Nonlawyer ownership of U.S. law firms has been a stale conversation for quite some time. That is slowly changing, as a number of developments in 2018 have, at the very least, teed up the possibility that outsiders may soon have a chance to invest in the business of Big Law.
ALM and The American Lawyer tracked those developments throughout the year, uncovering signs that the long-held regulatory barriers to outside investment in U.S. law firms may be becoming more porous. Here is some of what we reported:
Is Outside Ownership of Law Firms Picking Up Steam? Perhaps the most promising present-day solution to law firms’ underinvestment problems comes from litigation funders. While those businesses have traditionally been thought of as financing lawsuits, Burford Capital LLC in 2018 said it was exploring avenues to serve as an investment bank for law firms. Burford’s plan would involve spinning off the back end of a law firm. Set up as a more traditional corporation, it would have long-term equity that would be open to investment from non-JDs.
The Law Firm Disrupted: A Present-Tense Solution to Law Firms’ Short-Term Thinking That kind of structure is already in place at Atrium, a Silicon Valley-backed startup that has paired a LLP law firm with a corporation that employs software engineers. Atrium Legal Technology Services Inc., “a non-law corporation incorporated under the laws of the State of Delaware,” this year received $65 million in financing, led by prominent venture capital firm Andreessen Horowitz. Many Big Law firms are watching to see if the pairing of lawyers with engineers will provide breakthroughs for how the law is practiced.
The Law Firm Disrupted: Outside Ownership of a Law Firm Alert Further down the line, California’s state bar is studying the question of whether liberalizing the ownership rules for law firms would be beneficial to clients. A committee, which includes both lawyers and clients, has been formed to prepare a report on the topic. Its work is due by the end of 2019. The proposal was spurred by a report prepared for The State Bar of California by William Henderson, an Indiana University Maurer School of Law professor, who said that the current rules have limited access to lawyers to about 10 percent of the population.
California Bar to Consider Changes to Nonlawyer Ownership Rules Why is all this of interest? Because restrictions on law firm ownership have made it difficult for firms to invest in long-term projects that could improve the efficiency of the services they deliver. As law firms increasingly look to “innovate” by investing in technology and experts in the areas of pricing, tech and consulting practices, they would be bolstered by the ability to pay them from a pool of capital outside of the traditional partner draws. Yale Law School professor John Morley says their capital structure creates problems of “generational transfer” that are akin to governments that have difficulty convincing present-day citizens to pay for policies that would benefit tomorrow’s citizens.
“It’s no coincidence that law firms and other professional services firms are the only large businesses still existing in America that have unfunded pension plans,” Morley said. “And they have them for the same reason as towns and cities, which is they have a problem with generational transfer.”
The Law Firm Disrupted: ‘Pathologically Present-Focused’ Law Firms and Chipotle It’s unlikely that 2019 will see a revolution in how U.S. law firms are financed. The U.K. since 2011 has allowed outside investment in law firms, and it has not yet made a dramatic impact on Big Law. Nevertheless, the conversation is growing louder in the U.S.