Most jurisdictions are preparing for major legal reforms, particularly rules about who may and cannot have an interest in law firms. Ownership of law firms by non-lawyers saw its first foothold in Arizona in 2020 when the state allowed non-attorneys to acquire a financial interest in law businesses. Following suit, Utah authorized a “regulatory sandbox” for a two-year trial program in which non-lawyer investors or owners may dabble in the uncharted legal territory.
On the heels of recent initiatives by nations to make civil legal services more accessible and cheaper for low-income people and families, a push for more access and affordability has been clamored for. In order to increase access to legal services, advocates say opening up ownership of law firms to non-lawyers would provide more options and make services more affordable because tech companies like Legal Zoom and Rocket Lawyer are permitted to market affordable legal services in contrast to traditional law firms.
However, as the price of operations, personnel, and administrative expenses continue to decline with the assistance of newer technology, coupled with continuing trends in the reduction of office space and work-from-home rules, costs continue on their forced decrease. Will preparation, leasing agreements, and family law are examples of legal requirements that combine in a drive for state governments to cut costs throughout the sector.
BACKGROUND
The current status of the legal scenario stems from American Bar Association Rule 5.4. Though unofficial, the majority of states have based ownership rules as per the documentation under the rule, seemingly done so in an effort to vouchsafe the “Professional Independence of a Lawyer.” Rule 5.4(b) states that: “A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.”
Right now, New York is actively considering changes to the ownership rules. It should be noted that a major reason why the rules may be changed would be to accommodate the ubiquity of internet businesses and Big Four accountancy firms as well as to provide easier access to the legal sector. It is accepted as truth that the regulation changes would help the Big Four, which in turn will generate a return on the fees that so-called “white shoe companies” demand.
To note the stand of the ABA, the staunch refusal to accommodate non-legal ownership by the entity should be referred to. Previous to the bubbling changes, the ABA had been very against any such reforms. However, in an apparent change of heart, the ABA recently approved the alterations, urging “US jurisdictions to go outside the box on the issue of justice access.”
STATUS OF COMPETING NON-LAWYER FIRMS
As alternative legal service providers have entered the market, competition has grown in the legal sector. More and more law firms and businesses are using these alternative legal service providers to reduce expenses, increase efficiency, and utilize new technologies. In other words, not only are legal firms losing income to alternative legal service providers, but they are also suffering more expenses as a result. For instance, if ownership regulations change, it may be possible to make use of those services (and related income) that are now outside of the firm, and more effectively compete with alternative legal service providers.
Changes in ownership regulations have been proposed as a way to break down an obstacle to innovation that has existed for decades. At the present, firms are unable to offer partnership stakes to exceptional individuals with non-legal backgrounds in order to get them to work in IT or on the business side. For the purposes of this discussion, only licensed attorneys may be ownership stakeholders in law firms. If the laws change, the incentives will also shift, which implies that companies in the legal and software industries could become appealing to bright MBAs and computer programmers. A long-standing method of recruiting high-quality personnel has been the attraction of equity pay, which helps to unlock the hidden potential of law firms.
To be able to explore creative methods to acquire and manage money from other sources, such as hedge funds, adjustments to regulations seem to be the most favorable option. As a business gains more money, this may result in investment in technology, which helps companies adjust to different pricing arrangements, and concurrently increases firm attractiveness. The end result is the drawing of top personnel that views the company as a secure long-term career home.
The second advantage of linking attorneys with other professions is that companies may harness convergence between them to offer more comprehensive services. Trust and estate management, as well as appraisals and tax services, are just a few of the many services offered. More “product lines” may allow law firms to serve customers that have varied requirements who are interested in extra services. This is possible since all these additional services may be provided from the same location.
REQUIREMENT FOR OWNERSHIP RULES
Nevertheless, American jurisprudence maintains ownership rules serve an essential function. The prevailing ideology is that a legal practitioner should be responsible to make legal choices; and if a law company opens up its decision-making process to non-lawyers, then its counsel may be compromised. When there is a possibility that other factors may compromise the interests of the client, this becomes all the more important.
The recent growth in alternative legal service providers has provided more competition for legal firms. Enabling non-lawyer ownership may offer new market possibilities for law firms, such as technology and consulting companies, as well as opening the door to the competition including information technology and consulting organizations and the four largest Big Four accountancy companies. Additionally, legal companies have expressed concerns that law would become a commodity, resulting in a “Walmart” phenomenon. In many instances, fundamental legal requirements may be supplied by a larger and more diverse business, pushing out smaller companies and enabling them to operate at cheaper rates. Because of this, small businesses will be forced to specialize and provide services they may not be able to provide to a generalist company.
Additionally, the question of privilege must be considered. Non-attorneys have now entered the mix, but the status quo concerning attorney-client privilege remains unanswered. In occupations other than creative ones, there is a degree of secrecy, but legal privileged speak is not one of them.
HOW DOES RULE 5.4 MAINTAIN ATTORNEY AUTONOMY
ABA Model Rule 5.4 bars lawyers from sharing legal fees with nonlawyers and forbids law firms from having nonlawyer owners or officers. ABA Model Rule 5.4 also provides for exceptions within this ambit. The regulation is instituted to protect attorneys’ autonomy by shielding them from non-lawyer oversight, which may place profitability above their obligation to their clients. For this rule to have any practical impact, law firms do not offer any non-legal services since any non-attorneys who supply such services will never get to a partnership or be put in charge of managing the lawyers in a company. Nonlawyer ownership is also prohibited, as well as other things, such as law firms using stock as a lure for nonlawyer personnel and funding expansions and developments with outside financing.
HOW HAVE STATES ADOPTED RULE 5.4
Limitations on growth have the effect of making it difficult for law firms to innovate and develop, especially to cater to a bigger part of the market. Alternatively, supporters of Multidisciplinary Practices have proposed that the introduction of Multidisciplinary Practices would further improve the quality and affordability of legal advice to customers by offering integrated services alongside legal assistance. In the professional services sector, specifically in the field of law, limits on nonlawyer ownership have had the effect of holding legal companies smaller than those in the other professional services sectors, such as accountancy and consulting.
For the longest time, all fifty states have adhered to Rule 5.4, with the exception of D.C. While D.C.’s rules allow non-lawyer ownership since 1991, and a small minority of D.C. firms have one or more partners who are lobbyists or public relations professionals, these types of firms (those with lobbying or public relations professionals rather than lawyers) comprise a much smaller minority of D.C. businesses. Although ABA Formal Opinion 360 prohibits these companies from growing into jurisdictions that follow Model Rule 5.4, they are permitted to expand into places that do not follow this rule.
The concept of modifying Rule 5.4 has been previously discussed. Before the Model Rules were created, the Kutak Commission was developing its proposal for the rules in the early 1980s. In that proposal, Rule 5.4 suggested that fees may be shared with nonlawyers. While following the recommendation, the Model Rules instead adopted the restrictions on fee-splitting that had been in place for years. Attempts to modify the regulation after the first proposal failed to gather sufficient support.
International changes have happened in the last fifteen years, particularly. The first publicly traded law company was founded in Australia in 2007, while the UK granted the first permits for law firms to become “Alternative Business Structures” in 2012.
Access to justice seems to be a driving factor in current lighter regulations initiatives in certain U.S. jurisdictions. The more liberal policies that have been implemented or are currently being considered have generally been seen as attempts to spark legal innovation in the form of new legal models and technology that would result in the reduction of the expensive barrier to legal counsel. It’s also true that some authorities also appear to accept that Rule 5.4 alterations may result in big companies gaining control of and investing in law firms.
CASE STUDIES UTAH AND ARIZONA
Utah launched a time-limited trial program in August 2020 that allows businesses, as well as those controlled by nonlawyers, to apply for authorization to offer legal services via the newly established Office of Legal Services Innovation. Originally scheduled to continue for two years, the program was subsequently increased until seven.
Arizona’s Supreme Court’s task force on the procurement of legal services issued a sweeping decision on January 1, 2021, completely voiding Arizona’s Rule 5.4, ever since Utah’s program had begun in August of 2020. In order to apply for a license to operate as an Alternative Business Structure (ABS), companies and their nonlawyer owners may now do so.
Although the changes that have occurred in Arizona are substantial, only three licensed ABSs have been discovered so far. Despite the application’s initial sluggishness, additional applications are now under development, notably Rocket Lawyer’s. These new rules make it obvious that multinational companies will gravitate to the ABS licensing system since the most costly option in the ABS license price schedule is designed especially for these types of businesses.
STATES IN TRANSIT
The goal of California’s Bar’s Justice Gap Working Group as setting up in May of 2020 is to create a regulatory sandbox program like Utah’s current pilot. The plan that excluded relaxation of the prohibition on nonlawyer ownership was expressly rejected by the Bar’s Board of Trustees, which instead selected a more comprehensive one that was widely accepted. Pilot programs are controversial, however, since they have raised questions about whether participation should be restricted to groups focused on making justice more accessible. There’s a good chance significant changes may occur in the state’s judicial system over the next several years, as the committee expects to present its findings to the board of trustees in September of 2022.
In July of this year, the Florida Bar’s Special Committee was to submit a report to the Florida Supreme Court. The committee is highly likely to propose that companies be allowed to have nonlawyer owners, pending certain oversight (but not passive investors). According to recent meeting minutes, the committee is considering Utah’s pilot program as a potential model.
The North Carolina state bar has likewise formed a committee on the subject. According to the videotaped meeting uploaded on the bar’s YouTube account, the Subcommittee to Study Regulatory Change seems to be in the information-gathering stage. However, the committee has shown interest in Utah’s program.
The ABA is one area where modifications to Rule 5.4 are still fiercely resisted. In February 2020, the benefits of deregulation aimed at improving access to justice were extensively discussed, and the resulting decision explicitly abstained from proposing changes to Rule 5.4. Additionally, the report accompanying the resolution was substantially altered, with an entire section omitted and all references to Rule 5.4 eliminated to expedite the resolution’s approval.
Countries such as Australia and the United Kingdom have already adopted an “alternative business structure” (ABS), which allows partnership with non-legal ownership. In June 2020, litigation funding powerhouse, Burford Capital took a 32% equity interest in a London-based litigation firm. While there are clear challenges, the amendment of Rule 5.4 may allow law firms to broaden horizons and gain exposure to other markets. In the United States, there has traditionally only been one location to get legal advice: a law firm that is owned and operated by one or more attorneys. However, change is clearly possible. In a few states, regulations that attempt to enforce this standard have been removed, and other states are exploring this. This move is scarcely a tectonic shift, since at least some jurisdictions will be following the same course, and if other bigger jurisdictions make the same adjustments, these legal market reforms may transform the nationwide environment.
According to its most recent quarterly report, the committee is very likely to recommend that, subject to some regulation, firms should be permitted to have nonlawyer owners (but not passive investors).
The report accompanying the resolution was also significantly revised, with an entire section being deleted and all references to Rule 5.4 being removed to facilitate the resolution’s passage.
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Sources
1. Rule 5.4(d) then goes on to disallow a lawyer to practice law…
…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
2. New York Chief Judge Janet DiFiore has convened the Commission to Reimagine the Future of New York’s Courts which will consider such changes.
3. The ABA Commission on the Independence of the Profession made the following assertion in 2016: “The core value of the independence of the profession would be severely challenged by the dual allegiances owed to clients and demanded by investors, shareholders, and managers. No man (or) woman can serve two masters.”
4. As the technologist and lawyer Jon Tobin recently observed, “Innovation is not slow in the legal sector because of some inbuilt characteristic of lawyers to reject technology. Nor because of some cultural bias against innovation.” No: In Tobin’s view, the rules on ownership are the main barrier.
5. American Bar Association, www.americanbar.org/products/ecd/chapter/219925/.
PROHIBITION OF PARTNERSHIPS WITH NONLAWYERS: EXTRAJURISDICTIONAL EFFECT (July 11, 1991) A lawyer who is licensed both in a jurisdiction that prohibits partnerships with nonlawyers, as in Model Rule 5.4(b), and in a jurisdiction that permits lawyers to form partnerships with nonlawyers, but who practices only in the latter jurisdiction, should not be subject to the prohibition of the jurisdiction where the lawyer does not practice. On the other hand, if a lawyer licensed in two such jurisdictions is engaged in practice in the jurisdiction that prohibits such partnerships, the lawyer must adhere to the restrictions of that jurisdiction.
6. “Special Committee to Improve the Delivery of Legal Services.” The Florida Bar, www.floridabar.org/about/cmtes/cmtes-me/special-committee-to-improve-the-delivery-of-legal-services/#reports.
7. Ambrogi, Bob. “Revised ABA Report on Innovation Stripped out All Mention of Rule 5.4.” LawSites, 18 Feb. 2020, www.lawsitesblog.com/2020/02/revised-aba-report-on-innovation-stripped-out-all-mention-of-rule-5-4.html.
