Why Is The US Holding Out on the Non-Lawyer Ownership Of Law Firms Change?

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The rules relating to ownership of law firms have been changing dramatically in recent years, including the previously forbidden rule of having non-lawyer ownership of law firms, but it is apparently a step too far for US regulators and law firms who continue to tread carefully in such waters.

For the United States law firms, there is a recent memory of the fate of  LeClairRyan, a national firm based in Virginia which did a deal with a tech-law company UnitedLex in 2018 and then went bankrupt a short time later.

But the rules forbidding non-lawyer law firm ownership may be set to change in the United States, just as they have in other jurisdictions, notably the United Kingdom with their Alternative Business Structures (ABSs), but also in several European countries too where the changes have generally been well received by the firms and their clients alike.

Currently, the American Bar Association’s Model Rules of Professional Conduct specify in Rule 5.4 that nonlawyers cannot partner with or share legal fees with lawyers. It also requires that they have no ownership interest in law firms.

As Reuters have reported, there are now increasing calls for a change to Rule 5.4. One of the reasons, outlined in Reuters’ report, is a call from some quarters for greater access to justice by having non-lawyer ownership of firms. The greater access would involve – presumably – such matters as divorce filing, leases, rentals, basic company work, will drafting and the like.

The Big Law Issue for Law Firm Ownership

It is at the Big Law end of town however that is most likely to see issues arising in terms of how any changes will affect their businesses.

The question of how businesses would respond to changes that created entitles like the UK’s ABSs is something that is yet to be determined in the US.

A close eye is kept on those jurisdictions overseas and at home that have made the changes. In August 2020 Arizona became the first state to eliminate Rule 5.4, with Utah also creating a seven year process to test the ABSs and Florida is introducing a three year trial period for the same thing.

The UK ABS situation is one that has seen stock market listings for major firms, Slater Gordon being the first such listing in 2007 and as we reported in LawFuel recently, the largest-ever float of law firm Mischon de Reya would make it the richest stock market offering of any law firm.

As Reuters’ report notes:

Outside of law firms, alternative legal service providers are also looking to cash in on the shifting landscape of law firm ownership. LegalZoom, a popular document preparation ALSP, was the first U.S. business to be a licensed ABS in the U.K. in 2015 and has successfully partnered with and acquired U.K. law firms. LegalZoom and Rocket Lawyer (another document preparation company) have also filed applications for ABS licenses in Arizona, while Rocket Lawyer is currently active in the Utah sandbox.

Reuters

The Big Law firms are tending to sit out the trial periods and observe what is happening. Their strength and strong capital access and lender networks mean that they can continue their expansion without using the ABS-style strategies, which may also create risk and disruption when competition and growth remain the priority issues.

Further, the different state rules could mean that larger law firm may need to break up their structure when non-lawyer ownership occurs.

Big Four Accounting Moves

But they will also watch the moves being made by the Big Four accounting groups as they intrude into legal territory.

They are practising law in Europe already but the regulations in the US could create issues for them the same as for the larger law firms.

However, massive revenues from US sources mean that they are not greatly jeopardized by any wait-and-see attitude and will be little concerned about moving early into the ABS space.

It is more likely the mid-sized law firms who will be seeking greater access to capital and growth that are likely to take advantage of any changes coming on the law firm ownership front.

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