Under Model Rule of Professional Conduct 5.4, “[a] lawyer or law firm shall not share legal fees with a nonlawyer” except under very limited circumstances. Accordingly, it has long been the rule that only lawyers could manage or have an ownership interest in a law firm. That is why, for example, no law firm (at least none in this country) has ever gone public. Ostensibly, this rule prevents direct conflicts of interest in that shareholder interests are never allowed to trump client loyalty. This rule mimics the rule that bars the corporate practice of medicine. On the other hand, accounting firms generally only need a majority of their owners to be licensed CPAs.
If non-lawyers held an equity interest in a law firm, the Appearance of Impropriety Rulewould also apply whenever a law firm’s interests appeared to benefit equity owners’ interests over that of a client. For example, a very conservative defense strategy might prolong a lawsuit and give the appearance that the strategy was enriching shareholders to the detriment of a client. Aggressive collection strategies might also appear to create a direct conflict between shareholders and delinquent clients. Although N.J. R. 1.7:210 is focused on barring dual representations, e.g., representing both sides in litigation, it can easily be envisioned that this rule might also apply to bar representations when outside shareholder interests were in direct conflict with a client.
Are these ethical prohibitions fair or sound?
Other than via the traditional “bill, manage, or produce” buckets, lawyers have few options when it comes to generating significant wealth. For example, the potential upside for a successful litigation billed on an hourly basis is only the promise of future business. Unlike their clients or even their investment banker peers, lawyers are not issued stock options, cannot invest in deals, and never reap the rewards of a seven figure annual bonus based on the upside of a corporate transaction. This leads to an obvious disadvantage when it comes to law firms competing with hedge funds, investment banks, consulting firms, or high-growth companies. It is clearly unfair that law firms experiencing double-digit growth are unable to reward those who contribute to such growth with some equity interest that can be sold to non-lawyers. As for the soundness of such ethical prohibitions, they primarily make sense if one adopts a paternalistic approach – one that assumes lawyers will not recognize the right ethical course of action unless given a blueprint. Otherwise, the prohibition makes little sense.
In addition to questions regarding the soundness or fairness of this ethical framework, a bar against law firm shareholders puts US law firms at a disadvantage with global law firms who do have non-lawyer shareholders. An article in the Wisconsin Law Review argues exactly that point: “The very fact that outside equity is now available to lawyers in other jurisdictions, especially the United Kingdom, could create an influx of external competitive pressures on the American legal-services industry.” It remains to be seen whether global competition from law firms who have non-lawyer equity owners will ever be sufficiently strong to warrant removal of the ethical bar. More to the point, given the public’s general distrust of lawyers, it is doubtful these ethical barriers will be removed anytime soon. The most we can hope for is improved creativity when it comes to billing and an increase in hybrid law firm practices.