Push for non-lawyer law firm investors creates serious ethical concerns, expert says

By Edward Poll The Daily Record Newswire Several months ago, I wrote about the growing momentum for non-lawyers to take an equity interest in law firms, despite prohibition of such an arrangement under American Bar Association Rule 5.4 of Professional Conduct. That momentum has since become a runaway train. A nationally known law firm has filed suit in U.S. District Court in New York, New Jersey and Connecticut, contending that those states' versions of Rule 5.4 are unconstitutional because they allegedly prevent the firm from raising the money it needs to provide legal services, violating the Constitution's due process clause. No matter what one thinks of that argument, the real motivation -- bringing in outside owners to get more capital for expansion -- raises several red flags. One is that removing the "membership" provision -- that is, having to be a lawyer to be an owner -- makes law firms like every other business. The truth is that larger law firms are already looking very much like their business clients with marketing, personnel and business development (sales) directors. It is this marketing aspect that is so worrisome. Effective marketing and sales tactics in advertising and prospecting are sometimes at odds with a rule of professional conduct, bringing state bar ethics sanctions. Marketers are just doing what comes naturally. But there is a difference for lawyers. Would non-lawyer investors create similar problems? Would they urge lawyers to cross the line of confidentiality to tell potential financing sources that the firm has just signed a lucrative new client or taken on a matter with potentially high fees? Such disclosure is normally not permitted, but lenders or private equity sources want to know such information. In the corporate world, that skirts the edge of insider trading. For law firms, it is against professional ethics. Again, the point is that such changes make us similar to our clients. Big firms will become more like the Fortune 500 while solo and small firms will be at an even greater disadvantage in the marketplace. That could produce desperation, leading to the kind of conduct that the rules were made to address. A colleague recently told me that chiropractic clinics in his large state are increasingly owned by non-doctors, who solicit and treat accident victims and refer the patients to small law firms that don't question medical issues -- or ethics. The general feeling of bar association staff seems to be that the smaller-firm lawyer needs to be monitored and governed more carefully and strictly (as in restrictions on loan modification retainers, malpractice insurance disclosure, selling a law practice and similar issues). Meanwhile, the largest national firms have already tipped their hands by proposing to the ABA Commission on Ethics 20/20 that large firms need their own national regulatory code on issues like conflicts of interest, liability and lawyer mobility. Granted, all this involves oversimplification and exceptions. But it indicates why solo and small-firm practitioners as well as large national firms increasingly no longer support the mandatory, organized bar -- each size category doing so for its own reasons. The growing fight over non-lawyer investors is another indication of this lack of support. New, voluntary bar associations specifically designed to fit new law firm realities might well be the result. Edward Poll is a speaker, author and board-approved coach to the legal profession. He can be contacted at edpoll@lawbiz.com or (800) 837-5880. Published: Thu, Jul 7, 2011

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