Selling Pieces of Law Firms to Investors
NY TIMES October 28, 2011
By JOHN ELIGON
Imagine an afternoon trip to a Wal-Mart: You pick up socks, a flat-screen television and a microwave meal. After checking out, you stop in the photo studio at the front of the store for a family portrait, and then shift one booth over to a lawyer, who drafts your will or real estate contract.
The concept may not be that far-fetched.
England began this month to allow groups other than lawyers to own and control law practices, and some of the country’s major retailers have begun offering legal services in their stores and online. Other countries, most notably Australia, already allow someone other than a lawyer to own a practice.
Now, with calls increasing for a similar model in the United States, the country’s chief legal ethics authority intends to propose a plan to permit law practices to have limited outside ownership.
Such a move could upend the industry’s stiff adherence to the partnership system in favor of full-fledged corporations that have access to the capital markets.
Some legal experts envision a marketplace that would become more customer-friendly, affordable and accessible for the average consumer: one-stop shops on street corners that bundle, for instance, legal, banking, accounting and real estate services; drive-through-style law firms with numerous branches across the country, similar to accounting shops like H&R Block; more complex legal services offered online; and, of course, retail stores with a legal unit.
Although Australia’s legal landscape has not shifted in this direction since it began allowing outside ownership of law firms in 2007, analysts are eagerly watching to see what will become of the legal market in England, which has more global prominence.
Regulators hope giving law practices access to private capital will allow them to invest in technology and other resources that could help them operate more efficiently and at cheaper rates.
“That surely expands the pool of individuals and organizations that have access to effective legal services,” said Mark Ross, the vice president of legal services at Integreon, an international legal process outsourcing company.
An ethics commission of the American Bar Association is expected to circulate by early November a draft proposal recommending that ethics rules be amended to allow other professional service providers — like accountants, economists and social workers — to partner with lawyers and own up to 25 percent of a law firm.
The current rules say that only lawyers may share directly in legal fees.
Individual states have the final say on whether to allow ownership by someone other than a lawyer. Washington is now the only jurisdiction in the United States that allows it. A bill to allow investments in law firms was introduced this year in North Carolina. One New York firm, Jacoby & Meyers, has sued the state’s court system to allow it to receive capital from outside investors.
Despite these efforts, many lawyers and legal analysts remain skeptical about the need for outside investors and are concerned about the ethical implications.
“The idea is that nonlawyers might not have the same codes of ethics,” said Andrew M. Perlman, a legal ethics professor at Suffolk University Law School and the chief reporter for the American Bar Association’s Ethics 20/20 commission, which is preparing the draft recommendation. “They might not be bound by the same sense of professional responsibility and might push the lawyers to do things that they should not be doing to chase the dollar rather than abiding by the rules of professional conduct.”
One ethical concern is about lawyer-client privilege, as shareholders would have an interest in knowing who the firm’s clients were and the specifics of their cases. Another is that lawyers might feel pressured, for example, to settle a lawsuit to make shareholders happy, no matter what the best interest of their client was.
But such thinking derives from the naïve assumption that the lawyers “who currently own law firms are not motivated by profit,” said Ken Fowlie, the executive director of Slater & Gordon, an Australian law firm that was the first in the world to become a publicly traded company.
If anything, going public has increased transparency, Mr. Fowlie said, and has separated the ownership from the lawyers, giving the lawyers more distance from business side pressures than in traditional partnerships.
Since listing on the Australian Stock Exchange in May 2007, Slater & Gordon’s revenue has more than tripled. It has added 30 offices for a total of 50 and has more than doubled its roster of employees to about 1,000.
Despite Slater & Gordon’s success, the largest Australian firms have not followed suit. Legal analysts attribute that to various factors, including volatile market conditions, the country’s tax laws and the fact that Australia is not an international legal and financial hub.
Yet it may also hint at a broader reluctance among major firms in England and the United States to allow private investors.
Top-tier firms already make a lot of money and could easily borrow from banks in the rare instance they might need capital, lawyers said.
“It’s a nonstarter for us,” said Chris Perrin, the general counsel for Clifford Chance, one of Britain’s largest firms. “Some of the firms that will do this in England who are the smaller to midsized firms may get an advantage because they may not be able to so readily borrow money from banks and they may be able to expand more quickly to provide a better service to their clients.”
Big firms may have cultural obstacles as well: lawyers are trained to avoid risk, and partners are unwilling to cede control or equity to outsiders.
Ralph Baxter, the chairman and chief executive of the law firm Orrick, said allowing law firms to accept outside capital would give them market value and could make them attractive to investors. Even if investors do not establish direct profit-sharing agreements, they can provide capital that law firms could use to invest in technology, streamline processes and expand, becoming more profitable businesses, Mr. Baxter said.
“The investors can sell their investment because it’s worth more,” he said.
Legal experts expect outside investment to be more eagerly sought by small law firms and those providing basic legal services, especially online.
The English law allowing nonlawyer ownership, the Legal Services Act, took effect on Oct. 6, but regulators are not expected to begin offering licenses for outside ownership until early next year. The act has been called the “Tesco law” after the major retail chain based in Britain.
Although Tesco has no plans to sell legal services in stores, other English retailers and professional service providers like WHSmith, the Co-Operative Group and Halifax have moved in that direction.
Consumers may gravitate toward a particular retailer for legal services because “they know what the brand stands for and what they’re going to get,” said Stephen Mayson, the director of the Legal Services Institute in England.
Bradford Hildebrandt, the president of Hildebrandt Consulting, a legal consulting firm, said he did not believe there was much unmet demand.
“The average American consumer doesn’t need lawyers all that often,” Mr. Hildebrandt said. If someone needs simple services like drafting a will or defending a small-claims lawsuit, “there’s plenty of law firms available for that market and they’re priced pretty reasonably,” he said.
Some lawyers and analysts believe that the tough economy and consumer demand for lower prices will spur the industry, even top-tier firms, to find ways to use private investment to become more competitive. And if English firms gain even a perceived advantage, experts said, calls to change the rules in the United States could increase.
Irwin Mitchell, one of Britain’s top 25 law firms, has said it plans to seek outside investment once the law allows it.
“The more sophisticated firms, the ones that will thrive in the future, they have become very much aware of what this new situation presents,” said Silvia Hodges, who teaches law firm management at Fordham Law School. “To say or to assume that the status quo is going to prevail and that we’re not going to have any changes, that doesn’t make any sense.”