John Ray, Senior Consultant, Law Firm Consulting Group

Some argue that permitting nonlawyers to own and manage law firms will adversely affect the professional judgment of the lawyers. I argue the contrary: the fact the lawyers do not have access to adequate capital — both financial and human — adversely affects their professional judgment.

The Law Firm Consulting Group advises personal injury and plaintiff mass tort law firms in the areas of financing, marketing, use of technology to increase efficiency, and the mitigation of risks.

Some argue that permitting nonlawyers to own and manage law firms will adversely affect the professional judgment of the lawyers. I argue the contrary: the fact the lawyers do not have access to adequate capital — both financial and human — adversely affects their professional judgment.

The fact that a law firm cannot access financial and human capital the same way that every other business is able to do creates a scarcity of resources. That scarcity of resources adversely affects the cases that the law firm is willing to take on, and adversely affects the extent to which the law firm is willing to prosecute the cases that it does take on.

It is important that a client’s case be prosecuted to its fullest extent, and that the client’s lawyer has the resources to do that. This far outweighs any risk there may be in a nonlawyer shareholder adversely affecting a lawyer’s judgment.

If you do not agree, then consider a country like Russia, where contingency fees are not permitted. In Russia, there are open pits in the streets. If you get hurt – and people get hurt in Russia all the time — if you don’t have money to hire a lawyer then you can’t access the legal system. There is no incentive to protect human health and safety in large part because people can’t access the legal system to obtain redress. The system we have created in the United States also disenfranchises a large number of people. They cannot get adequate redress for their injuries — they cannot access the legal system because they cannot find a law firm that has the resources needed to help them.

DC’s Rule 5.4 does not address the problem. It does not permit passive investment, and it does not sufficiently clarify just how nonlawyer ownership is supposed to work. Most lawyers who are members of the DC bar are also members of the bar of another state, and that state does not permit nonlawyer ownership in any form. For these reasons, few DC firms feel comfortable enough that they can bring in a nonlawyer partner without breaching an ethical rule of some kind, somewhere.

In a personal injury or tort context, there are a number of different types of people that a law firm could benefit from bringing on board — people that have medical or pharmaceutical backgrounds, people with scientific backgrounds who can assist with evaluating evidence, and who can identify what types of injuries are linked to what types of substances. Lawyers don’t have that kind of knowledge.

Outside the personal injury or tort context, there are of course many types of people that a law firm could benefit from bringing on board — a forensic accountant, a tax specialist, a finance specialist, a marketing specialist, a lobbyist, a social worker — the list is limited only by imagination.

Here is why I think the ABA has resisted nonlawyer ownership and management for so long: many of the decision makers at the ABA either work for large firms that represent large corporate clients, or they are in-house lawyers with large corporations — pharmaceutical companies, chemical companies, insurance companies, car companies, etc. Large corporations would not benefit from a change to Model Rule 5.4. Large corporations have every incentive to stop plaintiff personal injury and tort law firms from gaining access to greater resources. The defense firms for those large companies are Goliaths to the Davids of the plaintiff firms. Large companies have every interest in keeping extra stones out of David’s sling.

From the purely business perspective of those corporations, it makes sense. But is it good public policy? Is it in the interest of American citizens? If plaintiff firms had greater resources, they would be able to take on a greater number of cases, and would be able to handle those cases more effectively. It would not result in increased frivolous litigation as there are rules to protect against that.

The General Counsel of nine large corporations submitted a letter to the ABA Commission on Ethics 20/20 in strong opposition to nonlawyer ownership of law firms. It is not a coincidence that each of those corporations has defended multiple class action lawsuits.

Defense law firms already have access to capital. Those firms bill by the hour, and banks are willing to lend on that basis. But plaintiff firms only get paid if they win, and banks are not comfortable lending on that basis. There is a secondary market for this kind of financing, but it is very expensive. For plaintiff firms, external capital would provide the resources they need to work during the time they are not getting paid, and enable the firms to mitigate the risk by sharing it with investors, rather than obliging the partners to take it all on.

Generally speaking, people and companies are free to raise capital in the United States. If we are going to restrict the ability of anyone, law firms included, to raise capital, then we need a really good reason to do so. There is no good reason.

Limiting the ability of plaintiffs to have access to the use of contingency fees is, in essence, limiting the ability of citizens to file lawsuits against large corporations. It’s about access to justice, and it’s about power and money.

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