Sokolove Success Blog – Our Perspective on Legal News that Matters

At the American Bar Association’s recent midyear meeting in Orlando, an important hearing was held of the ABA’s Ethics 20/20 Commission.  The commission was created last August and charged with reviewing lawyer ethics rules and regulation across the United States within the context of a global legal services marketplace.  If I may paraphrase, the commission was looking to possible reforms to the ethics rules that would allow the U.S. legal market to keep up with the rest of the world.

Much to my surprise and pleasure there was a great deal of debate at the first hearing about the subject of non-lawyer ownership of law firms.  It’s about time.

As we know, Rule 5.4 of the American Bar Association’s Model Rules of Professional Conduct prohibits non-lawyer ownership of law firms.  Simply put, a non-lawyer investor cannot take an equity position in a law firm. The rule was created to ensure that lawyers did not prioritize profits ahead of the best interests of their clients.  We want our lawyers to have a duty to their clients, not be slaves to shareholders.  That seems to make good sense.

However, there are consequences to Rule 5.4 and none more important than the fact that it can stifle growth and innovation in the profession.  But don’t take my word for it.

The February hearing of the 20/20 Commission included differing viewpoints on the subject from Lawrence J. Fox, who practices with Drinker Biddle in Philadelphia, and Richard Granat, who chairs the eLawyering Task Force of the ABA Section of Law Practice Management.  Here are their arguments summarized in brief from the hearing transcript.

Fox compared the idea of non-lawyer ownership to the kind of conflict of interest that existed at Arthur Andersen when it served as both auditor and consultant to Enron. He further argued that the debate over non-lawyer ownership was similar to the debate over multidisciplinary practice that occurred 10 years ago when the ABA proposed allowing lawyers to practice law within entities that included non-lawyers. (A rule that the ABA House of Delegates rejected).

In short, Fox’s argument is that relaxing restrictions on non-lawyer ownership is a bad idea because it could give rise to a conflict of interest. Furthermore, we considered doing it ten years ago and decided not to, so we should reach the same decision today.

Granat, who runs what he calls a “virtual law firm” in Maryland, said that the existing rules limiting non-lawyer ownership stymie innovation in the legal market and prevent firms from finding new ways to  deliver legal services, including online offerings.

In a nutshell, Granat’s argument is basically that our competitors are innovating, and there’s a huge unmet demand for legal services to be delivered in more innovative and efficient ways.  To do that requires capital.

I don’t want to put my thumb on the scale, but it seems to me that Granat makes the better point.  What do you think?