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Is outside ownership of law firms picking up steam?

One of the least interesting ways to end a conversation about legal innovation is also one of the most frequent. It goes something like this: “That change would require amendments to professional regulations.” Often, the regulation being discussed is the ban on nonlawyer ownership of law firms.

It’s a good way to end a conversation because, as Yale Law School professor John Morley puts it, it is “astonishing how little happens” on the issue of nonlawyer ownership in the United States.

But things are happening that are finally worth talking about. The State Bar of California voted in July to form a task force to study, among other things, allowing outside investors in law firms. Meanwhile, litigation finance giant Burford Capital Ltd. recently began discussing with law firms a financial structure that the company says would allow investors to own portions of today’s firms, with no regulatory changes required.

Commenting on the California task force, legal marketing executive Heather Morse asked if the news meant that a “game changer” for the law was “finally here.” The answer to that question is a resounding no. The task force won’t finish its work until 2020, so nothing has arrived yet. But the fact that a state bar association is studying the issue has, at least, generated a real discussion about an often taboo topic for the first time since 2016.

Legal innovators hope California’s task force comes to a much different conclusion than the efforts in 2016 of the American Bar Association’s Commission on the Future of Legal Services. That commission followed shortly on the heels of the ABA House of Delegates issuing a stamp of approval for professional Rule 5.4—the official ban on outside investors in law firms. A March resolution that year adopted “model regulatory objectives for the provision of legal services,” and noted that “nothing in this resolution abrogates in any manner existing ABA policy prohibiting nonlawyer ownership of law firms.”

Some of the harshest critics of the commission’s work exploring the concept were bar associations themselves. State bar leaders from Illinois, Missouri, New York, New Jersey and Texas wrote to oppose the idea of nonlawyer ownership.

“There is no need for non-attorneys to acquire ownership interests in firms, or any evidence that firms are in danger of losing access to complementary professional services if an ownership interest is not made available,” wrote Miles Winder III, then-president of the New Jersey State Bar Association. “The NJSBA urges the commission to not rehash settled concepts.”

William Henderson, a professor at the Indiana University Maurer School of Law who wrote a study that spurred California’s task force, says the issue is anything but settled. The rise of technology has put law firms on an uneven plane with new companies that are looking to enter the legal services market. Without the ability to co-invest in law firms, he says, people with the types of skills needed for today’s market—such as technologists, data analysts and others—will not be attracted to law firms.

“What we have is consumer protection for those who can afford legal services, but the ethics rules really limit the ones who can enter the market,” Henderson says.

Those ethics rules won’t be amended without a fight. Jordan Furlong, a consultant on the legal business based in Canada, points out that no bar association has voluntarily vanquished the prohibition on outside owners in law firms. In both Australia and the U.K., direct government intervention was the basis for allowing so-called “alternative business structures.”

Still, recent reforms to California’s bar association may work in reformists’ favour. Last year, the State Bar of California split into two parts: one contains the voluntary trade association activities, while another focuses on regulation and discipline.

That separation, along with a rule that put six nonlawyers on the bar’s 13-member board, limits what legal consultant Mark Cohen says is an incentive for bar associations to bow to pressure from their members to protect lawyers’ revenue streams.

As evidence of this incentive, Cohen points to a doomed pilot program, ABA Law Connect, that used Rocket Lawyer’s technology to provide consumers access to lawyers for as little as $4.95. The pilot was scrapped in early 2016 after bar leaders from Illinois, Pennsylvania and elsewhere wrote a letter decrying the program for what they perceived as a “blue-plate-special mentality.”

“The ABA Law Connect program is not in the best interest of the public, the legal profession or small businesses that operate in our states,” the bar leaders wrote.

Cohen disagrees.

“This is not really about protecting the public. How can they say that when roughly 85 percent of Americans who need legal services can’t afford them at the present rates?” he says. “I think this is just lawyer protectionism.”

Cohen and others believe that nonlawyer ownership in law firms would allow them to harness increasingly important technologies and professional skills to provide new and less-expensive types of legal services.

One example of that is the U.K.’s Gateley plc, one of the few law firms to list its shares publicly following bar regulation reform. The firm increased last year its number of employees by 8.8 percent, to 757 people, many of whom the firm’s chairman, Nigel Payne, says were drawn to the firm by the opportunity to own equity. More than 55 percent of the employees participate in a stock-option program, Gateley said in its most recent annual report in July.

“Being able to offer something different as an employer has helped us not only retain staff since the IPO, but also attract a wide pool of new talent,” Gateley wrote.

For those who are not inclined to wait out a decision from the California bar—or who operate elsewhere in the United States—there may be a near-term way to offer something different to employees.

Burford Capital, the litigation financier that wrote in support of the ABA’s 2016 commission on nonlawyer ownership, says it can finance new ventures that would provide corporate-like equity in today’s law firms. Burford hasn’t publicly shared all the specifics of the plan, but its co-founder, Jonathan Molot, who is also a professor at the Georgetown University Law Center, says it would involve spinning off the nonlegal functions of a law firm into a separate company. That company would receive investment from Burford or others. The firm’s partners would also be investors, allowing them to own a piece of what they helped build long after they stop billing hours.

“I think liberalising the ethics rules is a good idea,” Molot says. “But, that being said, because you’re not looking to move the entire profit center of a law firm into a permanent structure, only a slice of it, I think that can all be done now without any change.”

Change or not, it is a good time for talk.