Mark Dubois ()
The Second Circuit just put to rest Jacoby & Meyers’ lawsuit challenging New York’s prohibition in Rule 5.4 on nonlawyer investment in law firms. It’s not surprising, as the challenge seemed fatally flawed in some respects. What’s more important is that the whole thing is really moot now. Nonlawyers practice law all day, every day, in a variety of ways, without the bother of sharing their revenue with lawyers. Why buy stock in a law firm if you can get the same (or better) return and not deal with lawyers, and their ethics and structural rules?
Jacoby is a New York enterprise that operates storefront law offices in Southern California, Alabama, Florida, Arizona and New York. They focus on consumer law and personal injury. Think of LegalZoom, only with real offices and live lawyers. They challenged the law in New York, New Jersey and Connecticut, claiming that the restriction on the sharing of legal fees with nonlawyers found in the Rules of Professional Conduct violated various constitutional rights, including free speech and association, as well as the Dormant Commerce Clause.
Their case had a rocky course, being initially dismissed on standing grounds—only to be revived by the Second Circuit, then dismissed again by the District Court and now put to bed by the Second Circuit, unless the U.S. Supreme Court gives it a look. The plaintiffs’ claim is that they could expand their operations if they could have access to equity financing. They pointed out that the financial avenues available to them as a law firm—partner investment, retained earnings or bank loans—all either required investment of money they did not have, or carried high interest rates and restrictions on operations. The court found no constitutional right to running a law firm as a publicly traded company.
Nonlawyer investment is allowed in England and Australia, and has been used by some consumer-oriented enterprises as an effective funding mechanism. But the results have not been universally positive. One firm used the cash infusion from its IPO to fund some sort of ill-considered expansion and, last I read, was on life support.
On this side of the world, nonlawyer investment and fee-sharing has been assiduously resisted by the American Bar Association and is not permitted in any state other than the District of Columbia. D.C. has come to grips with it because so many of the D.C. law firms have former government official lobbying partners who are not lawyers but who require a share in the profits.
U.S. firms that wish to raise capital do so with debt instead of equity. If anyone thinks that the limitation on lawyers’ independence attendant upon taking in nonlawyer partners—one of the stated objections to equity funding—doesn’t exist in debt financing, read some of the lending agreements, covenants and guarantees used for this commerce. You can find a lot of it in the detritus of cratered firms like Dewey.
While all of this has been wending its way through the ABA House of Delegates, and various courts and state ethics committees, firms that wanted to bring in nonlawyer money discovered they could sell their “back office” enterprises to nonlawyers, who provide services to the firms on a contractual basis. There are firms in many states, including Connecticut, that operate in exactly this way.
Other nonlawyer investors have put their money into Internet-based legal services delivery platforms. Some services do employ lawyers for part of the work, but the businesses are not regulated as law firms, much as Lyft and Uber offer common-carrier taxi services without, in many states, any licenses or permits from public-services authorities. And Airbnb offers short-term room rentals without zoning, licensing or room tax considerations.
Jacoby & Meyers might seek certiorari; I wouldn’t waste my time with that. The market has moved well beyond their business model, and the firm is throwing good money after pursuing an outdated service-delivery model.
That’s too bad, because serving the legal needs of working- and middle-class folks has been one of the foundations of the American model of law and lawyering for the last century or more. It provided plenty of work for many lawyers like myself and kept law schools busy producing new generations of eager lawyers to follow us when we retire. Closing off the ability of modest firms to finance their operations with equity is going to further stratify the profession; the biggest and deepest-pocket firms will continue to grow, and the little guys will be consumed by Internet-based nonlawyer operations.
The few members left when the ABA collapses—due to declining membership and revenue, a fascinating subject for another column—can pat themselves on the back for holding the line on nonlawyer investment, right up to the bitter end.