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September 08, 2011 Articles

Non-Lawyer Ownership of Law Firms: A Historical Debate

By Norayr Zurabyan

The question of whether non-lawyers should be permitted to own law firms has been debated for many years. The issue is addressed in Rule 5.4 of the American Bar Association's (ABA) Model Rules, entitled "Professional Independence of a Lawyer," and bans the ownership of law firms by non-lawyers. The comments that follow Rule 5.4 indicate that the limitation is intended to guard lawyers' professional judgment in providing legal services from outside third parties' influence.

Recent Constitutional Challenges
The question was raised recently in a lawsuits filed by the personal injury law firm of Jacoby & Meyers, LLC (J&M).  In the lawsuit, J&M challenges the ban in New York, Connecticut and New Jersey on non-lawyer ownership of law firms. For example, the suit in New York is filed against the presiding justices of the four appellate divisions who implement changes to the disciplinary rules pertaining to attorney conduct. The lawsuit is premised upon various constitutional violations: the First Amendment's right to freedom of association; the Fourteen Amendment's due process and equal protection rights; and several other Constitutional provisions. Additionally, the New York complaint asserts claims for violation of New York's Judiciary law. The Complaint generally alleges that the presiding judges may only control the conduct of the attorneys, not "commerce."

Some constitutional scholars argue that J&M's constitutional claims lack merit because the ban does not discriminate against out-of-state business and that the ban on non-lawyer-owned firms has been recognized for a long time. They further contend that the underlying point of the lawsuit is predicated upon the idea that abolishing the rule would put small firms on equal footing with large firms in terms of capital generation. J&M, however, disagrees:

    [T]he present system perpetuates economic inequity at every level of practice. The small practice does not have access to the capital markets that the [large] firms have. As a result, critical sources of funding are unavailable to a majority of [solo practitioners] and [small firms] which dramatically impedes access to legal services for those otherwise unable to afford them.

Complaint for Declaratory and Injunctive Relief at 2–3, Jacoby & Meyers Law Offices, LLP v. Presiding Justices of the First, Second, Third, and Fourth Dep'ts of App. Div. of the Sup. Ct. of the State of N.Y., No. 11-CV-3387 (S.D.N.Y. filed May. 18, 2011).

However, scholars and bar members reply that small and medium law firms will not attract non-lawyer investors unless it is a high-end contingency firm as there is a perception that the returns generated by large firms would be more attractive to outsiders than returns generated by small firms.  

Are Changes Coming?
Both England and Australia allow non-lawyers to own law firms. Consequently, J&M complains that American firms do not have access to the same funding sources possessed by U.K. and Australian law firms. J&M's complaint further states:

This inequality has the obvious economic impact of artificially constraining firms in the practice of law, yet there is less obvious casualty of Rule 5.4, that is the individual, group or business that is deprived of cost efficient, technologically advanced access to the legal system. Simply put, the practice of law in the United States is now lagging considerably behind other English speaking countries (including the very one on which our legal system was modeled), in which similar investment prohibitions have been turned aside.

Id. at 3. The only jurisdiction in the United States that permits non-lawyers to have an ownership interest in a law firm is Washington, D.C., which allows non-lawyers to own up to 25 percent of a law firm. Although the American Bar Association's ethics committee is soliciting comments on whether outside ownership should be allowed, many scholars are still convinced that non-lawyer ownership will degrade attorneys and will obliterate attorney-client confidentiality.

Others argue that the debate J&W's lawsuit is creating is just a natural evolution for a profession where law firms function as businesses in a worldwide marketplace. Bill Jawitz, a Milford law firm management consultant and member of ABA's Law Practice Management and Solo/Small Firm sections, commented as follows:

    Changes that allow non-lawyer ownership while protecting client interest could generate more cost-effective, efficient delivery of services. Now, for instance, a large estate owner has to go to a lawyer for legal services and an accountant for financial services. If a lawyer and an accountant were allowed to co-own a business, both services could be provided in one location.

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