Back to the Future: Is It Time to Consider Alternative Business Structures for Law Firms?

Chicken Little may fret that nonlawyer ownership of law firms would cause the sky to fall. But countries that have allowed the practice have averted disaster, and U.S. firms are at a competitive disadvantage because of constraints on firm ownership, according to an April 26, 2018 panel on alternative business structures at the Spring 2018 ABA National Legal Malpractice Conference.

The panelists were Andrew Finkelstein, managing partner at Jacoby & Meyers in New York and lead plaintiff in a Second Circuit case involving nonlawyer ownership of firms; Deepak Gupta, a Supreme Court advocate and founding principal of Gupta Wessler in Washington, D.C., whose practice includes consumer, commercial, and constitutional law litigation; and James McCauley, ethics counsel at the Virginia State Bar and author of number articles on alternative business structures.

Background – Rule 5.4 and Resistance to Change

Over the past two decades, the ABA and state bars have wrestled with proposals to modify the prohibition against nonlawyer ownership of law firms and multidisciplinary practice, even as international jurisdictions have evolved to permit regulated alternative ownership structures, and accounting firms have encroached on traditional legal services.

ABA model rule 5.4 generally forbids lawyers from sharing fees with nonlawyers. The fee-sharing ban is black letter, except for a nonprofit carve out, and state bars enforce the rule without any showing of interference with a lawyer’s professional independence. The ABA has debated changes to its policies on nonlawyer ownership and multidisciplinary practice throughout the preceding decades, ending at a standstill in the face of substantial resistance by the bar.

In the UK and Australia, nonlawyers can have an ownership interest in a law firm and can participate in the delivery of legal services. They can also be passive investors in a law firm. The ABA has studied these models through several commissions and in 2016 issued a whitepaper on whether the House of Delegates should pass a resolution encouraging states to consider liberalizing the nonlawyer ownership rules. Yet no action has been taken. The bottom line, McCauley said, is that the bar does not want “barbarians to come through the gates.”

At the state level, Virginia has rejected proposals for multidisciplinary practice, and several states are considering similar proposals. Two states have modified their rules to allow for limited nonlawyer participation in the profession. The Washington State Bar Association’s Limited License Legal Technician program allows paraprofessionals to provide legal services to clients, though they cannot represent clients in court. The District of Columbia version of rule 5.4, responsive to a market that includes lobbyists, allows nonlawyer ownership of a law firm. To add to the mix, the South Carolina Supreme Court approved Legal Zoom’s business model, which had been challenged as the unauthorized practice of law.

Challenging the Status Quo

In Jacoby & Meyers, LLP v. Presiding Justices, <-cite-parallel ref="BL\2017\93470">2017 BL 93470, 2d Cir., No. 15-2608, 3/24/17, Finkelstein, on behalf of the law firm of Jacoby & Meyers, challenged the nonlawyer ownership prohibition in rule 5.4 as an unconstitutional interference with the First Amendment right of association. Ultimately, the Court of Appeals ruled that lawyers do not have unfettered rights of association if they are associating for profit. Finkelstein said that the purpose of the case was to try to restructure the market so that consumers have more access to legal services, and that changes to the rules relating to ownership would give organizations financial incentives to provide the capital that would expand access to legal services. The question of alternative business structures naturally tees up questions of how regulation of attorneys affects access to justice.

An antitrust lens might be appropriate, Gupta said, suggesting that the commercial speech doctrine has its genesis in antitrust concerns. Moreover, the Supreme Court’s decision in North Carolina State Board of Dental Examiners v. FTC, <-cite-parallel ref="SCt\135\1101">135 S.Ct. 1101 (2015), in which it held that a state occupational licensing board primarily composed of persons active in the market it regulates only has antitrust immunity when it is actively supervised by the state, is likely to change lawyers’ approach to some aspects of self regulation. In response to the North Carolina case, Virginia disbanded its unauthorized practice of law committee because it did provide for nonlawyer review, and restructured the process so as to be consistent with Supreme Court’s holding.

The Sky is Falling

Key critiques of alternative business structures concern the erosion of core values associated with the profession, such as privilege and confidentiality, and the commitment to public service and pro bono work. But empirically, McCauley said, based on the experience overseas, there is no evidence of any such erosion of values. Before modifying its rules to provide for alternative structures, the UK Law Society had frequently been criticized as unresponsive. Now, data shows that complaints are down and that client satisfaction has improved. Although there is not much evidence that the experience overseas has improved access to legal services for low income clients, McCauley speculated that a reason for that might be that law firms are not interested in providing those services for profit because they already provide them on a pro bono basis, and low income clients are served by nonprofit legal services corporations.

As far as ABA consideration of nonlawyer ownership is concerned, McCauley described a fear that “money talks” and that law firms may become captive, thus compromising the independence of the profession. But it is a myth, he said, that the profession is independent. Bank executives and Fortune 500 companies already dictate many aspects of law practice, from conflicts of interest to programming in law firms. Finkelstein recognized that there is an argument that the benefits of alternative business structures have not been seen, but in Australia, England and Wales, Scotland, Italy, Spain, Denmark, Quebec, Singapore, and New Zealand, the “chicken little” concerns have not proven out.

The Middle Market

A fundamental issue is that lawyers are dealing with two markets but that the rules approach it as one market. At the top end of the market are professionals who may not be lawyers, such as policy professionals and economists. Lawyers should be able to work with these professionals to provide sophisticated services, and denying U.S. firms the ability to deliver services this way puts U.S. firms at a competitive disadvantage.

At the other end of the for-profit market are simple legal problems like wills, divorces, and landlord/tenant issues. As it stands, lawyers are too expensive for most people to seek assistance from a lawyer for these kinds of services, even with the current glut of lawyers. Different categories of legal service providers might arise from alternative business structures, such as storefront chains, or mom and pop shops that would provide tax services with legal services, or perhaps family law services provided in partnership with psychologists.

Rather than seeing a lawyer in a reactive posture, clients could see lawyers for proactive reasons, similar to getting a checkup. The future of middle market legal services might be similar to healthcare services, where online delivery provides access to healthcare, even if not necessarily from a doctor. But capital is needed to compete in this space, though attendees questioned whether an infusion of capital could solve these problems. The panelists responded that capital would mean loans on better terms, and firms would also be able to invest in leverage technology through economies of scale.

Competition from Abroad

An attendee asked how cross-border merger activity among law firms is impacting thinking on alternative business structures. Finkelstein responded that he was not aware of any Australia or UK firm that had sought to deploy money from nonlawyer ownership in the U.S., but noted that those entities have a competitive advantage. Legal Zoom is registered in the UK and has filed paperwork to go public; now time will tell if it can reach the population needing its services.

Finkelstein pointed out that the hedge funds that own firms like Legal Zoom recognize how lawyers have constrained our ability to compete, especially in the middle market. McCauley observed that Slater & Gordon had a successful model to reach the middle-income population, though that firm made certain financial missteps and expanded too quickly. That firm had gone public in Australia and grew fully in Australia before expanding to the UK, where it ultimately failed due to problems its business plan.

Challenges and Approaches to Regulating Nonlawyers

Only individual lawyers are subject to discipline in the current system, giving rise to questions as to how nonlawyers could be regulated. The panelists offered several different schemes. A nonlawyer might voluntarily subject herself to the authority of the state bar, and a supervising lawyer would also be subject to discipline. Without a licensing framework, there is no way to take away a license from a nonlawyer, but a nonlawyer could be prevented from entering into another practice with other lawyers. The most effective regulatory framework includes the ability to suspend a firm from doing business. Although not part of the regulatory scheme in the U.S., this has been effective in the UK. Models from overseas include different disciplinary systems for firms to opt in to: a lawyer-only firm opts into one system, while a lawyer and nonlawyer firm opts into another.

Conclusion

The panelists provided a comprehensive overview of the considerations surrounding alternative business structures for law firms, offering practical solutions to common critiques. Still, any change in the ability of U.S. lawyers to enter into partnerships with nonlawyers is likely to be isolated and incremental because of longstanding resistance from the bar.

The impulse to protect the independence of attorneys is surely a sound one. But concerns about access to legal services at the middle income level and increasing competition from overseas firms, accounting firms, and services such as Legal Zoom may provide impetus for further consideration.