Law firm 'short-termism' could be cured with nonlawyer ownership, law prof argues
A Georgetown law professor has identified a problem with the current financing model for law firms: “short-termism.”
Firms are funded by partners who withdraw their equity when they retire or leave for higher pay at a new firm, Georgetown law professor Jonathan Molot points out in an article in the Southern California Law Review. There is no incentive to create long-term value, says Molot, co-founder of litigation finance company Burford Capital. The Washington Post and the New York Times have stories.
Molot calls the focus on current revenues short-termism and says the solution is public financing of law firms.
“It is no wonder that law firms favor current revenues at the expense of long-term value,” Molot writes. “Law firms are structured to be nothing more than transitory associations of individuals who happen to practice law under the same roof for a particular period of time.”
With outside funding, Molot argues, firms would have incentives to build long-term value by investing in younger lawyers and trying alternative billing.
Currently every U.S. jurisdiction, with the exception of Washington, D.C., bars outside ownership of law firms. The ABA’s model ethics rules also bar nonlawyer ownership of law firms, though the idea has been considered. Most recently, the ABA Commission on Ethics 20/20 released a draft proposal to allow partial nonlawyer ownership, but never recommended the change after receiving a negative response.
The objection to outside funding is that nonlawyer owners could compromise lawyers’ professional judgment. The ABA is currently monitoring developments in Britain and Australia, which allow publicly funded law firms.
“We’d like to see more of a track record of client protection being paramount so there are no divided loyalties,” ABA President William C. Hubbard told the New York Times in an interview. Hubbard has created a new ABA Commission on the Future of Legal Services to examine ideas and innovative practices for the delivery of legal services.
Related articles:
ABA Journal: “Does the UK know something we don’t about alternative business structures?”
ABAJournal.com: “Will continuing to ban nonlawyer ownership make US firms and clients less competitive?”
