Does The Legal Profession Have An Emerging New Structure

Published January 1, 2013

Reprinted from:

The basic premise of lawyers’ self-regulation has always been that all firms are equal before the 50 state bar associations. But in the last several years, a number of large national/international law firms petitioned the ABA’s Commission on Ethics 20/20 with a complaint about state bar regulation, contending that, given their multistate and multinational corporate practices, such firms are restricted by the separate state bar admission requirements on issues like conflicts of interest, liability and lawyer mobility. The entrenched legal establishment is highly unlikely to consent to such a voluntary diminishing of its power. But other changes, in the name of adapting a two-tier profession to globalization, may be imposed from outside.

Non-Lawyer Ownership

Pre-eminent among these changes is the issue of law firm ownership. In 2011, a nationally known law firm filed suit in federal courts in New York, New Jersey and Connecticut, contending that those states’ versions of Rule of Professional Conduct 5.4—which prohibits non-lawyers from taking an equity interest in a law firm—are unconstitutional because they prevent the firm from raising the money it needs to provide legal services in an expanding global market, supposedly, violating the Constitution’s due process clause.

In March 2012, a New York federal district judge dismissed the case, holding that the firm lacked standing since it had not proved it had been harmed by the rule. The judge also observed that New York’s Rule of Professional Conduct 5.4 was not the only obstacle to the firm taking on equity investors: other New York laws besides Rule 5.4 (like the one on Limited Liability Partnerships) bar the firm from accepting investment capital from non-lawyers, the judge concluded. However, the firm appealed and in November 2012 the Second Circuit remanded the case back to the district because these other laws could be challenged. The Second Circuit said, “We see no reason not to remand the case back to the district court, in order to permit the plaintiffs to amend their complaint to name additional state defendants and challenge other provisions of New York law that prohibit non-lawyer investment in law firms.”

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. This confirms what I have been preaching for the last 20 years. The truth is that larger law firms are already looking very much like their business clients with marketing personnel and business development (sales) directors. This marketing aspect 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 global law firms similar to their clients. Big firms would become more like the Fortune 500, while solo and small firms would ostensibly have even more of a disadvantage in the marketplace. That can produce desperation, and the kind of conduct that the rules were made to address. As just one example, chiropractic clinics in one major Southwestern 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 Licensing Monopoly

Other challenges to the “exclusivity” of legal practice come under the guise of making it more competitive. In 2011, a Brookings Institution analyst expounded in The New York Times that by requiring lawyers to have a law degree and pass the bar exam, the profession seeks to restrict the supply of new lawyers, and so perpetuates a monopoly. Calling them “barriers to entry,” this analyst wrote that, rather than improving the quality of legal practice, the requirements to graduate from an accredited law school and pass the bar “exist simply to protect lawyers from competition with non-lawyers and firms that are not lawyer-owned — competition that could reduce legal costs and give the public greater access to legal assistance.”

These are not new ideas, but the assertion that they are the key to lowering costs of delivery of legal services is misplaced for three major reasons.

• First, most of the rules in place for the licensing of lawyers are there protect the public; they are not there to protect the interests of lawyers. For example, an individual must be competent to represent and advocate for the interests of a client. It’s the same principle as licensing doctors. Incompetence in court or in the operating room can cost people their lives.
• Second, technology provides many avenues to reduce legal costs. Removing the licensing requirements has no impact on this issue. Why not remove licensing requirements for everyone in everything, from medicine, to plumbing, to driving a car? Licensing assures a minimum standard of quality; eliminating it takes the “caveat emptor” principle to excess.
• Third, the underlying premise that licensing provides an insurmountable barrier to entry and substantially raises costs by controlling supply might be true if one doesn’t look at the facts. There are many more lawyers than the current demand for “traditional” services (excluding poor and lower economic clients) can accommodate. This market force in itself has helped to bring down legal costs. With no regulation, we might likely see larger law firms pattern their pricing after one another, just as airlines currently do, so that the benefit of lower costs would not be evident.

The Value Solution

So if non-lawyer ownership of law firms and non-licensing of lawyers have ample drawbacks to enabling large law firms to deal with globalization, where does the situation leave smaller firms? Are they doomed to wither and die? The emerging answer is no—they are in fact adapting to the global transformation of the profession. Yes, practice admissions and jurisdictional requirements are on a state-by-state basis, and small firm lawyers generally don’t have to be concerned about a law firm from another country showing up on their doorstep to buy out their practice. In a broader sense however, the rest of the world has already had a major impact.

Investment expansion of Asian, European and Latin American countries means that local lawyers in the United States may be working with companies whose headquarters are in a foreign country. They may even be representing a foreign investor in an effort to buy an American business operation. And even longtime local business clients increasingly require familiarity with customs laws, trade treaties and anti-piracy statutes.

Similarly, a family law practitioner may have clients subject to an international treaty regarding child custody and may have to take depositions outside of the United States, or may even be subject to the decisions of a foreign tribunal. And as retirement to a location outside the United States becomes attractive to more people seeking a lower cost of living, or just an exotic new locale for their “second season,” it raises a host of issues for estate planning, Social Security and pension benefits, and similar concerns.

In such examples, globalization has the potential to provide more work for the typical firm, provided that firm is prepared to take the work on and “think global, act local.” Globalization creates new causes of action, new opportunities for legal work—and new concerns from firms that cannot adjust to global realities. If an offshore company buys a firm’s largest local business client, it could create new demand for that firm’s services in local courts and regulatory agencies—but not if an offshore company rejects the firm’s current rate structure, or sees the firm is unable to lower it through efficiencies from electronic technology.

The crux is not outside ownership or eliminating licensing. It is practical adherence to Rule of Professional Conduct 1.5, which says a lawyer should not “charge, or collect an unreasonable fee.” Controversies can arise over what is a reasonable price when a client fails to see the “value” being offered. The firm that adopts technology to reduce the costs of its operation, and then passes those savings onto the client will be more successful. Demonstrating value and quality of service by achieving results enables any accredited lawyer to make a convincing case about competing in the new law firm world—regardless of the size of the firm.

Categorized in: Client Relations, Financial and Cash Flow Management, Management, Marketing and Business Development

Audience type: Administrators, Associates, Large Law Firms, Small Law Firms, Sole Practitioners