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Ethics 20/20 Stands by Plans to Propose Latitude for Firms to Have Nonlawyer Owners

Wednesday, October 26, 2011

By Joan C. Rogers  

DENVER—The ABA Commission on Ethics 20/20, meeting here Oct. 14-15, decided to go ahead with its plans to circulate nonfinal recommendations to allow law firms to include nonlawyer owners, or at least ease barriers to fee-sharing when jurisdictions have conflicting rules on nonlawyer owners.

The commission tentatively voted in August to prepare and publish a set of proposals on these subjects.

“Alternative law practice structures,” or ALPS as the commission refers to them, have long been forbidden by the ABA model rules and by every U.S. jurisdiction except the District of Columbia, which for two decades has allowed partial nonlawyer ownership of law firms. Likewise, ABA rules have long prohibited lawyers from sharing legal fees with nonlawyers in most circumstances.

But the commission's working group on alternative business structures concluded that in light of developments around the globe, the time has come for the ABA to relax its rules somewhat on the subjects of nonlawyer partners and the sharing of legal fees with firms that include nonlawyer owners.

In Denver, the commission debated how best to explain and present the working group's ALPS proposals, and hashed over a possible concern about nonlawyers' voting rights. The commission also discussed tentative proposals that would allow some forms of fee-sharing between two firms, or between two offices of the same firm, that are located in jurisdictions with inconsistent rules on nonlawyer ownership.

Despite some trepidation about what the reaction might be, the commission ultimately decided to release preliminary ALPS and fee-sharing proposals for public comment. “If we're the lighting rod, at least we'll see what the lay of the land is,” said commissioner Gerald W. VandeWalle, chief justice of the North Dakota Supreme Court.

In other action at the meeting, the commission decided to file its draft white paper on alternative litigation finance as an informational report to the ABA House of Delegates. After the meeting, the draft was released for public comment.

The commission also heard from speakers who object to its draft proposals on practice by foreign in-bound lawyers and other recommendations on multijurisdictional practice.

New Timetable

The commission was launched in August 2009 to review the ABA Model Rules of Professional Conduct and the U.S. system of lawyer regulation in light of advances in technology and the increasingly global nature of law practice.

With a scheduled three-year life span, the commission originally planned to present all of its recommendations for consideration by the ABA House of Delegates at the bar group's annual meeting in August 2012.

But the commission has decided that, if additional funding can be obtained, the panel's work will continue for an additional six months. Under this plan, commissioners will submit about half of their proposals for the delegates' review in August, with the remaining recommendations to be presented for consideration in February 2013.

Nonlawyers Working in Firms

The working group's yet-to-be-released ALPS proposal would amend Model Rule 5.4, which governs a lawyer's professional independence, to permit nonlawyers working in a law firm to have an ownership interest in the firm under certain narrowly defined circumstances.

In addition to limiting nonlawyer ownership to a minority share, the proposal states that the firm's sole purpose must be to provide legal services to clients and that any nonlawyer owner must have demonstrable good character.

Addressing fellow commissioners by phone, Frederic S. Ury characterized the key benefit of the proposed change to Rule 5.4 as “giving lawyers the ability to innovate.” He practices with Ury & Moskow in Fairfield, Conn.

Commissioner Theodore J. Schneyer, professor emeritus at the University of Arizona law school, characterized the proposal as “extremely modest” compared with models implemented in other countries which allow law firms to have passive investors or float stock. The proposal poses “very minimal risks” and offers the potential for “somewhat modest benefits,” he said.

Voting Control Issue

The commission discussed several possible concerns about the draft proposal, such as whether its provision on voting interests could open the door for nonlawyer owners to act as tiebreakers when two groups of partners disagree on an issue.

Some commissioners suggested that the proposal should be reframed to prevent firms from making certain decisions without a majority vote of the lawyer owners, while others believed that firms should be able to resolve this voting control issue for themselves and that law firms may be better able to recruit top nonlawyers as partners if they can offer them meaningful voting rights.

After hearing this debate, commission co-chair Jamie S. Gorelick of WilmerHale in Washington, D.C., said she did not sense a groundswell of support for changing the provision on voting rights. The commission can revisit the issue in light of public comment on the draft proposal, she noted.

Interfirm Fee Sharing When Rules Differ

The commission also discussed a draft recommendation that a new comment be added to Model Rule 1.5 on the subject of fee-sharing to deal with growing inconsistencies that may arise among jurisdictions on the question of nonlawyer ownership in law firms.

The new comment addresses choice of laws regarding division of fees between lawyers who are not in the same firm. It would state that under Rule 1.5(e), a lawyer may divide a fee with a law firm in which a nonlawyer is a partner or has an ownership interest if that form of fee sharing is permitted by the jurisdiction in which the firm has an office and whose rules govern the firm's nonlawyer partners or owners.

The commission's chief reporter, professor Andrew M. Perlman of Suffolk University law school in Boston, explained at the meeting that the draft comment essentially codifies a Philadelphia bar ethics opinion. That opinion is the only one on the issue, and there's no contrary authority, he said. (See Philadelphia Ethics Op. 2010-7, 26 Law. Man. Prof. Conduct 556 (2010).)

Commissioner Stephen Gillers of New York University law school asked Perlman whether the proposal would allow fee-sharing with a firm that has passive investors. It would, Perlman answered.

Fellow commissioner Elizabeth B. Lacy, a senior justice of the Virginia Supreme Court, expressed concern about the implications of the proposed comment. You're saying, she asked Perlman, that Rule 1.5 has allowed division of fees with a firm that has nonlawyer partners? Doesn't this comment sort of approve the idea of nonlawyer partners? she asked. We're saying Rule 1.5 is ambiguous on this issue, Perlman responded.

As the discussion continued, several commissioners expressed support for the new comment, which will be released as a draft proposal to seek public reaction.

Intrafirm Fee Sharing When Rules Differ

The commission also decided to seek public feedback on a proposal that would amend Model Rule 5.4 to provide much the same authority for fee-sharing within a firm that has offices in jurisdictions with differing rules about nonlawyer ownership.

In essence, the proposal would allow lawyers to share fees with nonlawyers who are in the same firm so long as that form of fee-sharing is permissible in the jurisdiction whose rules govern the nonlawyer.

Although the commission tentatively endorsed this idea in August, Perlman said that while drafting the proposal he grew concerned that it might be viewed as asking states to accept through the back door what they wouldn't accept through the front door. He consulted with the chairs of the commission's working groups on alternative business structures and uniformity, and they put together a memorandum discussing the potential concerns and identifying various alternatives to the proposal.

At the meeting, Gorelick put the issue in these terms: If my jurisdiction has rejected the D.C. model allowing nonlawyer owners, why should I say it's okay for lawyers in a firm to share fees with a nonlawyer partner? Do we go there at all? she asked.

Gillers, who chairs the working group on uniformity, summarized the possible concerns and alternatives for his fellow commissioners. It seems anomalous, he said, to endorse fee-sharing between two firms in jurisdictions with different rules on nonlawyer partners, but not between different offices of the same firm.

But the concern is that if nonlawyers are owners of a firm, they may be able to impose their wishes on the lawyers in the firm, he explained, saying that this risk is not present when one firm divides fees with another firm that has nonlawyer owners.

One possible approach where a firm has offices in jurisdictions with inconsistent rules on nonlawyer partners was offered in ABA Formal Ethics Op. 91-360 (1991). The opinion recommended keeping the two offices separate, financially and otherwise. But that solution is “purely cosmetic,” Gillers remarked.

Range of Ideas

Gillers also broached the idea of amending Model Rule 5.4(a)(3) to make clear that firms may include nonlawyer owners in a profit-sharing plan, if permitted in the jurisdiction whose rules govern the nonlawyer's ownership interest and if the nonlawyer performs professional services that assist the firm in providing legal services to clients.

Several commissioners seemed to like that idea and expressed concern that the approach tentatively approved in August for intrafirm fee-sharing when rules on nonlawyer owners differ may be too far-reaching. Others believed that the approach favored in August is more up-front and straightforward, and that the suggested clarification to the rule on profit-sharing with nonlawyers may be viewed as somewhat “sneaky.”

After a lengthy discussion of these issues, the commission ultimately decided to stick with the approach it tentatively endorsed in August, but include in its draft report a description of other possible ways to enable firms with multiple offices to recognize the contributions of nonlawyer owners in a jurisdiction that allows them.

The commission's draft white paper on alternative litigation finance can be viewed at http://www.americanbar.org/content/dam/aba/administrative/
ethics_2020/20111019_draft_alf_white_paper_posting.pdf
.
 


Ethics 20/20 Commission Puts Out Draft White Paper on Alternative Litigation Funding

At the ABA Ethics 20/20 Commission's October meeting in Denver, the panel decided to file a draft white paper on alternative litigation finance (ALF) as an informational report for examination by the ABA House of Delegates.

A few days later, the commission circulated the draft ALF paper for public comment, with a cutoff date of Nov. 20.

The paper explains that “alternative litigation finance” refers to the funding of litigation activities by sources other than the parties themselves, their counsel, or other entities with a preexisting contractual relationship with one of the parties, such as a liability insurer.

By way of background, the paper provides an overview of ALF funding mechanisms, including consumer legal funding, investing in commercial litigation, and loans to lawyers. It also reviews common-law doctrines historically affecting ALF, such as maintenance and champerty, usury, and unconscionability.

The heart of the document discusses the professional responsibility issues that lawyers may encounter as a result of their clients', or their own, interaction with ALF, including conflicts of interest, interference with professional judgment, fees and fee-splitting issues, confidentiality concerns, and privilege waiver.

“In the event that the lawyer's involvement in the funding process significantly limits the lawyer's capacity to carry out these professional obligations, the lawyer must fully disclose the nature of this limitation, explain the risks and benefits of the proposed course of action, and obtain the client's informed consent,” the paper states.


The ABA/BNA Lawyers’ Manual on Professional Conduct is a joint publication of the American Bar Association Center for Professional Responsibility and BNA.

Copyright 2011, the American Bar Association and The Bureau of National Affairs, Inc. All Rights Reserved.  

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