The American Bar Association Standing Committee on Ethics and Professional Responsibility issued first-time guidance on Sept. 8 to help the legal profession navigate investments in legal entities with alternative business structures (ABS) when the lawyer-investors practice in non-ABS jurisdictions.
Two states — Arizona and Utah — have recently modified their Rule 5.4 to permit business structures that either allow nonlawyer ownership of law firms or the sharing of legal-related fees with nonlawyers. Since 1991, the District of Columbia has allowed nonlawyers to be partners in law firms.
With other states considering changes in their regulatory structure, Formal Opinion 499 outlines how ABA Model Rules of Professional Conduct could affect a lawyer’s “passive investment” in an ABS enterprise, or, in the case of Utah, a project approved by the Utah Supreme Court that includes nonlawyer equity in a business that provides legal services.
The ABA formal opinion specifically notes that these and future changes raise the question of whether a lawyer admitted to practice in a jurisdiction adhering to the model rule that strictly bars nonlawyer ownership of law firms should be permitted to make a “passive” investment in a legal entity in an ABS-approved jurisdiction.
“A lawyer admitted to practice law in a Model Rule jurisdiction may make a passive investment in a law firm that includes nonlawyer owners operating in a jurisdiction that permits such investments provided that the investing lawyer does not practice law through the ABS, is not held out as a lawyer associated with the ABS and has no access to information protected by” other model rules, the formal opinion said. “With these limitations, such ‘passive investment’ does not run afoul of Model Rule 5.4.”
The formal opinion, however, flags several conflict-of-interest model rules that could either force the investing lawyer to refrain from the investment or appropriately address the conflict.
The standing committee periodically issues ethics opinions to guide lawyers, courts and the public in interpreting and applying ABA model ethics rules to specific issues of legal practice, client-lawyer relationships and judicial behavior.
- ABA Standing Committee on Ethics and Professional Responsibility
- ABA Model Rules of Professional Conduct
- Recent ABA ethics opinions on the ABA Center for Professional Responsibility website
- ABA Center for Innovation: Legal Innovation Regulatory Survey — hAn overview of the legal regulatory landscape related to legal innovation and access to justice
- ABA Journal coverage of alternative business structures