the definition of a consultant? Who decides whether a self-professed consultant possesses the basic level of competency to engage in consulting services? To whom is the consultant accountable if he or she makes a mistake? And by what standards will his/her performance be measured should a transaction go bad? While all these questions are relevant for all types of consultants, they are particularly applicable for those specializing in the field of franchising.

Until recently, franchise consultants have been slipping noticeably, but silently, into areas many would view as reserved for licensed attorneys. In particular, I am referring to the preparation of franchise agreements and disclosure statements. Franchise consultants have been preparing these for years, and until recently no one has challenged their license to do so. However, a recent decision from the Northern District of Illinois, Franchise Corp., Inc. v. Siebert (Francorp, Inc. v. Mark Siebert , 2/1 F.Supp. 2d 1051) has brought to center court the question of what constitutes the practice of law in a franchising context.

Francorp is a franchise consultant that markets itself as a 'one-stop shop.' It advises clients on the benefits and drawbacks of franchising and formulates franchise programs for clients who wish to pursue franchising. It has attorneys on staff, and these attorneys prepare franchise agreements, franchise disclosure statements, and ancillary documents for Francorp's clients. They also supervise franchise filings and registrations. It appears from the Siebert decision that Francorp advises its clients to seek independent counsel to review its handiwork, although the decision suggests that those clients who do so do not typically ask for 'the full Monty' from these attorneys.

The defendant, Siebert, a former president of Francorp, had, since leaving the company, formed his own franchise consulting business and, unlike his former employer, did not engage in the preparation of franchise agreements and disclosure documents, or perform registration services. Siebert claimed that Francorp's engaging in such activities constituted an unfair trade practice under the Illinois Uniform Deceptive Trade Practices Act (' 15 Ill. Comp. Stat. Ann 510/2 (West 2001) because it permitted Francorp to offer a wider variety of services to its clients and thus gain a competitive advantage using unlawful means.

The court ultimately concluded that the unauthorized practice of law could constitute a deceptive trade practice and suggested that the creation of legal documents was practicing law, but the court ultimately failed to put the final nail in the coffin, noting that there were factual issues relating to 'the extent of Francorp's involvement in creating legal documents and whether those activities crossed the line from consulting into legal practice.' Id. One interesting aspect of Siebert is that, unlike many consulting situations, the documents prepared by Francorp were in fact prepared by licensed attorneys. The court's problem, however, stemmed from the fact that under Illinois law, in-house lawyers can give legal advice to their employer, but cannot give legal advice to their employer's clients. Id. Thus, the Siebert situation is distinguishable from the more common situation in which there is no franchise lawyer involved in the process, or the lawyer's involvement is secondary. Should franchise consultants be permitted to prepare franchise agreements and related documents for their clients on their own? The Siebert court, in my opinion, answered this question with little hesitation:

“One who drafts franchising agreements must exercise judgment with respect to franchise, trademark and contract law, among others, to ensure that the document produces the desired results and guards against undesired ones ' Drafting franchise agreements, offering circulars and license agreements and executing registration certificates is practicing law.” Id. at 1057.

The court's opinion clearly suggests that a franchise consultant acting on his/her own does so with great peril.

The more intriguing question is what happens when the consultant brings the lawyer into the process as an intermediary. What we typically see is that the consultant either hires an attorney to look over his handiwork or instructs the client to hire the attorney to perform that function. (Usually it is the latter, although the attorney selected often results from a recommendation by the consultant. In some cases, the client will simply use an attorney he/she has used for all of his/her matters.) If the attorney views the documents he or she is presented as fair game, such that the attorney adopts a de novo approach (ie, starting from the ground up) to his review, there is little about which the bar can complain. In this scenario, the attorney, as required under most ethics rules, approaches the documents zealously ' as though he/she were drafting them from scratch. How can a neutral observer say that the client's interests have been compromised? That is, until the economic factor is taken into consideration.

Does the attorney called in to review the consultant's end product have such free rein as was postulated above? I have been asked on occasions to review documents prepared by franchise consultants, but under the caveat that the client is not willing to pay twice for the same work product. Some consultants' documents are quite good and need only a few tweaks. I have found it more common, however, that the documents have significant deficiencies and that a tweak or two may not fulfill our professional obligation to serve our clients zealously.

In those circumstances, I then face the issue: Do economics require that the member of the bar compromise his ethical standards? Should this representation be quickly declined because, under our professional standards, we cannot fully protect the clients' interests because of the economic constraints? Or do we do as the attorney mentioned in Siebert did: limit the scope of representation in a very noisy manner ' so that the client cannot later claim that he or she did not know the limitations of the legal services he or she was accepting, and then go ahead and give the client limited advice? Are we, as members of the bar, suggesting that it is acceptable to provide less-than-needed representation for a client? Has the franchise consultant, by getting first shot at the client, created a situation that compromises the quality of franchise legal work that clients will receive? And, to be honest, can anyone tell or notice any difference in most circumstances?

I am personally troubled by this last series of questions. I think we all would agree that absent a risk of a claim of improperly abandoning a client, clients and their attorneys are free to knowingly limit the scope of engagement. In the context of a corporate acquisition, for example, the client and attorney can freely decide that the attorney will perform only a certain level of due diligence. The same proposition should hold true here. However, my concern is that with the intervention of the consultant, the client may not understand that he/she is not getting what is needed under the circumstances, at least not until the franchise lawyer is brought to the table. And under those circumstances, the dollars for document preparation may have already been spent. My concerns are exacerbated by the fact that frequently the consultant's deficiencies are errors of omission and less likely to be noticed.

Take, for example, an arbitration clause. We have all seen franchise agreements that have no such clause. Assuming (an assumption that many, myself included, will not accept at face value) that arbitration clauses are in the client's best interest, is the attorney required at this point, when the client comes to him/her with the consultant's work product in hand, to raise the issue with the client? For that matter, would the attorney have that obligation had the client first come to him or her? The problem I perceive is that the attorney, arriving on the scene after the play has begun, does not know precisely what advice has or has not been given to the client. Must the attorney, to protect himself/herself from later claims, go through the motions of advising clients on the desirability of an arbitration clause? If so, has the consultant's intervention again resulted in what may well be a duplication of efforts? And has this process ended up requiring the client to pay twice for the same services? What if the client says that the consultant has explained the merits and disadvantages of such a clause? Can the attorney rely simply on that statement, knowing that the consultant has no license to practice law? Or must he/she probe behind the consultant's counsel to determine the quality of advice?

The lawyer should also take into account whether the legal fees he/she will receive, under customary pricing policies, warrant the risk that he/she is undertaking. Preparation of a full franchise package can result in handsome compensation. A review of existing documents will likely result in a substantially lower fee from the client, since, in the client's viewpoint, he or she has already paid for the service and is now only looking for the lawyer to pour holy water on the consultant's offerings. Given the current billing mentality of lawyers toward hourly based fees, will the attorney adequately price his/her product to compensate for the risk he/she is underwriting? An invalid non-compete, for example, under either scenario (ie, lawyer prepares documents or lawyer reviews consultant's documents), could result in a malpractice claim. Will the attorney put a premium on his hourly rate so that the risk is adequately compensated where he/she is only being paid to review documents? I suspect this will not be the case.

On balance, the consultant's presence in the process of franchise document preparation is troublesome. The consultant has no license to do what the Siebert court clearly characterized as practicing law. (I should note that simply having a license to practice law does not mean that an attorney will adequately understand franchise issues. Often because of their years of experience, consultants will have a better handle on legal issues than the rookie attorney. On the other hand, it is frequently the case that consultants will include provisions in their documents the effects of which they do not comprehend, or, as noted above, they will omit clauses that would further the franchisor's interests.) The consultant tries to compensate for this deficiency by bringing in an attorney, but the attorney is often handcuffed and placed in a situation that injects less-than-zealous representation into the process. Is this what franchising should tolerate?

Rupert M. Barkoff, a member of this newsletter's Board of Editors, is a partner in the Atlanta-based law firm of Kilpatrick Stockton LLP, where he heads that firm's franchise practice team. He is also a former chairman of the American Bar Association's Forum on Franchising.