The District’s experience with Rule 5.4 has been disappointing.
The D.C. Bar serves both a representative and a regulatory function for the District of Columbia. Its core functions are the registration of lawyers, operation of a lawyer disciplinary system, maintenance of a Clients’ Security Fund, and other administrative operations. The D.C. Bar’s Legal Ethics Program provides informal guidance to lawyers on questions that arise under the D.C. Rules of Professional Conduct. Hope Todd serves as Assistant Director for Legal Ethics, Regulation Counsel of the District of Columbia Bar.
I cannot speak officially for the D.C. Bar, but I will give my personal opinion.
In my personal opinion, the District’s experience with Rule 5.4 has been disappointing in its ability to serve as a “model” or “pilot” because it appears very few law firms have nonlawyers partners or managers. There has been little movement on the Rule although the ability to partner with a nonlawyer has existed in the District of Columbia since 1991.
I think that the movement towards allowing nonlawyer ownership and management and investment in law firms is one that at least holds a promise for more affordable legal services for the general population, and for that reason I believe that the changes in Australia and in England and Wales may well result in better and less costly provision of legal services to the average legal consumer.
In the District we do not have empirical data on this subject. I know that there are firms that have nonlawyer owners, but I know that primarily based upon the telephone calls we get on the Legal Ethics Helpline. Of the approximately 2400 annual Helpline calls, a handful will be from someone wanting to set up a law firm with a nonlawyer partner and one or two from someone purporting to already be in such a firm, and asking some sort of ethical question in relation to that.
I can’t provide any names or specific information about those firms because all Ethics Helpline calls are strictly confidential. The most I can say is that we do field a few of these calls each year, so we know that there are some lawyers out there who have nonlawyer partners or individuals in supervisory positions.
The rule in the District allowing nonlawyer partners has been in effect since 1991. This raises the question — why haven’t more firms taken advantage of it? I think there is more than one reason for that.
The most obvious and the most mentioned reason is that the majority of lawyers who are licensed in the District are also licensed by and many practice in one or more other jurisdictions. As a practical matter this means that D.C. lawyers with multi-jurisdictional practices are subject to the rules of more than one state bar. Under the rules of all other U.S. bars, lawyers are not allowed to spilt legal fees with non-lawyers. For this reason, many are hesitant to take advantage of D.C. Rule 5.4, when they may be disciplined under the rules of other jurisdictions when providing legal services in those states.
The second reason is that the Rule is so limiting. It allows for a nonlawyer professional to provide services, but the entity itself can only provide legal services. So, you can have an economist, or an accountant or a social worker as a partner in a law firm, but they cannot offer their economic, accounting or social work services separately or maintain their own client base within the firm. Their services must be tied to the provision of legal services. That is, D.C. Rule 5.4(b) does not truly permit multidisciplinary practice. But that is the structure that would most likely benefit both clients and nonlawyer professionals, as clients often have both legal and non-legal professional needs. For that reason D.C. Rule 5.4 is not a very good deal for many nonlawyer professionals. They would probably do better in a different kind of structure, and notably simply as a contractor to the law firm. On the other hand, if the nonlawyer is happy to provide services to the firm only, such as in the role of a Technology Officer or Executive Director, it is easier to see how Rule 5.4 can work.
Again, this is my personal opinion. There are no surveys or statistics available in the District on this information.
The calls that we receive in relation to Rule 5.4 come from all over the country. The caller is usually quite excited — they’ve just heard that the District of Columbia permits nonlawyer ownership. Sometimes the caller is a lawyer who is in contact with potential nonlawyer investors in their firm, and sometimes the caller is a potential nonlawyer investor, excited at the idea that they could own and run a law firm. But that is not what Rule 5.4 is about. The Rule does not permit a nonlawyer to start a law firm by hiring a couple of associates. That is still the unauthorized practice of law.
What we often have to clarify for those callers is that the Rule also does not allow for passive investment. That is off the table and always has been. D.C. Rule 5.4 is not a way for a law firm to raise capital. The nonlawyer owner must be an individual professional who is providing services within the firm.
Nothing in the Rule specifically says that the nonlawyer owner must own less than 50%. On the other hand, Rule 5.4(c) requires lawyers to be free to exercise their professional judgment. Practically, this means that lawyers must have more than a 50% say in the legal decisions. The lawyers still have to call all the shots on the legal representation in consultation with their clients. This is something that could trip you up if you are not careful.
One of the protections built into the D.C. Rule, and why the Rule may be attractive to other U.S. jurisdictions, is first that the nonlawyers must agree to respect and adhere to the ethical rules, and second that the managing lawyers are “vicariously liable” for the ethical actions of the nonlawyers. This helps to address the problem that, at least as of today, the D.C. Bar does not have the power to regulate nonlawyers.
You can contrast this to Australia, which also makes the managing lawyer vicariously liable. But Australia adds another layer — Australia additionally regulates the entity itself, which means that if there is a problem, the regulator can shut the whole thing down. The D.C. Bar does not have the power to do that.
I am not aware of any complaints made, and there are no reported disciplinary actions that were connected to the activities of a nonlawyer owner or to the fact that a firm had a nonlawyer owner. But since the number of firms concerned may be so small (again, we have no idea just how many of these firms exit), this absence of complaints and disciplinary actions may or may not be significant, Nevertheless, it is a fact.
There are jurisdictions that are interested in the District of Columbia’s ’s experiences with Rule 5.4. Several have working groups in place at the moment that are considering the permissibility of alternative business structures, and those groups contact us from time to time. Our response to them is fairly consistent:
– Yes, D.C. Rule 5.4(b) has been in place in the District since 1991,
– We know there are a few law firms in the District that take advantage of it,
– We have not seen any problems with those law firms who are taking advantage of it, but that may just be because there are not that many of them, and
– That is unfortunately all the information that we have to share.
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