One of the most frequent excuses we hear for the glacial pace of innovation and problem-solving in the legal profession is that our ethical rules are too confining. Eric Cooperstein and Megan Zavieh propose to remove this last barrier and use this 4-part series to highlight the ethical rules that most desperately need updating. Excuses be damned, these changes would free lawyers to innovate, adapt, and‚ hopefully‚ bridge the gaping access-to-justice divide. This series focuses on updating the Rules of Professional Conduct that threaten the very future of law practice.

In our first post on revising lawyers’ ethics rules, we argued that an overhaul of the advertising rules is long overdue. Today we explore Rule 5 of the Model Rules of Professional Conduct, which is ripe for innovation in its own right.

Professional Independence – Rule 5.4

Let’s begin with Rule 5.4, which purports to govern lawyers’ professional independence and prevent lawyers from sharing fees with non-lawyers.

To set the tone, here’s a composite of several conversations we’ve had with lawyers about the scope of Rule 5.4:

Can I incentivize my non-lawyer employees by paying them a percentage of the fees on files if they meet efficiency goals on that case?

No. Rule 5.4 prohibits that.

Can I defray the costs of rolling out a web-based platform for serving more clients by paying my web developer based on the volume of business generated? 

Nope. Rule 5.4 prohibits that.

Well, can I get some venture capital to fund the franchising of my law firm concept and in exchange give the funders a 10% interest in the business?

No dice. You got it—Rule 5.4.

Rule 5.4 says lawyers cannot share fees with non-lawyers. So no per-case bonuses, no law-firm ownership for non-lawyers, and no referral fees. Without these guardrails, the thinking goes, hordes of money-hungry non-lawyers will improperly influence lawyers to settle cases prematurely or abandon difficult, unprofitable clients. Rule 5.4 protects the profession, and therefore clients, from the ugliness of the capitalist marketplace.

Oh, those weak-willed, spineless lawyers! One might wonder how they dress themselves each morning, let alone represent their clients’ diverse, complex, high-stakes interests. Thank heavens Rule 5.4 insulates us from Machiavellian business interests.

How ironic that other ethics rules—especially Rules 4.2 (contact with represented persons) and 4.3 (contact with unrepresented persons)—protect the public from lawyers’ interrogation and negotiation superpowers. Maybe sharing fees with non-lawyers is our kryptonite?

Rule 5.4 assumes lawyers are unable to maintain independence if a non-lawyer owns a financial stake in the entity providing legal services. This is absurd and, frankly, insulting. With all of ethics rules to which we are subject, the duties we owe our clients and the courts, and the manner in which we are entrusted with client funds, we as a profession have somehow deemed it necessary to protect ourselves from outside financial investment?

Notably, our rules do not explicitly prohibit investment in our law firm by a manipulative and ill-willed licensed attorney who could just as easily corrupt our professional judgment.

Rule 5.4 says that no matter how upstanding lawyers are as a profession, and no matter how much the public trusts us, when it comes to money, we are so susceptible to influence that we must protect ourselves from ourselves. Oy. We wonder why the public doesn’t trust lawyers? We don’t trust ourselves. The prophecy has been self-fulfilled.

We Are Stronger Than Regulators Think

A lawyer’s judgment is influenced daily by financial pressures. Undoubtedly, Rule 5.4’s drafters knew about work in a private law firm. But perhaps they drafted the rule before billable-hours goals, utilization and realization rates, and per-partner profitability came into vogue. Because struggling solo lawyers feel pressure to settle cases (if only to manage their financial exposure). Lawyers with “mill practices” emphasize high volume over personalized client attention. Thinking we need to protect the public by limiting lawyers’ financial relationships with non-lawyers sounds noble (maybe), but it lacks support in the empirical data.

Experiments with non-lawyer ownership of law firms have yet to collapse any democratic legal systems. The District of Colombia Rules of Professional Conduct allow non-lawyers to own up to 25% of a law firm. Great Britain began allowing non-lawyer ownership of law firms in 2011. And Australian non-lawyers have been permitted to purchase equity interests in law firms since 2007.

Sadly, it appears that most innovation in the legal profession is coming from outside the practice and is being spearheaded by non-lawyers. Legal Zoom and Avvo have built super-charged internet engines to identify potential consumers of legal services, increase access to legal services, and—to the extent lawyers provide those services—control how the work is routed to lawyers and how much the lawyers are paid. What roles have lawyers played in these developments? Very few, if any. Except, of course, to oppose them.

Fixing the access to justice gap will require innovation. Indeed, the gap has proven so stubbornly resistant to decades of lukewarm policy tweaks that we can conclude a fix will demand game-changing innovation. Other issues plaguing the legal profession will benefit, too.

Innovation requires significant investments of time and money. Practicing lawyers—whose days are often filled only with their provision of legal services—have proven unable (and, perhaps, unwilling) to reinvest their time and money into meaningful innovation.

Lawyers Funding Lawyers

Some lawyers manage to make it happen. Erin Levine of Levine Family Law Group, a full-service family law firm, recently built and launched Hello Divorce, a self-help platform for California family law litigants. She kept her firm open and helping people during her innovation cycle. But most lawyers with great ideas for innovation can’t fathom launching a powerful new innovation at all, let alone doing it while continuing to run a law firm.

Our observation is that lawyers at the forefront of innovation—often with an access-to-justice angle, but not exclusively—seem to be leaving their law practices entirely. Take, for example, Chad Burton of CuroStudio and CuroLegal and his former partner Nicole Braddick of Theory and Principle as two examples. There are more. When they stop practicing law, the rules let them solicit investors. But relying on innovation by non-lawyers and so-called “recovering” lawyers is fraught.

Our rules—or, more precisely, states’ implementation of the Model Rules—hinder the innovation process. Every entity currently offering legal services lacks access to catalytic outside investment.

Imagine if Uber could have launched and grown only by reinvesting its profits (or by relying on taxi companies and their drivers to give them money to develop their disruptive technology and implement their vision). The game-changing innovations would never have happened. What are we leaving on the table? What could outside investment unlock in our industry?

Consider a law firm that wants to implement a costly custom software solution to allow its lawyers to take and resolve pro bono matters at scale. Or a non-profit or low bono firm that needs a significant influx of cash to create and implement a new solution to grow its services.

The profession’s allergy to outside cash prevents these entities from creating or implementing tools that could—without hyperbole—change the way our profession and our society delivers legal services and bridges the yawning access-to-justice divide.

Arrogance Preventing Meaningful Change While Lawyers Are Left In The Cold

Maybe it’s plain arrogance that lets lawyers believe that other professions have nothing to teach us about business or innovation, or that partnerships with non-lawyers cannot grow the market for legal services.

Still, while lawyers sit around grinding our collective teeth about Legal Zoom, long-established market forces drive non-lawyers and their capital to carve up and repackage a host of services that we used to regard as the practice of law.

We have long known, for example, that accounting firms provide tax consulting and strategic planning services that look an awful lot like giving legal advice. There are entire industries that provide employers with “out-sourced” human resources services, assist closely-held businesses in converting to employee-owned (ESOP) companies, review discovery documents, and facilitate completing and filing mechanics liens.

Non-lawyers can own these companies and provide services that used to be performed by lawyers alone. Notably, they can also accept and leverage investors’ cash to do it better, more efficiently, and in more innovative ways.

This trend is not limited to transactional work. The Social Security Administration has decided that non-lawyers may represent claimants in hearings before administrative law judges. That process, for the uninitiated, involves direct examination of the claimant, cross-examination of government experts, and making legal arguments to the ALJ.

A social security benefits services company—not organized or holding itself out as a law firm—is doing exactly the things that lawyers have always thought was their birthright.

In Washington State, the nascent Limited License Legal Technician program allows “technicians” to provide some legal services after completing a one-year educational program and 2,000 hours of field experience. The program is limited to family law for the moment, but there are plans to expand to landlord-tenant law and elsewhere. These are just a few examples.

These entities are exempt from fee-sharing, trust accounting, multi-jurisdictional practice, non-compete, and advertising rules that restrict how lawyers run their businesses. These “outsiders” innovate, invest, solicit venture capital, and partner with other professionals in ways that lawyers may not. All this because lawyers must be “independent.”

There have been efforts to make Rule 5.4 less stifling. But some of the exceptions are as absurd as the rule itself. In some jurisdictions, insurance companies have “captive” law firms that hold themselves out to the public as law firms, but that only defend policyholders of the insurance company that controls the firm. Bar associations—which are, obviously, not licensed to practice law—operate referral services that require lawyers to split fees with them.

We are asserting our “independence” straight to our extinction. The practice of law is being carved up like so many cuts of meat, each slice a value-judgment that what lawyers do is not quite so unique as we lawyers think. Lawyers are missing out on the spoils of these new ventures, of course. But the greater missed opportunity is that we are not even part of the conversation.

Change Is Possible

Our argument for change is not theoretical. Change is possible. Like Britain and Australia, we could allow full or partial non-lawyer ownership of law firms. We could allow sharing of legal fees with non-lawyers (while ensuring the lawyer retains complete control over the attorney-client relationship and decision-making process).

Until ethics rules evolve, lawyers will struggle under the weight of the old ones that directly cripple their innovation. This crisis should be self-evident: lawyers face possible sanction, clients suffer, and access to justice remains as sticky as ever, all because we lack the will and creativity to create a regulatory regime that fosters innovation and empowers us and our profession. If we continue to do nothing, we’ll just keep getting carved to pieces.

2 Comments

  1. Paul Spitz says:

    And to be clear, fee-sharing with non-lawyers already happens every single day, across the country, by every lawyer and law firm. Most overtly, fee sharing happens when you collect payment by credit card, and your merchant processor charges a fee based on a percentage of the card transactions. Less overtly, it happens when you pay your office rent, utilities, employees, office supply company, etc. Where does that money come from? It comes from fees paid by clients.

    • For the most part, fee-sharing does not include paying expenses that a lawyer has an independent obligation to pay, regardless of whether the lawyer’s clients pay their bills. Fee-sharing refers to how the fee gets divided up when it comes in. I agree that credit card payments seem to be an exception that regulators accept. However, it doesn’t to offend the traditional policy goals that Rule 5.4 purportedly protects, such as a lawyer’s independence of judgement or a paying for individual referrals. Somewhat like Google adwords, the credit card company has no idea what the payment is for and the entire transaction is automated, without any human judgement involved.

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