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Law Practice Magazine

The Big Ideas Issue

Nonlawyer Ownership Is Not the End of Professionalism

Jayne R Reardon


  • Lawyers have an obligation to regulate the profession in the public interest.
  • Model Rule 5.4 does not necessarily serve the public interest, but it does prevent lawyers from accessing capital and talents of other professionals.
  • We should re-examine whether Rule 5.4 is necessary or appropriate.
Nonlawyer Ownership Is Not the End of Professionalism

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Model Rule of Professional Conduct 5.4, entitled Professional Independence of a Lawyer, prohibits lawyers from sharing legal fees with nonlawyers and from practicing law in a corporation or organization if a nonlawyer is an officer, director or has an ownership interest.

Without the constraints of Rule 5.4, our profession could possibly provide effective services to more people. Moreover, Model Rule 5.4 is not necessary to our professional obligations and changing it would not pose a threat to professionalism.

Much of the historical basis of Rule 5.4 is protectionism, not preservation of lawyers’ professional independence. Far from being the linchpin of lawyers’ ethical requirement of professional independence, Rule 5.4 duplicates the professional independence required by many other Rules of Professional Conduct. Model Rule 5.4 has been abolished or relaxed in several jurisdictions without negative repercussions to the profession or its consumers.

A Short History of Model Rule 5.4

The notion that lawyers should not share fees with those who are not lawyers can be traced back to legislation and court decisions in the first decades of the 20th century prohibiting corporations from practicing law. A 1910 New York case held that a corporation that provided legal services through staff attorneys could not lawfully engage in the practice of law, reasoning that the staff attorneys would be beholden to the corporation rather than the clients.

The first set of ABA rules, promulgated in 1928, contained a canon stating that “no division of fees for legal services is proper, except with another lawyer, based upon a division of service and responsibility.” The underlying rationale has been described as a way to stop large banks from “grab[bing] off all the legal business in the community” and to prevent personal injury attorneys from paying a network of ambulance chasers, both of which were major issues of the day.

The ABA’s 1928 proscription against lawyers sharing legal fees with others has been adopted in every subsequent compilation of lawyer ethical rules. One would think such strict restrictions on how lawyers conduct their business would be accompanied by robust comments explaining the rationale for such restrictions. One would be wrong. The brief comments to Rule 5.4 simply state the provisions express “traditional limitations” on sharing fees and on permitting a third party to direct or regulate the lawyer’s professional judgment in rendering legal services.

Model Rule 5.4 not only keeps the ownership and management of law firms to lawyers, it also means that lawyers and law firms may not avail themselves of capital other than their own profits or bank loans secured by those profits. Lawyers and law firms also cannot offer equity interests to other types of professionals who may offer expertise or efficiencies in delivering legal services, such as operations specialists, technologists, accountants or project managers.

Conceived to protect lawyers’ business from outside encroachers, the practical effects of Rule 5.4 today are to shackle lawyers in outdated business models that lack financial flexibility and are difficult to scale.

Other Rules Require Professional Independence

Proponents of the status quo overstate the importance of Rule 5.4 to a lawyers’ professional independence. Lawyers’ obligations to exercise independent professional judgment is a bedrock concept that is included in several different Rules of Professional Conduct.

Model Rule of Professional Conduct 2.1 is directly on point. “In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.” This obligation exists, as the comments explain, even if a third party, such as an insurer, is paying the lawyer’s fees or if a lawyer’s partner wants him to prematurely settle a case for cash flow purposes. It would apply even if a lawyer had another professional as a partner or shared legal fees with a businessperson who handled the finances, operations or other aspects of a law firm.

Model Rules 1.6 and 1.18 require lawyers to keep clients’ (and potential and former clients’) confidences and to not disclose such information to third parties. And the conflicts rules (Model Rules 1.7–1.10) set forth in detail under what circumstances lawyers can represent certain people or organizations as clients. Model Rule 1.8(f) says a lawyer shall not accept compensation for representing a client from a third party unless certain conditions are met including that “there is no interference with the lawyer’s independence of professional judgment.”

Finally, Model Rules 5.1 and 5.3 require supervising and managing lawyers to ensure personnel and assistance comply with the Rules of Professional Conduct. Thus, lawyers need to supervise associates, paralegals, clerks and any contract professionals to ensure they comport themselves in compliance with the Rules of Professional Conduct.

These requirements would still apply if Rule 5.4 were relaxed to allow people who were not lawyers to provide capital or know-how to the firm in exchange for an equity interest.

Entity Regulation Has Been Successfully Implemented

Over 25 years ago, the District of Columbia adopted a version of Model Rule 5.4 that allowed lawyers to form a partnership with nonlawyers for the rendering of legal services. This business structure is allowed if the sole purpose is providing clients with legal services, every person with managerial authority or a financial interest abides by the Rules of Professional Conduct and lawyers with managerial authority or a financial interest ensure all personnel comply with the Rules of Professional Conduct as required by Rule 5.1. The business structures allowed in D.C. did not spread to other U.S. jurisdictions until Utah made regulatory changes in 2020, followed by Arizona in 2021.

In 2020, the Utah Supreme Court changed its rules to allow lawyers to practice in a business structure with other professionals. The entity is regulated through the court-created regulatory sandbox and Office of Legal Services Innovation. The regulatory sandbox allows different modes of regulation to apply to different service models categorized by type of risk. Data is gathered, including evidence of consumer harm, and policy is developed, with the goal of providing customers with high-quality, innovative and affordable legal services.

As of January 2024, 51 authorized entities are operating in the Utah sandbox. The vast majority have lawyers and other professionals investing, owning or providing some legal services. Data show an astonishingly low number of complaints have been reported. The Office of Legal Services Innovation has received one complaint per 4,011 services delivered, amounting to a percentage of harm related consumer complaints of less than 0.01 percent.

In Arizona, the Supreme Court modified its rules to allow entity regulation, or alternative business structures (ABS). Under Arizona’s rules, ABS firms may include partners who aren’t lawyers, lawyers may share fees with other professionals and passive investment in ABSs is allowed. Lawyers are responsible for assuring all personnel abide by the Rules of Professional Conduct, including conflict considerations and confidentiality. As of the fall 2023, 52 ABS licenses had been approved. Complaints against the ABS are investigated and if the allegations are considered to have probable cause, prosecuted. In Arizona investigations are confidential; only adjudicated cases become public. As of fall 2023 no cases have been publicly reported.

The regulatory schemes in D.C., Utah and Arizona all preserve lawyers’ ethical requirement to maintain professional independence. Data is being collected and analyzed, and the data show that legal services being delivered by entities that include nonlawyer investment or involvement do not result in increased harm to consumers.

Model Rule 5.4 is neither necessary nor appropriate. Many ethical rules require lawyers to exercise professional independence as they render services to clients. If not bound by the economic and protectionist restraints of Model Rule 5.4, lawyers may actually be able to provide efficient and effective legal services to more people who could benefit from legal services. Professionalism demands we consider reform of Rule 5.4.