Change, though, may be on the horizon. A few states have loosened the rules that enforce this norm, and several more are considering it. This shift is hardly seismic—at least, not yet—but, if larger jurisdictions adopt similar changes, these liberalizations may well begin to shift the national landscape.
The Current Rule
With a few inapposite exceptions, ABA Model Rule 5.4 bars lawyers from sharing legal fees with nonlawyers and forbids law firms from having nonlawyer owners or officers. The rule is intended to safeguard lawyers’ professional independence by insulating them from the supervision of nonlawyers who might prioritize profit over duty to clients. One practical effect of the rule is that law firms generally do not provide services outside of law, because any nonlawyers providing those services could never advance to become partners or hold supervisory authority over a firm’s lawyers. The prohibition on nonlawyer ownership also prevents law firms from offering equity to entice nonlawyer employees and from raising outside capital to fund major expansions or innovations.
Some commentators suggest that these limitations have the effect of preventing law firms from expanding, innovating, and finding ways to offer more economical services to a larger segment of the market. Others have suggested that allowing firms to form multidisciplinary practices (“MDPs”) that could offer legal services alongside other complementary services would positively affect the quality and cost of legal advice for clients. Globally, restrictions on nonlawyer ownership have likely contributed to keeping large law firms smaller than their counterparts in other professional services industries, such as accounting and consulting.
Until recently, all 50 states followed some version of Rule 5.4, with the only significant outlier being the District of Columbia. D.C.’s rule has allowed nonlawyer ownership since 1991, and a small minority of D.C. firms have one or more partners who are lobbyists or public relations professionals, rather than lawyers. However, ABA Formal Opinion 360 prevents those firms from expanding into jurisdictions that follow Model Rule 5.4.
The Beginnings of Change
The idea of changing Rule 5.4 is nothing new. When the ABA’s Kutak Commission was first formulating the Model Rules in the early 1980s, the Commission’s proposed version of Rule 5.4 permitted the splitting of fees with nonlawyers. The Model Rules adopted in 1983 did not, however, follow that proposal, but instead reinforced the longstanding restriction on fee splitting. Subsequent attempts to change the rule failed to gain significant traction.
Changes have occurred internationally, especially in the past 15 years. In 2007, an Australian personal injury firm became the first publicly traded law firm, and in 2012, U.K. regulators issued the first licenses for law firms to convert to “Alternative Business Structures,” which can have nonlawyer owners and provide services beyond legal advice.
The current push for looser regulations in some U.S. jurisdictions appears to be driven by concerns over access to justice. In states that have adopted or are considering more permissive rules, the changes are often framed as an effort to encourage the development of legal business models and technologies that will reduce the often-prohibitive cost of legal representation. That said, some regulators also seem to recognize that changes to Rule 5.4 may lead to outside investment in, and even ownership of, law firms by large corporations.
Major Shifts in Utah and Arizona
In August of 2020, Utah created a time-limited pilot program allowing entities, including those owned by nonlawyers, to apply to the state’s newly created Office of Legal Services Innovation for permission to provide legal services. The program was initially planned to run for two years, but has recently been extended to seven. Applicants must explain how they propose to offer legal services through technology or a nontraditional corporate structure, and successful applicants are authorized for the duration of the program to provide legal services in their area of law (e.g., healthcare or housing) using their approved model. There are currently 26 entities authorized under the program, including established companies like Rocket Lawyer, two nonprofit efforts focused on medical debt relief, and a number of law firms with majority nonlawyer ownership. In March, the first U.S. law firm entirely owned by nonlawyers, Law on Call, opened under Utah’s program.
Less than two weeks after Utah’s program went into effect in August of 2020, Arizona’s Supreme Court followed the recommendation of its Task Force on the Delivery of Legal Services and issued an expansive order entirely abrogating Arizona’s version of Rule 5.4 as of January 1, 2021. Arizona now permits firms and their prospective nonlawyer owners to apply for licensure as Alternative Business Structures (“ABSs”), which may have nonlawyer owners and managers.
The changes in Arizona are significant, but the state’s ABS directory lists, thus far, only three licensed ABSs, none of which appear to be very large or to have a presence beyond the Southwest. Despite the program’s apparently slow start, other applications are in process, including one from Rocket Lawyer. Further, the new regulations clearly contemplate that the licensing scheme will eventually attract multinational corporations—the most expensive tier of the licensing fee schedule for ABSs is specifically for international firms.
Potential Future Changes
Although regulatory changes in two comparatively small legal markets might seem like footnotes to lawyers in major East Coast cities, these shifts may portend larger changes. Notably, California and Florida are both considering following Utah’s lead.
In May of 2020, California’s Bar established its Working Group on Closing the Justice Gap, which is tasked with the possible development of a regulatory sandbox akin to Utah’s pilot program. The decision establishing the group was notably broad—the Bar’s Board of Trustees explicitly rejected a counterproposal that would have prohibited the working group from considering liberalization of the ban on nonlawyer ownership. There has been recent debate, though, over whether participation in any pilot program should be limited to organizations focused on increasing access to justice. The working group will deliver its recommendations to the Bar’s Board of Trustees in September of 2022, so it is conceivable that major changes could occur in the next few years in California.
The Florida Bar’s Special Committee to Improve the Delivery of Legal Services is slated to deliver a report to the Florida Supreme Court by July of this year. According to its most recent quarterly report, the committee is very likely to recommend that, subject to some regulation, firms should be permitted to have nonlawyer owners (but not passive investors). Recent meeting minutes show that the committee is looking to Utah’s pilot program as a possible model.
North Carolina’s state bar has also established a relevant committee. The bar’s Subcommittee to Study Regulatory Change appears to be in an information-gathering stage, judging by the recorded meeting posted on the bar’s YouTube channel. The committee has, however, expressed some interest in Utah’s program.
One place where changes to Rule 5.4 are still strongly opposed is at the ABA. The merits of deregulation aimed at increasing access to justice were hotly debated in February of 2020, and the eventual resolution expressly refrained from recommending changes to Rule 5.4. The report accompanying the resolution was also significantly revised, with an entire section being deleted and all references to Rule 5.4 being removed to facilitate the resolution’s passage.
Looking Ahead in Massachusetts
For now, changes to other jurisdictions’ versions of Rule 5.4 are unlikely to have major effects in Massachusetts. In the future, though, Massachusetts practitioners may find themselves as co-counsel with lawyers from other jurisdictions who have nonlawyer partners, and questions may arise about the propriety of sharing fees in such situations. As nonlawyer ownership becomes more common and ownership structures become more varied, Massachusetts lawyers would be well advised to seek guidance from ethics counsel before entering into any fee splitting arrangements with lawyers from alternatively structured firms.
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