Should law firms have non-lawyer owners? ABA reopens debate

May 5, 2016

(Reuters) – In 2012, after a bruising yearlong debate, the American Bar Association’s Commission on Ethics 20/20 chose not to propose a new model rule to permit lawyers to practice in firms owned in part by non-lawyers. At the time, Washington, D.C., was the only jurisdiction in the U.S. that allowed non-lawyers to take an ownership stake in a law firm, though other countries had begun to experiment with alternative law firm structures. An ABA working group dedicated to the issue drafted a proposal based on Washington’s rule, but, as the working group’s co-chair later recounted in a law review article, lawyers were overwhelmingly suspicious.

“The response was extremely negative, and categorically so,” wrote working group cochair Ted Schneyer, a legal ethics professor at the University of Arizona. “Opponents wanted the Model Rules to continue to bar lawyers from practicing law in any firm owned in any form and to any degree by non-lawyers.”

Have times changed? A different ABA working group believes they may have. In April, the regulatory opportunities group of the Commission on the Future of Legal Services relaunched the question, issuing a report on developments since the death of the 2012 proposal and a request for comments.

The deadline for comments is tomorrow. An ABA representative told me the group’s procedure is not to share comments until they are posted publicly, which, in this case, could be as soon as Friday. So we don’t know for sure whether the reaction this time will be different. But based on letters from three defense bar groups, any new proposal to allow non-lawyers to own law firms will not go down easy.

The commission’s April 8 report said it has not decided whether to propose new regulations on alternative business structures for law firms. That said, the working group’s discussion seems to suggest that the potential advantages of allowing outside investment in law firms outweigh drawbacks. Those potential benefits, according to the paper, include improving consumer choices and enhancing access to legal services, giving law firms more financial flexibility and stability, and encouraging innovation.

“Additional sources of capital may encourage legal service providers to ‘take greater risks in improving their services,'” the paper said. “That innovation in turn, may allow lawyers to deliver better services at lower prices.”

The paper duly noted criticism of alternative business models, chiefly “that any form of nonlawyer ownership or management threatens lawyers’ ‘core values,’ particularly, professional independent judgment and loyalty to clients,” it said. “Specifically, opponents of ABS fear that lawyers will act in the financial interests of the firm’s non-lawyer owners rather than in the best interests of their clients.”

The working group said, however, that in the jurisdictions that allow alternative business structures, doomsday predictions about the impact on lawyers’ professionalism have not come true. Non-lawyers are permitted at least a partial ownership stake in law firms in Australia, New Zealand, England, Singapore, Scotland, Italy, Spain, Denmark and some Canadian provinces. In the U.S., the state of Washington now permits a limited version of non-lawyer ownership, though, as the paper points out, few firms have taken advantage of Washington, D.C., or Washington state alternative business structures. (I’ve written about a network of interconnected personal injury firms that set up shop in Washington, D.C., and granted partnership stakes to marketing executives.)

According to the ABA working group, the experiment with alternative business structures is working outside of the U.S. – where no jurisdiction that adopted new models for law firm funding has since rescinded them. In fact, once alternative business models gain a toehold, according to the paper, they tend to spread.

Moreover, the commission said, there is no empirical evidence, the paper said, that outside investment in law firms has led to a deterioration of lawyers’ professional conduct: consumer complaints have not gone up in jurisdictions that allow alternative business structures, and consumer confidence levels have held steady. “In sum, the commission found no studies indicating the erosion of core values or harm to clients in jurisdictions that permit ABS,” the paper said.

The organized defense bar has been quick to react – negatively – to the commission’s call for comment. The International Association of Defense Counsel suggested new models for law firms might “diminish, not improve, access to justice and the quality of legal services.” Lawyers like their independence, the letter said. If the legal system were to come to resemble health maintenance organizations, with lawyers working as salaried employees of profit-minded corporations, “lawyers would become mere revenue producing units for outside business owners,” according to the group.

Similarly, DRI – The Voice of the Defense Bar warned in its letter to the ABA that there’s a conflict between lawyers’ obligations to their clients and the court and a corporation’s duty to maximize shareholder profits. “This difference in the fundamental loyalties of a corporation and a lawyer may likely trigger situations in which non-lawyers with an ownership interest in a law firm will exert pressure that potentially may influence a lawyer’s ethical and fiduciary obligations to a client for the sole purpose of maximizing the owner’s return on investment,” the letter said.

IADC, DRI and a third defense bar group, the Association of Defense Trial Counsel, all complained that the ABA did not allow enough time for comment. The commission extended the deadline for comments from May 2 to May 6 but it’s not likely that Friday will be the last chance lawyers have to register their opinions on this enduringly divisive issue.

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