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 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.