Lawyers Hiring Capital, or Capital Hiring Lawyers — The Failure of the Profession to Innovate Creates a Gap

The California Lawyer has an interesting story, Investors at the Gates on the Jacoby and Meyers firm suing in three states to knock out rules preventing non lawyer participation in ownership of law firms — i.e. equity capital.

On May 18 of this year the nationwide firm filed three nearly identical class actions–in New York, New Jersey, and Connecticut federal courts–challenging the constitutionality of state judicial bans on nonlawyer ownership of law practices, based on ABA Model Rule 5.4. The nearly identical lawsuits make claims based on alleged violations of the Commerce Clause, the 14th Amendment, and, most interesting, the First Amendment rights of free speech and association. (Jacoby & Meyers Law Offices LLP v. Presiding Justices, No. 11-CV-3387 (S.D.N.Y.); No. 33-AV-001 (D. N.J.); No. 11-CV-817 (D. Conn.).)

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To be fair, the ABA recommended amending MR 5.4 twelve years ago–but its House of Delegates overwhelmingly rejected the proposal. In 2001 the State Bar of California’s Task Force on Multidisciplinary Practice voted down a measure that would ease the ban on sharing fees with nonlawyers, and its rules revision commission recently endorsed a version of MR 5.4. This spring, the ABA Commission on Ethics 20/20 recommended no changes to the rule, although it will hear further comment from members at the Annual Meeting this month.

Apparently, part of the claim is that the prohibition on non-lawyer equity participation inhibits the abilty of firms to compete internationally.

.  .  .  Australia and the United Kingdom have permitted nonlawyer equity ownership of law firms. Australia’s Slater & Gordon held a public stock offering in 2007, and the UK’s Legal Services Act–which gives law firms access to equity capital–takes effect in October.

The fear, of course, is that legal practice will be debased, and that ethical control will be lost if legal services are controlled by non-lawyer capital.  The real fear, I suspect is that the organization of the delivery system will be commoditized (see my post last month on the setting up of access centers in bookstore-stationers in the UK).

The real point is that so far the profession has failed to find ways to delivery legal services to the vast middle market in ways that are accessible and cost effective.  I really do not believe that it is fundemantally an access to capital problem, although, I do agree that those with access to capital and the incentives of equity ownership are well positioned and motivated to build access friendly and lower cost systems, once the current barriers to incentives are removed.

It is such a pity that the profession has not been able to rise to this challenge on its own, using technology, understanding of client needs, coperative relationships between lawyers supporting platforms, etc., to build delivery systems that reach the millions in legal need.  Now may be too late, although I would urge the organized bar to take the leadership in supporting the building of new legal delivery systems that bring the advantages of efficiency, without the dehumanization of total commoditization.

p.s. Comment from Richard Granat:

I think that there has to be a balance between new ways of delivery legal services and adherence to core professional values and professional ethics. Without, that there is no legal “profession” It’s just another service business.

The VC community will see the delivery of legal services as just another service business, the fact is, practicing law is not just another service and there are societal contributions by lawyers that are essential in our democracy.   So I think the goal should be balance, on the one hand, legal services that are affordable, transparent, reliable, and effective, and on the other,  retaining the integrity of a true “legal service” which means to me adherence to core professional values and ethical rules.


About richardzorza

I am deeply involved in access to justice and the patient voice movement.
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1 Response to Lawyers Hiring Capital, or Capital Hiring Lawyers — The Failure of the Profession to Innovate Creates a Gap

  1. chrissieroar says:

    Hi Richard

    This is a wonderful post. Thank-you 🙂

    I have no doubt that USA (and Canada for that matter) will tip at some point. In the meantime Google Ventures backing Rocket Lawyer and coming in innovatively and smartly via ‘the back door’ (as it were) will no doubt help deal with some of the points you raise – in particular “so far the profession has failed to find ways to delivery legal services to the vast middle market in ways that are accessible and cost effective.”

    Direct ownership by non-lawyers in whatever format the state judiciary and/or federal judiciary consider in due course (maybe similar to the UK) I am convinced will happen to enable USA lawyers and law firms to compete internationally. As we are already living ‘the global lawyer’ era it’s only a matter of time…

    Warmest and best intentions

    The Entrepreneur Lawyer
    (of the naked kind)

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