Innovative or invasive? Practitioners sound off on nonlawyer ownership of law firms

The Virginia State Bar’s Special Committee on Technology and the Future of Law Practice reported in 2022 that an emerging market of legal service providers owned by nonlawyers “may be here to stay.”

Only two states currently allow nonlawyers to own law firms, otherwise known as alternative business structures, or ABS. Washington, D.C., has allowed limited nonlawyer ownership since 1991.

Some states — including Illinois, New York and New Jersey — are more actively resisting the practice. Virginia, like most states, has taken a wait-and-see approach with ABS.

And just one year after opining that lawyers could passively invest in ABSs, albeit with some limitations, the American Bar Association warned that sharing legal fees with nonlawyers was “inconsistent with the core values of the legal profession.”

ABS in Virginia

At the Virginia Trial Lawyers Association annual meeting in March, Maryland attorney Bruce Plaxen of Plaxen Adler Muncy gave a presentation on ABS, titled “Coming Soon? Non-Lawyer Ownership of Law Firms.”

Speaking with attendees at the trial lawyer’s meeting, one thing became clear: a near unanimous disapproval of the concept. It’s unlikely that Virginia will join the ABS market any time soon.

“Virginia does not even allow a D.C.-based law firm to send one of its lawyers into a Virginia court if the lawyer is from a firm that has a non-lawyer as a partner,” Daniel Schumack, an ethics attorney in Fairfax, told Virginia Lawyers Weekly.

And Sen. Scott Surovell, a member of the Virginia Senate Judiciary Committee, said Virginia has no plans to adopt ABS.

Oakton attorney Christopher R. Fortier, a member of the VSB Special Committee on Technology and the Future of Law Practice since 2017, described the Virginia State Bar as “very cordial.”

“They’re not the most aggressive when it comes to regulatory reform,” he said. “Our state tends to look for the best solutions that are tried, tested and true.”

Having also been involved with VSB and ABA Tech Shows, Fortier praised the ABA’s “Startup Alley,” a live pitch competition for legal technology entrepreneurs who “appreciate having lawyer input to guide them.”

“Many of these startups had lawyers either owning the company or whispering in their ears about what to do and how to do it,” Fortier said. “I don’t see how you can enter the legal space without having lawyers around for significant advice.”

Stephen P. Younger, senior litigation counsel with Nixon Peabody in New York, became a spokesperson against ABS in 2011 after he chaired the New York State Bar’s Task Force on Nonlawyer Ownership.

Younger principally authored the task force’s 2012 report, which New York’s House of Delegates adopted by resolving that the state “should not adopt any form of nonlawyer ownership in the absence of compelling need, empirical data or pressure for change.”

“We did a survey in the New York State Bar report and something like 80% of all responses, regardless of the firm size, were against nonlawyer ownership,” Younger told Virginia Lawyers Weekly. “Everyone knows the law has become more of a business, but where we draw the line is having a nonlawyer telling us how to run our cases.”

And while he thinks the key issue is professionalism, Younger wondered, “What’s the harm and what’s the reason we should do this? I would be in favor of ABS if it’s demonstrably shown to have an impact on access to justice.”

“We did a survey in the New York State Bar report and something like 80% of all responses, regardless of the firm size, were against nonlawyer ownership. Everyone knows the law has become more of a business, but where we draw the line is having a nonlawyer telling us how to run our cases.”

— New York litigator Stephen P. Younger

Younger said Virginia was interesting, in that Northern Virginia seems to be more aligned with technology and appears to support innovation more.

However, he said, if you talk about ABS with attorneys in other parts of the commonwealth, their responses likely would focus on the community.

“The lawyer is an essential part of the community in small cities and towns,” Younger pointed out. “If you just roll them all into Walmart, there’s an impact on the community of losing that lawyer. Also, small and solo firms are very concerned about competition.”

The ‘sandbox’

Currently, Arizona and Utah are the only states that allow nonlawyers to own law firms.

Lucy Ricca was the first executive director of Utah’s Office of Legal Services Innovation. She’s currently a member of the office’s executive committee and oversaw the 2020 adoption of Utah’s regulatory approach to ABS, dubbed the “sandbox.”

Ricca’s office categorizes sandbox applicants by levels of risk, depending on how involved attorneys are within the ABS entity.

“If it’s just an ownership change but attorneys are still doing all the legal practice, that’s relatively low innovation and risk,” she told Virginia Lawyers Weekly. “Where you have a compliance lawyer with active oversight, we categorize that as moderate risk. That’s where most entities are in Utah.”

Entities that have no lawyer involved at all would be the highest innovation category and also the highest risk category.

“There’s very few of those if any currently in Utah,” she said.

Citing high barriers to legal access, Ricca said Utah’s goal was to change rules on the front end that may not reflect reality by relying on market data about the types of services being provided and the experience of consumers to inform ongoing regulatory oversight and interventions.

“We have data coming in from our entities in the sandbox every month, and we do quality of service audits by Utah attorneys of the nonlawyer providers,” she said, adding that her office regulates the entity itself, rather than individual professionals.

And unlike Arizona, Ricca said her office maintains a “robust back-end system” of oversight to regulate the ABS entities.

“The Utah Supreme Court felt comfortable with fewer upfront rules to setting up the entities,” she noted. “Separately from nonlawyer ownership, Utah and Arizona both have independently licensed legal paraprofessionals, subject to their own code of conduct.”

Utah has some ABS entities providing services that range from advocacy for domestic abuse victims and medical debtors, to programs for housing stability and expungements she pointed out.

“We’re also seeing a lot of for-profit entities where lawyers are building a nonlawyer or software-based tier of their practices,” Ricca said.

It remains to be seen what level of individual liability a compliance attorney in a Utah ABS could have for the entity’s conduct; Ricca said she wasn’t aware of any professional liability insurance policies marketed to their situation.

“Arizona and Utah are trying to get out ahead and we’re really interested to see what comes out of their sandboxes,” Fortier noted.

Built-in conflicts?

In Arizona, investment advisors and tax accountants forming businesses with lawyers aren’t providing any new services to underserved communities.

“There’s nothing to show that what’s going on in Arizona helps the average person who can’t afford a lawyer in foreclosure, eviction, or debt collection,” Younger said. “Nor does a personal injury ABS with more access to capital solve some need out there.”

Built-in conflicts are a significant harm caused by ABS, according to the New York litigator.

“For example, an estate lawyer partners with an investment advisor or insurance broker, but then every estate plan only offers their own investment or insurance products,” he said.

He also questioned whether an attorney could stand up to an investor who wants the firm to settle a case even though it’s bad for the client.

“That’s the risk I see on the litigation side, with people who only care about financial results saying, ‘OK, it’s end of year, we have to start settling cases because we need to bring money in the door, not caring about the clients’ interests,” he noted.

And while ABS supporters raise the need for innovation to provide more access to legal services, Younger said that’s not necessarily true.

“That argument misses how a law firm can already give its chief technology or innovation officer a share of the firm’s overall profits,” he said.