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Equity for Non-Lawyers: An Unexpected Opportunity for Small Firms

November 12, 2020

For decades, the rule has been clear: non-lawyers may not hold an ownership stake in a law firm. Period. End of discussion.  

This prohibition has long been codified in state bar ethics guidelines and rules of professional responsibility. Yet recently, the landscape of ethics rules has started to look different.

One major force—perhaps the major force—behind those changes is the growing sophistication of legal technology. Today’s legal tech promises to deliver certain legal services to clients faster, cheaper, and more accurately than any licensed lawyer could. In response, states have begun to consider whether some of the legal profession’s bedrock principles now serve as an obstacle to accessible, economical legal services for ordinary clients. This infographic from a State Bar of California task force, for instance, openly wonders whether the rule prohibiting non-lawyers from giving legal advice has become outdated.

The erosion of the principle that non-lawyers cannot hold equity in a law firm is part of this larger trend. Currently, only two states have made official changes to their rules, but momentum is swinging against the old guard. And while the change favors legal technology companies that could benefit from going into business with law firms, there could also be an unexpected—and much more traditional—beneficiary of such a rule change: small and solo practices.

A New Way of Operating

In August 2019, the Utah Supreme Court unanimously voted to allow a so-called “sandbox” program, giving applicants the ability to “propose and execute new business structures and methods of service delivery that are currently illegal or deemed unethical, while under the watchful eye of regulators.” The sandbox program went into effect on August 14, 2020, and is scheduled to last for two years, at which point its experimental reforms will be evaluated to determine if they should continue.

Among those allowed to apply for the program were legal services providers with non-lawyer owners. In September, the state-approved five applications for the sandbox program. Four involve legal tech businesses or personnel taking ownership in legal services providers.

The fifth, however, is a solo practice: Blue Bee Bankruptcy Law. The owner of Blue Bee is using the Utah rule change to give a paralegal a 10% stake in the firm. Undoubtedly, many small and solo practices would like to give valued employees a financial incentive to stay with and help grow their firms, but without having to guarantee large salary increases. Bonuses can serve that function to some degree, but nothing gets employees invested like an ownership stake. It is easy to imagine midsize firms using this benefit to reward CFOs, CMOs, and other non-attorney leaders.

A Shifting Trend?

Utah is not the first state to move towards fee-sharing for nonlawyers. This past August, Arizona’s Supreme Court voted unanimously to allow nonlawyers to have an ownership stake in law firms. The new rule, recommended by Arizona’s Task Force on the Delivery of Legal Services, will take effect on January 1, 2021, replacing Rule 5.4, which had long prohibited nonlawyers possessing an economic interest in a firm.

The Task Force’s report stated that “no compelling reason exists for maintaining ER 5.4 because its twin goals of protecting a lawyer’s independent professional judgment and protecting the public are reflected in other ethical rules which can be strengthened.”

Ultimately, Arizona and Utah are trailblazers when it comes to abolishing this long-standing prohibition against nonlawyer fee-splitting. And though it remains to be seen what other states may do in the coming years, these states are providing a blueprint for what fee-sharing at firms could look like going forward.