Why Do We Maintain an Artificial Barrier to Innovation and Access to Justice?

As I read the news a couple of weeks ago that the Ford Foundation became the latest institution to commit to impact investing (i.e., investing for social impact as well as financial return), it got me thinking about the many exciting possibilities those types of investments could create for access to justice. And then I quickly remembered that this is largely off limits, because our profession clings to outmoded and artificially limiting rules that prevent lawyers from sharing ownership or profits with outside investors. We have enough challenges in our quest to bridge the gulf in access to legal assistance without having to do it with one hand tied behind our collective back, and it is well past time to remove this barrier.

Why Does This Matter for Access to Justice?

While more flexible investment and ownership options for law firms are not a game changer for every access to justice challenge, they have the potential to make a big impact in the consumer and small business markets.

Entities that provide free legal services to low-income and disadvantaged people, which typically are organized as nonprofits, would be unlikely to attract significant new capital in this way because there is no realistic opportunity for a financial return on the investment. Government funding and charitable contributions will always be critical to ensure pro bono and legal aid organizations have the means to provide services for these vulnerable populations, and we still have a long way to go on that front.

For the many people who make too much to qualify for free legal help but are in the moderate-income market the people in the middle, who number about 1.9 million in Cook County alone it is a different story. With notable exceptions like personal injury cases, access to affordable legal help increasingly is out of reach for this broad segment of our community.

A number of lawyers and firms are developing innovative models to make legal help more affordable and accessible through the CBF’s Justice Entrepreneurs Project and beyond. However, these lawyers and firms face huge challenges in accessing the capital that would be necessary for them to scale up their successful efforts due to the unyielding restrictions on outside investment.

The Rule Restricting Outside Ownership and Investment

Illinois and most of the country has long prohibited lawyers from sharing profits or attracting investments from anyone except other lawyers in the same law firm. As a result, not only are lawyers and firms prohibited from attracting outside investors, they also are prohibited from sharing profits or equity with other professionals they work with who do not happen to be lawyers.

Rule 5.4 of Illinois Rules of Professional Conduct contains the limitation typical of others around the country, and the comments to the Rule reflect its underlying purpose: These limitations are to protect the lawyer’s professional independence of judgment.

But is this kind of blunt prohibition really necessary to protect lawyers and their clients? Isn’t there a way to underscore those protections while still giving lawyers and firms access to the capital investment options other professions and businesses have access to and utilize?

As a matter of fact, there is.

Other Jurisdictions Already Are Proving This Can Be Done

Australia and the United Kingdom are among many other jurisdictions that for years have permitted what are commonly referred to as alternative business structures for law firms. These rules allow for outside investment and/or other professionals to be able to share in law firm ownership and profits.

Recognizing the potential for innovation here in the U.S. legal market, last year the ABA Commission on the Future of Legal Services issued a thorough and well-reasoned Issues Paper Regarding Alternative Business Structures and invited comment. This Issues Paper laid out the many potential benefits to the profession and to access to justice that would flow from allowing more flexibility in law firm ownership and investment. The Paper also noted that in other countries and jurisdictions where alternative business structures have been allowed, there has been no evidence of harm to the profession.

In spite of the fact that there has been no documented harm elsewhere, the comments to the Issues Paper from the ABA membership were overwhelmingly negative, with a relatively small number of supporters drowned out by a cascade of opposition. Many of the comments were nakedly protectionist and short-sighted. Other commenters raised legitimate concerns about protecting professional loyalty and independence, but nothing that could not be addressed through regulations. As other countries already are proving, we can protect our duties of professional independence and loyalty while at the same time being more flexible on investment and ownership.

Legal Innovation Increasingly Flows Outside of the Profession

Among the consequences of the outmoded restrictions on investment for lawyers is that investments in legal innovation increasingly are just going around the profession. Avvo and Legal Zoom are just two examples of entities that are attracting significant outside investment and driving a number of innovations around marketing and technology that have the potential to meaningfully increase access to legal help. These entities are more limited in their impact because they can’t themselves provide legal services, and instead have to work around the ownership restrictions by connecting with other lawyers who must remain independent.

All Animals Are Equal, but Some Animals Are More Equal than Others

The continued opposition to anyone other than lawyers having ownership in law firms hinders innovation in the profession in another important way as well: by artificially limiting the roles of the many other professionals who play a key part in law firm success. As I noted in my New Year’s Resolution for Our Profession post earlier this year, this is a similar problem to our profession’s unfortunate habit of referring to other legal professionals as non-lawyers.

Many other professionals who specialize in technology, marketing, management, finance, and other key disciplines bring necessary expertise that complements what lawyers bring to the table and is crucial to innovation and business success. Yet these other professionals are then prevented from sharing in the ownership or profits of a firm. Lawyers are similarly prevented from partnering with professionals from other disciplines to deliver a comprehensive suite of services.

So Why Are We Still Doing This?

Putting aside the protectionist elements in our profession, who I believe are only a vocal minority, I believe the main reason these limitations continue to exist is that lawyers genuinely concerned with potential threats to their professional independence don’t see a good enough reason to risk changing the status quo without proof that it will lead to something better. Given the large and growing gap today in access to justice for such a large segment of our community (not to mention the other points noted above), that simply is not a good enough reason. There clearly is a major market failure for people in the middle market who need legal services, and the genuine concerns about preserving professional independence can be addressed through new rules that also open the door to broader ownership and investment.

In addition to evidence this is working out okay in other countries, lawyers in Illinois and elsewhere in the country who work in-house for corporations have proven this can be done. Lawyers who work in-house don’t check their ethics at the door, they do pro bono work, and they have figured out how to maintain their professional independence in the corporate setting. Companies that want to bring legal services in-house take on the ethics responsibilities that come with it.

Regulation that allows other owners and investors in law firms can do that as well, requiring anyone who wants to deliver legal services through an alternate business structure to expressly agree to be responsible for adhering to the Rules.

The profession will survive. Lawyers already balance a host of financial, business, and other pressures in carrying out their duties in any setting. It is part of what being a lawyer is all about, and that is no less true just because others may have an economic interest.

By opening the door to a broader array of capital options including impact investing, ownership and investment from other professionals, and the traditional sources of capital that are available to other businesses we can jump start innovation in the profession. It will allow our profession to compete on a level playing field with other legal innovators, and enable lawyers to undertake strategic partnerships with other professionals to make their legal services more accessible and affordable.