Following up on our March 10 blog post regarding the introduction of a bill in the North Carolina General Assembly that would permit non-lawyer ownership of law firms. The following post explains in more detail the origin of the bill as well as its pros and cons.

ORIGIN
In the United Kingdom, the Legal Services Act (effective since 2011) allows lawyers to partner with non-lawyers. The Act constitutes an attempt to sweep aside old historic protections and restrictions allowing lawyers to compete in the legal marketplace like traditional businesses do. The English Legal Services Board foresees alternative business structures that will allow “a greater proportion of individual non-lawyers, as well as external ownership or part ownership of law firms.”

In North Carolina, Fletcher Hartsell Jr., a Republican state senator and lawyer, introduced a bill in the General Assembly on March 8, 2011 that would permit non-attorney ownership of law firms.

Under the proposed bill, non-lawyers can own up to 49 percent of law firms so long as lawyers continue to control the company. Furthermore, stock certificates must state that “no non-licensee shareholders shall interfere with the exercise of professional judgment by licensed attorneys in their representation of clients.” The certificates must also provide that any conflict between the company’s duties to its clients and the court versus shareholders will be resolved by giving the duty to the court first priority, followed by the duty to the client.

The current version of North Carolina Rules of Professional Conduct 5.4(d) does not allow such ownership of law firms by non-lawyers:

“A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:
(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration; or
(2) a nonlawyer has the right to direct or control the professional judgment of a lawyer.”

PROSPECTS FOR ENACTMENT
A spokesman for the North Carolina State Bar Association told Legal Futures that the bill had just been introduced and the bar “has not had any chance yet to review the proposed bill or adopted any position on [it].”

PROS AND CONS
PROS

1. Non-lawyers can buy up to 49% of a firm, leaving it in control of licensed attorneys.
2. The language used in the bill is designed to prevent non-lawyers from interfering with the relationship between attorneys and their clients:
   • No interference without the exercise of professional judgment by licensed attorneys.
   • In the case of a dispute the duty of the Court shall prevail over all other duties and the duty to the client shall prevail over the one to shareholders.
3. “Right now lawyers borrow money at high interest rates from outside investors who hide behind the fig leaf of providing debt financing instead of equity. But debt starts to look a lot like equity as the risk levels escalate. And therefore lawyers facing interest rates of 20% or more encounter enormous pressure to agree to settlements that may shortchange their clients but leave them financially whole.” (Daniel Fisher for Forbes; March 11, 2011)
4. “Greater access to justice for the public, more flexible business forms, and better and more comprehensive services to clients.” (Deanna Brocker of Brocker Law Firm, P.A., NC; April 7, 2011)
5. “It might broaden the focus of firm management to include the firm as a whole not just a few individual lawyers who produce big revenues.” (Milton Regan Jr., Professor at Georgetown University Law Center for ABAJournal; August 14, 2007)
6. “It might take the shine off high-producing laterals whose only connection to the firm is the amount of their year-end distribution.” (Milton Regan Jr., Professor at Georgetown University Law Center for ABAJournal; August 14, 2007)

CONS

1. Concerns that shareholder interests may conflict with a law firm’s primary duty to clients and courts of which they are considered officers.
2. Rules are still too anachronistic and limited according to Larry Ribstein, Professor at the University of Illinois College of Law and ethics expert.
3. Professor Milton Regan of Georgetown Law School (who has promoted much of the discussion in the U.S. about Legal Services Act-style reforms) said that even if North Carolina passes the bill, “lawyers in a firm that has offices in other states would be in violation of state laws unless there was structural change.” (Matt Byrne at www.thelawyer.com; March 10, 2011)
4. “Non-lawyers are not bound by ethics rules, problematic for example in the personal injury field as the bill might serve as an invitation for private “investigators” to troll for clients. The problem could also arise in criminal law, where guarantees of outcome could be sold like commodities. How much does a winning witness cost these days? And what is the price of silence for that poor crime victim?” (Eric Turkewitz on New York Personal Injury Law Blog)
5. A firm’s duty to its shareholders could lead it to focus blindly on maximizing profits. However, the firm can specify the nature of the duty that it owes to shareholders. (Milton Reagon Jr. for the American Lawyer; August 14, 2007).

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