Ethics 20/20 Edges Toward Decision on Endorsement of Versions of Alternative Law Practice Structures

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The ABA Commission on Ethics 20/20 today took another step toward deciding whether to recommend changes in legal ethics rules to allow nonlawyers to have a limited ownership interest in U.S. law firms.

But the commission does not expect to reach any final decision on the issue until giving lawyers and representatives of the organized bar a chance to comment on the discussion paper (PDF) that was posted earlier today on the commission’s website.

Whether to allow nonlawyers to participate in ownership of law firms—and if so, how much—has been one of the most challenging issues on the commission’s agenda 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, said Jamie S. Gorelick, one of the commission’s co-chairs, in comments sent by email in response to questions from the ABA Journal. “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.

What is becoming apparent from the commission’s work so far relating to ALPS is that any recommendation to change current rules is likely to be limited in scope.

“Alternative law practice structure” is an umbrella term that encompasses 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 and/or financial interest with nonlawyers in entities that are limited to providing legal services. At another point in a potentially broad spectrum, lawyers and nonlawyers would be allowed to share management and/or ownership of entities that provide both legal services and other types of work for clients. Other approaches would allow passive investment by nonlawyers in law firms or publicly traded law firms.

The approach articulated in today’s discussion paper would largely follow the District of Columbia model, but with even more bite. Rule 5.4 of the ABA Model Rules of Professional Conduct would be amended to permit a lawyer to practice law in a firm in which individual nonlawyers hold a financial interest if—and only if—the firm’s sole purpose is providing legal services to clients; the nonlawyers do only work that assists the firm in providing those legal services; and lawyers in the firm would be responsible for assuring that conduct of the nonlawyers is consistent with lawyer ethics rules.

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 D.C. model does not impose a cap on nonlawyer ownership or require nonlawyer owners to pass a “fit to own” test.

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,” Gorelick said, “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 ALPS to the House for consideration at the 2013 ABA Midyear Meeting in Dallas. Most of the commission’s other recommendations will go to the House for consideration in August at the 2012 ABA Annual Meeting in Chicago.

The Ethics 20/20 Commission today also posted initial draft proposals (PDF) on choice-of-law issues affecting fee-sharing between law firms when they are governed by different rules on nonlawyer ownership. The proposals also address fee-sharing issues when one law firm has offices in multiple jurisdictions with different rules on nonlawyer ownership. By issuing draft proposals on these issues, the commission has signaled that it is closing in on a final recommendation.

Comments on both the ALPS discussion paper and the draft proposals on choice of law may be submitted by Jan. 15 to Natalia Vera, the commission’s senior research paralegal, at [email protected].

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