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Expanding Law Firm Ownership: a potentially permanent impact on the legal industry

By Michelle Truong, and edited by Brenda Hansen and Tim Zunich.

Generally, lawyers are governed by the rules of professional responsibility. Many states have adopted the model rules from the ABA or have used them as a guide to create their own unique set of state rules. One of the rules, ABA Model Rule of Professional Conduct 5.4 prohibits non-lawyers from practicing law and owning or investing in law firms. Reforms to this rule have gone into effect in D.C., Washington, Utah, and Arizona partially as an effort to increase access-to-justice. While it is unclear whether COVID-19 has accelerated revisions to Rule 5.4, the rule is changing throughout the country. Below is a summary of the changes to Rule 5.4 by state.


Rule 5.4 changes to date:

District of Columbia

Effective since 1991, D.C.’s Rule 5.04 allows for lawyer and non-lawyer partnerships, if their sole purpose is to provide legal services to clients. [1] This expansion of the rule does not allow corporations or investment banks to acquire parts of law partnerships or practices. Although this rule rejects an absolute prohibition against lawyers and non-lawyers joining together to provide collaborative services, it continues to impose the traditional ethical requirements on those providing legal services.


On January 24, 2020, the D.C. bar committee proposed a rule that would be even less restrictive for non-lawyers to partner with lawyers. The rule allows for “alternative business structures,” which is a legal service business model that may allow for external investment in a law firm, and non-lawyer ownership of a law firm. The rule also allows for “multidisciplinary practice," which is a type of alternative business structure that provides both legal and non-legal services. The Big Four accounting firms, EY, PwC, Deloitte, and KPMG, are prime examples of multidisciplinary practice, and with the regulatory reform, could offer full services, including legal services, in addition to financial and accounting services, at competitive or market impacting prices.

Since January, the D.C. bar committee has received public comments about the proposed changes and benchmark data on how many and what types of legal service businesses have formed in the city that include non-lawyer partners.


In a March 9 letter, the U.S. Chamber of Commerce’s legal policy arm, the Institute for Legal Reform, opposed the proposed change to the D.C. rules involving third-party litigation. The Institute’s president, Harold Kim, wrote in a 14-page letter co-signed by the American Tort Reform Association and two business trade groups that, “relaxing Rule 5.4 any further to permit fee-sharing with, or ownership of, law firms by TPLF companies would pose deleterious ethical and normative consequences for D.C.’s civil justice system and should be strongly rejected.” The D.C. bar committee has yet to reach a decision on further reform. The arguments in opposition of a change to the rule is typical and will be discussed further below.


Washington

Washington did not reform Rule 5.4 in the same way as D.C. but has provided another avenue to increase access to justice. In 2012, the Washington Supreme Court approved a rule change that permitted non-lawyers to practice only family law in the state. [2] Washington was the first state to create a quasi-lawyer category of professionals known as a Limited License Legal Technician, or LLLT. [3] In 2015, the Washington state allowed LLLT to become minority owners of law firms. However, on June 4, 2020, the Washington Supreme Court voted to sunset the LLLT program because of a lack of participation and funding. [4] Currently licensed and new LLLTs may complete the program if they need the admission requirements by the deadline of July 31, 2022. [5]


Utah and Arizona

On August 14, 2020, the Utah Supreme Court approved the regulatory reform allowing for non-lawyer ownership or investment in law firms and permit legal services providers to try new ways of serving clients during a two-year pilot period. [6]


Just two weeks later, on August 28, 2020, Arizona followed suit approving non-lawyer ownership and non-lawyer licensees in access-to-justice reforms. The Arizona Supreme Court also approved a new category of non-lawyer license called “Legal Paraprofessionals,” who will be able to provide limited legal services to the public, including presenting clients in court. With limited jurisdiction in civil and criminal matters, LPs will be able to practice in administrative law, family law, debt collection, and landlord-tenant disputes.


Illinois and California

Illinois and California are considering reforming this rule. The Chicago Bar Association and Chicago Bar Foundation Task Force on the Sustainable Practice of Law & Innovation released a report and recommendations for reforming regulations on the delivery of legal services. The recommendations include: (1) help lawyers connect to potential clients and offer affordable and accessible solutions; (2) help people recognize they have a legal problem and identify where they can turn for affordable and reliable legal problem and identify where they can turn for affordable and reliable legal help; and (3) spur innovation in the legal profession and the delivery of its services. [7] The task force suggested changing the Rules of Professional Conduct or adopting new regulatory models to help implement the recommendations. The task is in the process of reviewing the comments, after a 30-day public comment period that ended on August 21, 2020. The next step is approval by the Chicago Bar Association and the Chicago Bar Foundation.


The California Task Force on Access Through Innovation of Legal Services submitted a report and seven specific recommendations on March 6, 2020. Any regulatory changes will likely need the approval of the California Supreme Court and the Legislature, including the Consumer Attorneys of California and Public Counsel who currently are opposed to these changes. The state bar’s board of trustees will vote on a series of proposed changes to its bar rules in January 2021, including one proposal to amend its Rule 5.4 to permit law firms to share fees with non-lawyers. [8]


Connecticut and Oregon

Connecticut and Oregon are also considering reforms to rule 5.4. Connecticut created a State of the Legal Profession Task Force, which held a launch meeting for a study of alternative business and law school training in December 2019. [9] They are aiming to produce a report by 2021.


As of fall 2019, the board of the Oregon State Bar voted in favor of liberalizing regulations to allow licensed paraprofessional to provide some legal services without a servicing attorney.


The Impact of Reforming Rule 5.4

These changes to rule 5.4 could permanently transform the legal industry. Clients can turn to alternative service providers. Increasing the number of service providers in the legal market likely will affect the price for legal services. Non-traditional legal service providers may be able to leverage economies of scale to provide legal services in addition to their current service offerings. The Big Four accounting firms are the most obvious example of the type of company who could offer legal services in addition to their current suite of services. An accounting firm would already have a relationship with the client and access to their confidential financial information. Offering legal services would be a natural extension of tax and audit services that these firms already provide.


Initially, ABA Model Rule of Professional Conduct 5.4 was implemented to protect lawyers and clients. According to the rules of professional conduct a lawyer owes a duty of loyalty to his clients. This dictates that the lawyer be free from conflicts of interest. This not only means that the lawyer must avoid conflicts between present and former clients, but also avoid conflicts with the lawyer’s own interests.


“The core value of the independence of the profession would be severely challenged by the dual allegiances owed to clients and demanded by investors, shareholders and managers. No man (or) woman can serve two masters.” [10] The fear was if a lawyer and non-lawyer went into business together to open a law firm, the non-lawyer’s goals and objectives of maximizing profit could compromise the lawyer’s judgment, creating a conflict of interest as he must serve the best interest of his client and not his non-lawyer partner. Additionally, the non-lawyer partner would not be bound by the ethical rules that apply to lawyers which could create tension as lawyers are ethically bound to act in their clients’ best interest, and a typical business partner’s obligation is to maximize profit for their stakeholders. This is the typical opposition to the expansion of rule 5.4.


In practice, these ethical concerns have not occurred at any higher rate than that of a traditional law firm. D.C. has experienced no rise of related disciplinary violations in the two decades since rule 5.4 was expanded. Critiques of those opposed to rule expansion speculate that these ethical arguments are raised to insulate the legal industry from increased competition rather than out of actual concern for ethical violations.


Should Lawyers be Worried?

Disadvantages of Rule 5.4 Reform

In addition to the ethical concern noted above, opponents of the rule reform worry that increased competition that will hurt smaller firms and commoditizing the legal industry will lead to a loss of control over setting of prices and terms for legal services.

  1. Threat to Smaller Firms Most would believe that reforming Rule 5.4 is a disadvantage to big law firms who would now have to compete against a full-service firm like one of the Big Four. However, big law firms have the resources to continue operations, especially with mature clients and startups who have the cash flow to pay for the legal services. On the other hand, smaller law firms or solo practitioners tend to serve the low-income and middle class market. Most smaller firms do not have the same resources as a large law firm to compete with non-lawyer participants entering the market. Smaller law firms may be at a disadvantage when competing with other firms who have implemented technology or allowed legal paraprofessionals to handle cases which would reduce pricing for these services. Thus, some attorneys opposing this regulatory reform, argue that allowing non-lawyers to own or invest in law firms detrimentally pulls business away from lawyers who spent years in law school, gaining legal experience, building up clientele, and opening their own law firms.

  2. Loss of Control Over Price and Term Setting This regulatory reform may also open the door for venture capital funded startups to set up AI-powered legal self-help websites. Anyone can access these sites with their legal questions, and a chatbot will respond with answers and corresponding documents. A tax attorney in Los Angeles, Steven Chung, says expansion of rule 5.4 will result in the “creation of ‘Uberlaw’ where the website connects the client with the attorney. But the website will set the price and terms of the attorney-client relationship. And if the client gives the attorney less than five stars, the lawyer can be removed. Meanwhile the lawyer will still be responsible for her overhead and will be responsible if something goes wrong.” [11]

Thus, with the website setting the price, lawyers do not have as much control over their services, making it harder for lawyers to budget and survive. With the website setting the terms, lawyers may also have to compromise their own standards and terms in order to take on this business. After taking on this business and even if the legal service went smoothly, a client may nonetheless give a low rating which severely impacts the attorneys’ future business. For example, if a client did not like price, lost the case, or just plainly did not like the attorney’s personality, the attorneys’ rating could be negatively affected, pushing him/her to the bottom of the Uberlaw site as the algorithm recommends attorneys based on positive customer ratings. With just one bad review which the lawyer has no control over, he/she may see a reduction in business and an ability to attract clients. One attorney claims, “allowing non-lawyer participation and ownership will diminish the profession of law to just another commodity.” [12]


While these concerns are valid, others feel reforming rule 5.4 creates certain advantages and benefits the legal industry as a whole.


Advantages of Rule 5.4 Reform

A Stanford white paper discussed possible advantages to reforming Rule 5.4, including the benefits for consumers and lawyers, promoting innovation, and increasing access to justice. [13]

  1. Affordable Legal Services By reforming Rule 5.4, consumers will have greater access to justice at more affordable prices. With non-lawyers owning part of a law firm, lawyers can also focus on quality work and client relationships, rather than dealing with the operational and business development aspects of the firm.

  2. Client-Focused Law Firm Structure Traditionally, attorneys bill their time in six-minute increments. This method of charging clients results in a short-term goal of bringing in revenue or having to finance debt to stay in business. By reforming Rule 5.4 and allowing non-lawyers to contribute equity, lawyers can have research and development budgets and invest in long-term projects that improve legal services. [14] Additionally, evolving law firms who want to stay competitive can consider alternative options including contingent fee arrangements and value-based pricing to drive costs down for clients. In the short term, alternative fee arrangement may not maximize profits. However, in the long term, alternative fee arrangements strengthen client loyalty, the firm’s reputation, and result in more referrals for new clients.

  3. Innovation for Law Firms Evolving law firms with capital structures are also able to make investments in technology that may decrease profit in the short term but increase profitability and impact in the long term. In today’s digitization era, technology is used to make processes more efficient as most tedious tasks are automated. With COVID-19 forcing many businesses to go remote, clients expect more service with less. Attorneys working from home need the appropriate software and technological capabilities to deliver services. Thus, reforming Rule 5.4 to allow non-lawyers to own and invest in law firms will allow for innovation. Tech companies and entrepreneurs have more incentive to invest in the legal industry if they are able to own a part of the law firm. Lawyers will reap the benefits of training and implementing this new technology, while focusing on building rapport with clients.

  4. Access to Justice in a Time of COVID-19 Given all that is happening—the pandemic, natural disaster, and the threat of domestic terrorism—access to justice is especially important now more than ever. The above benefits to clients and lawyers help us get one step closer to solving this issue of access to justice.

The legal profession is evolving and COVID-19 has accelerated inevitable changes. Thus, it is crucial that we become aware of these changes and adapt accordingly. Specifically, law firms should think about implementing ways to remain competitive in a changing legal market. In-house and individual clients, on the other hand, should learn about the various providers and services offered before deciding on a legal services provider. Laws are probably changing for the better, and consumers will definitely benefit the most.

 

Notes:

 

About the Author

Michelle Truong is a third-year law student at Santa Clara University School of Law. She is a part of the Tech Edge JD program and serves as Co-President of the Vietnamese American Law Students (VALS), Director of Fellowship and Bay Area APALSA of the Asian Pacific American Law Students Association (APALSA), Managing Editor of the Journal of International Law, Production Editor of the High Tech Law Journal, and Co-Mentorship Chair of Vietnamese American Bar Association of Northern California (VABANC). She was the Legal Operations Extern at UpLevel Ops, where she wrote this article while helping businesses become more efficient and effective through people, process, and technology. She also externed for Judge Beth Labson Freeman at the U.S. District Court, Northern District of California and for the Honorable Justice Nathan D. Mihara at the California Sixth District Court of Appeal. Currently, she is a Summer Associate at Weil, Gotshal & Manges LLP and is super excited to be a part of the Private Equity and M&A team.


About the Editors

Brenda Hansen, Senior Consultant, UpLevel Ops

Brenda Hansen brings 20 years of experience in the legal industry to the UpLevel Ops team. Most recently Brenda was the Compliance and Legal Operations Lead for Biogen. In this role, she managed the global operations of the function by focusing on administrative support, process and procedure efficiency, and system implementation and management. Brenda is known for her ability to partner with business leaders in identifying gaps and producing solutions that generate new levels of efficiency, employee satisfaction, and productivity.


Prior to joining Biogen, Brenda worked for the national law firm of Jackson Lewis LLP. In 2011, she was promoted to Office Administrator from Litigation Paralegal as a result of her reputation for strong execution and collaboration skills. As the Office Administrator for the Washington DC Office, Brenda oversaw the daily operation and management of administrative, fiscal, and business-related activities.


Currently based in Boston, Massachusetts, Brenda holds a Masters of Business Administration from D'Amore-McKim School of Business at Northeastern University, and a Bachelor of Science Degree in Legal Studies from Bay Path University.

Tim Zunich, Consultant, UpLevel Ops

As a Consultant at UpLevel, Tim works as part of a team on various client projects including operations assessments, intake and ongoing interviews, drafting processes and documents, designing surveys, creating presentations, technology implementation and more. Tim is focused on delivering efficient and creative solutions for the in-house legal departments. Tim is a member of the California Bar and specializes in Business Law and Emerging Enterprises.

Before joining UpLevel in 2019, Tim received his JD from Santa Clara University School of Law and has undergraduate degrees in marketing and entrepreneurship from the University of Dayton. Tim has in-house experience prior to law school as a paralegal and sales desk administrator and spent his summers during law school interning in the legal departments at both Oracle and Maxim Integrated.


When not working Tim can be found on the tennis court or in the kitchen cooking.


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