ABA Commission Revives Nonlawyer Firm Ownership Debate

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By Samson Habte

April 15 — The ABA Commission on the Future of Legal Services April 8 revived a contentious debate by seeming to signal its possible support of regulatory reforms that would permit nonlawyers to become owners and managers in U.S. law firms.

The commission released a 15-page “issues paper” that recounts the potential benefits and drawbacks of eliminating long-standing ethics rules that in most states prohibit lawyers from granting nonlawyers equity stakes in law firms or practicing in multidisciplinary partnerships with nonlawyers.

The commission requested comments—which will be accepted until May 2—on whether it should ask the ABA House of Delegates to pass a resolution encouraging state courts to liberalize ethics rules that forbid nonlawyer ownership in law firms and multidisciplinary partnerships between lawyers and other professionals.

The commission is also looking at possible ways to regulate nonlawyers who increasingly are offering services that traditionally were reserved to lawyers and law firms. See 32 Law. Man. Prof. Conduct 242.

Some History

The commission pointed to the purported success of reforms in other countries that permit nonlawyers to hold ownership stakes in law firms and become partners with lawyers in “Alternative Business Structure” (ABS) entities that provide legal and nonlegal services.

Past efforts within the ABA to ease U.S. restrictions on multidisciplinary partnerships failed in the face of stiff resistance from within the profession.

In 2000, the ABA House of Delegates voted to reject such a move by a 3-1 margin. See 16 Law. Man. Prof. Conduct 367.

Observers told Bloomberg BNA that past will likely be prologue—that the current drive for liberalization seems likely to fall victim to the same institutional opposition that doomed the 2000 reform effort.

In 2012 the ABA Ethics 20/20 Commission studied the issue of nonlawyers' financial participation in law firms, but ultimately decided not to make any recommendation to the ABA House of Delegates on the subject. See 28 Law. Man. Prof. Conduct 250.

Currently only Washington state and the District of Columbia permit some degree of nonlawyer ownership in law firms, although other states are studying the concept. See 31 Law. Man. Prof. Conduct 187; 31 Law. Man. Prof. Conduct 760.

‘Pitchforks and Torches.'

Mark Dubois, a former chief bar prosecutor in Connecticut who now practices in Geraghty & Bonnano LLC in New London, Conn., told Bloomberg BNA he believes ABA delegates will probably respond to a resolution on ABS liberalization with “pitchforks and torches.”

Dubois pointed to the extensive debate that erupted earlier this year when delegates were asked to vote on a resolution adopting the Model Regulatory Objectives for the Provision of Legal Services, which many saw as a predicate for ABS reform proposals. See 32 Law. Man. Prof. Conduct 114.

The delegates approved the regulatory objectives, but they added language reaffirming the ABA's opposition to “nonlawyer ownership of law firms.”

Liberalization of nonlawyer ownership and multidisciplinary practice rules “is clearly an idea whose time has come,” Dubois said. But “lawyers have been very slow to adapt to change,” he said, and “it will take a generation before you get them to change their minds.”

The commission's vice chair, Andrew Perlman, referred questions about the issues paper to the ABA's communications division. An ABA staffer told Bloomberg BNA the organization does not comment on communications issued by the commission.

Pros and Cons

The commission's issues paper analyzed the “potential benefits and risks of ABS.”

On the benefits side, it cited proponents who have said ABS reform “will increase access to justice” by reducing the costs of acquiring operating capital—which would allow firms to pass those cost-savings on to consumers in the form of lower legal fees—and by facilitating the creation of bigger firms that “may be better for access to justice, due to risk-spreading opportunities and economies of scale and scope.”

The commission said permitting multidisciplinary practice structures can also enhance operational flexibility, allowing law firms to offer “an integrated team approach to serving client interests—in other words, providing clients with a ‘one-stop shopping' approach for problems requiring services in different fields.”

But the issues paper also cited critics who have argued that “nonlawyer ownership could pose a threat to the quality of legal services, particularly if lawyers feel beholden to investors rather than their clients.”

In addition, the paper repeated opponents' concerns that “nonlawyer ownership may threaten attorney-client privilege” because courts might refuse to uphold the privilege in situations where a nonlawyer partner is privy to privileged conversations with clients.

Supportive Studies

Near the end of its paper the commission summarized the conclusions of several studies that have been conducted on ABS in other countries, particularly Australia, England and Wales.

According to the bullet points the commission listed, the studies are largely positive:

  •  “There is no evidence that ABS has caused harm.”
  •  “ABS has increased funding for innovation.”
  •  “Jurisdictions have stayed with ABS.”

 

Feedback Request

The commission requested input from the public on the “potential benefits and risks associated with ABS, including whether there is any other available evidence on the impact of allowing ABS.”

The group asked for feedback on “the relative advantages and disadvantages [of] five forms of ABS” entities: (1) Entities that deliver only legal services and in which individuals who are not licensed lawyers are permitted to actively participate in the entities’ operations and have a minority ownership interest; (2) The same as (1), but where there is no limitation on the percentage of nonlawyer ownership; (3) Entities that provide both legal and non-legal services and in which individuals who are not licensed lawyers actively participate in the entities’ operations and are permitted to have a minority ownership interest; (4) Same as (3), but where there is no limitation on the percentage of nonlawyer ownership; and (5) Any of the above options but with passive investment by nonlawyers.

To contact the reporter on this story: Samson Habte in Washington at shabte@bna.com

To contact the editor responsible for this story: Kirk Swanson at kswanson@bna.com

For More Information

The ABA Commission on the Future of Legal Services “Issues Paper Regarding Alternative Business Structures” is at http://www.americanbar.org/content/dam/aba/images/office_president/alternative_business_issues_paper.pdf.

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

 

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