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May 01, 2021 May/June 2021

For the Times, They Are A-Changin'

Once an inconceivable notion, lawyers and nonlawyers could own law firms together under regulatory changes.

Roberta Tepper
In the last two years, a few states began seriously exploring regulatory changes that would allow nonlawyers to invest in law firms.

In the last two years, a few states began seriously exploring regulatory changes that would allow nonlawyers to invest in law firms.

via Warchi / E+ / Getty Images

For years, almost without exception, law firms could be owned by lawyers and only lawyers. It was an accepted premise in the United States. Sure, there were some other situations going on over­seas, in the United Kingdom and Australia, but we were a bastion of lawyer-owned firms. Period. Well, not anymore.

A Foot in the Door

The District of Columbia cracked open the door to change when it allowed lawyers and nonlawyers to jointly own law firms, as long as they only provided legal services. The District of Columbia’s rule was for many years the most lenient and somewhat of an anomaly in the United States.

But the only constant in life is change, right? Like many ideas that once seemed inconceivable, the notion that lawyers and nonlawyers could own law firms together, ethically serving clients without hastening the apocalypse, slowly gained traction. And the ever-widen­ing justice gap continued to plague the legal landscape. In the last two years, a few states—most notably Arizona, Utah and California—began seriously explor­ing regulatory changes that would allow nonlawyers to invest in law firms. The District of Columbia likewise began con­sidering expanding its rule. 

Well, Maybe More Than a Foot

Unlike Utah, which has created a regu­latory “sandbox” during which nonlaw­yer investment in and ownership of law firms will be permitted as an experiment, the Arizona Supreme Court has taken it one step further. Based on recommenda­tions of a task force chaired by Vice Chief Justice Ann Scott Timmer, the Arizona Supreme Court went “all in” on changes to the regulation of the profession and adopted sweeping changes that became effective on Jan. 1, 2021.

Bridging the Justice Gap

Is this just a way to expand law firms into big businesses? No. Concerns over access to justice started the conversation under­lying these changes.

During a recent interview on Sharon Nelson and Jim Calloway’s The Digital Edge podcast, Timmer discussed the court’s rationale for making these dra­matic sea changes.

In addition to access to justice, the task force focused on other potential benefits of an infusion of capital into law firms. One of the anticipated benefits is technological innovation that will result in more efficient and economical delivery of legal services. Law firms, and law firm partners, don’t always look to the future, being more con­cerned about a firm’s current profitability. This is not an atmosphere that is conducive to investing in the creation or implementa­tion of cutting-edge technology.

Allowing nonlawyer investment, the task force hoped, would permit firms to attract the best possible talent incentivized by the ability to have an equity interest in the firm and its future success. Permitting law firms to become one-stop shops pro­viding a wide array of services the client needs is certainly an innovation not previ­ously possible, at least not in Arizona.

As Timmer explained, this kind of investment may also allow smaller firms to offer the same level of one-stop service to consumers. In addition to allowing nonlawyer investment in law firms, the Arizona Supreme Court created a new class of legal service provider, the legal paraprofessional (LP).

With LPs offering legal assistance in areas where many if not most litigants are self-represented, there is a significant likelihood that the justice gap will finally start to shrink. In addition, lawyers will be able to expand their services by offer­ing what will likely be lower-cost services rendered by LPs.

Arizona Deep Dive

So, in this brave new world, what is permitted and what is not? Is it now no-holds-barred pandemonium, with nonlawyers swooping in by way of their monetary investment and ownership interest to dictate how and when lawyers take clients? As you might have antici­pated, the answer is no. There are definite rules governing this new environment.

Alternative Business Structures

The changes in Arizona created a new entity, an alternative business structure (ABS) defined by administrative code as “a business entity that includes nonlaw­yers who have an economic interest or decision-making authority in the firm and provides legal services.” Decision-making authority refers to big-picture kinds of decisions—including author­ity to legally bind the ABS and control or participate in the management and policies and operation of the ABS—not whether to use one messenger service over another or when to pay an invoice for services.

Licensing of an ABS begins with filing an application and consideration of that application by a court-created commit­tee. The committee must take into con­sideration the regulatory objectives that underlie the creation of this new entity: promoting and protecting the public interest; promoting access to legal ser­vices; advancing the administration of justice and the rule of law; encourag­ing an independent, strong, diverse and effective legal profession; and promoting and maintaining adherence to profes­sional principles.

Applicants are required to demon­strate adequate governance structures and policies to ensure: the professional independence of lawyers providing legal services, proper standards of work, the freedom for lawyers to make decisions in the best interest of clients, the confidenti­ality required by the Rules of Professional Conduct and that any business policies or procedures do not interfere with lawyers’ duties and responsibilities to clients. Once licensed, the entity submits itself to regulation by the Arizona Supreme Court.

Disbarred or suspended lawyers or persons denied admission to the practice of law may not own more than 10 percent of an ABS, nor may those censured, on probation or under any other disciplinary action relating to their professional or occupational license if the underlying conduct is relevant to the goals set out for ABSs. There is a long list of additional disqualifying events that may result in an application being denied.

Compliance Lawyer

An ABS must follow the typical require­ments when forming a new business entity, such as disclosure of relation­ships to any parent company and any related businesses. However, an ABS is also required to designate a compliance lawyer—a lawyer who is a manager or employee of the ABS and who is respon­sible for ensuring the ABS, any autho­rized persons and specifically its lawyers comply with the ethical and professional responsibilities required when providing legal services. The responsibilities of the compliance lawyer are significant and potentially daunting as they are on the hook for the conduct of the ABS and its staff and must report breaches of the reg­ulatory requirements of the code or the ethical or professional responsibilities of the lawyers.

Other Changes to Bridge the Justice Gap

Arizona had previously attempted to bridge the access to justice gap by autho­rizing certified legal document prepar­ers who could assist unrepresented individuals in completing documents but could not provide legal advice. In Arizona, entrepreneurial lawyers lev­eraged the opportunities that change presented and created law-related busi­nesses offering document preparation. This, sadly, did not significantly bridge the gap. The LP, able to offer legal advice and appear in court in certain cases, is a more significant step in addressing access to justice.

How will this help individuals in need of but unable to afford legal services, while not harming lawyers and their practices? It’s time to embrace the change and reimagine what law prac­tice looks like. While LPs are permitted to set up shop on their own, they may also become part of the firms of the future. LPs may handle lower-level or more routine matters in the permissi­ble practice areas, leaving the lawyers to handle more complex matters. Think, if you will, about how medical offices now employ nurse practitioners, and you begin to see the possibilities.

Are the barbarians at the gates? Well, lawyers must certainly start to rethink the practice of law and their business models. But barbarians? Not likely. 

Roberta Tepper


Roberta Tepper is the lawyer assistance pro­grams director for the State Bar of Arizona where she advises lawyers on all aspects of their practice from starting up to winding down. She was the co-chair of the 2021 ABA TECHSHOW and sits on the Law Practice Division Council. [email protected]

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