McDermott's private equity plan could test long-standing bans on outside funding for law firms
It had the look of conventional law firm nuptials when McDermott Will & Emery and Schulte Roth & Zabel got engaged last May and made it official Aug. 1.
McDermott was known for expertise in health care, private equity, taxes and litigation. Schulte focused on investment management, private equity and fund formation. Additionally, the Chicago-headquartered McDermott got a bigger footprint in New York City by combining with Schulte. All in all, it was a pretty traditional union.
But then came the twist.
In retrospect, the fact that both firms considered private equity to be one of their strengths was telling. Tradition gave way to trepidation in legal circles when the newly christened McDermott Will & Schulte confirmed reports it planned to invite private equity funding into the house and divide the house itself in two: a law firm operation run by members of the bar, and a PE-funded management services organization to handle back-office matters.
The new firm’s website refers to much of its clientele and to its ambition to shake up the standard, hidebound law firm business model. The headline reads: “Firmly focused on PRIVATE CAPITAL.”
The private equity investment idea landed with the kind of jolt that once greeted the notion of lawyer advertising and the end of the billable hour. It rattles a staid business model that has long kept an ethical firewall between the practice of law and the use of third-party funding.
Law firms tend to take themselves and their professional traditions seriously. They value probity, dignity and decorum. So is McDermott’s plan for a new ownership structure a bracing waft of fresh air? Or does it threaten an ethics-bending commercialization of the legal profession?
McDermott Chairman Ira Coleman said in a Nov. 12 statement that the firm is “fielding inbound interest” from outside investors, and “we always listen to new ideas.” He stressed that talks with potential funding sources were preliminary.
“At this time, we do not have any updates to share, and Ira Coleman will not be providing further comments on this issue,” a McDermott spokesman said in response to an ABA Journal inquiry.
Reactions to McDermott’s new venture were cautious. “The dynamic between law firms and nonlawyer investment is so new and radically different, it’s difficult to know the endgame,” legal sector analyst Jordan Furlong told Bloomberg Law in November.
“The fear is that commercial interests will influence legal decision-making,” says Daniel A. Cotter, a corporate transactional and governance partner at Chicago’s Aronberg Goldgehn Davis & Garmisa. “Lots of firms outsource their IT, and the IT guys don’t tell the lawyers how to run cases. But in an MSO, you have accountants.”
That puts a different spin on McDermott’s potential dual nature, Cotter adds. “Overall, lawyers have a duty to their clients, and CPAs have a duty to the public. And apparently, the MSO will be paid by revenues from legal services. It raises some legal issues.”
But temptation loomed, and law firm financing became a hot topic on business talk media. “There seems to be this wall of money that sees law as an asset class, and everyone wants some sort of piece of the legal marketplace,” said Howard Rosenberg, a partner at New York law firm advisors Baretz+Brunelle, in an October episode of The Future is Bright Podcast.
Rosenberg and Chris Batz, the founder of boutique M&A advisory firm Columbus Street, interviewed legal ethicist Lucian T. Pera in that October episode. They centered the chat on a key issue: ABA Model Rule 5.4, which forbids lawyers from sharing their fees with nonlawyers, forming partnerships with nonlawyers for legal practice or allowing nonlawyers to direct their professional judgment.
“None of those prohibitions, if you structure an MSO arrangement correctly, are triggered or violated,” said Pera, a partner at Adams & Reese in Memphis, Tennessee, and a former chair of the ABA Center for Professional Responsibility’s coordinating council.
Pera adds in an email: “Investors of all kinds—not just ‘private equity’ but family offices, tech companies, real estate companies, and others—are continuing to explore ways to invest money alongside lawyers in MSOs that support one or multiple law firms. All of that is happening at an accelerating pace. That acceleration will continue in 2026. To be very clear, no changes to the ethics rules need to happen to accommodate these structures.”
Is it inevitable?
Outside investors can fund the legal world in two ways. MSOs use a two-entity makeup to separate lawyers and business functions. The alternative business structure model allows direct nonlawyer equity ownership in legal practices. That requires jurisdictional authorization, and only Arizona and Utah have modified their ethics rules to allow for this—although Utah has since stopped allowing ABS-only entrants into its regulatory sandbox. In Arizona, there are more than 100 ABS law firms, each strictly regulated and required to have a compliance lawyer responsible for twice-yearly audits.
Pera has joined a group of consultancies, investors and law firms in a partnership called the Private Equity Legal Alliance.
Trisha M. Rich, an ethics partner at member firm Holland and Knight, says MSOs and the alternative business structure can work for law firms.
“The alliance offers a comprehensive, ethics-first road map that helps investors and firms pursue innovation without compromising the profession’s core responsibilities,” she says.
The group published a 60-page guide that envisioned capital investments in personal injury practices: Building Ethical, Value-Focused Partnerships: How Personal Injury Law Firms Can Engage Private Equity to Unlock Capital, Fuel Growth and Create Rewarding Exits.
Stephen Gillers, an emeritus law professor and prominent ethicist at New York University School of Law, believes outside funding of law firms is inevitable because financial incentives tend to prevail.
“The trend has certainly been in the direction of opening up investment opportunities to nonlawyers and non-law firms, consistent with my view that if an innovation will benefit enough lawyers and clients, the money will find a way to make it happen,” Gillers said in an email.
In the forthcoming 14th edition of his casebook Regulation of Lawyers, Gillers discusses several ways nonlawyers are looking to profit from investments in the law industry. He noted that Rule 5.4 contains exceptions, one of which permits law firms to include nonlawyer employees in compensation retirement plans based on profit-sharing. “So we have partly crossed that barrier already,” he says.
Other states are watching. According to David Freeman Engstrom, a Stanford Law School professor and the co-director of the Deborah L. Rhode Center on the Legal Profession, argues that “new financing models will make their way into American law one way or another” and the only question is whether it will be through alternative business structures “with Rule 5.4 relaxations subject to public oversight and regulation” or privately funded MSOs, which can be “opaque and hard to monitor.”
“State regulators have a very short window in which they can be part of and guide these changes, but that window is closing. Capital is no longer waiting for permission to access the business of law,” he says.
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