An Opening Skirmish? 2nd Circuit Rejects Challenge to Ban on Nonlawyer Ownership of Law Firms

Rule 5.4(d) of the Vermont Rules of Professional Conduct prohibits lawyers from practicing in or forming a for-profit firm if (1) a nonlawyer owns any interest therein; (2) a nonlawyer holds a position similar to director or officer (or partner); or (3) a nonlawyer can control or direct a lawyer’s professional judgment.

Last year, I posted a series of blogs in which I asked whether it’s time to rescind 5.4 and authorize lawyers to practice in so-called “Alternative Business Structures.”  There are strong arguments in favor of ABS.  Chief among them, the infusion of capital, ingenuity, talent, and expertise in running a business might make lawyers and firms more efficient, more flexible, and better suited to provide clients with access to cost-effective legal services.  My posts aren’t all that original.  Rather, they summarize an ABA issues paper.  Nevertheless, I concluded that nonlawyer ownership is coming.

Josh King is the Chief Legal Officer at Avvo.  For a great take on how a careful and smart implementation of ABS might help both lawyers & clients, I recommend this post from Josh.

Last week, the 2nd Circuit Court of Appeals rejected a law firm’s challenge to New York’s ban on nonlawyer ownership. Jacoby & Meyers claimed that the rule violated the first amendment rights of association and to petition the government on behalf of clients.  In particular, per the ABA Journal, “Jacoby & Meyers  had argued it needed outside investment from nonlawyers to expand and increase efficiency, leading to reduced legal fees and the ability to represent more clients of limited means.”  Stories on the ruling and link s to the opinion ran in the ABA Journal, the Wall Street Journal Law Blog, How Appealing, and the Legal Profession Blog.

I’d be surprised if a constitutional challenge removes the ban on nonlawyer ownership & management from the ethics rules.  Rather, as a profession, we must continue to examine whether the rule makes sense. As noted at Above The Law, our task becomes increasingly important as more & more jurisdictions around the world and within the U.S. report not only the sky’s failure to fall following elimination of the ban, but a sunnier, bluer sky.

Nonlawyer Ownership: It’s Coming – UPDATED

(Updated at 4:32 PM on June 21)

Last month, I posted a series of blogs on whether Rule 5.4 should be amended to allow non-lawyer ownership of law firms (“Alternative Business Structures”).  The series did not generate much response.

I don’t think I can let the issue go without attention. So, as appropriate, I’ll call attention to it.

Joe Borstein of Above The Law has Legal Zoom co-founder Eddie Hartman’s thoughts on whether Alternative Business Structures are the solution to the “quiet crisis” in the legal profession.

Meanwhile, The American Lawyer posts on Big Accounting’s continued push into the legal market.

Finally, today’s ABA Journal reports that  Wal-Mart law firms are here.

In related news, the North Carolina state legislature passed a bill that redefines the “practice of law.”  The bill authorizes online services to provide blank legal documents, provided that the services register with the state bar, refer dissatisfied customers to the state bar, and that the forms include disclaimers warning that blank forms are not a substitute for legal advice.

Non-lawyer Ownership – It’s Coming

Last month, I posted a series of blogs on whether Rule 5.4 should be amended to allow non-lawyer ownership of law firms (“Alternative Business Structures”).  The series did not generate much response.

I don’t think I can let the issue go without attention. So, as appropriate, I’ll call attention to it.

Joe Borstein of Above The Law has Legal Zoom co-founder Eddie Hartman’s thoughts on whether Alternative Business Structures are the solution to the “quiet crisis” in the legal profession.

Meanwhile, The American Lawyer posts on Big Accounting’s continued push into the legal market.

Finally, while this story doesn’t involve non-lawyer ownership of law firms, it might be indicative of a step in that direction: Wal-Mart is leasing space in it stores to The Law Store.

What Say You Wednesday: Time for ABS?

It’s time for another edition of What Say You Wednesday.  Today’s poll question: should Vermont amend (or rescind) Rule 5.4 so as to allow nonlawyer ownership & management of law firms, as well as multidisciplinary practice.

The poll is HERE.

To make an informed decision, here are some options:

  1. Read last month’s issues paper from the ABA’s Commission on the Future of Legal Services; or
  2. Read my series of blog entries on the issues paper.

Of course, as anyone who knows me would tell you, the road to where I find myself today is littered with uninformed decisions.  So, I totally get it if you just want to skip to the vote.  However, to paraphrase the old Gatorade ad, “don’t be like Mike.”

Please forward this blog post to colleagues.

Thank you.

ABS: How’s it doing?

This is the fifth entry in my series on Alternative Business Structures (“ABS”).  I’ve posed the question: is it time to amend (or rescind) Rule 5.4 so as to allow

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

My posts aren’t original.  Rather, I’m summarizing an issues paper issued last month by the ABA’s Commission on the Future of Legal Services.  My previous entries:

ABS – Arguments Against

A is for Alliteration.

Anyhow, this is part 4 in a series on whether Rule 5.4 should be amended (or rescinded) so as to permit:

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

The series summarizes an issues paper on Alternative Business Structures (“ABS”) issued last month by the ABA’s Commission on the Future of Legal Services

Previous entries in the series:

As noted by the Commission, those who oppose ABS offer four main arguments against:

  1. Threat to Lawyers’ Core Values
  2. Decreased Pro Bono Work
  3. Threat to the Attorney-Client Privilege
  4. Failure to Deliver Promised Benefits

Let’s look at each in turn.

Threat to Lawyers’ Core Values

Opponents argue that ABS will lead to a system in which lawyers focus on the bottom line at the expense of their clients’ best interests, sacrificing client loyalty and ceding professional judgment to untrained nonlawyers who are not subject to disciplinary rules.

Among other sources, the Commission’s issues paper cites Nick Robinson’s manuscript: When Lawyers Don’t Get All the Profits: Non-Lawyer Ownership of Legal Services, Access, and Professionalism, 29 GEO. J. L. ETHICS (forthcoming).  On page 14 of his manuscript, Robinson notes that “while some have claimed that non-lawyer ownership will lead to an increase in quality of legal services, it is not obvious this will be the result and pressure for investors for profits may actually undercut standards in the profession.”

There is no doubt that I’m less than qualified to debate ABS with those who study and write about the topic.

However,this is an argument that puts (what I hope is) a wry smile on my face. Implicit in the argument is that lawyers who own their own firms do not let the “bottom line” influence their work. I mean, it’s not like I’ve never heard “mike, once the retainer ran out, my lawyer dumped me.”

Decreased Pro Bono Work

The Commission points out that opponents also contend that ABS will lead to a decrease in pro bono work.  Again, the issues paper cites to Nick Robinson’s manuscript, specifically page 11 where he argues that nonlawyer ownership may “undermine the public-spirited ideals of the profession, making it less likely lawyers in these firms will engage in pro bono or take on riskier cases that may have a broader social benefit.”

Again, color me jade(d), but I’m not so sure that lawyers hold a monopoly on the “public-spirited ideals” traditionally (quaintly?) associated with the legal profession.

Threat to the Attorney-Client Privilege

Per the issues paper, ABS opponents argue that “[i|f nonlawyer partners are privy to privileged conversations between attorneys and clients, courts might refuse to uphold the attorney-client privilege.”  Issues Paper, p. 10, Section 4(B)(3).

As an aside, and as my readers know, the ethics rule is much broader than the privilege.  See, V.R.Pr.C 1.6, Comment 3.  For my thoughts on Rule 1.6 and the disclosure of information relating to a representation, check out these posts:

Failure to Deliver Promised Benefits

Finally, the Commission notes that ABS critics argue that ABS will not deliver the benefits its proponents promise.  For example,

  • THIS STUDY commissioned by the Ontario Trial Lawyers Association concludes that there is “no empirical data to support the argument that [nonlawyer ownership] has improved access to justice” in jurisdictions that have approved ABS.
  • Similarly, on page 14 of his manuscript, Nick Robinson argues that “many other areas of legal work may be difficult to scale or commoditize, meaning non-lawyer ownership will be less likely to occur in these areas or bring unclear access benefits.”
  • Finally, critics contend that firms can attract top, nonlawyer talent with generous salaries & compensation packages that do not include ownership/management interests.

That’s all for tonight.  Next up:  ABS has been permitted for quite some time in jurisdictions around the world.  Some have data.  So….what has been the impact of ABS in jurisdictions where it is allowed?

 

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.

 

 

What is ABS and who allows it?

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.”

AustraliaSee, pp. 2-4 of Andrew Grech & Tahlia Gordon, Should Non-Lawyer Ownership of Law Firms Be Endorsed and Encouraged?, GEO. L. CENTER FOR THE STUDY OF THE LEGAL PROF. 2 (May 2015).

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.”

Not Vermont.

My  next post in this series  will focus on MDP’s and the arguments in favor of ABS.

 

 

 

 

 

 

 

 

 

Is it time for nonlawyer ownership? An introduction to ABS

With the exception of Washington State and the District of Columbia, U.S. jurisdictions prohibit:

  • nonlawyer ownership of law firms;
  • nonlawyer management of law firms; and,
  • lawyers from sharing fees with nonlawyers.

Vermont does so through Rule 5.4.

In 2014, the ABA formed the Commission on the Future of Legal Services The ABA charged the Commission with:

  • studying how legal services are delivered, and
  • recommending innovations to improve the delivery of, and access to, legal services.

The Commission tasked working groups and project teams with focusing on specific topics.  To date, the Commission has issued a compendium of white papers, as well as five issue papers. The most recent issue paper solicits comments on Alternative Business Structures.

Today, I will introduce the topic of ABS by summarizing the issue paper.  Then, over a series of blogs, I will dig deeper into various aspects of the issue paper.  I’m presenting it this way – serialized, if you will – because blogs tend to bog down if too long.

The issue paper begins by answering this question: what is an alternative business structure?  The answer: an ABS is any business model for the delivery of legal services that is currently prohibited by the ethics rules.

Next, the paper identifies the 3 principal features that differentiate ABS from traditional law firms:

  • nonlawyer ownership
  • investment by nonlawyers
  • multi-disciplinary practice.

From there, the paper sets out the jurisdictions that allow ABS in one form or another:

  • D.C. and Washington State
  • Australia
  • England & Wales
  • Several other European Countries
  • Singapore
  • Quebec, Ontario, and British Columbia

Finally, the paper lists the principal arguments for and against ABS.

Argument for ABS

  • Increased Access to Legal Services
  • Enhanced Financial Flexibility for Law Firms
  • Enhanced Operational Flexibility for Law Firms
  • Improved Cost Effectiveness & Quality of Services

Arguments against ABS

  • Threat to Lawyers’ Core Values & Professional Independence
  • Will Lead to Less Pro Bono Work
  • Threatens the Attorney-Client Privilege
  • Promised Benefits Not Likely to Happen

That’s all for today.  In the next post, I’ll look at the principal features that distinguish ABS from traditional law firms, and the jurisdictions that permit ABS.