Richard Granat has recently made an interesting proposal to facilitate the use of technology to improve access to justice by loosening the law firm ownership rules for groups using automated solutions to serve low and middle income clients. Specicially, he suggestions that:
The American Bar Association amend Rule 5.4 to permit private investment in just those law firms that serve low and moderate income clients exclusively.
Personal injury and other contingent fee practices would be excluded from this exception as capital is self-generating for successful firms in these practice areas.
To comfort to those who are concerned that the independence of the lawyer is compromised by this proposal, the law firm must remain at least a 51% owner of the law firm. Private investors can be minority shareholders only.
It is relatively easy to create an income generation screen to capture just low and moderate income clients for the law firm, and exclude those of higher income. The data from this intake process can be archived and audited to comply with the exception to the rule.
He notes that “Creating this exception opens up the opportunity for smaller law firms to take advantage of crowd-funding opportunities, the angel investor community, and the new SEC rules that [will] permit crowd-funding investment. Further, the rich relatives a young lawyer could fund the new lawyer’s law firm, and get a return on investment, without the lawyer risking disbarment because of violation of the 5.4.”
I like it, because it allows for experimentation in a relatively small sector, in which access to capital is perhaps a more significant barrier. I am less convinced that access to capital is as much of a problem in the larger market, and I suspect that the problem there might be the lower rate of return to investments, rather than a lack of capital.
I recommend the full blog for a more comprehensive analysis.