Nonlawyer Ownership of Law Firms

A financial planner, a CPA, and a lawyer walk into a bar … to form a law firm. A joke, right? Two years from now, some version of this could be happening for real in California.

A state task force headed by a former law professor is expected to produce proposals in 2019. Presently, Rule of Professional Conduct 5.4 prohibits nonlawyers from acting as partners, corporate officers, or directors of a law firm. The same rule strictly regulates fee sharing and forbids nonlawyers from directing or controlling a lawyer’s professional judgment.

Why consider nonlawyer ownership?

Some view nonlawyer ownership as a means of boosting productivity, reducing costs, and improving access to justice. Others herald the benefits of outside investment and potential for greater innovation in the corporate legal market.

What we can expect from California

Your opinion may differ, but I believe the State Bar of California is ready to make this change. The purpose of the Task Force is to work out the issues.  I predict:

  • California will be the first state to allow nonlawyer ownership of a law firm.
  • Nonlawyer owners will be prohibited from controlling or directing the professional judgment of a lawyer in the course of providing professional services to a client.
  • Nonlawyer owners will be allowed to control or direct business affairs of the firm.
  • Fee sharing will be authorized, provided: (a) clients give informed consent in writing; and (b) the sharing of legal fees does not affect the lawyer’s professional judgment.
  • Receiving referral fees from nonlawyers will be permissible.
  • Disclaimers or disclosures may be required in firm advertising, marketing, engagement agreements, websites, etc.
  • Lawyers will be permitted to reveal confidential client information to nonlawyer owners and their staff in order to carry out representation.
  • Conflict of interest rules will expand to include nonlawyers as “members” of the firm – a conflict for one is a conflict for all.

Operational concerns

Anyone pondering formation of a future lawyer/nonlawyer union should think long and hard about all the issues involved in business formation. A business plan, mission statement, and written ownership agreement will be an absolute must. Thorough insurance coverage, including professional liability, will be a necessity.  Prepare to integrate office systems, record retention, and nonlawyer staff. This includes training!  If nonlawyer partners are beholden to regulatory agencies, know the ins and outs for your sake, but don’t fall into the trap of advising nonlawyer owners. Lastly, have a plan for departure. When a law partner leaves you high and dry, the repercussions aren’t pretty. But at least you can temporarily cover your partner’s legal cases. This isn’t likely to be true with a nonlawyer partner who has an area of expertise (and perhaps licensure) that you lack.

All Rights Reserved – Beverly Michaelis – 2018