The Future of Law Firms in the United States and the Impact on Your Firm

Traditionally, the only place to get legal representation in the United States has been at a firm owned and run by one or more attorneys. This is because of a longstanding rule requiring such a setup.

It’s entirely possible, however, that this could change. In fact, several states have already loosened their rules about this, and others are considering following suit. If this happens, how will law firms look and operate going forward? Is this something you should embrace, and how do you prepare for it?

What is Rule 5.4?

Rule 5.4 prohibits lawyers from partnering with non-lawyers and prohibits non-lawyers from investing in law firms. The rule is called “Professional Independence of a Lawyer.” According to the ABA, law firms and associations are not permitted to:

• Share legal fees with a non-lawyer except under certain specific situations;
• Form a partnership with a non-lawyer for the purposes of practicing law;
• Practice with or in the form of a professional association or corporation authorized to pursue profits if a non-lawyer owns an interest or has any control in the organization; or
• Allow a person who employs, pays, or recommends the lawyer to render legal services for another to regulate or direct the lawyer’s professional judgment.

Rule 5.4 was originally intended to protect the professional judgment and interests of lawyers from the potential influence of non-lawyers. As you can see, it has many rules against the involvement of outside holding parties and investors in the legal landscape. But, many argue that it holds law firms back and doesn’t give legal professionals enough credit as far as safeguarding the integrity of the profession.

Does a Single Rule Limit the Access to Justice?

When consumers need legal assistance the most, how accessible are the services? Here’s a troubling statistic – The United Stated ranks 126 out of 139 countries in access to legal services.

For many Americans, it’s challenging to get qualified help for a variety of reasons. In fact, two-thirds of American adults report having a civil issue in the past year, but only one-third of those were able to get any assistance.

As a personal injury or family law attorney, these are serious concerns. People are facing severe personal and economic hardships due to injuries, domestic violence, divorce, and other civil issues.

Small businesses face troubling legal issues as well. Yet over half of small business owners are unable to access the legal services they need to pursue relief for issues that could impact their business and livelihood.

Sure, there are pro bono and legal aid options. But those alone are insufficient to address the lack of access to legal services. And law firms are able to charge the rates they wish for their services, but not everyone can afford to pay them.

One of the reasons the legal industry is so inaccessible is that rule 5.4 requires that law firms be owned, financed, and run exclusively by lawyers. That’s a pricey proposition, particularly for professionals who are trained to be lawyers, not business people.

How Rule 5.4 Currently Limits U.S. Law Firms

The only thing constant is change. What worked for law firms and the legal industry over three decades ago may not be appropriate today. Here are some of the reasons that Rule 5.4 currently limits law firms in this country.

Law Firms Have Limited Access to Capital

Because Rule 5.4 prohibits non-lawyers from investing in law firms, this leaves many firms with cash flow issues. Not only are some firms unable to maintain their current operations, but they also don’t have the capital they need to invest in modern technology and expansion.

The ABA’s rules state that private-sector lawyers can only deliver legal services under three types of entities – sole proprietorships, LLCs, or legal partnerships. Because lawyers are unable to secure investments from non-lawyers, their only sources of capital are loans or revenue. This is a poor arrangement for several reasons:

• More lawyers may be reluctant to provide investment capital for long-term growth as lateral movement among law firms increases.
• Because lawyers are expected to bear the firm’s entire financial burden, law firms are more vulnerable to economic downturns.
• Lawyers don’t have access to modern financing alternatives like many other businesses.

This limited access to capital means that law firms are unlikely to invest in efforts that will deliver long-term returns. These might include creating a strong online presence through an engaging website, posting frequent educational content, and being active on social media.

When law firms fail to invest in themselves, they are unable to create the strong brand and name recognition that is necessary for a customer-oriented business. Because of this, law firms lag behind other industries like medicine, accounting, and insurance in adopting technology and business processes to provide higher levels of service at competitive prices.

Law Firms Fail to Benefit from Business Expertise

Rule 5.4 prohibits lawyers from partnering with non-lawyers in business ownership. Lawyers don’t receive business training in law school, yet are expected to emerge knowing how to start and run a business a successful business.

Private practice lawyers spend a significant amount of their time on administrative and business development activities. In fact, private sector lawyers report an average of just 2.5 billable hours per eight-hour work day. This doesn’t leave much time for the actual practice of law.

At the same time, professionals with substantial business experience are unable to take an equity stake in law firms. In business, it’s become customary to partially compensate executives in the form of stock options. Currently, this isn’t possible.

Because law firms can’t attract and hire business talent, they lack innovation in areas like project management, financing, marketing, technology, and more. This is particularly vital for law firms that want to become the best in their class and provide a winning client experience.

Law Firms Can’t Meet Consumer Expectations

Today’s consumers have more expectations than ever of the brands that get their business. Many don’t want to go to a different company for their insurance, banking, and legal needs. They’d rather have integrated, seamless services under one roof.

But Rule 5.4 currently prevents lawyers from providing these services under the umbrella of a large company like USAA or bringing in partners to offer integrated services.

Law firms that want to become mass-market providers have been stymied by these rules. And some have voiced their displeasure the best way they know how – through the courts. Jacoby & Myers, a large consumer law firm, has sued the state bars of Connecticut, New Jersey, and New York, arguing that it can’t take advantage of scale, upgrade technology, or expand its offices due to the restrictions.

Law Firms Can’t Compete With Non-Lawyer Legal Businesses

Several online businesses have exploded in the past several years that lie outside the current 5.4 rules. Sites like RocketLawyer and LegalZoom have either no or little lawyer ownership and are pulling business from smaller firms. Traditional law firms are having a hard time competing.

According to one survey, 14% of traditional law firms were losing business to alternative legal providers. Some estate planning, tax, and litigation support clients have also turned to accounting firms as an alternative to traditional law firms. And accounting firms don’t have the same ownership and operating restrictions, allowing them to offer a wider range of services and enjoy better economies of scale.

How Regulatory Changes Could Re-Shape the Legal Industry

There is probably a long list of advantages to changing Rule 5.4 and letting non-lawyers get involved in the legal industry. Here are just a few of the ways changing these rules could impact the legal industry.

More Innovation

Repealing or modifying the rule will give non-legal entrepreneurs and capital firms an opportunity to invest in the legal industry. This will allow law firms to expand their services in such a way that it solves all of a client’s issues instead of just one. For example, a small law firm can offer estate planning services as well as sell insurance products.

Improved Collaboration

The ability to share ownership and profits with non-lawyers gives law firms the power to collaborate with highly qualified experts who will help further their business goals. Business authorities can join the team to help law firms improve services and create a better client experience.

Increase in Business Volume

Investment and input from non-lawyer entities will likely enable small- to mid-sized law firms to be more productive and efficient. This means that they will be able to offer a wider range of services and increase the volume of fee-paying clients.

Lower Legal Costs

If you can make legal services more accessible at a lower price and still make more money, why wouldn’t you? On all sides of the rule change issue, experts note that there is the possibility of lower legal costs.

Things like innovation, better use of technology, and increased access to capital can certainly make your business more efficient. Instead of spending a majority of your day on administrative tasks, you might be able to actually practice law during those hours and charge a bit less to do it.

Better Access

Nearly 80% of civil cases today involve at least one party without a lawyer, doubling the percentage of self-represented litigants over forty years ago. Many of these underserved people will gain better access to legal services through a rule change thanks to improved innovation and the potential for lower rates.

Are There Valid Concerns With Rule 5.4 Changes?

There are some misconceptions about the potential harm that Rule 5.4 changes could bring to the legal industry. Specifically, opponents of change believe that there will be ethical concerns as well as the potential for “Walmart-style” legal services. Both concerns appear to be unfounded.

Ethical Issues

The argument that allowing non-lawyers into the legal industry will make it purely profit-driven and unethical doesn’t hold much weight. Lawyers have worked within accounting firms, insurance companies, and major corporations for years, and there is no evidence that these arrangements have destroyed their judgment.

Washington D.C. adopted a modified version of Rule 5.4 in 1990, allowing lawyers to form limited partnerships with others. So, over the past 30 years, we should see an increase in public discipline in that jurisdiction due to ethics violations. In fact, the District has the third-lowest percentage of public discipline filings in the nation.

The independent judgment of lawyers is sufficiently protected by other aspects of the Model Rules. For example, Model Rule 1.7 prohibits a lawyer from representing a client if there is a conflict of interest, and Model Rule 1.8(f) says that third-party payers can’t influence a lawyer’s professional judgment. Given these protections, there’s no reason that Rule 5.4 can’t be changed.

Low-Quality Legal Services

Another concern is that when non-lawyers become involved, cookie-cutter legal services will become the norm. In other words, you’ll have Walmart-type entries of massive providers that will dominate the industry and harm traditional firms.

Although there likely will be some new large entries into the market, the truth is that there are already some massive law firms that generate multi-billion dollar revenue. In fact, some of those firms might have to subdivide to take advantage of regulatory changes, making them more competitive with smaller firms.

And there’s no evidence that changes in the rules will lead to lower quality legal services. Instead, it will simply bring greater access to services and more innovation.

What’s the Status of Changes to Rule 5.4?

The idea of changing Rule 5.4 isn’t new. In the early 1980s, the ABA’s Kutak Commission was first formulating these rules, and there was a proposed version of Rule 5.4 allowing the division of fees with non-lawyers. But the Rule adopted in 1983 did not follow this proposal, and subsequent attempts to change the rules haven’t been successful. However, there have been international changes over the past 15 years, and several states have made provisions that allow Alternative Business Structures (ABS).

Washington D.C.

Non-lawyers have been partners in Washington D.C. law firms for years. In the nation’s capital, law firms have found it beneficial to incorporate non-legal experts as co-owners, and the D.C. Bar’s unique rule modifications permit such an arrangement.

New South Wales, Australia

In 2001, New South Wales, Australia, eliminated its restrictions on non-lawyer firm ownership and investment, becoming the first common law jurisdiction to create alternative business structures.

The UK

The Legal Services Act of 2007 (LSA) eliminates bans on non-lawyer ownership and allows lawyers and non-lawyers to work together in ABS.

Arizona

Arizona became the first U.S. state to completely eliminate Rule 5.4. In August 2020, the Arizona Supreme Court announced the elimination of the rule that prohibits partnership between lawyers and non-lawyers.

Utah

Also, in August 2020, Utah created a seven-year “regulatory sandbox” pilot program to test out different ABSs for law firms. The Utah Supreme Court established the Office of Legal Services Innovation to oversee non-lawyer-owned entities or legal entities in which non-lawyers are partial owners.

Florida and Other States

Florida has joined a growing number of states that are investigating changes to Rule 5.4 in an effort to improve the delivery of legal services to consumers. While Florida’s attempts appear to be stalled at the moment, an effort similar to Utah’s is underway. Other states that are exploring changes include California, Illinois, and New York.

Evidence From Other Jurisdictions Indicates Reforms Would Be Beneficial

Evidence from other jurisdictions indicates that reforms will be beneficial for both law firms and their clients. First, no country or state that has repealed or modified Rule 5.4 has found the need to change it back.

England and Wales started licensing ABS firms in 2011, so there is over a decade of data on them. According to reports from the Solicitors Regulation Authority,

• ABS firms are more likely to use technology, with 91% of ABS firms having a website compared to just 52% of independent firms;
• ABS firms are up to 15% more likely to offer new services: and
• ABS firms are more likely to have recent organizational and service innovations.

Even more important, consumers are getting better service. For example, ABS arrangements made it possible for 45% of consumers to get fixed-fee family law services, with 62% saying they receive value for their money.

A few examples of innovative services and firms that have emerged due to the changes include:

• Co-Op Legal Services, run by a successful consumer-owned grocery chain, has used its positive brand recognition to begin offering family, employment, will-writing, and other consumer legal services at affordable rates;
• Z Group, a London accounting and architectural firm, now serves as a “one-stop-shop” for those services, plus legal counsel; and
• Parental Choice, a company that assists families with au pair and nanny location, also now helps them understand their legal obligations.

Put Your Law Firm in the Best Position Possible for the Future

Permitting non-lawyer ownership of law firms may be on the horizon. But no one knows when those changes will take effect. But when they do, the legal industry will change quickly and drastically.

Law firms need every competitive advantage they can get. One way you can set your firm apart is to have a strong online presence that showcases your brand. And the right partner can help you hold your own against any coming changes.

At Too Darn Loud Legal Marketing, we specialize in helping law firms become the business of choice in their markets. We offer comprehensive digital marketing services but never cookie-cutter solutions. We will spend the time to get to know your firm and its goals before recommending things like website design, SEO, content marketing, digital ads, and social media marketing. Contact us today to schedule a free consultation and website evaluation.