For the most part, non-lawyers have been prohibited from owning law firms in the United States. As stated clearly by American Bar Association (ABA) Model Rule 5.4, licensed attorneys have not been permitted to share/offer ownership or investment opportunities to non-lawyers. State bar associations have long followed the ABA’s model rule.
However, changes are happening. The ABA itself cracked open the door to new state-level innovation in February of 2020. At Rize Technologies, our team provides managed IT services for law firms. We help law firms run as smoothly and efficiently as possible. In this article, you will find an overview of some of the most recent developments for non-lawyer law firm ownership.
What is the Current ABA Rule for Non-Lawyer Law Firm Ownership?
As mentioned previously, (ABA) Model Rule 5.4 prohibits licensed attorneys from sharing legal fees with non-lawyers and from offering non-lawyers a position as an owner, officer, or director of the firm. In effect, the long-standing rule on non-lawyer ownership for law firms was designed to help ensure that attorneys have the professional and financial independence that they need to practice law without any undue pressure from non-lawyer business owners and/or partnership members.
Change May be Coming: How the Idea for Non-Lawyer Ownership Started
There has long been a desire for more innovation in the legal industry, including on issues related to the structure of law firm ownership. In February of 2020, the ABA itself joined the chorus of those seeking to encourage innovation in the legal industry. They sought to encourage regulation that would enable those living below the poverty line to access affordable and quality legal services.
At that time, ABA members overwhelmingly supported and passed Resolution 115—an initiative that “encourages U.S. jurisdictions to consider regulatory innovations.” A big part of the push for change is a desire to help make legal services more available and affordable for middle income and low income Americans.
The language of Resolution 115 itself is relatively broad. Indeed, the resolution passed by the ABA does not specifically call for or endorse non-lawyer ownership for law firms. Instead, it supports individual jurisdiction to make regulatory changes that make legal services more accessible. Still, it is clear that several jurisdictions took Resolution 115 as a signal to allow non-lawyer ownerships.
Which States are Leading the Way on Non-Lawyer Law Firm Ownership?
Arizona and Utah are the two U.S. jurisdictions that are at the forefront of making changes for law firm ownership. Here is a brief overview of what is happening in these two jurisdictions:
- Arizona: As of January 1st, 2021, the State of Arizona officially altered its professional responsibility to standard to allow non-lawyers to hold an ownership interest in a law firm. Arizona has also rolled out a more comprehensive regulatory framework for this new type of business structure.
- Utah: Utah is also at the forefront of changes in law firm ownership structure. Back in the Summer of 2020, Utah’s Supreme Court temporarily amended its ethics rules for lawyers and law firms to permit non-lawyer ownership. The state is currently going through a two-year pilot project on the issues.
Many Other States are Expected to Make Changes
The trend towards non-lawyer ownership of law firms—or similar types of investment arrangements—are by no means restricted to Arizona and Utah. A number of other states are currently reviewing their legal ethics rules or are already in the process of considering regulatory changes. As an example, in Illinois, the Chicago Bar Association has recommended that the Illinois Supreme Court approve such changes. In early 2021, the State of California entered the “explorary” state of regulatory changes. Other states, including Massachusetts, have not yet rolled out any changes. Though, they may be coming in the future.
Is Non-Lawyer Ownership Going to be a Boon for the Legal Industry?
You may be wondering: Is non-lawyer ownership of law firms going to be good for the legal industry as a whole? The short answer is “we’ll see”—we are still in the very early stages of these regulatory changes. A lot will depend on exactly what happens in the states. It is likely that states will look at some of the early-adopters (Arizona, Utah, etc) to see how the legal industry is doing with new ownership options. Here are some of the pros and cons:
- Pros: The primary argument in favor of allowing non-lawyers to own and/or act as officers or directors of a law firm is that it will spur additional investment in law firms. More investment in the industry and greater competition could foster innovation, improve efficiency, and, potentially, reduce costs for consumers.
- Cons: Non-lawyer ownership also carries some potential risks. The primary argument against allowing non-lawyer ownership is the same reason why it has been prohibited for some many years: There are worries that new business incentives will compromise attorneys’ ethical and professional duty to provide legal representation for the sole benefit of the client’s best interests.
Would the Legal Costs Get Affected by the Change?
The supporters of non-lawyer ownership for law firms contend that costs will fall. Whether this comprehensive legal practice innovation will actually lead to falling costs, rising costs, or any cost changing at all is still an open question. The ABA and individual state bar associations will closely be studying the developments across different states. It is possible that some regulatory frameworks for allowing non-lawyer ownership of law firms and/or non-lawyer investment of law firms will work better than others.
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