What’s KPMG Up to With Its New Law Firm in Arizona? (1)

The Big Four accounting firm KPMG has taken advantage of relaxed rules in Arizona to start a law firm there, but the company has broader ambitions outside of the state.

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KPMG says it doesn’t want to compete with established players in the legal industry, but Big Law leaders are privately expressing concerns. That’s according to Justin Henry, a Bloomberg Law reporter who’s the guest on today’s episode of our podcast, On The Merits.

Henry talks about the legal work KPMG can do now and about the open question of whether it can operate outside of the Grand Canyon State. He also talks about the measures KPMG has taken to insulate its new law firm from the rest of its company, like having KPMG Law US attorneys access separate keyed spaces at KPMG’s Tempe, Arizona office.

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This transcript was produced by Bloomberg Law Automation.

TRANSCRIPT:

Host (David Schultz):

Hello, and welcome back to On the Merits, the news podcast from Bloomberg Law. I’m your host, David Schultz.

A couple weeks ago, we talked about how some well-capitalized investors and companies are taking advantage of relaxed law firm ownership rules in some states and are diving head first into the legal industry. The big four accounting firm KPMG is one of those companies, and today we’re going to get into greater detail about what it’s doing in the legal world and what that could mean for traditional law firms.

Bloomberg Law reporter Justin Henry has done more reporting on the new law firm KPMG created in Arizona, and he’s going to fill us in on what it is that they’re doing, and perhaps more interestingly, what it is that the firm can’t do. First he explains why KPMG chose Arizona as the site of this first-of-its-kind firm.

Guest (Justin Henry):

In most U.S. states, there is a professional ethics rule for lawyers modeled off the American Bar Association rule 5.4, which says only lawyers, only licensed attorneys, can have an ownership interest in a law firm. What Arizona did in 2021 is their Supreme Court, the state Supreme Court, said, we’re going to eliminate our version of that professional ethics rule to say that non-lawyers and other types of businesses can come in and have an ownership stake in law firms, and what that did is that opened the door for private equity entities and for litigation funders and for other types of professionals to come in and basically be shareholding partners in a business that provides legal services, and since then we’ve seen all kinds of alternative business structures pop up in the state.

Host:

Yeah, and it sounds like Arizona isn’t the only place that has tweaked its rules about law firm ownership a little bit. It just sort of is the state that’s gone the farthest in doing this, right?

Guest:

Absolutely. In the early ‘90s, there was a rule passed in D.C. that said other types of professionals could have an ownership stake because you have a lot of non-lawyer lobbyists coming out of government who are going into private practice at law firms, and it just makes sense given that volume of that type of professional in D.C. to kind of liberalize the rules there. In Utah, they have a similar approach to Arizona, although it’s not quite as broad. In Utah, they have an experimental, what they call a sandbox, which allows entities to test-pilot alternative ownership structures.

Host:

Okay, so we have KPMG Law U.S., a brand new law firm in Arizona as of this year. What are they doing right now? What sort of work are they doing?

Guest:

So it’s been six months since KPMG was granted a license to operate a law firm in Arizona. In those six months, what they’ve been doing is they’ve been coordinating with lawyers in the state as well as in other states to coordinate client services. Now, since most states prohibit ownership of law firms by non-lawyers, the only way that KPMG can service clients in other states is by forming co-counsel relationships. Now the argument that they make is that they can provide services in other states the same way any lawyer can provide services in a state that they’re not licensed to practice law in. If you think about a national law firm that has a litigation matter in Tennessee, it’s common for them to hire local Tennessee counsel to service clients there because the Tennessee lawyer knows the ropes of the court system there and has local roots. And in the same way, if you have a transactional matter, it can work on a similar basis. And so they’re using that co-counsel allowance to broaden their services beyond Arizona.

Host:

Right, because Arizona is not a small state, but it’s not the biggest state. So if KPMG could only operate in Arizona and nowhere else, that wouldn’t really be, I would imagine, hugely valuable to a company the size of KPMG, which operates around the globe.

Guest:

Not just that they operate around the globe, but so do their clients. I mean, this is not a company that wants to restrict itself to mom and pop main street businesses. They, as well as their clients, have operations all around the country and all around the globe. So if they were restricted to just Arizona, that would restrict their ability to service clients in a legal context very significantly.

Host:

Now you had a really interesting conversation with the person who’s heading up KPMG Law US. Tell me about the value proposition here. What is this firm offering its clients that a traditional big law firm can’t?

Guest:

So I spoke with the designated principal for KPMG’s new law firm called KPMG Law US. What he told me is that basically big law firms and law firms across the industry have left behind a large portion of services that you need a legal license to provide. If you think about the types of work that big law firms, Kirkland & Ellis, Paul Weiss are involved in, they are involved in the high dollar amount transactions, the billion dollar, the multi-hundred million dollar transactions for Apollo Global Management, for alternative investment firms that they can command extremely high hourly rates for. We’re talking about hourly rates that are pushing the $3,000 an hour mark. You cannot charge four figure hourly rates for the types of services that KPMG is trying to provide.

After the big law firms come in and negotiate the massive billion dollar transaction, KPMG wants to do is come in and work on all of the post-closing integration. After party sign on the dotted line, there’s a lot of duplicate and redundant functions and entities all around the global entity that either need to be dissolved, that need to be brought into compliance, that need to be harmonized under a single structure. It’s that kind of high volume work that KPMG is looking to step in and provide.

Host:

They want to help the dust settle after the merger is signed, it sounds like.

Guest:

That dust settling can take years and really turns into day-to-day corporate management.

Host:

There was a really interesting detail in your story that I wanted to highlight about how the lawyers for KPMG are kept separate from the rest of the folks at the company to the point where they actually have separate entrances and exits in their building in Tempe, Arizona. What’s that about? That seems like a pretty extreme way to create a firewall here.

Guest:

The whole reason why most states don’t allow non-lawyers to own law firms is because they are concerned that non-lawyers will infect the quality and ethics of the services that lawyers provide. What Arizona said in their legal reform efforts is, we’re going to allow non-lawyers to own law firms, but we have to get them to promise that they will not impede the quality and the ethics of the legal services that the lawyers provide.

Host:

Right, because the nightmare scenario, which is what you mentioned last time, is that you have a situation where a lawyer is pressured by his or her bosses to settle a case that actually would be in the client’s interest to take to trial.

Guest:

Exactly. So anytime an ABS, an alternative business structure for a law firm, forms in Arizona, the owners, including the non-lawyer moneyed interests, have to sign an agreement that says we will not impede on the professional independence of lawyers. And so KPMG prides itself and is known for its ability to help other companies comply with regulations. They say that they are turning those capabilities into themselves in this new venture. And they’re going as far as keeping the people and the technology stack separate. The technology stack of the legal venture of their law firm separate from KPMG’s other activities in the state. Even though that they are occupying one street address, they’re physically entering through different doors and they are using software that has been walled off from each other.

Host:

Now, I think this is something that some people see as kind of a vague future potential threat to the big law business model, that you have these sort of very large corporations coming in and sort of eating their lunch. But I’m not sure that every lawyer or every law firm really feels that way. And certainly KPMG does not want anyone to feel that way in all the reporting that you’ve done on this. They’ve gone out of their way to say, we are not in competition with big law. We are staying in our own lane. What do you think about that? Do you think that this is something that managing partners of law firms should be afraid of? Or is that really sort of overblown?

Guest:

When I talked to the managing partners at law firms about this, it’s kind of like, on the record, we’re not worried about the big four coming in. Off the record, we’re terrified. You know?

Host:

Yeah.

Guest:

And it’s a good question you asked, because the folks at KPMG have kind of said things that could sound contradictory about how they view their relationship with big law. But it’s complicated and it’s nuanced. Let me try to get to it. So when we talk about the type of high volume commoditized legal work that KPMG wants to do, we’re talking about system upgrades for entire legal departments. We’re talking about post-transaction, post-closing compliance work. That is the type of work that you need to have a legal license to do. However, it occupies a slightly different niche from what big law firms are up to. I think there is some overlap, but it’s not a one-for-one overlap. When you are helping to harmonize legal contracts, which is one of the areas of work that they have cited, we are talking about things that have to do with providing legal advice. That is the type of work that law firms do. However, I think what KPMG would argue is that they have an economic model set up that allows them to go for the type of work that, if law firms were smarter, they would have found an economic model to advise on. It’s just that they have left it behind.

Host:

All right, Justin, well, I guess time will tell if KPMG eats Big Law’s lunch or if the two can coexist peacefully. That was Justin Henry talking with us about the new law firm in Arizona. Justin, thank you so much for talking.

Guest:

Great to be here. Thanks so much, David.

Host:

And that’ll do it for today’s episode of On the Merits. For more updates, visit our website at news.bloomberglaw.com. Once again, that’s news.bloomberglaw.com.

The podcast today was produced by myself, David Schultz, and our editors are Chris Opfer and Alessandra Rafferty. Our executive producer is Josh Block. Thanks everyone for listening and see you next time.