This column is by Janet Stanton, Partner, Adam Smith, Esq.
Let’s start at the source. Here is the most salient part of Rule 5.4 “Professional Independence of a Lawyer” regarding law firm ownership for most of the US (Washington, DC and Washington state are exceptions to varying degrees)
(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
There’s more (of course!), but this is the nub.
(And, apologies to our readers where this does not apply. Our colleague in Santiago, Antonio rightly reminded me that beyond the two Washingtons here, several countries don’t have, and in some cases never have had these prohibitions. And guess what? The sky has not fallen!)
I spent a couple hours trying to find out the rationale for prohibiting nonlawyer ownership and frankly did not find much of substance; mostly inchoate exhortations along the lines of “doing harm to the legal profession” and “degradation of adherence to ethical standards” sans supporting backup.
But back to our results. And, once again you Dear Readers did not disappoint. Not only did a robust 147 of you vote – we also received over a dozen thoughtful comments from all over the globe. We’re just tickled by this! Thank you.
To refresh everyone’s memory, here’s the question and the choices we gave you:
Is the prohibition against non-lawyers having an ownership interest in a law firm still a good idea?
- Yes, to ensure clients’ interests and lawyers’ professional judgement are insulated from conflicts of interest that can come with outside ownership.
- Yes, because lawyers better understand the unique challenges of running a law firm.
- No, because it unfairly deprives law firms access to alternative sources of capital and, therefore limits their opportunities.
- No, because the prohibition impedes firms’ ability to recruit talented business professionals who are increasingly necessary to address the complex business challenges firms are facing.
- No, it is an anachronism better suited to an earlier era.
- Hard to say in the abstract; the only way to find out is to repeal the prohibition and let the market decide.
Topline: if left to our readers, the prohibition against non-lawyer ownership would be toast. When combined, the “No” choices added up to 108 votes, or 73% of the total. When you include those choosing “Hard to say; only way is to repeal the prohibition and find out,” the proportion of prohibition-naysayers jumps to 119 votes or 80% of all responses. Fairly definitive, I’d say.
Before I go any further, we found one data point truly fall-down funny. No one chose “lawyers better understand the unique challenges of running a law firm.” Zero. Nada. Bupkis. Vox populi.
Let’s break down the reasons people felt the prohibition should go. About a quarter (24% or 35 votes) simply thought the provision is an anachronism; worthy of history’s dustbin.
Then things got a little more interesting. Half felt that the prohibition in some way hamstrings the optimal functioning of law firms and limits their opportunities. Fully 40% (59 votes, the most of any choice) believe the prohibition impedes firms’ ability to recruit talented business professionals. Since law firms are enjoined from offering stock or stock options, they are at a serious disadvantage when competing for talented business folks. And, as we’re seeing, a hallmark of firms that are outperforming other firms is that they employ a robust cadre of talented business types. Another 10% believe the prohibition’s most negative impact is that it deprives law firms’ access to alternative sources of capital.
I guess I should not have been surprised that some – nearly one-fifth (19%) – continue to believe that the prohibition is a good thing in order to ensure clients’ interests and lawyers’ professional judgment are insulated from conflicts of interest that can come with outside ownership. Sigh. My partner, Bruce MacEwen had this tart response, “May we not stipulate that charging headlong into a conflict of interest (where, presumably, the pursuit of the almighty dollar at all costs wins out over professionalism) is one of the most self-destructive behaviors a law firm could engage in?” Leon Atkins wholeheartedly agreed. In his comment.
As mentioned, we got a bunch of great comments from all over. Ron Friedmann (a good friend) went all out and posted a whole piece urging a more evidence-based approach and analysis. Richard Moorhead correctly noted: “Interesting that the idea that it might be in the clients’ interests to deregulate is not mentioned.” José Fernando Torres Varela succinctly observed (translation from the original Spanish is ours), “[Non-lawyer ownership of law firms] is totally desirable. It improves the firm’s management, allows investment in R&D and encourages multidisciplinary counseling.”
We think it’s only a matter of time before this prohibition falls; there are too many opposing forces amassing against it. Not just the Big 4 (which alone should scare the pants off just about everybody). Prudent firms are planning for this, including how to capitalize on the opportunities presented and will be ready when it occurs.
What about your firm?
Thanks again, Dear Readers for your engagement. And, if any of you have hot button questions you’d like to see – please let us know!
Our next Question of the Month about de-equitizing partners is up here. We’d love to hear what you have to say on the topic.