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Tough Call: Ethics 20/20 Commission Ponders Limited Nonlawyer Ownership of Law Firms

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Tough Call: Ethics 20/20 Commission Ponders Limited Nonlawyer Ownership of Law Firms

Jan 1, 2012, 07:40 am CST

The ABA Commission on Ethics 20/20 is edging toward a decision on whether to call for changes in legal ethics rules to allow nonlawyers to have a limited ownership interest in U.S. law firms. But it’s too early to predict what the commission will ultimately decide to recommend to the ABA House of Delegates.

On Dec. 2, the commission posted a discussion paper (PDF) on alternative law practice structures to its website. The commission also posted initial draft proposals (PDF) on choice-of-law issues affecting fee-sharing when law firms operating in multiple jurisdictions are governed by different rules on nonlawyer ownership. The commission is asking for comments on both issues by Feb. 29 (comments may be sent to senior research paralegal Natalia Vera at natalia.vera@americanbar.org).

Whether to allow nonlawyers to participate in ownership of law firms—and, if so, to what extent—has been one of the most challenging issues for the commission since it was created in 2009 to look at how ethics and lawyer regulation are being affected by technology and globalization.

Alternative law practice structures right now are prohibited in every U.S. jurisdiction except the District of Columbia. They are becoming more common, however, in foreign jurisdictions, notably the United Kingdom, Canada and Australia. American law firms doing business overseas are in a quandary over how to balance the more permissive rules on business structures in other countries and the more restrictive regulations in U.S. jurisdictions.

“We would really like to hear from a broad cross section of the profession on this before making a recommendation to the House of Delegates,” which sets ABA policy, says Jamie S. Gorelick, one of the commission’s co-chairs. “The commission will review the feedback it receives and decide what, if anything, to propose to the House.”

Gorelick is a partner at Wilmer Cutler Pickering Hale and Dorr in Washington, D.C. The other commission co-chair is Michael Traynor of Berkeley, Calif., a past president of the American Law Institute.

KNOW YOUR LIMITS

The commission has indicated that any recommendation to change current rules is likely to be limited in scope.

Alternative law practice structures encompass entities in which lawyers organize themselves with nonlawyers to provide services to clients. The District of Columbia, for instance, permits lawyers to share a management or financial interest or both with nonlawyers in entities that are limited to providing legal services.

The approach articulated in the commission’s discussion paper would largely follow the District of Columbia model, but with even more bite. The amendments to Model Rule 5.4 would go beyond the D.C. model in two key ways:

• First, lawyers in the firm would retain controlling voting rights and financial interests in the firm.

• And second, the lawyers would make reasonable efforts to establish a nonlawyer’s professional integrity before that person may gain a financial interest in the firm.

The commission already has decided against further consideration of publicly traded law firms, passive outside investment in or ownership of law firms, or multidisciplinary practices that offer both legal and nonlegal services.

“Though some advocated even greater flexibility in structuring relationships with nonlawyers, the commission has taken those proposals off the table,” says Gorelick, “so that what remains for consideration is a version of the rule applicable in Washington, D.C., for many years, but with additional protections to ensure that law firms are run by lawyers and solely for the purpose of delivering legal services.”

The commission expects to submit its recommendations on alternative law practice structures to the House for consideration at the 2013 midyear meeting in Dallas. Most of the commission’s other recommendations will go to the House for consideration in August at the 2012 annual meeting in Chicago.

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