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Lifting the Prohibition on Nonlawyer Ownership: Advantages for Small Firms

The California bar is reviewing how ethics rules affect access to legal services.

By Susan Peters

The ABA Model Rules of Professional Conduct, including Rule 5.4 (Professional Independence of a Lawyer), prohibit lawyers sharing equity interest with “nonlawyers” in any business engaged in the practice of law.

Critics say Rule 5.4 limits the amount and quality of collaboration between lawyers and allied professionals when making business decisions, which affects the bottom line by restricting the capital available to grow the business, lower costs, and improve the delivery of legal services.

Several common law jurisdictions, including England and Australia, have lifted the prohibition on nonlawyer ownership and there has been a steady drumbeat to relax the ethics rule in the U.S. Three states — Arizona, California and Utah — are studying revising the rule.

Will California Lead the Way?

In 2018, the State Bar of California created a task force to study the current state of the legal services market. Its approach, however, wasn’t to ensure that Big Law could compete with the Big Four accounting firms encroaching on their turf. Rather, it was to investigate if amending the rule could increase consumer access to lawyers by lowering costs, thus increasing the number of consumers who can afford legal services, and in that way grow the pie for solos and small firms.

I recently attended a discussion on this topic at the Legal Marketing Association’s annual conference in Atlanta featuring William D. Henderson, Professor of Law at Indiana University Maurer School of Law, and Scott Westfahl, Professor of Practice and Faculty Director, Harvard Law School Executive Education.

Last year, Henderson was asked to write a report for the California bar detailing the legal market landscape. In it, he notes that while the cost of traditional legal services is going up, access to legal services is going down, the growth rate of many law firms is flat, and lawyers serving ordinary people are struggling to earn a living. Moreover, private investors are successfully pushing the boundaries of the ethics rules by funding new technologies and service delivery models, which eat into the traditional legal market.

Five Advantages to Easing the Nonlawyer Ownership Rule

Here, according to Henderson and Westfahl, are five advantages solos and small firms will see if the ethics rules are lifted or modified, allowing them to collaborate more fully with allied professionals.

  1. Increased innovation. Traditional law firms of all sizes fund technology and other capital improvements straight from their pockets. Often, this means legal services will not improve without increasing the cost to buyers — unless lawyers are willing to take serious hits to their bottom lines. Changing the rules means law firms will no longer trail alternative legal services providers, legal tech and in-house legal in creating new legal services combinations that can deliver more value to clients. This opens up myriad partnering possibilities with other disciplines, such as technology, process design, data analytics, accounting, marketing and finance.
  2. More money. With the help of outside investments that create efficiencies and cost-savings, small to midsize firms that represent individual consumers will be able to offer products and services that increase the volume of fee-paying client work — tapping into the pool of potential clients who often forgo legal services due to cost. Similarly, lawyers serving corporations will see more fee-paying work and law firms will be on a more level playing field with ALSPs, which have cut into the traditional corporate legal market.
  3. Better teams. Being able to share profits allows law firms to bring in highly qualified professionals aligned with the firm’s goals. The internal empowerment (read: financial remuneration) in an organization that shares its success creates a better environment for innovation and ultimately improves client services. Also, by paying nonlawyers as shareholders, firms aren’t tied to a costly salary and bonus structure. Instead, firms can reward employees via profits, just as they are, meaning a previously fixed cost can fluctuate with the market.
  4. New business possibilities. Repealing or modifying the rule will provide incentives for nonlegal entrepreneurs to fully enter the legal market. Many see a chance to create more successful outreach programs with allied professionals who can solve problems beyond a client’s immediate legal issues. One example: A small firm partnering with a hospital system might install a booth or satellite office in the lobby to assist patients and their families with the full spectrum of issues relating to health care law (power of attorney, HIPPA, insurance, proxies, wills, malpractice and elder law, to name a few specialties). Legal triage could be performed on the spot, and by nonlawyers.
  5. Elevating the profession’s reputation. Lawyers should be viewed as trusted confidants and advocates who understand their clients, instead of as opportunistic fee-grabbers. Changes that allow lawyers to reach more people and expand access to legal services may help public perception. The profession has a duty to enlarge the pie by driving costs down and also serve the broader needs of society.

Ethics attorney Megan Zavieh of Zavieh Law agrees that for small to midsize firms, there is a bright future ahead: “I’m hopeful — California is long overdue for change. If we’re going to grow or create DIY products, we need more money to make these things happen. Lawyers will be able to create new products with different types of firms and ways of doing business.

“Lifting or modifying the rules allows lawyers to serve more clients, do more, and scale in ways we have never been able to before,” says Zavieh.

As the report concluded, some U.S. jurisdiction “needs to go first. Based on historical precedent, the most likely jurisdiction is California.”

The California bar task force’s final report is due by December 31, 2019.
Editor’s Note: The State Bar of California voted unanimously July 11 to allow a 60-day public comment period on the proposed changes. The bar will accept written comment from consumers, legal service providers, technology experts and lawyers, and hold a public hearing to receive oral testimony Aug. 10, 2019.

Illustration ©
Originally Published May 23, 2019

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Susan Peters Susan Peters

Susan Peters is a lawyer and owner of Greybridge PR, a public relations and communications agency focused on profile raising in the legal industry. Based in New York, she sits on the board of Law Firm Media Professionals and has more than 15 years of legal marketing experience.

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