How Will Changes to Law Firm Ownership Rules Affect US Law Firms?

The legal industry is constantly evolving, but a new order from the Arizona Supreme Court could cause significant changes for law firms in that State. Until this order, non-lawyers in Arizona were not permitted to own law firms. Now, however, that restriction has come to an end.

“The two-page order last week from the Arizona Supreme Court reads as pedestrian as any routine court order, but its impact is sure to be game-changing for the practice of law and access to justice,” begins a Law Sites blog article covering the recent order. “The court’s order, issued Aug. 27, eliminates the ban on non-lawyers having economic interests in law firms and the prohibition on sharing legal fees among non-lawyers and lawyers.”

While Arizona is the first state to completely eliminate the ban on non-lawyers having an economic interest in law firms, it is not the first state to loosen the reins on non-lawyer law firm ownership. This court order may set an example for other states to follow suit. If more states do lift their Rule 5.4 restrictions, law firms across the country may look very different in the future.

New Business Models Could Impact Legal Costs

According to a recent article published by law.com, legal professionals are divided over the pros and cons presented by this law firm ownership change. On all sides, experts note the possibility of lower legal costs. Proponents of these ownership changes, such as advocates in Utah and California, welcome ownership changes because these changes can bring innovation, and innovation can result in lower prices for the client.

Indiana University law professor William Henderson wrote in 2018 about “lagging legal productivity.” Henderson continued by pointing out how, over time, this lagging productivity inflates the value of traditional consultative legal services comparative to other goods and services. By changing the rules, non-lawyer ownership could very well cut into the high prices seen within the legal field today.

Big Changes and Further Implications: The Future of Law Firms

Non-lawyer ownership isn’t the only big change impacting law firms and their clients today. Major technological changes are also breaking new ground.

In July 2019, the California State Bar started considering allowing non-lawyers, including artificial intelligence (AI) programs, to “practice” law. Critics decried the mere consideration, arguing that allowing non-lawyers to practice law would most likely affect “solo and small law firms the most” since they often serve lower- to middle-class income markets. Among the controversial recommendations proposed by the Task Force On Access Through Innovation Of Legal Services: allowing technology-driven legal systems to provide legal advice, allowing non-lawyers to deliver legal services, and allowing non-lawyers to have an ownership interest in law firms.

In Utah, the Rogers College of Law launched a two-year pilot project which begins in September 2020 that will train non-lawyers on how to provide “limited legal advice.” During the pilot project, a few non-lawyers will be licensed through Rogers College of Law to give limited legal advice on topics associated with domestic violence. Referred to as “licensed legal advocates,” their training will include providing legal advice on housing, consumer protection, protective orders, child custody, and even divorce. Participants must hold a bachelor’s degree and have at least 2,000 hours of experience working as a “lay legal advocate.”

According to Artificial Lawyer, one of the leaders of the pilot project stated that “Big Four firms would in principle be welcome to apply to join the two-year pilot project.” In the event that was to happen, Deloitte, PricewaterhouseCoopers (PwC), Ernst & Young (EY), and KPMG would be allowed to operate a state-regulated legal service. It goes without saying that nothing like that has ever been allowed before in the United States for any one of the accounting firm giants.

Former President of the Utah Bar John Lund told Artificial Lawyer: “There is nothing stopping those firms from submitting an application to participate in the Utah sandbox for us to consider. Likewise, there is nothing stopping a Utah law firm from submitting an application to add accounting services to its operation. As of now, we have not heard from any such applicant.”

How Will Proposed Reforms Affect U.S. Law Firms?

There may be some advantages to lifting the prohibition on non-lawyer ownership. Presently, lawyers are prohibited from sharing equity interest with non-lawyers engaged in any business involving the practice of law (ABA Model Rules of Professional Conduct, including Rule 5.4).

Some critics of Rule 5.4 say that it restricts the quantity and quality of cooperation between lawyers and associated professionals when making business decisions. As a result, they allege the bottom line is affected, which restricts the capital needed to grow the business, as well as lowering costs and improving the delivery of legal services. Common law jurisdictions such as England and Australia have already taken measures to lift the prohibition on non-lawyer ownership. In a way, this has validated arguments in the U.S. for relaxing the ethics rule. Below are a few advantages to easing the non-lawyer ownership rule.

Build Better Teams

The capability of sharing profits with non-lawyers will empower law firms to collaborate with highly qualified professionals who are aligned with their goals. Organizations that share their success ultimately create better environments while improving services for clients. In addition to that, by making non-lawyers shareholders or stakeholders, law firms are able to avoid paying high salaries and bonuses. Employees can then be rewarded with profit sharing, allowing previously fixed costs to fluctuate with the market.

Promising Business Possibilities

Modifying or repealing the ethics rule will present unique incentives for non-legal entrepreneurs who fully invest in the legal industry. This will allow legal professionals to ally themselves with non-lawyers to create more successful outreach programs through litigation funding. In doing so, the legal industry can better resolve problems beyond clients’ immediate legal concerns. For example, a small law firm opens a small booth in a hospital to help patients with healthcare-related legal matters. Services like wills, malpractice, power of attorney, insurance, HIPAA, elder law, and other things could be offered to those who need it.

Increase the Volume of Fee-Paying Clients

Assistance from non-lawyer investors would most likely enable small- to mid-size law firms to operate more efficiently. As a result, they will be able to offer a wider range of products and services which would increase the volume of fee-paying clients. On top of that, attorneys representing companies will level the playing field with Alternative Legal Service Providers (ALSP), which have long since cut their slice out of the corporate legal market.

Closing Thoughts

The debate over the legal industry becoming available to non-lawyers has long been a point of contention. But societal shifts and advancements in technology seem to be driving the market in a certain direction. After all, this is how a free market is supposed to function—in theory, at least. Rather than pushing back against the force of change, a better strategy would be to find ways to adapt and overcome.

Back