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.

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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.