Ownership of law firms by non-lawyers: a jurisdiction near you? | Conn kavanaugh
Traditionally, the only place to seek legal advice in the United States has been a firm owned and operated by one or more attorneys. Change, however, may be on the horizon. A few states have relaxed the rules that apply this standard, and several others are considering it. This change is hardly seismic – at least not yet – but, if larger jurisdictions adopt similar changes, these liberalizations may well start to alter the national landscape.
The current rule
With a few improper exceptions, Model rule ABA 5.4 prohibits lawyers from sharing legal fees with non-lawyers and prohibits law firms from having non-legal owners or directors. The rule aims to protect the professional independence of lawyers by isolating them from the oversight of lay people who might prioritize profit over duty to clients. A practical effect of the rule is that law firms generally do not provide services outside the law, as non-lawyers providing such services could never become partners or exercise supervisory authority over lawyers in a law firm. cabinet. The ban on non-legal ownership also prevents law firms from offering equity capital to attract non-legal employees and from raising outside capital to fund major expansions or innovations.
Some commentators suggest that these limitations have the effect of preventing law firms from growing, innovating and finding ways to offer more economical services to a larger segment of the market. Others have suggested that allowing firms to form multidisciplinary firms (“MDPs”) that could offer legal services alongside other complementary services would have a positive impact on the quality and cost of legal advice for them. clients. Globally, restrictions on the ownership of non-lawyers have likely helped to keep large law firms smaller than their counterparts in other professional service industries, such as accounting and consulting.
Until recently, all 50 states followed some version of Rule 5.4, with the only significant outlier being the District of Columbia. DC rule has licensed non-legal ownership since 1991, and a small minority of DC firms have one or more partners who are lobbyists or public relations professionals, rather than lawyers. However, the ABA 360 formal opinion prevents these companies from expanding into jurisdictions that follow Model Rule 5.4.
The beginnings of change
The idea of changing rule 5.4 is not new. When the ABA’s Kutak Commission first formulated the Model Rules in the early 1980s, the Commission’s proposed version of rule 5.4 allowed fees to be shared with lay people. The Model Rules adopted in 1983, however, did not follow this proposal, but rather reinforced the long-standing restriction on cost-sharing. Subsequent attempts to change the rule failed to gain traction.
Changes have taken place internationally, especially over the past 15 years. In 2007, an Australian personal injury firm became the first publicly traded law firm, and in 2012, UK regulators issued the first licenses allowing law firms to convert to ‘alternative business structures’. Which may have non-lawyer owners and provide services beyond legal advice.
The current push for more flexible regulations in some US jurisdictions appears to be driven by concerns about access to justice. In states that have adopted or are considering more permissive rules, changes are often presented as an effort to encourage the development of business models and legal technologies that will reduce the often prohibitive cost of legal representation. That said, some regulators also seem to recognize that changes to Rule 5.4 may lead to external investment, or even the ownership of law firms by large corporations.
Major changes in Utah and Arizona
In August 2020, Utah created a time-limited pilot program allowing entities, including those owned by non-lawyers, to apply to the state’s new Office of Legal Services Innovation for approval to provide legal services. The program was originally planned for two years, but has recently been extended to seven years. Applicants should explain how they propose to offer legal services through technology or a non-traditional business structure, and successful applicants are permitted for the duration of the program to provide legal services in their area of law (for example, health care or housing) using their approved template. There is currently 26 entities licensed under the program, including established companies like Rocket Lawyer, two nonprofit efforts focused on medical debt relief, and a number of predominantly non-lawyer-owned law firms. In March, the first fully non-legal US law firm, Law on Call, opened as part of the Utah program.
Less than two weeks after the Utah program went into effect in August 2020, the Arizona Supreme Court followed the recommendation of its task force on the provision of legal services and issued an extended order repealing entirely Arizona version of rule 5.4 effective January 1, 2021. Arizona now allows businesses and their future non-lawyer owners to apply for a license as Alternative Business Structures (“ABS”), which may have non-lawyer owners and managers.
The changes in Arizona are significant, but the state ABS Directory lists, so far, only three authorized ABS, none of which appear to be very large or have a presence beyond the southwest. Despite the apparently slow start of the program, more applications are underway, including one from Rocket Lawyer. In addition, the new regulations clearly provide that the licensing regime will eventually attract multinational companies – the most expensive level of the ABS license fee schedule is specifically aimed at international companies.
Potential future changes
While regulatory changes in two relatively small legal markets may seem like footnotes to lawyers in large East Coast cities, these changes may portend larger changes. Notably, California and Florida both plan to follow Utah’s lead.
In May 2020, the California Bar established its Closing the Justice Gap Working Group, which is tasked with the possible development of a regulatory sandbox similar to the Utah pilot program. The decision establishing the group was particularly broad – the bar’s board explicitly rejected a counter-proposal that would have barred the task force from considering liberalizing the ban on non-legal property. There have been recent debate, however, on whether participation in a pilot program should be limited to organizations focused on improving access to justice. The task force will deliver its recommendations to the Law Society’s board of directors in September 2022, so it’s conceivable that major changes could occur in the next few years in California.
The Florida Bar’s Special Committee to Improve Legal Service Delivery is expected to report to the Florida Supreme Court by July of this year. According to his last quarterly report, the committee will most likely recommend that, subject to some regulation, companies be allowed to have lay owners (but not passive investors). Minutes from recent meetings show the committee sees the Utah pilot program as a possible model.
The North Carolina State Bar has also established a relevant committee. The bar subcommittee tasked with studying the regulatory change appears to be at an information gathering stage, judging by the recorded meeting posted on the Youtube channel. The committee has expressed some interest in the Utah program, however.
One place where changes to rule 5.4 are still strongly opposed is at ABA. The merits of deregulation to increase access to justice were hotly debated in February 2020, and the eventual resolution expressly refrained from recommending changes to rule 5.4. The report accompanying the resolution has also been significantly revised, with an entire section deleted and all references to rule 5.4 deleted to facilitate adoption of the resolution.
Looking to the future in Massachusetts
At this time, changes to other jurisdiction versions of rule 5.4 are unlikely to have major effects in Massachusetts. In the future, however, practitioners in Massachusetts may find themselves co-counsel with attorneys from other jurisdictions that have lay partners, and questions may arise as to the appropriateness of sharing fees in such cases. situations. As non-lawyer ownership becomes more common and ownership structures become more varied, attorneys in Massachusetts would be well advised to seek advice from an ethics counselor before entering into fee-sharing agreements with attorneys from the State. firms structured differently.