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Much Ado About Nothing: The ABA’s Ideas About Admitting Nonlawyers to Law Firm Partnerships; “Alternative Law Practice Structures”

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                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             December, 2011

The American Bar Association’s Commission on Ethics 20/20 just released its long awaited “Discussion Paper on Alternative Law Practice Structures.”  The report immediately brought to mind  Judge Posner’s recent decision in which he bench slapped a lawyer in a written and illustrated opinion by comparing him to an ostrich for ignoring an obvious case which the court felt controlled in the matter sub judice. My take is that the Commission simply ignored facts already on the ground and, more significantly, completely sidestepped the more urgent question, namely whether the United States would follow the lead of the United Kingdom and permit non lawyer ownership and equity investments in law firms. Our cousins across the pond call this model “Alternative Business Structures” or sometimes the “Tesco” model (the latter based on the ubiquitous retailer of that name).

The essence of the Commission’s report, predicated on the notion that lawyers in the United States some current ethical strictures relaxed so that they can effectively compete on the global stage, mandate the following changes which would permit nonlawyers to hold equity in a law firm, subject to the following strictures:

 such law firms would be restricted to providing legal services;

 nonlawyer owners would have to be active in the firm, providing services that support the delivery of legal services by the lawyers (i.e., the firm cannot be a multidisciplinary practice);

 nonlawyer ownership and voting interests would be restricted by a percentage cap sufficient to ensure that lawyers retain control of the firm;

 nonlawyer owners would be required to agree in writing to conduct themselves in a manner consistent with the Rules of Professional Conduct for lawyers; and

 lawyer owners would be responsible for both ensuring that the nonlawyer owners in their firm were of good character and supervising the nonlawyers in regard to compliance with the Rules of Professional Conduct.

These recommendations are, frankly, superfluous and add nothing to the current marketplace. . More significantly, market forces and realities have already pushed the envelope way beyond the Commission’s shortsighted vision.

For example, the Commission noted that many proponents argued that in order to attract the highest quality management and support staff that today’s legal market demands, law firms should have the opportunity to provide these personnel with an equity kicker. But, the fact is that the market long successfully dealt with this issue by simply paying top quality nonlawyer support personnel partner level compensation and bonuses. Famed comedian Jackie Mason does a great riff on how some people just want to be called partners for bragging rights, but the fact is that as Jerry McGuire said, “just show me the money.” And as we well know, law firm partners are nothing more or less than employees at will.

Second, the purported extant strictures limiting the services a law firm can offer to the delivery of legal services have long been ignored and circumvented through the creation of law firm subsidiaries that offer a plethora of services, some not even law related.

Moreover, substantial nonlawyer control currently exists in that many law firms are rather tightly controlled by their lenders.  It is often said that Citibank owns more law firms in the world than anybody. And banks can exercise the ultimate control:  they can force a law firm to shut its doors.

The final piece of what is to me plain silliness are the peculiar requirements that nonlawyer partners need to be vetted to be assured that they have the character and fitness required for bar admission and their conduct must be monitored by lawyer partners to assure that they are in full compliance with the Rules of Professional Responsibility.  Who is going to do this vetting?  And should a nonlawyer partner violate one of the Rules, who is going to be subject to discipline?  As I said before, top notch professionals just want to be “shown the money” and treated with professionalism and respect.  Having a business card that contains the word “partner” is no assurance of financial reward, job security or being treated with respect or dignity.

The tonier topic, is of course private equity investment in law firms.  As for that issue, the Commission blithely said

The Commission has ruled out certain forms of nonlawyer ownership that currently exist in other countries. In particular, the Commission rejected: (a) publicly traded law firms, (b) passive, outside nonlawyer investment or ownership in law firms, and (c) multidisciplinary practices (i.e., law firms that offer both legal and non-legal services separately in a single entity).

But whether you are a believer or a doubter concerning the Alternative Business Structures, it is a topic that demands immediate attention and public debate.  But as with so much else that Commissions do, it simply kicked the can down the road and agreed to continue to study the issue.

As that can goes rolling down the road beyond any visible horizon, the United Kingdom, hell  bent  on being the home base to the world’s great law firms, will take robust advantage of its substantial head start, legal services will be increasingly be provided by nonlawyer owned and unregulated Internet providers of legal services and  offshore LPO’s will continue to take larger market share, again in an environment where they are not owned by lawyers, not regulated and often under insured.

My expectation is that the next step in the evolution of  law firms will largely continue to evolve and form significant joint ventures with non-traditional providers of legal services.

In one of the next belated iterations of the Commission’s discussion papers, the Commission and the bar will arise from its long slumber and look around at a brand new world and perhaps even wonder “how did all of this happen; who was asleep at the switch?”

© Jerome Kowalski, December, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at jkowalski@kowalskiassociates.com


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8 Responses

  1. Well said as usual. I have to wonder the extent to which the Working Group limited their recommendations due to concerns about lawyers remaining self-regulated. The term is stressed a couple of times in the discussion draft. I’m having trouble coming up with other legititmate reasons why the recommendation would fall so flat.

    • Thank you James.

      I would argue that in material measure, providers of legal services have become unregulated. The guild rules creating artificial barriers to entry are dissipating. The problem is that nobody seems to be noticing.

      The completely bizarre thing here is that these guys spent months addressing an issue which is completely a non-issue and then proposed an unworkable solution to a problem that simply doesn’t exist in the market.

  2. This reminds me of the mid-90s, when the whole multi-discipline practice thing heated up and the various bar groups studied it ad infinitum. At the time, in the face of demonstrated client behavioral preference for the benefits of MDP, the stance they took then sounded a lot like, “We forbid the hurricane to come ashore; we won’t permit it.”

    From Wikipedia:
    The ABA mission, as stated in its 2008 mission statement, is “To serve equally our members, our profession and the public by defending liberty and delivering justice as the national representative of the legal profession.”[2] The goals and objectives are:
    Goal 1: Serve our members. (Objective: Provide benefits, programs and services which promote members’ professional growth and quality of life.)
    Goal 2: Improve our profession. (Objectives: 1) Promote the highest quality legal education; 2) Promote competence, ethical conduct and professionalism; 3) Promote pro bono and public service by the legal profession.)
    Goal 3: Eliminate bias and enhance diversity. (Objectives: 1) Promote full and equal participation in the association, our profession, and the justice system by all persons; 2) Eliminate bias in the legal profession and the justice system.)
    Goal 4: Advance the rule of law. (Objectives: 1) Increase public understanding of and respect for the rule of law, the legal process, and the role of the legal profession at home and throughout the world; 2) Hold governments accountable under law; 3) Work for just laws, including human rights, and a fair legal process; 4)Assure meaningful access to justice for all persons; and 5) Preserve the independence of the legal profession and the judiciary.)

    I’m not a lawyer, so I’m struggling to see where this latest position fits in. Which of the four mission components does constraining US lawyers, thus granting a competitive advantage to UK and Australian firms (for now), support?

    The law business arguably is undergoing its most fundamental (some have described it as “seismic”) change in its history. One of the biggest components of that shift is from demand exceeding perceived supply (a sellers’ market) to the opposite (a buyers’ market). Now that buyers are (belatedly) recognizing their leverage, they’re changing how they buy with a speed that even the most unfettered lawyers and firms would struggle to keep up with.

    For example, does the ABA think that Google Ventures (among many) are playing games when they invest tens of millions in RocketLawyer, LegalZoom, LawPivot and others?

    What lawyers need now is help learning how to understand competition and figure out ways to compete with each other and the well-funded alternative legal solution categories/suppliers springing up like weeds.

    • It is no wonder to me that the ABA is losing membership at a rapid clip. I let my membership lapse a couple of years ago after I came to the realization that the ABA was providing nothing of value to me, the profession or the public.

      Several months after my membership lapsed, I got a call from membership services asking if I knew that my membership lapsed. I told him I did and told him why. He gave me a sales pitch about the ABA and I asked him to identify a single benefit I derived from membership. The two items he came up with were the daily ABA newsletter (available for free to non members) and discounts at Staples (which proved to be false). I politely declined and he then offered me a free one year membership. I took him up on the offer; after all who can resist free? A year passed and since nothing changed, I did not renew.

      I recently attended a conference where a member of the 20/20 Commission spoke. His singular contribution was that the Commission was looking at ways to tweak the existing Model Rules so that law firms could sub-contract to offshore LPO’s. At least 50 LPO’s were in the audience and their reaction was the same as the other attendees: What’s the point? We’re already subcontracting with law firms and contracting directly with clients.

      The speaker suggested that in a year or so, the Commission would complete its tweaking and propose amendments to the Model Rules. Then of course, those tweaks are simply going to be recommendations which each of the 50 states would then need to consider; a process, which itself usually takes years and each state bar makes its own independent decisions.

      The point is that the market is, as you correctly pointed out, Mike, going through seismic changes. We are quite literally in the midst of category 8 level earthquake and the ABA simply doesn’t have the capacity, will or ability to deal with the tough issues.

      To unforgivably mix a metaphor, these folks are simply rearranging the deck chairs on the Titanic as the ship is going down.

  3. […] (although the ABA has continued to resist meaningful change in this regard—for analysis, see this post by Jerome […]

  4. […] As the ABA agonizes over whether US law firms should permit nonlawyer employees of a law firm to hol…, the real question concerns the underlying issue of adoption of Tesco laws in the United States. The New York State Bar Association announced just a few days ago that it would create a committee, under the capable leadership of immediate past NYSBA president Stephen Younger to study the issue. But, even as he seated this committee, current NYSBA President Vincent Doyle proclaimed that the Association “remains opposed to nonlawyer ownership of law firms.” Sounds like a fair unbiased hearing on the subject won’t be very likely here. […]

  5. […] business model of law firms and the delivery of legal services. While the American Bar Association dithers with little bits of the non-lawyer ownership of law firms issue for no good or productive reason, the market – and clever lawyers – will develop a new […]

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