ABA commission shelves nonlawyer ownership policy change

, The National Law Journal


The American Bar Association's Commission on Ethics 20/20 announced April 16 that it would not recommend policy changes to allow nonlawyer ownership of law firms.

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What's being said

  • Jerome Kowalski

    Just as Mark Twain described the relations between the United States and the United Kingdom as “two people divided by a common language,” so too are our legal systems two systems divided by a common heritage Most significantly, the simple notion that the US could move very quickly on the ABS issue is, well, humorous. The ABA commission has developed a well deserved reputation for making glacial speed appear to be breakneck speed. Its recommendations will not be made until all stakeholders have their say. And its recommendations will only be recommendations: Each state of the Union plus the District of Columbia imposes its own ethical rules and each will do after receiving, reviewing and debating the ultimate ABA recommendations. This process will not take ten months; it will more likely be a ten year process There are some quite serious business obstacles yet to be adequately addressed in the ABS model, let alone even comprehended. The UK has first begun to address these questions. But the basics of ABS systems still raises basic questions. As some have noted, the proceeds of capital infusions by outside investors in large law firms will likely be applied to technology and most particularly knowledge management systems, all with a view of lowering costs to consumers of legal services. The result would be increased commoditization and reduced revenues per lawyer. Thus, the consequence of such investments may well be that unless one creates a Goldman Sachs-type leverage ratio (10,000 to 1?), an extremely unlikely result for any law firm, the investor will simply not get the anticipated return. The practices which yield the highest return still remain in the plaintiffs’ class action bar and in big stakes high end plaintiffs’ contingency cases. Massive class actions and other high end cases chew up enormous amounts of capital. Law firms which have been active in this world have already amassed substantial capital and have the internal resources to fund these cases. Some still utilize traditional institutional lending from banks at favorable rates. Others utilize litigation funding companies which do tend to charge exorbitant interest rates; but, then again, these funding companies accept all of the risk in making non-recourse loans and at the end of the day, they do not remain partners of the law firm. The fact is that there are means, which are ethically compliant by which nonlawyers can effectively own and direct law firms. The market – not the courts, not the ABA and not local bar associations – will sort all of this out. But, in general, private equity non-lawyer ownership of traditional law firms simply are not economically viable. But, they can be a boon for plaintiff’s tort firms. See http://kowalskiandassociatesblog.com/2011/04/27/alternative-business-structures-here%e2%80%99s-a-great-idea-let%e2%80%99s-get-some-private-equity-funds-to-invest-in-large-commercial-law-firms-and-we%e2%80%99ll-all-make-a-ton-of-money/

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