New Washington Rule Allows Legal Techs To Become Minority Owners in Law Firms

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By Samson Habte

March 31 — A historic new order from the Washington Supreme Court makes that state the only U.S. jurisdiction other than the District of Columbia to pare back long-standing ethics rules that prohibit nonlawyers from sharing fees with attorneys or taking ownership stakes in law firms.

The March 23 order grants bar officials' petition to amend the Washington Rules of Professional Conduct to allow “Limited License Legal Technicians” (LLLTs)—a new breed of nonlawyer practitioners who will soon enter the marketplace in Washington—to share fees with attorneys and become minority partners in law firms.

The changes will become effective upon publication in the official Washington Reports. That will happen sometime in the next few months, court staff told Bloomberg BNA.

Some observers see the court's action as a precursor to broader reforms that could further liberalize rules that limit attorneys' financial dealings and business associations with nonlawyers.

In interviews with Bloomberg BNA, two experts predicted that Washington will become the first state to authorize the sort of “Alternative Business Structure” (ABS) law firms that have taken root in the United Kingdom and Australia in recent years.

‘A New Paradigm.'

Seattle attorney Sands McKinley, a fierce critic of the LLLT program, said he views the March 23 order as “an intentional first step” toward “a new paradigm” that will eliminate a host of other decades-old restrictions on financial and business associations between lawyers and nonlawyers.

McKinley said Washington State Bar Association officials and “certain supreme court justices” are determined to be “on the bleeding edge” of a national movement to reform the legal services marketplace.

WSBA Executive Director Paula Littlewood said there is no truth to claims that further rule changes have already been drawn up. But the language she used in speaking about the potential for additional reform was strikingly similar to the language McKinley used to describe WSBA officials' thinking.

Littlewood said the profession is “on the bleeding edge of [a] paradigm shift” that has transformed the legal services marketplace in other countries and will inevitably reach American shores. Acknowledging that WSBA officials have begun to study reforms in other nations, she added: “We're educating ourselves because it's the responsible thing to do.”

Introducing Rules 5.9 and 5.10 

The March 23 order responds to a petition in which the WSBA Board of Governors asked the court to approve a series of amendments to the Washington Rules of Professional Conduct.

The board said the changes were needed to provide attorneys with guidance on “how to interact” with LLLTs, who will soon be licensed to provide limited services to individuals who may not be able to afford to hire attorneys for advice on civil matters.

“[T]he suggested revisions to the Lawyer RPC seek to recognize, encourage, and legitimize the association and interplay of LLLTs and lawyers together in the marketplace and in the profession,” the board said in a summary of its proposed changes.

The court approved changes to the black letter and comments of several ethics rules (see box).

But experts said the most consequential change is the adoption of Rule 5.9—which, according to an accompanying comment, “is designed as an exception to the general prohibition stated in Rule 5.4 that lawyers may not share fees or enter into business relationships with [nonlawyers].” Another comment outlines the following limitations on LLLT-attorney partnerships:

[R]egardless of an LLLT's ownership interest in such a firm, the business may not be structured in a way that permits LLLTs directly or indirectly to supervise lawyers or to otherwise direct or regulate a lawyer's independent professional judgment. This includes a limitation on LLLTs possessing a majority ownership interest or controlling managerial authority in a jointly owned firm, a structure that could result indirectly in non-lawyer decision-making affecting the professional independence of lawyers.

The court also approved the creation of Rule 5.10, a related new ethics standard. That provision sets forth the supervisory obligations of lawyers who have managerial authority in law firms that include LLLT members. The rule says such managers must expressly assume responsibility for the conduct of LLLTs to the same extent as they do for the conduct of subordinate firm lawyers.

Imminent Expansion?

The WSBA board sought expedited approval of its proposed amendments because administrators of the LLLT program—which has been touted as a model for similar initiatives in other states (see 31 Law. Man. Prof. Conduct 164)—will begin licensing the first LLLTs in a few months.

The court granted the request for expedited action but also ordered the WSBA to “solicit and gather feedback on these rules and provide it to the court nine months after the rules' effective date.”

That part of the order did little to allay the concerns of McKinley, who founded a Seattle-based firm that focuses on family law—the only practice area that the first batch of LLLTs are permitted to work in.

McKinley said the expedited process was problematic because Rule 5.9 may presage more ambitious reforms that bar officials “have an incentive to push through as fast and quickly and under-the-radar as possible.”

Writing in his On the Future of Law Blog, McKinley said: “Given discussions under way within the [WSBA] and the Washington Supreme Court, there likely will be more ABS expansion to come, along with other potential law practice regulatory reforms that will fundamentally change the law practice landscape ….”

In his interview with Bloomberg BNA, McKinley said he fully anticipates that Rule 5.9 will soon be expanded to authorize fee-sharing and partnerships with other types of nonlawyers. “If a glorified paralegal can be an owner of a law firm,” he said, “what kind of argument could you make whereby a CPA tax expert from Deloitte & Touche could not?”

“There's no real reason that the court had to create that rule,” McKinley said. “It's the first step into a new paradigm in which [other] nonlawyers can take ownership interests in law firms,” he added.

No Plans to Expand … Yet 

Robert Ambrogi—a Massachusetts lawyer who has written extensively on the LLLT issue—said he views Rule 5.9 as a “sensible extension of the LLLT rules already in place.”

“In and of itself, I do not see this as opening the door to other forms of nonlawyer ownership,” Ambrogi wrote in an e-mail to Bloomberg BNA.

“LLLTs were already authorized to open their own offices and set their own fees,” he said. “Given this, if an LLLT is working in a law firm, the LLLT should be able to have an ownership in the firm and share fees earned by the work of both the lawyer and the LLLT.”

But Ambrogi was quick to add that he does believe “nonlawyer ownership is inevitable, not because of LLLTs, but because of the need for greater efficiencies in the delivery of legal services.”

Littlewood, for her part, dismissed McKinley's claims as speculative. She said the WSBA is focused on the LLLT program and has not proposed other regulatory reforms or suggested further expansion of Rule 5.9.

But Littlewood repeatedly couched those disavowals by saying that she and other bar officials have a responsibility to continuously think about market disruptions and the regulatory changes they might necessitate.

Littlewood said bar authorities must consider the possibility that their future roles might shift from “educating and regulating lawyers” to “educating and regulating a legal services delivery market.”

Littlewood also acknowledged that the WSBA's Future of the Legal Profession Work Group—a panel on which she sits—is “educating itself on ABS and entity regulation” systems in the U.K. and Australia. 

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

Full text at http://op.bna.com/mopc.nsf/r?Open=jros-9vcl5h.

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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Additional LLLT-Related Changes to Washington Rules of Professional Conduct 

 The creation of Rule 5.9 was just one of numerous changes approved in the Washington Supreme Court's March 23 order.

Among other revisions, the court also approved changes to rules and comments that deal with the following topics:

Fee Agreements: A new comment to Rule 1.5 says law firms providing services that include representation by an LLLT must ensure that fee agreements disclose limitations on the scope of representation the LLLT may provide.

Contingent Fees: Another new comment to Rule 1.5 clarifies that “[a]n LLLT, unlike a lawyer, is prohibited from entering into a contingent fee or retainer agreement with a client directly.” But that limitation, the comment adds, does not “prohibit a lawyer from sharing fees that include contingent fees or retainers with an LLLT with whom the lawyer has entered into a for-profit business relationship under Rule 5.9.”

Confidentiality: A new comment to Rule 1.6 clarifies that a lawyer's implied authority to disclose client confidences to another lawyer in her firm also authorizes disclosures between lawyers and LLLTs in the same firm.

Business Transactions: The court also adopted changes to Rules 1.8(a) and (h), which previously stated that lawyers may not enter into a business transaction with a client, or negotiate settlements of a client's potential malpractice claim, without advising the client to “seek the advice of independent legal counsel.”

Because LLLTs may not advise clients on business transactions with lawyers or assist clients in negotiation, the new versions of Rules 1.8(a) and (h) and their associated comments clarify that term “legal counsel” in these contexts means “lawyer.”

Trust Accounts: The court eliminated language in Rule 1.15(A) stating that only “a lawyer admitted to practice law may be an authorized signatory on the account.” The amended rule clarifies that LLLTs may also be authorized signatories on trust accounts. However, it further stipulates that “any check or other instrument requiring a signature must be signed by a signatory lawyer in the firm.”

Contacts With Represented and Unrepresented Persons: The court approved changes to Rules 4.2 and 4.3, which previously used the term “counsel” before outlining restrictions on contacting represented and unrepresented persons. The amended rules replace the word “counsel” with “a lawyer,” in recognition of the fact that a person who is assisted by an LLLT is not represented by counsel for the purposes of the no-contact restrictions.

Respect for Rights of Third Persons: A new comment to Rule 4.4 notes that communications between an LLLT and her client “are privileged to the same extent as client-lawyer communications.”

Accordingly, the comment says, although lawyers “may communicate directly with a person who is assisted by an LLLT,” they must “respect these legal rights that protect the client–LLLT relationship” when doing so.