Time for Changes to Rule 5.4?

The myth that lawyers aren’t running sophisticated business enterprises which look more like modern corporations than traditional law firms is just that — a myth.

Connecticut, like just about every other jurisdiction other than D.C., has adopted a version of ABA Model Rule 5.4, which prohibits nonlawyer investment and involvement, either as a partner or shareholder, in an entity offering legal services to the public. Maybe it’s time to consider the wisdom of that rule.

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<div> <div> The myth that lawyers aren't running sophisticated business enterprises which look more like modern corporations than traditional law firms is just that �� a myth. Connecticut, like just about every other jurisdiction other than D.C., has adopted a version of ABA Model Rule 5.4, which prohibits nonlawyer investment and involvement, either as a partner or shareholder, in an entity offering legal services to the public. Maybe it's time to consider the wisdom of that rule. The origins of the prohibition go way back, right to the beginning of lawyer regulation, and reflect a concern that lawyers who had to answer to nonlawyer shareholders might put the interests of the shareholders or stakeholders above those of the clients. This is a legitimate concern, but there are ways to handle the issue other than an absolute prohibition. For instance, the D.C. Bar has a version of the rule that allows nonlawyer involvement in an entity practicing law as long as the enterprise meets four simple requirements: <p style="margin-left: 40px;">(1) The partnership or organization has as its sole purpose providing legal services to clients;</p> <p style="margin-left: 40px;">(2) All persons having such managerial authority or holding a financial interest undertake to abide by the Rules of Professional Conduct;</p> <p style="margin-left: 40px;">(3) The lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1;</p> <p style="margin-left: 40px;">(4) These conditions be set forth in writing.</p> Many have argued and will argue that allowing nonlawyer investment in law-providing enterprises will be yet another nail in the coffin of the profession. Many of these folks are still smarting from the <i>Bates</i> decision 40 years ago that allowed lawyer advertising. They also are not too keen on the use of nonlawyers for many tasks traditionally done by members of the bar. Some of them are not even very happy about computer-assisted research, preferring the old digests and encyclopedias to Westlaw or Lexis. A few won't use email, preferring to dictate letters. I remember a huge fight we had in my firm over whether we should get a fax machine. To these folks, I point out that the myth that lawyers aren't running sophisticated business enterprises which look more like modern corporations than traditional law firms is just that, a myth. Firms have found simple end runs on the prohibitions on using equity shares to fund law office operations in two ways: through the use of debt and by using nonlawyer service providers for "back-office" operations. If you don't think borrowing to fund operations places lawyers in a bind where they have to worry about their own financial livelihoods and asset protection when considering whether to take or settle a client's case, think again. The guarantees that accompany sophisticated borrowing keep many up at night. In the hierarchy of clients, bondholder or shareholders and self, who do you think most lawyers are going to put on top of the list? The back-office phenomenon is a more recent work-around. Firms spin off their operations side into a separate entity which may be owned either by them or by others, but which is not a law firm. The law firm agrees to use the support firm for everything other than providing direct client services. This can include mundane stuff, such as secretarial and bookkeeping help to more sophisticated services such as legal research, document review and drafting and filing pleadings. Some day-to-day legal services, such as calendar calls, can be provided through the use of "on call" lawyers, leaving the core of true practicing lawyers to provide supervision and direct client contact. To make the spinoffs attractive to investors, the law firms enter into exclusive contracts with the service providers, guaranteeing a flow of cash to protect the interests of investors. Some lawyers have profited mightily by selling their back offices to these new entities. All of this is very sophisticated, and very legal. It just strikes me, as with the use of debt instead of equity for financing, that it's a lot of work to accomplish what the rule prohibits: allowing nonlawyers to serve as financial backers of and investors in law businesses. For my money, the D.C. rule is not only cleaner, it's more honest. By the way, some other common-law countries are now allowing nonlawyer investment, just as D.C. does. And guess what? They don't report any more horror stories about lawyers selling out clients to protect shareholders than does the D.C. Bar. I'm not such a Pollyanna that I think this has any hope of happening in my professional life, but for the next generation of lawyers, I think it can and should. In a few years, those of us who remember lawyering before <i>Bates</i> will have moved on to golf, shuffleboard and square dancing. We survived advertising, as well as email, faxes, paralegals and the internet. Some day we'll figure out how to run law firms like the businesses they are. </div> </div> <

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Time for Changes to Rule 5.4?

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