Recent developments in several states suggest new possibilities for non-lawyer ownership stakes in law firms. What’s changed, and could it indicate the start of a new trend?
Under Attorney Rule of Professional Conduct 5.4, law firms are barred from offering ownership or other investment/revenue-sharing opportunities to non-lawyers. Some recent developments in several states, however, offer the possibility that these long-standing restrictions could be scaled back, creating potential for dramatic changes in how litigation matters are funded and managed.
First released in 1983, the American Bar Association (“ABA”)’s Model Rule 5.4, subsection (a), states in relevant part, “[A] lawyer or law firm shall not share legal fees with a nonlawyer…,” while subsection (b) holds, “A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.” At the time the ABA rule was finalized—and versions of the rule adopted by state bar associations, these and other restrictions in Rule 5.4 were considered essential for keeping lawyers independent in their legal advice and preventing the possibility of non-lawyer owners who might prioritize profits over duties to clients.
Once adopted by state bar associations, Rule 5.4 restrictions were almost immediately challenged by multiple law firms that argued the rule precluded them from non-lawyer investment and prevented them from fully representing clients facing larger, better-funded opponents. Others argued that preventing law firms from expanding into ancillary practices managed and partially owned by non-lawyers limited opportunities for law firms to provide comprehensive services — and to charge lower rates to clients because of multiple revenue streams. Still others argued that Rule 5.4 prevented commercial (as opposed to law school-sponsored) legal clinics from offering low-cost legal services, reducing equal access to the court system. None of these arguments were very successful, and for many years, the District of Columbia was the sole jurisdiction in the country where it was possible, under limited circumstances, for lawyers to share fees with non-lawyers and for non-lawyers (e.g., lobbyists) to hold limited ownership interests in law firms.
Movement in the states
In the past few years, however, two states have taken a fresh look at their localized versions of Rule 5.4 and are trying new approaches. In August 2020, the Utah Bar created a pilot project that permitted non-lawyer-owned entities to apply to the state’s Office of Legal Services Innovation for a license to offer legal services. As of March 2022, 31 organizations have been approved to provide a wide range of services covering business law, immigration, divorce, and personal injury matters, and the pilot project has been extended from two years to seven years. Separately, in August 2020, the Arizona Bar eliminated its rule 5.4 entirely, creating a new licensing requirement for Alternate Business Structures (“ABS”) that are partially owned by non-lawyers but that provide legal services. Each ABS, however, must include at least one lawyer to serve as compliance counsel.
Other states have taken more modest steps that stop short of non-attorney ownership interests in law firms. For example, on February 18, 2021, the California Supreme Court approved an amendment to its Rule 5.4 that permitted greater fee sharing with non-attorney-owned non-profit organizations that qualify as nonprofits under IRS Rule 501(c)(3). The rule, however, does not permit non-attorney ownership of law firms or permit the non-profit to be directly involved with decision-making within matters in which it is not a client. Similarly, in Massachusetts, a law firm may share fees with a “qualified legal assistance organization” if the terms of the fee-sharing are fully disclosed and approved by the client. In Georgia, attorneys may work with — and share fees with — law firms and legal organizations in other jurisdictions, even if those other entities have non-attorney ownership, pursuant to the rules of the other jurisdiction.
Debate over the most cost-effective ways to increase access to legal services will continue to drive conversations about non-lawyer ownership of law firms.
It’s important to note that most other jurisdictions in the United States are not currently following Utah and Arizona’s example, even as their state attorney bars and courts grapple with the issue. Indeed, some jurisdictions remain explicitly opposed to opening this door. In Florida, on November 8, 2021, the Florida Bar Board of Governors unanimously (46-0) opposed a list of proposed amendments to its Rule 5.4 that would have, among other things, permitted minority ownership in law firms by non-lawyer firm employees and allow fee-splitting with non-lawyers. This March, the Florida Supreme Court agreed with this position and let the current Rule 5.4 remain in effect.
The ABA, which drafted the original Model Rules of Professional Conduct, takes a similar stand. After extensive debate at its February 2020 meeting, including discussion about whether to amend Rule 5.4, the ABA House of Delegates passed its Resolution 115, which encouraged innovative approaches to increasing access to justice — provided that these approaches do not violate ABA Model Rule 5.4 as it is currently written.
It’s clear that competition is coming, with or without changes to Rule 5.4. Many of the country’s largest accounting firms, which are not bound by state Bar rules of professional conduct, have added new lines of service — such as managing fact discovery, performing document review, etc. — that directly compete with traditional law firm services. The fact that these new services are successful — and profitable — shows that clients at all levels are interested in cost-effective ways of developing and resolving their legal disputes.
Debate over the most cost-effective ways to increase access to legal services will continue to drive conversations about non-lawyer ownership of law firms. Online providers of legal forms and legal-adjacent services — such as Rocket Lawyer and LegalZoom — are already bringing considerable innovation into the legal services space, offering services needed by many ordinary citizens who may not be able to afford a full-service law firm. The success of accounting firms at providing litigation discovery management services also highlights that change to the legal industry can come at any level. Debate over the future of Rule 5.4 is almost certainly only beginning.