Yesterday, I introduced the discussion surrounding Alternative Business Structures by linking to an issue paper published last month by the ABA’s Commission on the Future of the Legal Profession. ( “the Commission”).
This is part 2 in a series on whether it is time to amend (or rescind) Rule 5.4 of the Vermont Rules of Professional Conduct. This post addresses two questions: (1) what are the principle features of an alternative business structure? (“ABS”); and, (2) where are they allowed?
Good questions. So, as a true Vermonter, I’ll start by answering the questions with a question: what is an alternative business structures?
As I mentioned yesterday, the Commission defined an ABS as any business model in which legal services are provided in a manner that would violate Rule 5.4.
The rule is the rule. It prohibits lawyers from:
- sharing fees with nonlaywers;
- forming a partnership with a nonlawyer if any of the partnership’s activities include the practice of law;
- practicing in a professional corporation or association in which a nonlawyer has an ownership interest;
- practicing in a professional corporation or association in which a nonlawyer is a director, officer, or in a position of similar responsibility; or
- practicing in a professional corporation or association in which a nonlawyer directs or controls a lawyer’s professional judgment.
What are the principle features of an ABS?
The Commission identified the principal features that differentiate ABS from traditional law firms. In an ABS,
- a nonlawyer may hold an ownership interest or management role in a law firm;
- a nonlawyer may invest capital in a law firm;
- the entity may provide non-legal services in addition to legal services. This is also known as “Multidisciplinary Practice” or “MDP”.
Currently, Rule 5.4 prohibits each of these in Vermont.
Okay then, who allows ABS?
In the US? The State of Washington and the District of Columbia. Here’s the District’s version of Rule 5.4:
- “[a] lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients, but only if: (1) The partnership or organization has as its sole purpose providing legal services to clients; (2) All persons having such managerial authority or holding a financial interest undertake to abide by the [D.C. Bar] Rules of Professional Conduct; (3) The lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1; [and] (4) The foregoing conditions are set forth in writing.”
England & Wales: The Legal Services Act of 2007. Per pages 5 and 6 of the Commission’s report, and I’ve omitted the footnotes,
- “The LSA permits lawyers to form an ABS that allows external ownership of legal businesses and multidisciplinary practices (providing legal and other services), but with two significant regulatory requirements. First, under the LSA, nonlawyers who want to be owners of law firms must pass a fitness-to-own test. Second, the Solicitors Regulation Authority (SRA) and the Legal Services Board overhauled the regulation of law firms. Among other things, the new SRA Code of Conduct requires that firms “have effective systems and controls in place to achieve and comply with all the [p]rinciples, rules and outcomes and other requirements of the [SRA] Handbook” and to “identify, monitor and manage risks to compliance.”
Other European Countries and some Canadian Provinces. Again, per the Commission’s report, and again with citations omitted:
- “While England and Wales permit law firms to be owned entirely by nonlawyers, other European countries permit ABS on a more limited scale. For example, Scotland (up to 49% nonlawyer ownership), Italy (33%), Spain (25%), and Denmark (10%) all require lawyers to have majority control of the ABS.
- “Germany, the Netherlands, Poland, Spain, and Belgium permit various forms of MDPs.
- “Some Canadian provinces also have permitted nonlawyer ownership and/or MDP for some time.
- “In Quebec, nonlawyers may own up to 50% of law practices, and law firms may engage in multidisciplinary practice. British Columbia permits MDPs.
- “An Ontario working group examining nonlawyer ownership has decided against recommending majority ownership by nonlawyers, but is continuing to consider minority ownership by nonlawyers.”
My next post in this series will focus on MDP’s and the arguments in favor of ABS.