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

The Ethics of Crowdfunding, Revisited

When we last visited the subject of crowdfunding in January, I pointed out some of the ethical barriers to this method of fund raising.  While much depends on the lawyer, crowdfunding could implicate:

  • Improper communications concerning a lawyer’s services – Oregon RPC 7.1
  • Dishonesty, fraud, deceit – Oregon RPC 8.4
  • Fee sharing with a nonlawyer – Oregon RPC 5.4

I also noted that money raised via crowdfunding may well be taxable, even if the lawyer did not meet the minimum threshold to trigger a 1099.

This month I join forces with the venerable Amber Hollister, Assistant General Counsel of the Oregon State Bar.  We have co-authored an article for the OSB Bulletin entitled “Crowdfunding Your Law Practice.”  The article is scheduled for publication in the May issue.

In addition to the above, we identified other troublesome ethics concerns:

  • Potential third payment and trust accounting issues – If you are rewarding donors with a legal consultation in exchange for a donation and receive funds in advance or a donor is construed as “buying” a legal consultation for a third party, be sure to comply with all trust accounting rules.
  • Conflicts of interest are also a concern.  If a consultation is offered as a “perk or reward” in exchange for a donation, will the lawyer be able to perform?  Lawyers would be well-advised to forewarn donors of the necessity of conflict screening.
  • Running afoul of the rule prohibiting the lawyer from giving something of value in exchange for recommending the lawyer’s services – lawyers can’t give enthusiastic donors anything of value for promoting the lawyer’s crowdfunding campaign via social media.

None of this is shared to discourage Oregon lawyers from crowdfunding.  Rather, you need to go in with your eyes open and be sure you are tuned in to the ethics issues.  For a thorough analysis of this subject, refer to the article.

[All Rights Reserved 2015 Beverly Michaelis]