These days, lots of lawyers are reading and hearing about nonlawyer-owned law firms.
Some fear loss of the profession’s core values and independence, as well as competition by well-funded nonlawyers. Some law firms worry that the Big Four accounting firms are coming for their business.
Some wonder whether they can use nonlawyer ownership in D.C., Utah and Arizona to their business advantage in other U.S. jurisdictions.
Is that possible? Aren’t those nonlawyer-owned law firms pretty much persona non grata in other U.S. jurisdictions?
Well, one answer to how this might actually be possible might surprise you.
In my last column, I explored the use of co-counsel and referral-fee agreements across jurisdictional lines. Readers found that, generally, it’s not that hard.
Let’s take the next step.
Assume a nonlawyer-owned law firm––let’s call it Nonlawyer-Owned Law Firm––is lawfully organized and operated in a jurisdiction where nonlawyer ownership is permitted.
A client in a jurisdiction that has in place the traditional ban on nonlawyer ownership and fee-sharing with nonlawyers––let’s call it a Model Rules Jurisdiction––decides to hire Nonlawyer-Owned Law Firm to represent them in a case in that Model Rules Jurisdiction.
Can Nonlawyer-Owned Law Firm accept the case, associate a law firm in the Model Rules Jurisdiction, agree to work together on the case and share attorney fees between Nonlawyer-Owned Law Firm and the Model Rules Jurisdiction firm?
Let’s review the current fee-sharing landscape.
Under 2021 rule reforms, any Arizona lawyer may now share fees with nonlawyers or pay for recommendations.
Separately, Arizona permits nonlawyer ownership of Arizona Supreme Court–approved alternative business structures (ABSs). They can share fees with nonlawyers, but for today’s purposes, all you need to remember is that attorney fees can be shared with nonlawyers in Arizona.
Since 1991, D.C. has permitted fee-sharing with nonlawyers under very limited circumstances.
In 2021, Utah began to allow fee-sharing with nonlawyers in a regulatory “sandbox,” but not more generally.
Of course, that means 48 jurisdictions continue to bar lawyers from sharing fees with nonlawyers.
So, can the Model Rules Jurisdiction lawyer share fees with the Nonlawyer-Owned Law Firm?
On the one hand, the Model Rules Jurisdiction law firm might well be concerned that the law firm sending them the case is owned by nonlawyers. Sure, it’s lawful for that Nonlawyer-Owned Law Firm to be owned by nonlawyers. But is the Model Rules Jurisdiction law firm sharing fees with nonlawyers in violation of the rules by sharing fees with the Nonlawyer-Owned Law Firm?
Actually, there is authority on this question.
A 10-year-old ABA ethics opinion and ethics opinions from three jurisdictions––Florida, New York and Pennsylvania––allow precisely this kind of referral-fee arrangement. Plus, in 2016, Georgia added its own unique Rule 5.4(e) that codifies this result for Georgia lawyers.
Based on these authorities, a lawyer in a state whose ethics rules prohibit the sharing of attorney fees with nonlawyers may nevertheless enter into a referral-fee agreement, and divide fees with, a firm in Arizona, Utah or D.C. that does share fees with a nonlawyer in compliance with local law.
The logic is simple enough: if the Model Rules Jurisdiction lawyer complies with their own jurisdiction’s rule on the division of fees between lawyers not in the same law firm––a version of ABA Model Rule 1.5(e)––then their conduct is in compliance with the most important, the key, local ethics rules governing the fee-division arrangement.
The lawyers practicing in Arizona, Utah or D.C. are “lawyers” for purposes of that local version of Rule 1.5(e) and the Model Rules Jurisdiction lawyer has fully complied with their own rule. Further, that Arizona, Utah or D.C. lawyer is in compliance with Arizona, Utah or D.C. law on how they organize and operate their law firm and divide their fees. Each lawyer is in compliance with their rules.
The only ethics opinion finding to the contrary is from Maryland. No court decisions have addressed the issue.
So, of the four U.S. jurisdictions in which ethics opinions have considered this issue, three have agreed with this result, plus the ABA.
Of course, this also means that there are 46 jurisdictions in which no authority exists on this question. Further, ethics opinions are generally nonbinding and are, at best, not the strongest form of legal authority.
Still on the basis of these authorities, many lawyers and law firms have concluded that the majority of the existing authorities express the better-reasoned view, and they are actively relying on this view in structuring their practices.
The implications of the majority view are simple.
A lawyer (or nonlawyer) can establish a law firm with nonlawyer ownership in a jurisdiction where that’s permitted, seek cases from all over the country, sign up clients from all over the country, then associate counsel in other firms in the relevant jurisdictions, share fees in compliance with their local version of Model Rule 1.5(e) on fee-division, and the nonlawyer-owned law firm can share a portion of their share of the fees with their nonlawyer owners.
In most jurisdictions, it is possible for out-of-state law firms to market to potential clients and sign them as clients. No jurisdictions’ ethics rules impose any limits on this kind of marketing based on who owns the law firm or whether they lawfully share fees with nonlawyers.
Right now, and for some years, marketers, lead generators, litigation funders and others are using exactly this hub-and-spoke model and participating in attorney fees in a lawful way in jurisdictions where that is permitted. These nonlawyers either own a law firm at the hub of the system or, in Arizona, have agreements with a lawyer-owned law firm to share in fees in return for, for example, lead-generation services.
More than a little caution is in order for anyone contemplating this sort of arrangement.
First, the authority supporting this type of co-counsel and referral model with nonlawyer law firm at the hub is thin, even if many of us believe the majority view is quite correct legally.
Second, any lawyers using this model need to assure strict compliance with the requirements of their versions of ABA Model Rule 1.5(e)––maybe the versions in both jurisdictions in play. For details, see my last Ethics column, “Referral Fees Done Right.”
Third, in pretty much every jurisdiction, the ethics rule on referral fees requires that the lawyers sharing fees under Rule 1.5(e) must be in different law firms. That very likely means that the Nonlawyer-Owned Law Firm and the Model Rules Jurisdiction law firm cannot be the same law firm, cannot be jointly owned or share ownership and cannot have any lawyers in common.
Still, understanding there may be some risk and acting in compliance with the existing rules, lawyers in regular old-fashioned law firms outside jurisdictions allowing nonlawyer ownership may well be able to––only very indirectly and carefully––share fees with nonlawyers.
