ABA Sides Against Opening Law Firms Up to New Competition (1)

The American Bar Association is pouring cold water on efforts to loosen restrictions on who can own law firms, including moves that could open firms up to new competition from corporations.

The group’s House of Delegates on Tuesday passed a non-binding resolution discouraging changes to state rules barring the sharing of legal fees with non-lawyers. But it also encouraged state bar groups to explore innovations designed to increase access to justice by making legal services more affordable.

“By reaffirming our core value of independence of the legal profession and the prohibition against nonlawyer ownership, the ABA House’s action today is a huge victory for all lawyers,” said Foley Hoag partner Stephen Younger, a previous president of the New York State Bar Association.

“Lawyers from across the country coalesced in agreeing that we ought not to allow investment firms and tech companies buy our law firms and thereby influence our independent legal judgment,” Younger continued.

The resolution, passed at the ABA’s annual conference in Chicago, comes as states like Arizona and Utah have already loosened law firm ownership restrictions. Others, such as California, Michigan and North Carolina, are considering similar tinkering.

The changes are often touted as access to justice measures. But they could also allow law firms to seek outside investors and permit the Big Four accountancies and other for-profit businesses like litigation funders to compete to provide legal services in the US.

State bar groups routinely follow the ABA’s lead when considering revisions to specific legal ethics rules.

Mixed Message

The new resolution sends a mixed message to states considering changing their law firm ownership rules.

The ABA reaffirmed a two-decade-old policy that supports the existing model ethics rule, banning nonlawyer ownership. But Tuesday’s resolution was amended before the vote to also voice at least some support for states that are testing new types of legal businesses.

That leaves the likely impact of the ABA’s move unclear.

“Over the next five to ten years, we’re going to live in a mixed environment” with different states either holding to old rules or testing new types of ownership models, said long-time ABA member Lucian Pera, a partner with Adams and Reese in Memphis, Tenn. “And that’s okay.”

A resolution issued by the ABA in 2000 stated that sharing law firm ownership or legal fees with nonlawyers is “inconsistent with the core values of the legal profession.”

Arizona has already scrapped its version of ethics rule 5.4, which blocked lawyers from sharing fees with nonlawyers. Utah, meanwhile, has created a regulatory “sandbox” to test new-model operations—a model some in California want to replicate.

“The key is to allow for reform,” said Andrew Perlman, dean of Suffolk Law School in Boston and a reform advocate. The ABA’s new resolution, he said, “doesn’t change the call for regulatory innovation. That’s an important outcome here.”

So far, most of the newer legal operations licensed or being tested in Arizona and Utah are much smaller than the behemoths that could upend the legal industry. As efforts have gained steam in those states, speculation has grown about the potential impact.

Some industry leaders expect that changes in larger states could prompt Big Four accountancies like Deloitte or EY to acquire regional law firms to compete directly in the legal services business, as they already do in other countries.

Last November, executives with two leading litigation finance companies, Longford Capital Management LP and Burford Capital Ltd., said Arizona’s revised legal industry regulations made it possible for them to co-own law firms in the state. With other states considering similar actions, they said it made sense for law partners to increasingly consider changes in how firms are structured.

The California legislature is pushing the state bar to place restrictions on a proposed a new regulatory sandbox experiment similar to that in place in Utah. A final vote by the state assembly could come by the end of August.