Published in: Wisconsin Law Journal, June 1, 2011
Several months ago, an article I wrote looked at the growing momentum for non-lawyers to take an equity interest in law firms, despite Rule 5.4's prohibition of such an arrangement. Now momentum has become a runaway train. A nationally known law firm has filed suit in federal courts in New York, New Jersey and Connecticut, contending that those states' versions of Rule 5.4 are unconstitutional because they allegedly prevent the firm from raising the money it needs to provide legal services – supposedly, violating the Constitution's due process clause.
No matter what one thinks of this argument, the real motivation – bringing in outside owners to get more capital for expansion – raises several red flags. One is that removing the “membership” provision (having to be a lawyer to be an owner) makes law firms like every other business. The truth is that larger law firms are already looking very much like their business clients with marketing personnel and business development (sales) directors. It's this very marketing aspect that is very worrisome. Effective marketing and sales tactics in advertising and prospecting are sometimes at odds with a rule of professional conduct – bringing state bar ethics sanctions. Marketers are just doing what comes naturally. But, there is a difference for lawyers.
Would non-lawyer investors create similar problems? Would they urge lawyers to cross the line of confidentiality to tell potential financing sources that the firm has just signed up a lucrative new client, or taken on a matter with potentially high fees? Normally, such disclosure is not permitted but lenders or private equity sources want to know such information. In the corporate world, this skirts the edge of insider trading. For law firms, it is against professional ethics.
Again, the point is that such changes make us similar to our clients. Big firms will become more like the Fortune 500 while solo and small firms will become even more at a disadvantage in the marketplace. That can produce desperation, and the kind of conduct that the Rules were made to address. A colleague recently told me that chiropractic clinics in his large state are increasingly owned by non-doctors, who solicit and treat accident victims and refer the patients to small law firms that don't question medical issues – or ethics. The general feeling of bar association staff seems to be that the smaller firm lawyer needs to be monitored and governed more carefully and strictly (as in restrictions on loan modification retainers, malpractice insurance disclosure, selling a law practice and similar issues). Meanwhile the largest national firms have already tipped their hands by proposing to the ABA Commission on Ethics 20/20 that large firms need their own national regulatory code on issues like conflicts of interest, liability and lawyer mobility.
Granted, all this involves oversimplification and exceptions. But it indicates why sole and small firm practitioners and large national firms increasingly no longer support the mandatory, organized bar – each size category of firms doing so for its own reasons. The growing fight over non-lawyer investors is another indication of this lack of support. New, voluntary bar associations specifically designed to new law firm realities might well be the result.
