ABA: Could Non–Lawyers Become Equity Partners?

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Non–lawyers are currently forbidden from owning an interest in a law firm by the ABA Model Rules of Professional Conduct. With the current self–regulation of the legal profession, non-lawyers aren’t allowed to have any ownership interests in a firm. But the ABA Commission on Ethics 20/20 has released a discussion paper and proposed resolution on alternative law firm structures. Could bringing on a non–lawyer on as a partner be the right step for your practice?

The Proposal

The Commission’s Alternative Law Practice Structures Working Group recommends allowing a limited form of non–lawyer ownership in law firms. The Commission explains:

the sole purpose of such a law firm must be the delivery of legal services and that the services provided by non–lawyers must be limited to assisting the lawyers in the delivery of those legal services. The lawyers would be responsible for assuring that the conduct of the non–lawyers is consistent with the lawyers’ obligations under the Model Rules. Non–lawyer owners would not have their own clients or offer nonlegal services to clients independent of the legal services provided to clients of the firm. In short, alternative law practice structures are not multidisciplinary practice by another name.

In evaluating different approaches to non–lawyer ownership, the Commission expressly rejected “(a) publicly traded law firms, (b) passive, outside non–lawyer investment or ownership in law firms, and (c) multidisciplinary practices (i.e., law firms that offer both legal and non–legal services separately in a single entity).”

Instead, the Commission modeled its approach on the current regulations in place in the District of Columbia. But the Commission is recommending stricter regulations than the DC bar. Namely, “lawyers would have to maintain the controlling financial interest and voting rights in the law firm.” Non–lawyers must be screened, and their “professional reputation for integrity” must be examined. “The investigation would be analogous to a character and fitness inquiry, and the firm would have to maintain a record of that investigation and its results.”

The Benefits

The discussion paper suggests that small firms will be the most likely to employ non–lawyer ownership models. “Some firms reported that taking on non–lawyer partners has allowed for greater innovation and efficiency than segregating non–lawyers in a related ancillary business of the sort permitted under Rule 5.7 of the Model Rules of Professional Conduct.”

Large law firms can create financial incentives similar to partnership, and thus retain qualified non–lawyers. In a small firm, such financial incentives can be a hardship. With non–lawyer partners, the small firm can hold its own against a potentially large competitor attempting to hire a valuable non–lawyer. For example, “[s]ome plaintiff personal injury firms working on a contingent fee basis view fee–sharing with non–lawyer partners as a more equitable distribution of firm income given the value of the support non–lawyer partners provide in developing their firm’s cases.”

Concerns

The Commission has already heard some concerns over any form of non–lawyer ownership. Some argue that any kind of non–lawyer ownership “could diminish the profession’s current judicially–based system of regulation by expanding the scope of professional regulation beyond its traditional focus on lawyers, thus making external regulation more likely.”

These changes could also cause problems for multi–jurisdictional practices. States can be slow in adopting this kind of change. That means even if the ABA adopts this change, it could be years until the states follow suit. If states do start to adopt the change, attorneys that practice in multiple states may have to have separate structural agreements that bind the non–lawyer in each jurisdiction.

(photo: http://www.flickr.com/photos/baslow/6038580/)

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  • The Commission’s proposals do not adequately address the needs of law firms, consumers of legal services or the very small audience of potential nonlawyer partners in law firms.

    The Commission continues to kick the can down the road on a more pressing issue, namely alternative business structures under which law firms can raise money by going public and by receiving significant equity investments from private equity sources.

    Instead it proposes to continue to limit law firms to providing legal services and eschews multidisciplinary practices. Yet, the fact is that law firms through subsidiaries do conduct multidisciplinary practices.

    In addition, the suggestions that by permitting extremely limited numbers of nonlawyer partners in law firms, subject to the control of the firms partner-lawyers, US law firms will “better be able to compete in the global marketplace” (yes, no kidding, they really said that) shows a complete lack of comprehension of what is now transpiring in that marketplace.

    Providers of legal services are continuing to evolve and have demonstrated terrific agility in either circumventing existing rules or simply ignoring them.

    This Commission white paper shows a complete suspension of conscious reality. (http://kowalskiandassociatesblog.com/2011/12/05/much-ado-about-nothing-the-abas-ideas-about-admitting-nonlawyers-to-law-firm-partnerships-alternative-law-practice-structures/ )