The idea of allowing nonlawyers to hold ownership in law firms has taken hold in Australia, the United Kingdom, parts of Canada, and in Washington, D.C. Now the American Bar Association is discussing whether the concept should expand across the United States.
Current ABA ethics rules say that only lawyers may share directly in legal fees, but each state has the final say. A bill to allow 49 percent outside ownership in law firms is pending in North Carolina. And in May the personal injury law firm Jacoby & Meyers filed suit challenging the ban on outside investors in New York, New Jersey, and Connecticut.
At press time an ABA ethics group was expected to release a discussion paper on the subject. Under consideration are additional requirements, such as a cap on the percentage of nonlawyer owners and a "character and fitness" test.
Good idea? "It's frightening," insists Robert Weber, general counsel of IBM Corp. Weber recently sat down with senior reporter Sue Reisinger to explain his concerns. Excerpts from their conversation follow.
Corporate Counsel: You have been very vocal in opposing outside ownership of law firms; can you sum up your main concerns?
Robert Weber: My key concerns all rise from the fundamental proposition that outside ownership favors the lawyer to the client's detriment. The very nature of being an attorney is that you're an agent to someone. The lawyer has a fiduciary duty to the client, and he needs to fulfill that or his own assets are at risk.
CC: But the ABA is talking about limiting the outside ownership so that the lawyers would still be in control and still answer to the client, right?
RW: Only the most naive will think that limited ownership is where it will stop. As nonlawyers and investors and financiers begin owning law firms, that direct relationship, that agency-fiduciary relationship between lawyer and client, is going to become muddled.
CC: Well, proponents claim that U.S. law firms could become more financially sound and do a better job for their clients.
RW: Oh, I get it from a lawyer's point of view—they want more money. But why is this good from a client's side? The fiduciary model should remain, and law firms can go to the capital market and borrow money like any other partnership.
CC: If law firms in other countries have investors, don't those law firms have a financial and competitive advantage?
RW: First, we lose nothing competitively to anyone in the U.S. legal market, and this is the largest legal market in the world. Second, there are any number of large law firms who are already global, who have made the investments that they need to, and are doing pretty darn well. How could anybody argue that in order to be competitive, you have to have this when those firms are already market leaders without it?
CC: Proponents of outside ownership say it can create a legal marketplace that would be more affordable and accessible to the average consumer, with a legal office in your local Wal-Mart.
RW: It sounds good, and I think everybody will agree that legal services should be accessible and affordable to the average consumer. But they are. If you look urban, rural, anywhere, you will find tons of lawyers. The largest Yellow Pages entry in most urban areas is for attorneys.
CC: But with outside investment, couldn't law firms lower their rates?
RW: That's not the least bit true. Now the partners can contribute working capital, or they can borrow—and those rates are pretty low. If they bring in outside investors, the investors are going to want more of a return than you pay on borrowing. So the business model doesn't work. To say this is a client-friendly, cost-lowering business model is contrary to economic reality.
CC : How would outside ownership affect in-house legal departments?
RW: Big corporations would tend to be less detrimentally impacted than individuals and smaller businesses. But even big businesses will be affected because you'll see higher costs. Rates would go up to feed returns demanded by investors. Lastly I have to say that even in big companies, we've seen more and more breaches of conflict of interest rules in the last few years than ever before. We are seeing a change in the way some big law firms think about their clients.
CC: Is there anything else you'd like to add?
RW: It is surprising to see these kind of lawyer-centric financial reforms. Pretty soon we get to the point of losing fundamental protections for clients. And that's the point where I say, then let's get rid of one other thing—self-regulation. If you want to put into action the investment banker envy, and water down the protection for clients, then take the whole cake and agree to be regulated like everybody else.
Morally unfit to practice law? Really? So how is it we have some many lawyers? (December 29, 2011, by Missing the Sound) Read more
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