ABS: Arguments in Favor

This is the third in a series on Alternative Business Structures (“ABS”).  The series focuses on whether it is time to amend the Rules of Professional Conduct so as to allow:

  • nonlawyer ownership of law firms; and,
  • nonlawyer management of law firms; and
  • multidisciplinary practice.

Today, Rule 5.4 prohibits each.

The first two posts in the series are HERE and HERE.

My posts are not original.  Rather, I am summarizing (and borrowing from) an issues paper issued last month by the ABA’s Commission on the Future of Legal Services.

The arguments in favor of ABA appear in Section IV(A), pp. 7-9, of the issue paper.  Per the Commission, proponents offer four benefits of allowing ABS:

  1. Increased access to justice;
  2. Enhanced financial flexibility;
  3. Enhanced operational flexibility; and,
  4. Increased cost-effectiveness & quality of services.

Each relates to the belief that allowing ABS will infuse law firms (and the profession) with much-needed capital and talent.

Increased Access to Justice

Noel Semple is on the faculty of law at the University of Windsor. Professor Semple studies access to justice and, in 2014, published Legal Services Regulation at the Crossroads:  Justitia’s Legionsin which he argued that ABS will improve access to justice.

A quote from Profession Semple appears on page 7 of the Commission’s issues paper.  He makes 3 arguments in favor of ABS.  He writes better than I, so here’s the quote:

  • “[f]irst, [limits on nonlawyer funding] constrain the supply of capital for law firms, thereby increasing the cost which the firms must pay for it. To the extent that this cost of doing business is passed along to consumers, it will increase the price of legal services. Second, bigger firms might be better for access to justice, due to risk-spreading opportunities and economies of scale and scope. Individual clients . . . must currently rely on small partnerships and solo practitioners, and allowing non-lawyer capital and management into the market might facilitate the emergence of large consumer law firms. Large firms would plausibly find it easier than small ones to expand access through flat rate billing, reputational branding, and investment in technology. Finally, insulating lawyers from non-lawyers precludes potentially innovative inter-professional collaborations, which might bring the benefits of legal services to more people even if firms stay small.”

Then, citing a 2014 report from the Canadian Bar Association’s Legal Futures Initiative, the Commission concludes:

  • “[i]n short, it is said that ABS may improve consumer choice and value because additional sources of capital may encourage legal service providers to ‘take greater risks in improving their services.’ That innovation in turn, may allow lawyers to deliver better services at lower prices.”

Enhanced Financial Flexibility

  • Citing a report from the Queensland (Australia) Law Society, the Commission notes that ABS might lead to significant financial benefits, including “asset protection, greater flexibility for raising and retaining capital, greater flexibility for remunerating employees, possible tax advantages, and opportunities to introduce more effective management and decision-making arrangements.”
  • The Commission notes that law firm funding relies almost exclusively on partners and banks.  Then, the Commission quotes this 2008 report in which the author states that in:
    • “[t]his pre-industrial model of financing the firm . . . The owners bear significant risk, which effectively increases their cost of capital and restricts available funding. Part of the risk is from a mismatch of revenues and expenses. Even a fundamentally viable firm may face a liquidity crunch when its bank loans come due and its only assets are accounts receivable and pending cases.”
  • Finally, the Commission suggests that
    • “[p]ermitting nonlawyer investment might also help young lawyers who would be able to afford, for example, to partner with skilled information technology professionals to develop innovative ways to deliver legal services.”

Enhanced Operational Flexibility

I like this one. Essentially, lawyers aren’t the only smart people in the world.

As proponents of ABS point out, precluding nonlawyers from managing law firms certainly precludes one thing:  it precludes firms from employing talented nonlawyers who might offer insightful and innovative ways to improve the delivery legal services.

Essentially, lawyers aren’t the only smart people in the world.

Increased Cost Effectiveness and Quality of Services

This argument centers on multidisciplinary practice (“MDP”).  MDP is a business model in which the owners offer legal services and non-legal services.  For example, a family law practitioner could own a business with a family counselor, providing legal and counselling services to a clients in a “one stop shopping” approach.

The Virginia State Bar laid out the pros and cons of MDP HERE.

The Commission quotes this law review article, in which the authors argue that the:

  • “major benefit of multidisciplinary services is the delivery of an integrated team approach to serving client interests – in other words, providing clients with a ‘one-stop shopping’ approach for problems requiring services in different fields [which leads to]  efficiency that translates into savings of time or money, and ensures the delivery of a higher quality product to the client with lower transaction costs.”

Tomorrow, I’ll have the answer to last Friday’s quiz, as well as a post in which I set out the arguments against ABS, as noted by the Commission in its issues paper.

 

 

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