Oregon State Bar Bulletin NOVEMBER 2015
The Wave of the Future?
Alternative Law Practice Business Structures
By Helen Hierschbiel
Lawyers enjoy the exclusive authority to “practice law.” The reason often cited for limiting the practice of law to lawyers is consumer protection — to ensure that those who dispense legal advice and assistance are competent and comply with minimum professional standards. With great authority, however, comes great responsibility. The preamble of the ABA Model Rules instructs, “[t]he profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar.”
The traditional law firm structure is a partnership or professional corporation owned solely by lawyers. This structure is militated in part by Oregon RPC 5.4, which prohibits lawyers from sharing legal fees with nonlawyers and from sharing ownership of a law practice with a nonlawyer. Thus, lawyers in Oregon may not establish a multidisciplinary practice in partnership with accountants, financial planners, therapists or other professionals that may complement their law practices.
Does this structure really serve the public interest? Might lawyers serve their clients more comprehensively and creatively under different business arrangements? Would a family practice partnership between a lawyer and a therapist — or an estate planning lawyer in business with a financial planner — lead to better service and results for clients in the long run? Might solo practitioners be able to better protect their clients — and their families — if their professional but nonlawyer spouses were allowed to be co-owners in their practices?
Things Look Different Around the World
Globally, nonlawyer ownership in law firms is gaining traction. The United Kingdom’s adoption of the Legal Services Act of 2007 opened the door for alternative business structures involving lawyers and nonlawyers sharing management and control of businesses that provide legal services. The U.K. granted the first licenses for alternative business structures in 2012. The new model quickly gained momentum; by January 2014, more than 200 licenses had been issued.1
Canadian law societies have been considering similar sweeping reforms to their regulatory systems, which would include allowing for alternative law firm structures and multidisciplinary practices by lawyers.2
In Australia, nonlawyer ownership of law firms began in earnest in 2001 in New South Wales. Reasons for the change there included:
…removing the regulatory barriers between states and territories to facilitate a seamless, truly national legal services market and regulatory framework; providing greater flexibility in choice of business structures for law practices; enhancing choice and protection for consumers of legal services; and enabling greater participation in the international legal services market. There was also a growing perception in Australia that the traditional structure of law firms no longer met the needs of many practitioners and clients.3
Commentators who advocate for alternative business structures for law firms cite one principal reason: enhanced access to justice. The traditional law firm model is expensive to sustain, making legal services for consumers costly at best and out of reach at worst. Pressure from clients and competitors to provide less expensive legal services is driving lawyers to experiment with innovative service delivery models. Alternative business structures may give law firms access to new capital and allow them to invest in new technologies to provide legal services more efficiently, effectively and cheaply, “thereby partially resolving some aspects of the access to justice problem.”4
Purposes of RPC 5.4
If nonlawyer ownership of law firms is so great, why have RPC 5.4? The dangers to clients that Rule 5.4 is meant to protect against include: the practice of law by someone who is not a lawyer; clients sharing confidences with someone who is not required to maintain confidentiality of the information; and the possibility of interference with the lawyer’s independent professional judgment. Hazard, G., Hodes, W., & Jarvis, P., The Law of Lawyering, §48.02 (4th ed. 2015).
On the other hand, these client protection measures are already covered in other rules of professional conduct, making most provisions in RPC 5.4 arguably redundant and unnecessary. For example, lawyers are already prohibited by RPC 5.5(a) from assisting someone in the unlawful practice of law. In addition, RPC 1.6(c) provides a more general requirement that lawyers “make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.” In other words, lawyers who work with nonlawyers have a duty to ensure that those nonlawyers maintain the confidentiality of client information. Moreover, RPC 5.3 requires that lawyers who have supervisory authority over nonlawyers to “make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer.”
Thus, at least one commentator has suggested that the rule is not simply a client protection measure, but works to protect against “encroachment by professionals in other fields.” Id. See also, Hill, Louise Lark, “The Preclusion of Nonlawyer Ownership of Law Firms: Protecting the Interest of Clients or Protecting the Interest of Lawyers?” 42 Cap U L Rev 907 (2014)(taking the position that the rule seeks to protect lawyers, not clients).
Oregon is No Outlier
All United States jurisdictions include a prohibition against nonlawyer ownership in law firms except the District of Columbia, whose version of Rule 5.4 is unique. As of 1990, its Rule 5.4 permits lawyers to form law partnerships and share fees with nonlawyers as long as: the entity is limited to providing traditional legal services; the nonlawyers provide professional services that assist in that function; and the nonlawyers agree to abide by the rules of professional conduct. Notably, passive ownership by nonlawyers is still not allowed in the District of Columbia.
Other jurisdictions have proposed similar changes to their Rule 5.4 without success. In 2000, the State Bar of Arizona Task Force on the Future of the Legal Profession supported the multidisciplinary practice concept and proposed revisions to its Rule 5.4 to expressly allow for them; in 2002, however, its board of governors tabled the proposal indefinitely.5 In 2011, North Carolina considered — but did not pass — a bill that would have allowed up to 49 percent ownership in law firms.6 And in 2012, the New York State Bar Association Task Force on Nonlawyer Ownership recommended staying the course on the issue, stating that “the absence of compelling need, empirical data, or pressure for change, combined with professionalism concerns, all militated against changing New York’s position on nonlawyer ownership … ”7
Initially, the American Bar Association Commission on Ethics 20/20 put forth a proposal that would have allowed for nonlawyer ownership in law firms. In the end, however, the Ethics 20/20 Commission decided not to recommend changes to the Model Rules of Professional Conduct that would allow nonlawyer ownership of law firms because “[b]ased on the Commission’s extensive outreach, research, consultation and the response of the profession, there does not appear to be a sufficient basis for recommending a change to ABA policy on nonlawyer ownership of law firms.”8
Should Oregon Catch the Wave and Reconsider?
In Oregon, conversation on the topic has stalled since 2000, when the OSB House of Delegates rejected a recommendation from the Board of Governors to study the question of whether ethics rules be changed to permit lawyers to share fees and partner with nonlawyers for the delivery of legal services.
Perhaps it is time to renew the conversation in Oregon. As in other parts of the world, new lawyers in Oregon struggle to find a business model that will make a profit while Oregon consumers struggle to find affordable legal services.
In April this year, I wrote about recent changes to the Oregon Rules of Professional Conduct made to keep pace with a changing Oregon. Those changes addressed the legalization of recreational marijuana in Oregon, the expansion of the global market into Oregon, and the continued existence of harassment and intimidation based on bias and prejudice in the practice of law. Oregon lawyers should be proud of their leadership in these and other lawyer regulation areas. My hope is that Oregon lawyers will not rest on their laurels, but set their sights on new challenges to the legal profession and take steps to stay ahead in this changing world.
2. Rees, Victoria, “Transforming Regulation and Governance in the Public Interest,” Nova Scotia Barristers’ Society, (2013).
3. Mark, Steve, “The Regulatory Framework in Australia,” 2014 ABA CPR Conference Materials for Regulatory Innovation in England and Wales and Australia: What’s in it for Us?
4. Rees, page 25. Seealso, Adams, Edward, “Rethinking the Law Firm Organization Form and Capitalization Structure,” 78 Mo.L.Rev. 777 (2013) (advocating for change in ABA Model Rules of Professional Conduct that would allow for public ownership of law firms and require disclosure of firm financials for firms with over 100 lawyers, citing as reasons, access to new capital, enhanced transparency, increased efficiencies and access to justice); and Guttenberg, Jack, “Practicing Law in the Twenty-First Century in a Twentieth (Nineteenth) Century Straightjacket: Something Has to Give,” 2012 Mich.St.L.Rev. 415 (2012) (“nonlawyer ownership will bring needed capital and incentives to develop alternative and creative business models” to better meet the needs of low- and middle-income clients).
5. See Status of Multidisciplinary Practice Studies by State (and some local bars), ABA CTR Prof Resp., www.americanbar.org/groups/professional_responsibility/commission_ multidisciplinary_practice/mdp_state_action.html.
6. For a text of the bill and its history, go to: www.ncleg.net/gascripts/BillLookUp/Bill LookUp.pl?Session=2011&BillID=S254& submitButton=Go.
7. New York State Bar Association Report of the Task Force on Nonlawyer Ownership, Pg6 (Nov. 17, 2012).
8. News Release, ABA Comm’n on Ethics 20/20 (Apr. 16, 2012), www.americanbar.org/content/dam/aba/administrative/ ethics_2020/20120416_news_ release_re_ nonlawyer_ownership_law_firms. authcheckdam.pdf.
ABOUT THE AUTHOR
Helen Hierschbiel is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or (800) 452-8260, ext. 413, or by email at firstname.lastname@example.org.
© 2015 Helen Hierschbiel