The Firm: Can non-lawyers own a law firm?

By Edward Poll

The Daily Record Newswire

Given that Model Rule 5.4 prohibits firms from selling equity shares in law firms to non-lawyers by stating that an attorney shall not share legal fees with a non-lawyer, the answer to our title question has always been a clear "no."

Now, however, there are more reasons to answer "maybe," or even "yes," as questions regarding the rule abound: Do bonuses to personnel, whether an inside employee or an outside consultant engaged in business development, constitute the sharing of legal fees? Does it matter if the bonus is based on a percentage of growth of the practice or is a subjectively determined flat sum of money? Aren't all compensation methodologies to non-lawyers really "sharing legal fees?" Is Rule 5.4 now outdated and in need of serious review and modification or deletion?

Over the last several years, the prospect that non-lawyers would be able to participate in the ownership of American law firms has emerged from the British Commonwealth. Australia already allows this and it will soon be permitted in England, where the 2007 Legal Services Act authorizing new alternative business structures for solicitor firms has cleared the way for such firms to list on the London Stock Exchange or Alternative Investment Market.

Similar changes are happening in the U.S. already. A bill pending in the North Carolina Senate would allow 49-percent non-lawyer ownership. The District of Columbia already permits non-lawyer ownership to the extent of 25-percent interest in a firm, possibly because more large firms are employing non-lawyer lobbyists in Washington.

The Washington Post recently called this an "uneasy marriage," because non-lawyer lobbyists can be treated like second-class citizens in law firms, not least because typically they are paid by retainer rather than the standard hourly rate. Allowing such professionals to have an ownership stake could change all that.

The use of professional lobbyists illustrates how law firms have expanded and are now very large organizations. In order to grow, they need additional capital, which is best raised in the capital markets, not from individual partners of law firms. Capital market ownership means non-lawyer ownership. With large law firms looking more and more like their corporate clients, is it still a stretch to suggest that law firms should raise outside capital?

There is, of course, the issue that stock sales might force lawyers to put shareholder interests above the duty to clients, creating conflicts between attorney-client privilege and Securities and Exchange Commission disclosure requirements. Some also argue that the rules of professional conduct wouldn't bind non-lawyers in matters of confidentiality and charging reasonable fees.

Either way, the independence of lawyers' judgment might come into question. But the rules have been bent, if not changed or discarded entirely, when large firms' economic interests were at stake. So it will be fascinating to see who argues on which side and how this issue develops.

It's likely that the major law firms will develop some way to finesse this issue if necessary. The more fundamental issue is whether corporate law firms need to grow as large as their clients. Why can't corporate clients' interests be served by smaller regional law firms that use technology to leverage their capabilities? Is it possible that this issue will finally cause the breakup of mandatory (integrated) bar associations into state licensing agencies and voluntary bar associations serving the economic interests of sole and small firm practitioners? Don't say it's impossible -- the Commonwealth countries, with their two-tier legal sectors of barristers and solicitors, may well offer an organizational model to go with their capital-raising one.

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Edward Poll is a speaker, author and board-approved coach to the legal profession. He can be reached at edpoll@lawbiz.com or at (800) 837-5880.

Published: Thu, May 12, 2011

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