Florida Bucks the Trend Toward Nonlawyer Ownership

With all the changes impacting law firms right now, it would be easy to overlook an important regulatory development that recently took place. In November, the Florida Bar Association’s Board of Governors unanimously voted down proposals to test nonlawyer ownership and fee sharing in legal practices. The decision represents a sharp deviation from the trend of “regulatory sandboxes” that have taken root in states including California, Utah, and Arizona.

Debating arguments from the Florida Supreme Court’s Special Committee to Improve the Delivery of Legal Services, which suggested these measures as opportunities to improve access, board member Josh Chilson expressed concerns, saying, “I’m troubled that this is being offered with no real evidence that the proposal will improve access to justice… This is a bell that once rung, will never be able to be unrung.” Member Sia Baker-Barnes asserted that allowing companies driven by profit to enter the legal services industry would impede the “independent judgment of a lawyer… critical to the fair administration of justice in [the] state.”

Those who support opening up law firm ownership to nonlawyers rely on a variety of arguments, ranging from a belief in the power of markets to assertions that such changes will improve access to legal representation among the middle class. The Florida Bar should be commended for asking for more evidence and reaching a unanimous decision.

Whether you think these changes are long overdue or expect they will bring on the demise of the legal profession, it’s clear that, if implemented, these changes will be very hard to reverse.  So let’s dig deep and examine whether allowing nonlawyers to invest in law firms is the best and only way to improve access to justice. Let’s also explore more incremental changes that will enhance the economic standing of law firms that represent individuals. As consultants to law firms, we see firsthand that the more financially secure a law firm is, the better positioned it is to serve a wider range of clients.

ABA Ethics Opinion Allows Passive Investment in Out-of-State ABS

On September 8, the American Bar Association (ABA) addressed lawyers’ ethical obligations as investors in firms with nonlawyer owners. Formal Opinion 499, issued by the Standing Committee on Ethics and Professional Responsibility, permits attorneys throughout the country to act as passive investors in Alternative Business Structures (ABS) that may not be allowed within a given lawyer’s state of licensure.

The issue, which we have covered in earlier stages of development, has worked its way to the fore, as states have created and extended regulatory changes to admit nonlawyers as owners in legal practices. The new ethics opinion clarifies how lawyers admitted to practice law in states without such permissions can still get involved in these business models.

The District of Columbia has allowed for nonlawyer partners since 1991 with limitations, but in recent years, others have joined the push. In 2021 alone, Utah extended its “regulatory sandbox” to a total of seven years, and Arizona eliminated Rule 5.4, which was modeled by the ABA to prohibit lawyers from splitting their legal fees with nonlawyers. The State Bar of California launched its own pilot program in May 2020 based on recommendations from its Task Force on Access Through Innovation of Legal Services (ATILS).

What last month’s opinion expressly condones is passive investing from lawyers admitted to practice law in other states. Providing guidance around potential conflict-of-interest issues, the committee broadly explains that attorneys would not be in violation of their ethical duties in making financial investments in ABS where such entities are allowed, so long as that lawyer has no active management role with the organization. As described in their conclusion below, the committee defines a passive investment as one in which the lawyer making the investment would not have a hand in the day-to-day operations of the ABS or be privy to confidential client information.

A lawyer admitted to practice law in a Model Rule jurisdiction may make a passive investment in a law firm that includes nonlawyer owners operating in a jurisdiction that permits such investments provided that the investing lawyer does not practice law through the ABS, is not held out as a lawyer associated with the ABS, and has no access to information protected by Model Rule 1.6 without the ABS clients’ informed consent or compliance with an applicable exception to Rule 1.6 adopted by the ABS jurisdiction… If, however, at the time of the investment the Model Rules Lawyer’s investment would create a personal interest conflict under Model Rule 1.7(a)(2), the Model Rule Lawyer must refrain from the investment or appropriately address the conflict pursuant to Model Rule 1.7(b).

This opinion will likely catapult the topic of nonlawyer ownership to prominence in additional states as lawyers are now being tempted to contribute to the growth of entities outside of their home locales. State bar associations and other advocates for the legal community will be forced to confront the fact that the current set of rules could favor firms in places like Utah and Arizona, shifting investment dollars out of other states. The most significant aspect of this opinion is that it may contribute to California adopting similar rules to those in Utah and Colorado. And given California’s size, that would be a game-changer for many U.S. lawyers.