The American Bar Association (ABA) toyed with a contentious idea earlier this year: non-lawyer equity investment in law firms. As it stands today in the U.S., ethics rules prevent lawyers from sharing their profits with non-lawyers, ostensibly because these people are not subject to the same professional rules of conduct. The ABA’s latest proposal was to allow non-lawyers who already work at law firms to own up to a 25% stake in the firm. Unfortunately, the idea appears to have stalled (again), but it is still worth discussing.
This is not the first time this issue has come up. In fact, the ABA put together a proposal as long ago as 2000. Not only that, it isn’t even illegal everywhere in the country: Washington, D.C. voted to allow non-lawyer investment all the way back in 1980. And it isn’t just being played out in ABA meetings and in business journals, it has reached the courts. In March, New York law firm Jacoby & Myers brought suit challenging the constitutionality of the state’s ethics rule barring this practice. Sadly for the firm, the court dismissed the action because Jacoby did not have the required locus standi to bring the suit.
And it isn’t that radical of an idea either. Countries like the United Kingdom and Australia already allow this, albeit only recently. The UK started the program on the idea that the capital raised would be used to invest in technology and other systems to bring down costs, with the goal of lowering the legal costs of consumers. The downside to this is legal services may become commoditized, which would make them less attractive investments.
Opponents of the idea worry that these outside investors would influence lawyers’ judgments and convince them to make unethical decisions, all in the name of maximizing profits. The practice would affect the “core values,” such as confidentiality and loyalty to our clients, that we as a profession so value. If non-lawyers are partners and are thus privy to confidential information, who will police what they do with that information?
There is also the issue of practicality. Who is going to invest in these firms? Individuals? Maybe. But for this to make any sort of meaningful impact, large dollars will have to be at play. Private equity is an option, but there is one big problem: an ethics rule that prohibits lawyers from entering into agreements that limit their ability to practice law. This underscores law firms’ biggest problem: their only assets can walk out the door at any time, never to return again. That isn’t exactly a trait of the textbook private equity investment.
However, the benefits to law firms of outside investment are numerous. It allows small firms easier access to capital. Large law firms are able to use banks much easier, giving them yet another advantage. Outside investment gives law firms a way to recruit and retain their top non-lawyers talent. This is also especially helpful to smaller firms, which could bring on certain experts as partners rather than hire them on a one-off basis. It especially makes sense given the rise of entrepreneurs (who need capital) in the law firm sector. One could also argue financial investors could help firms maximize their profits by making operational changes that do not affect their representation of clients.
It is tough to say who is right in this debate. Each side makes valid points. But in a time when giant firms are going under because of crushing amounts of debt (see Dewey & LeBoeuf) and investors are constantly looking for new ways to put their money to use, maybe it’s time for the ABA to make a change. After all, our country’s legal system developed largely out of British common law; we might as well import one of their newer ideas.
Written by: Jeffrey McIntosh