Who Can Own a Law Firm?
The general rule for law firm ownership is that only licensed attorneys can own law firms. This rule exists in large part to protect the interests of the public and clients. Indeed, one of the primary reasons the American Bar Association and various state and local bars have adopted their rules of professional conduct is so that they can then take action against lawyers who violate those rules.
Ownership issues are more complicated, as they relate not just to the ethics rules, but also to issues of law and corporate governance. Specifically, there are a number of states with either statutes or rules precluding non-lawyers from incorporating law firms. For example, Washington D.C. lawyers cannot form a law firm corporation. The former Corporation Counsel for the District of Columbia, Anthony Miscikowski, argued in a 1991 article in Maryland Bar Journal, that this ban was unconstitutional because it restricted speech, which is protected by the First Amendment to the Constitution of the United States.
As previously discussed on this blog, the Virginia State Bar’s Standing Committee on Unauthorized Practice of Law opined, in a May 31, 2011 opinion, that a non-lawyer could serve as the operating officer of a new Virginia professional corporation of which he or she was an owner, in order to comply with Virginia law that requires law firms to be owned by a licensed attorney . The Virginia State Bar suggests this opinion is consistent with the position taken by the New Jersey Supreme Court, which held, for the first time in 2009, that non-lawyers could own law firms, so long as the non-lawyer’s interest is limited to no more than a minority interest, the non-lawyer has no authority to control or direct the professional judgment of a lawyer(s) about how to practice law or to provide legal services, and the non-lawyer is not a licensed lawyer in any jurisdiction.
If a state does not have a statute or rule regarding law firm ownership and corporate structure, the legality of a non-lawyer owning and/or controlling a law firm will depend on the law governing business entities. For example, under Delaware law, in most circumstances, persons other than licensed attorneys cannot serve as directors of law firm corporations. Likewise, they cannot be officers of law firm corporations who have discretionary authority over the delivery of legal services.
One notable exception to the limitations on and risks associated with outside ownership of law firms is the situation where a private company allows otherwise non-lawyer individuals or entities to be shareholders in a subsidiary of the company that will primarily provide legal services to the company, similar to the structure used by Whiteford, Taylor & Preston, the first non-law firm to be owned by a publisher. However, this type of ownership structure requires considerable forethought in structuring the ownership of the operating entity to limit the risk of unauthorized practice of law and to ensure compliance with all applicable professional conduct rules.
History and Precedent
From ancient civilizations to modern times, the prohibition of non-lawyers from owning or managing law firms has its roots in the Ethical Rules that have been around for a very long time. As early as the 18th century, such restrictions were evident in the Code of Canon Law of the Roman Catholic Church; as far back as the 16th century, in Spain; and in other countries, as mentioned further below. In the United States, the first known laws on this matter began to take shape in the late 1890s. Massachusetts was first out of the gate, in 1898, followed by New York in 1909, Arkansas in 1911, and by now, all states had adopted at least tacit prohibitions. Currently, the ABA Model Rules of Professional Conduct allow only lawyers to have any ownership interest in a law firm, although non-lawyers may be permitted in certain states to have ownership and management roles in alternative business structures in law. A recent push in this direction is corporate ownership of law firms, with a pronounced urging by nutty Brexit-loving Brit Alan Shadrake. While we have yet to see such a structure start to take root in the United States, it presents an intriguing question of ethics and legality. Apart from the United States, Canada has a long tradition of forbidding non-lawyers from ownership interests in law firms. There is, however, increasing momentum in Canada to change the nature of law firm ownerships and allow incorporated partnerships consisting of both lawyers and non-lawyers, as well as Canadian companies to own majority interests in law firms. Australia also prohibits non-lawyer management of law firms, but allows non-traditional arrangements. In South Australia, all owners of incorporated legal practices must be lawyers, or legal entities, which could conceivably include companies. Section 84B of the Local Courts Act 1982 provides for the registration of "incorporated legal practices," which are prohibited from having any more than twenty percent of their shares held by non-lawyers. As a result of these traditions, by leaving the control of these firms in the hands of lawyers, the ethical rules against non-lawyer management of law firms, even today, force firms to choose between being lawyers’ firms and being any other body that could allow interdisciplinary practice – which means firms must be careful regarding whether they want to hire non-lawyer specialists or not.
Current Exceptions: Non-Lawyer Ownership in the United States
Among the states that bend the restrictions on non-lawyer ownership of law firms, only six now allow such models in some form, according to the ABA’s 2016 Survey of Law Management. They are Arizona, Washington D.C., Florida, California, New Jersey and Colorado.
In Arizona, non-lawyers’ ownership of law firms had been prohibited for many decades, but in 2017, the Arizona Supreme Court amended its rules to allow non-lawyer ownership. Under the new rules, non-lawyers can own not more than 49% of any Arizona law firm. The 51% non-lawyer ownership restriction is intended to "protect the client-lawyer relationship from outside interference" and "assure client loyalty and professional independence of judgment." Arizona lawyer Russell Kantor, who proposed the amendment, has written about the amendment in efforts to dispel concerns of ethical violations, professionalism, marketing and client confidentiality within the new non-lawyer ownership model.
Washington D.C. and Florida have had the most experience with non-lawyer ownership of law firms and no other jurisdictions have adopted such a model. In 1993, the D.C. Court of Appeals approved an amended rule allowing non-lawyer ownership of law firms, giving more options to lawyers and firms in managing their practices and a greater incentive for non-lawyer investment in legal firms. The amended rules opened the door to foreign law firms as well, making D.C. the only jurisdiction to provide for this. The D.C. Bar Employed Lawyer Section’s ELS0300-Authorization for Law Firms with Non-Lawyer Owners was created for this purpose.
Since 2007, the D.C. Bar rules have allowed non-lawyers to own UpCounsel, an online legal marketplace that allows individuals to submit legal work and lawyers to bid on them. Under the law, UpCounsel must have at least one lawyer with a supervisory role and 51% or more ownership interest must be held by District of Columbia-admitted attorneys.
Florida joined D.C. in April 2013, ruling on non-lawyer ownership for firms. Under the amended rule, firms must apply to the Florida Supreme Court for permission to allow non-lawyer employees to hold ownership interests, and if approved, they may do so. A non-lawyer may own or control not more than 49% of the firm’s equity ownership interests.
The California State Bar created a 16-member working group in early 2006 to examine the issue of non-lawyer ownership of law firms. It researched non-lawyer ownership in other countries and analyzed the potential impact on the California legal profession. In December 2017, the California State Bar Board of Trustees approved a proposal, which allows out-of-the-box alternative business structure as an experiment.
Pro Arguments for Non-Lawyer Ownership
The debate over non-lawyer ownership of law firms goes beyond the issue of preserving the legal profession for lawyers. Just as many say a law firm should be owned by a lawyer because of the professional service being rendered, there are those who say the inability of a non-lawyer to become an owner does not mean the service is unprofessional, just different. If a loan company or insurance company can have a non-lawyer owning the company and providing services, why should a law firm be different?
On one hand, the fear is that non-lawyer ownership would result in the commoditization of the legal profession (like real estate agents) and more billing on a transactional basis rather than by the hour, with more pressure to bill hours and less concern for solving problems. On the other, non-lawyer ownership was seen as resulting in efficiencies that had been lacking in the legal profession, finding new ways to serve clients at lower cost while also generating profits. Non-lawyers also embraced the notion that innovation and efficiency in the legal industry was needed to deploy new business models.
Providers of legal services and traditional law firms – the "little guys" – see the potential for non-lawyers to flood the market, harming consumers and unduly harming their business . Non-lawyers who own legal practices feel they are responding to a need not being met by traditional law firms, namely innovation and lower costs, and that their entry into the market should be welcomed, not feared.
Opposition to non-lawyer ownership fears a fundamental change in the legal profession. Lawyers are not just providers of a service, but also of a profession, and as such fear – like in other industries – that the move would be toward a commoditization of the industry, a loss of the profession’s status, about as low as you can get. In other words, a robo-lawyer, or a service that allows customers to design their own legal services (i.e. fill in a questionnaire online) creates a threat to traditional legal services, and not necessarily by the costs, but by the commoditization.
And because lawyers are increasingly in competition for those legal services, advocates fear that allowing non-lawyer ownership will result in the market being flooded with providers, driving prices down and inhibiting profits. Law firms, already like having to compete against each other, fear that a non-lawyer from Minnesota can open a non-lawyer owned firm in Michigan and begin to compete. More law firms means more competition.
Global Possibilities: Non-Lawyer Ownership in Other Countries
Internationally, the concept of non-lawyer ownership of law firms has gained a foothold in the conversation, as well. Countries all over the world are weighing their position on non-lawyer ownership and the value it may – or may not – bring to their citizens.
Several examples include:
Australia: In 2001, the Supreme Court of Victoria allowed a legal clinic to be owned by non-lawyers. Shortly thereafter, all eight Australian states and territories agreed to allow non-lawyer-owned firms.
England: The first publicly listed law firm on the London Stock Exchange was Alternative Business Structure (ABS)-owned in 2011. Prior to the ABS regulations, non-lawyers were not permitted to own law firms.
Canada: All provinces and territories in Canada allow non-lawyer owned firms, however there are regulations specifying how non-lawyers can/will operate the law firm.
Germany: In 1990, the German Federal Constitutional Court decided that legal services could not be provided without having a licensed lawyer involved. This is still the position today in Germany.
New Zealand: Alternative Business Structures (ABS) have been legal since 2008 and there are now nearly 28 practices operating as such.
North Dakota: As previously mentioned, the North Dakota Supreme Court "authorized lawyers to share ownership with accounting or financial services professionals."
The evidence is there that the trend toward non-lawyer owned firms has gained considerable traction in other parts of the world very quickly. To avoid being behind the curve, the United States should take heed of our international counterparts. We invite you to keep following this blog as we continue to follow the non-lawyer ownership conversation.
The Future of How Law Firms are Owned
The question of who can own a law firm – non-lawyers or capitalists, as they are often called in this debate – will continue to evolve and attract attention. While the nature of law firm ownership may change, the need for innovation and adaptation to the changing market will not. The ability to adapt is a law firm’s best asset – indeed, for many law firms, it is the key.
It is clear that the law is insufficiently flexible to meet the needs of the modern client, and the law cannot be a barrier to market forces. Many people believe the regulatory response will be a loosening of the restrictions on non-lawyer ownership. However, there may be an equally strong consensus that ease of entry into the legal profession needs to be balanced with the provision of quality services. The relationship among and between regulators, legislators and innovators will continue to be a critical one.
Some have argued that corporate-style law firms fail due to their inability to innovate and respond to market changes, while others have described the model as having better protections for its clients. We think that law firms must innovate, and they can do so outside the bounds of the corporate ownership model. There have been a number of interesting legal innovations and changes in practice models on the edges of the profession that put pressure on traditional law firms to respond. These include YLegal, Quality: The Legal Studio, Riverview Law and the NewLaw movement more generally.
The big question is whether regulation will loosen the current restrictions on non-lawyer ownership in the coming years . It is also important to understand that there is no single point of view on the matter. The Canadian Bar Association has said "non-lawyer ownership of law firms is undesirable and unnecessary" and most North American regulators feel the same way. Even the UK, an early adopter of this model, is experiencing trouble and some imminent fall-out from the new regime.
As the UK learned, bad lawyers will be amplified with added capital. While some would argue that there are already a number of bad lawyers out there, once they are injected with added capital, they will be given opportunities to flout the law that they do not currently enjoy.
The balance, ideally, would be to allow entrepreneurship and innovation that does not set up a model for bad lawyering or bad access to justice. We believe that law firms can have better access to the capital markets without sacrificing the independence of the profession. In the US legal market, for example, there are many examples that can support a more flexible approach to ownership. We are seeing more private equity investment in law firms, but we are not seeing a loosening of outside ownership requirements for law firms.
Without a wholesale reform, as other jurisdictions around the world experiment with the concept of non-lawyer ownership, stricter ownership requirements may be the only way to safeguard the legal work that must remain within the bounds of our regulated regime. It’ll be interesting to see how all of this plays out in the next few years.