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December 5, 2011 7:05 PM

ABA Panel Says No to Outside Law Firm Ownership

Posted by Sara Randazzo

An American Bar Association commission is considering recommending that nonlawyers be allowed to take an equity stake in law firms for which they work while urging that an existing ban be maintained on the kind of outside investment in U.S. firms that is now possible in the United Kingdom and Australia.

If the panel's recommendation moves forward, the move to let nonlawyers own a piece of firms that employ them would not become an ABA model rule for more than a year, and would still need to be adopted by individual states. While all 50 states currently ban such nonlawyer ownership of law firms, Washington, D.C., has allowed it for more than two decades.

At the same time, the ABA's Commission on Ethics 20/20 came out firmly against any move that would open the door to law firms becoming either publicly traded entities or multidisciplinary practices designed, for example, to serve as one-stop shops for accounting and legal needs.

Formed in 2009 to address how technological advances and globalization are affecting the regulation of  law firms and lawyers, the commission released a draft paper (PDF) Friday that lays out the panel's views and seeks input from members of the legal community. Any formal proposals that are adopted following the comment period will not go to the ABA's decision-making body until February 2013.

The commission's recommendations aren't going far enough for Thomas Gordon, legal and policy director for Responsive Law, a year-and-a-half-old nonprofit in Washington, D.C., that advocates on behalf of what the group cites as the 80 percent of Americans who have inadequate access to legal representation.

"There needs to be much more openness to outside involvement in the legal profession for consumers to benefit," says Gordon, who submitted comments to and testified before the commission earlier this year. "In any service industry, consumers will benefit where there's innovation."

Paul Paton, a professor at Pacific McGeorge School of Law in Sacramento who serves as reporter to the 20/20 commission, says the panel considered the entire spectrum of alternative business structures found elsewhere in the world, discussed at length in an issues paper (PDF) in April, but "decided there were certain practices mapped out . . . that weren't appropriate for adoption in the U.S. at this time."

The ownership model suggested in the draft report would allow firms to give the nonlawyers they employ a financial interest in the firm and a share in its profits. Among the professionals cited as potentially qualifying to take such a stake: architects, engineers, social workers, or investigators who assist in such practice areas as, respectively, land use, intellectual property, family law, or personal injury.

The commission does suggest placing some conditions on opening law firm ownership to nonlawyers, including: requiring lawyers to investigate the professional reputation of anyone considered for an equity stake; ensuring that a firm's lawyers maintain a controlling financial interest and voting rights in the enterprise; and prohibiting nonlawyer owners from having their own clients or offering any services to firm clients outside of legal needs. In short, the panel recommends that law firms must remain focused exclusively on practicing law.

In a separate development, the commission submitted a proposal Monday under which it recommends two changes to its model rules of professional conduct related to how U.S. firms share fees with their own offices abroad or other law firms operating in jurisdictions that allow outside ownership.

The proposal—which is closer to gaining final approval than the draft on nonlawyer firm ownership—recommends allowing fees to be divided between firms even when those firms have differing rules on nonlawyer ownership. For law firms with some offices that allow nonlawyers to have equity in the firm, the commission recommends letting fees be shared between offices as long as the nonlawyers are assisting the firm in providing legal services.

In the United Kingdom, the Legal Services Act now allows, among other things, investment in—and ownership of—law firms by parties other than lawyers. So far, there seems to be little interest by leaders of corporate law firms to take advantage of the new laws. According to a recent article in The New York Times, most of the impact of new rules is being felt at mass-market retailers aiming to offer legal services alongside grocery shopping and accounting.

In the U.S., plaintiffs firm Jacoby & Meyers is pushing the court system, not the ABA, to change the rules on law firm ownership. The firm, which became something of a household name in the 1980s and 1990s through a national television advertising campaign, filed suit earlier this year in federal court in New York, New Jersey, and Connecticut challenging laws in all three states that deny law firms from tapping into outside funding, which Jacoby & Meyers says could help smaller firms compete with larger rivals.

The firm's lawsuit in New York hit a roadblock in early November, when a skeptical federal judge questioned whether the firm has standing to bring its lawsuit and if so, why federal court is an appropriate venue to litigate the issue.

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Why not? everyone can advertise, why not let businessmen buy in?

Why not let business[persons] buy in? The question is whether law firms can "go public." Think about it for a minute. If you think mega-law firms are bottom line oriented now, just think about the pressure to increase profits that will be put on lawfirms by their lay shareholders (with shareholder derivative suits in their holsters, ready to file). Think the firm is going to do what's best for their clients, or what's best for their shareholders?? Why should we let the short-term profit-minded public influence the operation of law firms?? No thanks.

agree. if the companies have lots of shareholders then let the lawfirms have them too. also, in other countries this is done

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