Debating Nonlawyer Ownership of Law Firms

In New York, the Rules of Professional Conduct as well as numerous statutes prohibit NLO. Rule 5.4(d) of the New York Rules of Professional Conduct provides that:

A lawyer shall not practice with or in the form of an entity authorized to practice law for profit, if:

(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;

(2) a nonlawyer is a member, corporate director or officer thereof or occupies a position of similar responsibility in any form of association other than a corporation; or

(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.

In addition, section 1503 of the Business Corporation Law, section 495 of the Judiciary Law, and section 201 of the Limited Liability Company Law all prohibit lawyers from owning professional service corporations with nonlawyers. See, New York B.C.L. '1503 (McKinney's 2016); Roy D. Simon, Simon's Rules of Professional Conduct Annotated 1359 (2015 Edition) (“Under Sec. 1503 of the Business Corporation Law a non-lawyer may not own any interest in a professional services corporation authorized to practice law”); Jacoby & Meyers, LLP v. The Presiding Justices of the First, Second, Third and Fourth Departments, Appellate Division of the Supreme Court, 488 Fed. Appx. 526 (2d Cir. 2013) (New York Judiciary Law '495 and New York Limited Liability Company Law '201 prohibit nonlawyer investment in law firms).

ABA Commission

Recent challenges to these laws on constitutional grounds by law firms have failed, and these laws remain in full force and effect. See, Jacoby & Meyers, 2015 WL 4279720 (S.D.N.Y. 2015). For a discussion of this case, see , Arthur J. Ciampi, “Round Up of 2015 Developments of Business Practices,” NYLJ, Volume 254-No. 102, Nov. 7, 2015.

Nonetheless, the ABA Commission on the Future of Legal Services appears to be promoting NLO and has asked that ABA delegates consider NLO. See, Miranda, at 6. While the commission's report is somewhat cryptic, it repeatedly asks its delegates to vote in favor of recommending “regulatory objective for the provision of legal services” which would, among other things: “identify and implement regulations related to legal services beyond the traditional regulation of the legal profession.” American Bar Association Commission on The Future of Legal Services Standing Committee Resolution 105. In addition, the commission's report references other jurisdictions, such as Australia and England, in which NLO are permitted.

In response to this proposal, the president of the New York State Bar Association has written: “If approved, the Commission would likely propose amendments to Model Rule 5.4 to allow lawyers and law firms to share legal fees with nonlawyers, who could hold a financial interest in the practice, in the delivery of both legal and nonlegal services.” Miranda, supra n.1, at 6.

Critics of NLO

Starting in 1928 and for decades, the ABA opposed nonlawyer ownership in the practice of law. See, Edward Adams, “Rethinking Law Firm Organizational Form and Capitalization Structure,” 78 Mo. L. Rev. 777, 798 (2013). In 1998, the ABA appointed a commission to review NLO; this commission concluded that the ABA should permit lawyers to share fees with nonlawyers and authorize professional partnerships consisting of lawyers and nonlawyer professionals, such as accountants. Id. at 799.

In 1999, the New York State Bar Association established the McCrate Committee which was charged with studying the then existing law governing law firms and considering whether there was a need for change in the structure. The McCrate Report, which was issued in 2000, opposed NLO. It provided an extensive analysis of the legal profession, identified numerous concerns regarding NLO, and rejected the ABA's suggestion that the rules prohibiting NLO should be relaxed. For example, the report noted, “placing any measure of control over the practice of law in the hands of nonlawyers would form a constant backdrop for the lawyers attempting to practice in the organization, as the financial objectives of nonlawyer management perpetually compete with considerations of professional ethics and the formulation of independent judgments in the best interests of legal clients and the legal system.” New York State Bar Association, Report of the Task Force on Nonlawyer Ownership, 76 Alb. L. Rev. 865, 879 (2012-2013).

In addition, the McCrate Report pointed out that the “indicia of nonlawyer influence will often be elusive,” making it difficult if not impossible to identify “the point at which a nonlawyer's role within an organization rises to the level of inappropriate interference with practice governance.” Id.

In 2000 the state bar association approved a resolution from the Special Committee on the Law Governing Firm Structure and Operation that provided, among other things, that “no change should be made to the law that now prohibits lawyers and law firms directly or indirectly from transferring ownership or control to nonlawyers over entities practicing law.” Id. at 865.

In 2012, the ABA Commission on Ethics 20/20 released a discussion draft again proposing NLO, which it ultimately decided not to pursue.

David Miranda, president of the New York State Bar Association, in response to the recent ABA Commission of the Future of Legal Services, has eloquently stated numerous bases for rejecting NLO. He writes:

Nonlawyer ownership of law firms creates a whole new set of fiduciary responsibilities, which have nothing to do with clients or their interests. Investors want to see a profit; shareholders are owed a fiduciary duty. Of course all attorneys need to make a living, but professional judgment should not be compromised by the need to hit certain quarterly goals.

Miranda, supra n.1, at 6.

Proponents of NLO

There are numerous proponents of NLO. Some law firms have argued that NLO is needed to expand legal services which in turn “requires a substantial infusion of new capital” and that traditional means of obtaining necessary funds, such as capital contributions by partners and commercial bank loans, are too expensive or are unavailable to fund law firms' business plans. See, Jacoby & Meyers, LLP v. The Presiding Justices of the First, Second, Third, and Fourth Department, Appellate Division of the Supreme Court of the State of New York, 2012 WL 751946 (S.D.N.Y. 2012). Scholars similarly argue that permitting NLO would enable lawyers to generate additional capital, provide lower cost services by the utilization of nonlawyers to provide certain services, and even provide for greater transparency through corporate disclosure as is now required by public corporations. See, Adams, supra; Jack A. Guttenberg, “Practicing Law in The Twenty-First Century In a Twentieth (Nineteenth) Century Straightjacket: Something Has To Give,” 2012 Mich. St. L. Rev. 415 (2012).

In addition, proponents of NLO argue that, to compete globally with firms from countries such as England and Australia, where NLO is permitted, U.S. firms should also permit NLO. Other scholars argue that a complete ban on NLO is outmoded and is based upon “overblown” concerns and, like past bans on lawyer advertising, should be removed and replaced with regulations that permit NLO but also regulate the practice so as to ensure that the values of the profession are preserved. See, Ted Schneyer, “'Professionalism' As Pathology: The ABA's Latest Policy Debate On NonLawyer Ownership of Law Practice Entities,” 40 Fordham Urb. L.J. 75, 101 (2012).

Possible Solutions

Providing independent advice to clients is the hallmark of our profession. Opponents of NLO are concerned that NLO will erode “core values” including the independence of lawyers and the autonomous advice they give because lawyers will, in essence, have to serve two masters ' clients and nonlawyer investors whose goals are purely profit and who are not regulated by the profession.

At the same time, an attorney's obligation is also to provide the best services to clients. These “best practices” can include utilizing the services of nonlawyers to provide clients with more complete advice or a lower cost alternative. Proponents of NLO argue that NLO will provide such results by, for example, permitting lawyers and accountants to form partnerships to provide clients with multidisciplinary solutions to their problems. Also, in line with the desire to provide the best services is the need for firms to expand to meet client needs and the corollary requirement of capital to achieve such expansion needs.

Accordingly, in the simplest sense there is at least a conceptual tension between the requirements of independence and the desire to provide the best services to clients.

It is suggested that at least a partial solution to this quandary already exists in the New York Rules of Professional Conduct, in underutilized Rule 5.8, which provides both a solution to the problem and insight into its legitimacy.

Rule 5.8 of the Rules of Professional Conduct provides, in pertinent part, that: “a lawyer or law firm may enter into and maintain a contractual relationship with a nonlegal professional or nonlegal professional service firm for the purpose of offering to the public, on a systematic and continuing basis, legal services performed by the lawyer or law firm as well as other nonlegal professional services'.”

The rule places certain conditions on the relationships, which of course should be reviewed, and limits the qualified nonlegal professionals to architects, CPAs, engineers, land surveyors, and certified social workers. Accordingly, lawyers seeking to provide multidisciplinary services to clients may do so via a contractual arrangement with a qualified professional, pursuant to Rule 5.8.

It has been observed, however, that such contracts are rare because in reality lawyers and nonlawyers have little interest in entering into such contracts, and we share that observation. See, Simon, supra n. 2, at 1469 (“Rule 5.8, which its drafters hoped would be a model for the nation, has had minimal impact inside or outside New York.”). Moreover, it is submitted that this observation may provide further reason why the rules for NLO should not be relaxed at this time. Indeed, the lack of use of Rule 5.8 indicates that there is no urgent client need for NLO with other professionals.

Rule 5.8 was adopted in 2001. At an absolute minimum, it is submitted, it provides a litmus test concerning whether there was a real need for multidisciplinary practice in New York, albeit pursuant to contract. If such a need existed, it is suggested, there would have been a proliferation of contracts permitted by Rule 5.8. In the 15 years since its adoption, however, such contracts are few and far between. Thus, it appears that there is no need, not to mention a compelling need, to provide multidisciplinary services.

In light of the risk that partnerships among nonlawyers could present to professional “core values,” no reason seems to exist to take this risk as the needs of clients appear to be met by the traditional informal use by lawyers of other professionals who are independently retained as certain projects for clients require. Moreover, if in the future the needs of clients required an increase in multidisciplinary practices, Rule 5.8 already provides a solution; if that solution, over time, proves inadequate, only then would there be a reason to consider relaxing the rules which prevent partnerships with nonlawyers.

Seemingly irreconcilable with our professional “core values,” however, is the investment by nonlawyers in law firms. Investments by nonprofessional shareholders does, as the opponents of NLO state, seem to produce two masters both of which cannot be served. As well stated by David Miranda: “The financial objectives of nonlawyer management would be in perpetual competition with lawyer's professional ethics and independent judgments, which are in the best interests of legal clients and the legal system.” Miranda, supra n.1, at 6.

Moreover, the claim by proponents of NLO that bank loans create similar tensions ignores the legal reality that lenders are holders of debt but are not equity owners with a say in management or the firm's legal practice. See, Hamilton Capital VII, LLC v. Khorrami, LLP , 43 Misc.3d 1223(A) (Sup. Ct. New York County 2015) (lender is creditor and loan results in debt not equity). Furthermore, there does not appear to be any empirical evidence of the need for lawyers or law firms to obtain such nonlawyer investment. It remains the norm that firms require partners to make capital contributions to their firms which can be increased if needed by the firm and that banks continue to lend money to law firms which provide lines of credit and other means of financing without the risk presented by permitting NLO.

Conclusion

In its simplest sense, the risk of NLO seems, at this point in time, to overwhelming outweigh the potential reward. Moreover, the risk is to the heart of our professional “core values,” which, if eroded, would harm not only the profession but also our clients. Accordingly, there does not seem to be any legitimate need to relax the rules which prohibit NLO, and those rules should remain firmly in place.

Arthur J. Ciampi is the co-author of the treatise “Law Firm Partnership Agreements” and is the managing member of Ciampi LLC. Maria Ciampi, Of Counsel to the firm, assisted in the preparation of this article, which originally appeared in our ALM sibling, New York Law Journal.