BRINGING RULE 5.4 INTO THE 21ST CENTURY: PROTECTING CLIENTS AND LAWYERS IN A RAPIDLY CHANGING WORLD

Author: Laura Schack, Senior Editor

The American Bar Association’s Model Rules of Professional Conduct are the basis for ethical rules governing the practice of law in most jurisdictions.[1]  Rule 5.4 (with exceptions not relevant here) prohibits lawyers from sharing legal fees with nonlawyers; prohibits lawyers from forming partnerships with nonlawyers if any of the activities of the partnership consist of the practice of law; prohibits lawyers from allowing one who recommends, employs, or pays them to represent another from regulating the lawyer’s professional judgment; and prohibits lawyers from practicing with professional corporations or associations authorized to practice law for profit if a nonlawyer is an owner, director, officer, or otherwise is in a position to control the professional judgment of the lawyer.[2]  Concerns over access to justice, the cost of legal services, and stifled innovation have given rise to vigorous debate over whether the rule should be modified or repealed.[3]  The ABA has rejected calls for changes to the rule, but “encourages U.S. jurisdictions to consider innovative approaches to the access to justice crisis in order to help the more than 80% of people below the poverty line and the many middle-income Americans who lack meaningful access to effective civil legal services.”[4]  Washington DC, Utah, and Arizona permit some form of nonlawyer ownership (“NLO”) and other jurisdictions are considering it.[5]  Instead of restricting ownership, the rules should ensure that clients served under alternative ownership structures are protected and that law firms are not subject to unfair competition with entities not subject to restrictions on ownership. 

Protecting Professional Judgment

Sections 5.4(C) and 5.4(D)(3) specifically prohibit lawyers from allowing others to interfere with their professional judgment.[6]  This is an important restriction that protects clients.  For example, the Supreme Court of Ohio enforced this rule in Disciplinary Counsel v. Mamich, suspending the license of a lawyer hired by a father to represent his daughter in an action by a creditor.[7]  The father had opened an account with the creditor in his daughter’s name without her knowledge or consent.[8]  The lawyer corresponded exclusively with the father and did not communicate with his actual client, the daughter.[9] The daughter only became aware of the proceedings after summary judgment was entered for the creditor and her wages were garnished.[10]  Similarly, in Geauga County Bar Ass'n v. Patterson, the Ohio Supreme Court suspended the license of a lawyer who entered into a contract with Foreclosure Solutions, LLC; an entity that purported to help property owners avoid foreclosure.[11]  The lawyer did not meet with his client to determine the client’s financial situation or explore potential defenses to foreclosure.[12]  He left the determination of what actions were in this client’s best interest to Foreclosure Solutions.[13]  The client lost his home.[14]  These examples illustrate how parts of Rule 5.4 not pertaining to ownership protect clients in the face of pressure from nonlawyer parties.

Current NLO

While only a small number of jurisdictions have modified their rules to allow NLO, there are numerous avenues for obtaining legal services through entities owned by nonlawyers.  Internet-based companies like LegalZoom and RocketLawyer provide legal services while enjoying a competitive advantage over traditional law firms.  They employ lawyers and provide legal services to consumers and small businesses, yet these entities are not subject to restrictions on ownership, can raise outside capital, and can benefit from the expertise of nonlawyer directors.[15]  While not providing services to consumers, independent ALSPs enjoy similar advantages over law firms.  They employ lawyers and perform legal work.[16]  They are exempt from rule 5.4 because they are hired by law firms or corporate legal departments who are presumed to supervise their work.[17]  These entities are primed for growth because where a traditional law firm must look to equity contributed by the partners, earnings, and loans to fund their business, ALSPs can look to outside investors and deliver services at a lower cost.[18]   

Who’s Left Behind?

The ownership restrictions in Rule 5.4 harm law firms and fail to protect clients.  In addition to the restrictions on outside capital discussed above, the rule hampers lawyers’ ability to effectively run their businesses by prohibiting them from bringing in nonlawyers with expertise they lack and from using equity as compensation.  In a survey conducted by Clio, 41% of lawyers surveyed reported they had no training or experience in running a business and only 53% of managing lawyers reported that they felt confident in running their business.[19]  In the same survey, lawyers reported that on average, only 31% of their working hours were billable.[20]  Relaxing Rule 5.4’s prohibition on bringing in nonlawyers would free lawyers to bring in the expertise they lack and spend more hours doing the job they were trained to do.[21]  It would also free them to use equity in the firm as compensation, a standard practice in other industries.[22]  Equity compensation encourages employees to think like owners and drives performance.[23]  

According to a survey performed by the Institute for the Advancement of the American Legal System at the University of Denver, two thirds of Americans have experienced one or more legal problems in the past four years with just under half of these problems reaching resolution.[24]  Thirty-one percent of those surveyed turned to the internet, rather than a lawyer for legal advice.[25]  This is an enormous market for providers of lower cost legal services and one that is not protected by the ownership restrictions of Rule 5.4.

Potential Answers

Utah and Arizona could be instructive to other jurisdictions.  Utah has established a regulatory “sandbox” wherein fee sharing and nonlawyer equity ownership are allowed provided participants perform an assessment of risk to consumers and a process for mitigating those risks.[26]  Arizona has eliminated Rule 5.4 altogether and relies on remaining rules to protect clients.[27]  A lawyer in Utah has partnered with a software developer to generate documents for divorce, custody, eviction, and debt-related property seizures.[28]  Another Utah firm has given a software developer equity in the firm to build an app allowing consumers to opt in to spam tort litigation.[29]

Conclusion

The legal landscape has changed dramatically since the ABA introduced Rule 5.4 in 1983.  New entrants to the market unconstrained by the rule provide legal services creating unfair competition with law firms.  Law firms themselves could be more efficient and offer consumers innovative solutions if the rules on NLO were relaxed.  Provisions of the rules not pertaining to ownership protect clients from pressure exerted by non-lawyer owners.  Rather than prohibiting NLO, the rules should ensure that clients of these new entrants to the market are adequately protected as they are in Utah’s regulatory sandbox.       

[1]  Am. Bar Ass’n, https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/.

[2] Model Rules of Pro. Conduct r. 5.4

[3] Sam Skolnik, Firm Ownership Debate Rages Amid ABA Innovation Leader Change-Up, Bloomberg Law (August 25, 2023), https://news.bloomberglaw.com/business-and-practice/firm-ownership-debate-rages-amid-aba-innovation-leader-change-up.

[4] Am. Bar Ass’n Res. 20M115, (2020), https://www.americanbar.org/groups/centers_commissions/center-for-innovation/Resolution115/.

[5] Ronald C. Minkoff, Looking For Trouble And Finding It: The ABA Resolution To Condemn Non-Lawyer Ownership, Mondaq (August 16, 2022), https://www.mondaq.com/unitedstates/management/1221834/looking-for-trouble-and-finding-it-the-aba-resolution-to-condemn-non-lawyer-ownership.

[6] Model Rules of Pro. Conduct r. 5.4

[7] Disciplinary Counsel v. Mamich, 125 Ohio St. 3d 369, 370, 372

[8] Id. at 370

[9] Id.

[10] Id. at 371

[11] Geauga County Bar Ass'n v. Patterson, 124 Ohio St. 3d 93, 95

[12] Id. at 96

[13] Id.

[14] Id.

[15] See generally Robert Ambrogi, Latest Legal Victory has LegalZoom Poised for Growth, ABA Journal (August 1, 2014), https://www.abajournal.com/magazine/article/latest_legal_victory_has_legalzoom_poised_for_growth

[16] Alternative Legal Service Providers 2021 Strong Growth, Mainstream Acceptance, and No Longer an “Alternative”, Thompson Reuters Institute, 20

[17] Bill Henderson, Eight Updated Graphics on the US Legal Services Market, Legal Evolution (January 23, 2022),  https://www.legalevolution.org/2022/01/eight-updated-graphics-on-the-us-legal-services-market-285/

[18] See generally Zachariah DeMeola & Michael Houlberg, MODEL RULE 5.4 How It Protects Little, Harms a Lot, and Why Its Removal Can Greatly Benefit Lawyers, 38 GPSOLO, 27 (2021).  https://www.americanbar.org/content/dam/aba/publications/gp_solo_magazine/2021-july-august/model-rule-5-4-how-it-protects-little-harms-lot-why-its-removal-can-greatly-benefit-lawyers.pdf

[19] Clio, 2019 Legal Trends Report, 41, https://www.clio.com/resources/legal-trends/2019-report/read-online/

[20] Id. at 47

[21] Demolea, supra note 17, at 27.

[22] See generally Borris Groysbert ET. AL., Compensation Packages That Actually Drive Performance:

Principles for Designing Executive Pay, Harvard Business Review (January – February, 2021), https://hbr.org/2021/01/compensation-packages-that-actually-drive-performance

[23] Id.

[24] IAALS, 2020 Access to Justice Needs and Satisfaction in the United States of America 2021, https://iaals.du.edu/sites/default/files/documents/publications/justice-needs-and-satisfaction-us.pdf

[25] Id. at 11.

[26] Demolea, supra note 17, at 30.

[27] Id.

[28] Id.

[29] Id.