The Latest in Law Firm Ownership

Roy Ginsburg | Nonlawyer ownership of law firms provides a “new, fertile hunting ground” for private equity, but is it improving access to justice?
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Nonlawyer ownership of law firms provides a “new, fertile hunting ground” for private equity firms, but is it improving access to justice?

Over two years ago, I wrote a post, “What’s New in Law Firm Ownership.” What was new was that two states (Arizona and Utah) and the District of Columbia were allowing nonlawyers to own law firms. Since then, other states have not rushed to do the same, and that state of affairs is unlikely to change soon.

Nonlawyer Ownership in the Mainstream Media

However, one thing that has changed is that the idea of nonlawyer ownership of law firms has reached the mainstream media. Last month, The Wall Street Journal published an article about “Why Arizona Law Firms Are a Hot Investment for Private Equity.” A month before that, Forbes wrote about “Why Law Firms Could Be Private Equity’s Next Conquest.”

Did the publications get it right? Let’s see.

The Forbes article correctly identifies two reasons why law firms can be challenging to sell. First, there is the “key man” risk, or the problem of professional goodwill. Some clients only want to hire one lawyer and only that lawyer. They don’t want anyone else. Should that lawyer wish to sell to someone else, the clients will not follow.

Second, the legal profession prohibits covenants not to compete. The writer of the Forbes article then proclaims that the “most prohibitive obstacle” is that nonlawyers cannot own law firms (Model Rule 5.4). That may be a bit of an overstatement. A law firm’s marketability is very dependent on the practice area or location. For some personal injury or mass tort firms, Rule 5.4 is probably the biggest obstacle. I’m not so sure about smaller rural general practice-type firms where the more significant problem is finding lawyers to do the work.

Here, it doesn’t matter whether the boss is private equity or another lawyer. If the firm can’t be staffed, it’s not worth much to anyone.

The article continues that it is undoubtedly true that the legal profession represents a “new, fertile hunting ground” for buyout firms, especially for those practices where more automation requires lots of capital and can make such legal services a commodity. Think bankruptcy or immigration.

Further, the “sky hasn’t fallen” in other countries such as Australia, England and Wales, where law firm owners can be nonlawyers.

The article concludes with a spot-on observation of the profession’s mentality about the issue and why change is not around the corner. A lawyer who had recently sold his law firm and suspected he could have gotten more from private equity still doesn’t think that “non-attorneys should own law firms. The potential for abuse is too high.”

The Wall Street Journal article was less theoretical and had more of a “what’s happening now” take. The lead paragraph had it right:

Arizona launched a program to expand access to legal services for people who can’t afford or find lawyers. Three years later, the program is catching Wall Street’s eye.

Talk About Unintended Consequences!

Close to half of the so-called alternative business structures (ABSs) are estimated to be backed by private equity. I sincerely doubt they want to put their capital to work to “address the dearth of lawyers available to help people with critical services such as evictions, divorces, and immigration law.”

To date, only a handful of ABSs provide such services.

Not surprisingly, a third of the ABSs focus on personal injury and mass torts and are a “potential runway for litigation financiers.” Firms financing such matters in the past with interest-rate loan returns can now potentially get higher equity-like returns when cases are resolved. A former New York State Bar Association president says it well:

“Mostly rich people are getting serviced [by an ABS]. All it does is move the capital out of the hands of lawyers to nonlawyers.”

Sadly, the Journal article agreed with what I had predicted two years ago in my post about this phenomenon: “I doubt any of this will improve access to justice.”

As always, it is attorneys’ commitment to helping others that best serves the marginalized.

Editor’s note: Stanford Law School’s Legal Innovation Clearinghouse tracks new legal service entities offered in states that have approved major reforms to the regulation of legal services.

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