Inside Track: Lawyer Regulation: The Clash Between Core Values and Alternative Business Structures :

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  • Lawyer Regulation: The Clash Between Core Values and Alternative Business Structures 

    The ABA recently rejected a proposal to allow nonlawyer ownership in law firms through the amendments to the Model Rules of Professional Conduct. But as other countries explore alternative business structures, the debate will continue, according to ethics expert Paul Paton.

    Joe Forward

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    Paul Paton, George Brown, and Dean Dietrich

    Paul D. Paton (left) recently spoke at the 2012 Fellows of the Wisconsin Law Foundation Annual Recognition Dinner. Paton, professor of law and director of the Ethics Across the Professions Initiative at the University of the Pacific, McGeorge School of Law, discussed the challenges of change for the legal profession. He poses with State Bar of Wisconsin Executive Director George C. Brown and Wisconsin Law Foundation President Dean R. Dietrich.

    Oct. 17, 2012 – Think third-party investment in law firms is a good idea? What about lawyers partnering with engineers or accountants? These “alternative business structures” are happening overseas, but they won’t be happening in the U.S. anytime soon.

    The American Bar Association (ABA), which drives state regulation of attorneys through the Model Rules of Professional Conduct (Model Rules), has consistently rejected proposals to ease restrictions on law firm business structures, citing conflicts with the profession’s “core values.”

    Primarily, the ABA Commission on Ethics 20/20 – established in 2009 to study the U.S. lawyer regulation system in light of advanced technology and globalization – has expressed concern that allowing alternative business structures could infringe on a lawyer’s duty to exercise independent judgment, to provide undivided loyalty to clients, and avoid conflicts of interest, among other duties unique to the legal profession. Meanwhile, countries such as Australia, England, and Germany have eased restrictions on the way their law firms operate.

    In addition, domestic competition for U.S. consumers will continue to drive debates on how lawyers can more effectively compete while preserving the core values of the profession.

    “The ABA last looked at some of these issues in a comprehensive way about a decade ago," said Paul Paton, professor of law and director of the Ethics Across the Professions Initiative at the University of the Pacific, McGeorge School of Law. "I think it’s reasonable to expect that 10 years from now, or even sooner, the ABA will have to take another look.

    "The impact of both technology and globalization, and increasing demand from clients for legal services that are faster and more accessible, means we'll have no choice but to be alert to changes in the way legal services are being delivered, including whether alternative business structures have a place here in the U.S." 

    Paton served as reporter for the ABA Commission on Ethics 20/20 Alternative Business Structures Working Group and was the featured speaker at the Wisconsin Law Foundation’s annual Fellows Dinner in Milwaukee earlier this month.

    “Technology is breaking down traditional barriers," he said. "Both individual and corporate clients are looking globally for solutions. People are searching for answers themselves on the Internet, often from providers who are not regulated. We will have to continue to evaluate the way law firms are regulated and to see whether the business structures through which they operate are providing consumers with sufficient access to legal services while protecting their best interests." 

    Changes Overseas 

    More foreign countries are moving towards alternative business structures that allow lawyers or law firms to partner with nonlawyers, offer both legal and nonlegal services, permit passive and corporate investment in law firms, or let nonlawyers control law firms.

    At one end of the spectrum, Australia, England, and Wales allow a range of options, including lawyer-nonlawyer partnerships that provide both legal and nonlegal services, sometimes referred to as multidisciplinary practices (MDP).

    As of June 2010, there were approximately 250 law firms with nonlawyer partners in England.

    Firms in those countries can also seek external investment in law firms. So-called “incorporated legal practices” in Australia can be listed on the country’s stock exchange. Approximately 2,000 incorporated legal practices were operating in Australia as of December 2010.

    Noting third-party investing in law firms, the State Bar of Wisconsin’s 2011 Challenges Facing the Legal Profession Report addressed the concern that use of law firm public funding models in other countries could place U.S. firms at a disadvantage in the international market.

    In April 2012, the ABA Commission on Ethics 20/20 rejected a proposal that would allow nonlawyers to hold partnership interests in law firms. The proposal sought to amend Rule 5.4 of the Model Rules, which prohibits lawyers or law firms from sharing legal fees with nonlawyers. Only one U.S. jurisdiction, Washington D.C., allows such arrangements.

    In a press release, ABA 20/20 Commission co-chairs Jamie Gorelick and Michael Traynor said, “the case had not been made for proceeding even with a form of nonlawyer ownership that is more limited than the D.C. Model.”

    The Washington D.C. rule allows nonlawyers to partner in firms organized for the sole purpose of providing legal services. Law firms can include partners such as accountants, social workers, or engineers. But those professionals cannot maintain practices untethered from legal services.

    While the ABA currently resists a national model based on Washington, D.C.’s rule, the Commission on Ethics 20/20 may soon provide guidance on “choice of law” problems that arise when U.S.-based law firms extend into jurisdictions that do allow nonlawyer ownership.

    At a meeting later this month, the Ethics 20/20 Commission will decide whether or not to submit formal proposals on the narrow choice of law questions for consideration by the ABA House of Delegates at the ABA’s midyear meeting in February 2013.

    U.S. Holding Back 

    Paton says that governments in countries such as England and Australia instituted change in order to respond to consumer interests and the need to provide greater access to legal services. But there’s a trade-off.

    “The bars in those countries have effectively lost self-regulatory authority,” Paton said.

    For instance, England’s Legal Services Act of 2007 includes measures to protect the public interest and improve access to justice while allowing alternative law firm business structures.

    As an example of the change, the Act allowed British legal services provider Quality Solicitors (QS) – an alliance of independent law firms – to partner with retail giant WHSmith. QS employees sell legal document packages and fixed-fee sessions with affiliate lawyers in nearly 500 store kiosks.

    These services are similar to ones now offered online by nonlawyer entities such as LegalZoom, which sells online legal documents to do-it-yourself-consumers. LegalZoom reported $156 million in revenues last year and took approximately 490,000 orders, according to SEC filings.

    “One of the biggest concerns for the traditional practitioner, particularly solo and small firm practitioners, has to be an outfit like LegalZoom, which announced plans last spring for an initial public offering to raise more revenue,” Paton said. “But does their prospectus say anything about core values?”

    “How do we make sure that the increasing numbers of individuals who don’t have access to legal services are better able to access them?” Paton asks. “Does that mean allowing law firm kiosks in book stores and grocery stores as they are starting to see now in England? And how can we preserve the best traditions of the legal profession while responding to change?"

    Joe Forward is the legal writer for the State Bar of Wisconsin.

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