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  • Wisconsin Lawyer
    April
    01
    2013

    Trends: Nonlawyer Ownership or Investment in Law Firms

    Robert Denney

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    Faced with continually increasing expenses in a flat or even shrinking U.S. legal market, some large and small firms alike are considering untraditional sources of capital such as nonlawyer ownership or investment in firms.

    Alternate fee arrangements, nonlawyer service providers and, more recently, nonlawyers as firm CEOs are among the most discussed – and sometimes debated – developments in the legal profession the last few years. Now another issue is producing increasing discussion and debate: nonlawyer ownership of, or at least investment in, law firms.

    Background

    This all began 22 years ago in the United Kingdom when the Courts and Legal Services Act 1990 (CLSA) broke the monopoly that solicitors, barristers, and licensed conveyancers had over the provision of certain legal services known as “reserved activities.” This act also permitted nonlawyers to enter the legal market by creating alternate business structures that allowed lawyers and nonlawyers to work together to deliver legal and other services and also solicit outside investments.

    Robert Denneycom bob robertdenney Robert Denney of Robert Denney Associates Inc. provides strategic management and marketing counsel to law firms, companies, and nonprofit organizations throughout the United States.

    Note: Reprinted with permission Law Firm Partnership & Benefits Report (Dec. 2012). Article was updated to reflect recent decisions by the ABA Ethics 20/20 Commission.

    Then six years ago Slater & Gordon, a major personal injury firm in Australia, filed a public stock offering and, in the U.K. the Legal Services Act 2007 was passed, succeeding the 1990 act. The motive behind these developments was to increase consumers’ access to legal services and to increase competition in the legal profession. This has been happening.

    The first alternate business structure, Premier Property Lawyers, began operating in October 2011, the earliest date allowed by the LSA. Other alternate business structures have followed. Early in 2012, in what is probably the first purchase of a law firm by a publicly traded U.K. company, Quindell Portfolio announced it was acquiring a personal injury firm, Silverbeck Rymer, to expand its claims-management services.

    The next development occurred in March 2012 when British regulators allowed the Co-operative Group, a member organization that runs grocery stores and offers banking and insurance services, to provide legal advice on divorce and other family-law matters to its 7 million members.

    The Issue Arises in the United States

    It wasn’t until the passage of the Legal Services Act 2007, as well as the filing by Slater & Gordon, that the issue of nonlawyers owning firms or entities that provide legal services attracted anything more than a casual glance from the U.S. legal profession. Ironically, however, although barred by state bar associations, this structure has existed since 1980 when the District of Columbia Bar Association voted to allow nonlawyers to hold a financial interest in law firms. There is still little information on how many Washington firms have taken this step except for the now-defunct Howrey & Simon, which had made its top financial officer a partner back in 1990.

    Now ownership, or at least the related issue of nonlawyer investment in law firms, has increasingly become the subject of debate by supporters and opponents – as well as the basis for three federal lawsuits. These were filed in 2012 in New York, New Jersey, and Connecticut by Jacoby & Meyers, which challenged the states’ rules prohibiting outside investment in law firms. Although the New York suit was dismissed, the firm has challenged the ruling. The case is expected to be referred back to the district court for further proceedings.

    money plantDevelopments in Australia and the U.K. have caused the American Bar Association to grapple with the issue involving the right of foreign lawyers to practice in the United States if they are admitted to non-U.S. jurisdictions that permit nonlawyer ownership. However, the ABA is no longer considering a proposal that would allow nonlawyers working at a U.S. law firm to own as much as 25 percent of the firm.

    The Debate Has Heated Up

    As you would expect regarding any change involving lawyers, the intensity of the arguments, both for and against the issue, has increased.

    For example, opponent Lawrence J. Fox, a partner in the Philadelphia-based firm Drinker Biddle & Reath, stated, “Let’s keep remembering the story of Arthur Andersen and Enron – how great firms can lose their way by chasing monetary gain.” Another opponent, David J. Carr, a partner at Ice Miller in Indianapolis, who wrote one of the comments opposing the proposal, has been even more outspoken. He said, “I can’t think of anything more pernicious or ill-considered. You are diluting the essence of what it means to be a lawyer.”

    And Robert Weber, I.B.M. general counsel, says firms are only looking for interest-free capital. “I don’t know if I’d call it greed, but it’s in the greed ballpark.”

    On the other hand, Tony Williams, former managing partner of the global U.K. firm Clifford Chance, has said, “I’ve been party to this sometimes rather sterile debate – are you a profession or a business? I don’t see a contradiction between the two.” And Thomas Gordon emphasizes the original intent of the changes in the U.K. Gordon is the legal and policy director for Consumers for a Responsive Legal System, a group that wants to make legal services more accessible. “It’s the people who can’t pay $500 an hour but could pay a $500 flat fee for a divorce who would benefit.”

    See “What’s Hot, What’s Not: National and Global Practice Trends 2013” by Robert Denney, and “What’s Hot, What’s Not: Wisconsin Practice Trends 2013” by Dianne Molvig, in the February 2013 Wisconsin Lawyer, for a global and Wisconsin regional look at trends in the legal profession.

    Just an Issue for Small Firms?

    Developments in both Australia and the U.K. would seem to indicate that nonlawyer ownership or investment is an issue that would only be of benefit to small firms that provide legal services to individuals such as divorce, wills, and personal injury suits. In the U.K., most large corporate firms have not yet addressed these options because, in their opinion, they would create more problems.

    For example, according to an ethics opinion issued by the New York State Bar Association in 2012, if they are part of a U.K. firm that has nonlawyer partners, New York lawyers can’t practice in the state.

    However, faced with continually increasing expenses in a flat or even shrinking U.S. legal market, many BigLaw firms are implementing aggressive growth strategies that include recruiting lateral entries that have large books of business and opening offices in foreign countries or forming alliances with foreign firms. These strategies can require considerable capital. Historically, law firms have needed relatively little working capital, which they have been able to obtain through lines of credit, off-balance sheet leases, or partner contributions. In the current global economy, these traditional sources may not be available or sufficient.

    Meanwhile, Jacoby & Meyers continues to pursue its case and has already formed a limited liability company with the expectation it will be allowed to accept outside investments. And other types of operations, many of which are not lawyer-owned, continue to provide an increasing range of services.

    Conclusion

    It is not surprising that many lawyers oppose outside investment in law firms. However, a large number of legal services providers that are not law firms have already evolved in the United States. In a recently published article, Tony Williams may have summed up the entire issue best. “If external funding permits lawyers to do more for their clients and build services the market wants, then as long as safeguards are in place, external investment could have a positive impact.”

    Stay tuned.