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The Commercialization of Law

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The Evolution of Legal Practice: From Noble Service to Recognized Commerce

Historically, the practice of law has been regarded as an ancient and honorable profession devoted to public service as opposed to the traditional “unseemly” trades and businesses whose main intent is to make as much of a profit as possible. See Bates v. State Bar of Arizona, 433 U.S. 350, 371- 72 (1977).

The mentality was that “the practice of law is not a business that is open to a ‘commercial operation.’” People v. Merchants Protective Corp.,189 Cal. 2d 531, 538 (1922).

The Legal Profession’s Business Aspect Acknowledged

However, in 1975 the U.S. Supreme Court ruled that the exchange of legal services for money “is ‘commerce’ in the most common usage of that word. It is no disparagement of the practice of law as a profession to acknowledge that it has this business aspect.” Goldfarb v. Virginia State Bar, 421 U.S. 773, 787 (1975).

Advertising and Client Trust: A Supreme Court Ruling

In Bates, the State Bar of Arizona argued that advertising would erode the client’s trust in his or her attorney. The Arizona bar contended that “[o]nce the client perceives that the lawyer is motivated by profit, his confidence that the attorney is acting out of a commitment to the client’s welfare is jeopardized.” The high court rejected this argument, stating: “At its core, the argument presumes that attorneys must conceal from themselves and from their clients the real-life fact that lawyers earn a livelihood at the bar. We suspect that few attorneys engage in such self-deception.”

Law Firms as Commercial Entities

In Bates, the Supreme Court noted that at oral argument counsel for the Arizona bar had stated: “We all know that law offices are big businesses, that they may have billion-dollar or million-dollar clients, they’re run with computers, and all the rest. And so the argument may be made that to term them noncommercial is sanctimonious humbug.”

The Ethical Debate: Sharing Fees with Nonlawyers

Because the legal profession has traditionally been perceived as a public service above the “unseemly trades,” the splitting of fees for legal services rendered with a nonlawyer has long been prohibited. ABA Model Rules of Professional Conduct Rule 5.4. A century ago in Merchants Protective, the California Supreme Court stated, “[t]he bar, which is an institution of the highest usefulness and standing, would be degraded if even the humblest member became subject to the orders of money-making corporations engaged not in conducting litigation for itself, but in the business of conducting litigation for others. The degradation of the bar is an injury to the state.”

Nonlawyer Ownership and Economic Protectionism

Because the legal profession was promoted as a noble public service, the various bars did not want lawyers corrupted by the crass capitalism of “businessmen.” Yet an Arizona task force concluded that the real reason for the original prohibition of nonattorney ownership of law firms appears to be rooted in economic protectionism, not some ethereal desire to protect the public.

The Impact of Nonlawyer Financial Participation

Opponents of nonlawyer financial participation in a law firm contend that when lawyers have to answer to shareholders and explain their profits, they may be more motivated to cater to the interests of the shareholders rather than the interests of client. Thus, the lawyer’s independent professional judgment and duty of utmost loyalty to the client would conceivably be compromised.

Regulatory Sandboxes: Innovating Legal Services Delivery

In 2020, the Utah Supreme Court voted unanimously to establish a two-year regulatory “sandbox” for nontraditional legal providers an services to test new business models, including entities with nonlawyer investment or ownership. Because of its success the program was extended five years.

Arizona’s Bold Move: Abolishing Rule 5.4

Effective January 1, 2021, Arizona became the first state to abolish its Rule 5.4 entirely, based primarily on the lack of affordable legal services to the underserved and unserved communities. The Arizona Supreme Court categorized businesses with combined lawyer and lay ownership as “alternative business structures,” which would need to be licensed by the court.

Florida and California’s Approach to Legal Service Innovation

The Florida Supreme Court created the Special Committee to Improve the Delivery of Legal Services and it issued its report recommending a regulatory sandbox, but the Florida State Bar’s board of governors unanimously rejected it.

In July 2018, the State Bar of California’s board of trustees created the Access Through Innovation of Legal Services task force to look into the issue of opening the state up to nonlawyer businesses. A 2020 report found that the legal services gap is “widespread, pervasive, and multifaceted.” The Task Force found that 60% of low-income citizens and 55% of California citizens regardless of income experience at least one civil legal problem in their house each year, and that 85% of them received no or inadequate legal help.

The 20-person Closing the Justice Gap Working Group is currently debating whether a regulatory sandbox should be open only to the unserved and underserved population or should also be open to all types of alternative businesses structures, including the likes of the Big Four Accounting Firms (Deloitte, Ernst & Young, KPMG and PwC) — now called the Big Four Professional Service Firms — serving high-end clients?

If nonlawyers are allowed to have financial interests in law firms, this would make it possible for law firms to go public, as they have in Australia and the United Kingdom. This could result in law firms raising substantial funds through an initial public offering, which would avoid the firm from having to rely on traditional debt financing or partners’ capital contributions, allow them to acquire other law firms, improve technology and training, and the like. Which law firms are most likely to go public with an IPO? Probably not highly successful and established firms, as they may have no real need to become publicly listed. Small, struggling or unsuccessful law firms are not attractive to potential investors. Mid-sized law firms, on the other hand, are the best bet to go public because they have the greatest opportunity for growth.

Acknowledging the Modern Practice of Law as Big Business

The time has come to publicly acknowledge the modern practice of law for the big business it is. The pandemic has accelerated technological changes in the practice of law and administration which most likely would have occurred within the next decade. Now the question is, is nonlawyer ownership in law firms a foregone conclusion? If history has taught us anything, and as we look to other professions (e.g., dentistry), the answer is not hard to deduce. People did not embrace other advances and technologies until they were forced to. It might be too late if we do the same.

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