ABA rules out non-lawyer ownership of law firms

I have often heard it asserted that whatever happens in US legal circles comes to the UK eventually (generally about 10 years later)  – a cliche which portrays the US as a dynamic legal environment with which the staid and stuffy old British profession struggles to keep up.  Like most cliches, there is at least a grain of truth in it - the culture of litigation, compensation and “ambulance chasing” lawyers, for example, was clearly a trend which had its roots in the US, but which has taken a strong hold on this side of the Atlantic in recent years.  But in relation to reforms of the ownership structures of law firms, it seems to be the UK and Australia which are the more forward-thinking as, for the second time in 12 years, the American Bar Association (ABA) has decided not to change its rules to permit a degree of non-lawyer ownership of law firms. 

In December of last year the ABA's Commission on Ethics 20/20 released a draft paper suggesting that non-lawyers employed by a law firm could hold a minority (up to 25%) financial interest in the firm and share in its profits, something which is currently prohibited in all US jurisdictions other than Washington DC, largely due to concerns that non-lawyers are not subject to the same ethical standards as lawyers. However, the Commission released a statement earlier this week which said that after soliciting feedback from the legal community, "there does not appear to be a sufficient basis for recommending a change to ABA policy on non-lawyer ownership of law firms."  This means effectively that the proposals are dead, which will come as a blow to those eager to shake up the way law firms in the US are funded.

The proposals that have been rejected were in fact already far more modest than the reforms which have been introduced in the UK and Australia.  The idea of permitting broader forms of non-lawyer ownership, including publicly-traded law firms, external investment in law firms by third parties, and mixed-professional practices had been ruled out much earlier in the consultation process, and what remained under debate was a fairly modest proposal to allow non-lawyers a minority percentage of the equity.  Nevertheless, it seems it was a step too far for the Americans, who have firmly rejected the notion of any change.

The official line is that the ABA’s members do not see a need for change, and fear it would lead to an erosion of ethical standards and professionalism  - a view which was publicly promulgated recently by the general counsel of 9 of the US’s largest companies (and about which I have blogged previously).  However, the fear of some of the more progressive members of the US legal fraternity, such as Thomas Gordon, legal and policy director for Washington DC non-profit Responsive Law, is that the decision is more about lawyers protecting their own monopoly than about genuine concern for what is best for users of the legal system.  He has gone on record as saying "We're sitting here well into the twenty-first century, and the ABA has decided not to even bring the business of the practice of law to the 1980s."  

I find it hard not to have some sympathy with this view.  Whilst ethical standards are of course of paramount importance in the practice of law and great care needs to be taken to ensure that any changes in structure do not result in a diminution professional standards, the retention of a closed-shop monopolistic system raises ethical issues of its own.  There are many who might argue that clients would be getting a better service and better value for money if the monopoly was a little less tight.

In my view the Legal Services Act reforms should not be seen as a threat by law firms – they should be seen as an opportunity to bring into the profession some of the best elements of other business models and a talent pool which would have previously been unavailable to it at the most senior levels.  It seems that this is an opportunity which our American cousins will not have for some years to come.