Who Wins with Non-Lawyer Ownership? Just the Bankers (Part 1)

“I would write a shorter sermon, but once I start I get too lazy to stop.”

Today in the Prism Legal blog, I read an article titled “Rule against Outside Investment in Law Firms Stifles Innovation.” In the article, the author asserts that the “dangers” of allowing non-lawyer ownership in law firms are largely theoretical, but the “harm” in refusing non-lawyer ownership is “concrete and immediate,” including:

  • Legal costs remain higher than they otherwise would be
  • Lawyers cannot pursue professionally rewarding paths
  • Investors miss an opportunity to earn a return
  • Society continues to pay more for law that is possible or necessary
  • Innovations these firms create cannot “trickle down” to conventionally owned law firm.

The author then suggests that those who support upholding the prohibition on non-lawyer ownership should bear the burden to provide justification as to why the prohibition on non-lawyer ownership prohibition should stand. Basically, he argues: “We should change. If you can’t give me good reasons why we shouldn’t change, I win.”

I accept his challenge, but with a caveat. I believe that the burden is on the party seeking change to demonstrate why it’s necessary. Neither his article, nor any of the other articles arguing from the similar position, provide logical arguments for change. As was reported in the Lawyerist: “I don’t see the advantage to law firms, unless something about law firms makes them incapable of changing their business models without non-lawyer investment and control. That’s a scary concept without a strong justification.”

I also believe that to allow non-lawyer ownership would fundamentally and irrevocably change the way legal services are provided (which, for many, is the real purpose behind deregulation). It is my position that the negative aspects of such a change have been largely ignored by those arguing for deregulation, and dramatically outweigh any potential benefits.

1) Allowing non-lawyer ownership will not substantially decrease the cost of legal services OR increase the access to justice.

This first argument has two important aspects. Almost every single argument I’ve seen in favor of non-lawyer ownership accepts, without any argument, that the cost of legal services will go down, and that such decreased costs will increase the access to justice. These are two completely different issues, neither of which is addressed effectively by the idea of non-lawyer ownership.

First, the basic idea forwarded by most proponents of non-lawyer investment is that the introduction of a corporate environment, where executives answer to investors, will increase efficiency and lower the costs of providing legal services. But they provide no supporting evidence.

Many authors point to companies like Legal Zoom as examples. However, none address the fact that those services, constituting basic form practice, ARE ALREADY AVAILABLE. Your bank has the forms you need to set up a basic will, your state’s secretary of state has the basic forms for starting a business, and your local courthouse has the forms for divorce.

What many of these companies who advocate reform want to be is the Quicken Turbo-Tax of law. However, all they’re really doing is assembling information that was already publicly available (without an attorney) and putting them into software. Just like what Turbo-Tax actually does (automate a home accounting process you could have done without an accountant).

Second, many argue that the accepted-as-gospel decreased costs would increase access to justice. It’s crap. When we speak of true lack of access to justice, we’re not talking about someone who wants to spend a little less on the form setting up their grandchild’s trust. We’re talking about the victims of foreclosure fraud who can’t afford an attorney to fight the banks. We’re talking about the victim of medical malpractice who can’t get an attorney because their $15,000 medical bill, while crippling, would not provide a contingency fee sufficient for any attorney to afford to bring the case. We’re talking about people who won’t benefit from having Walmart providing basic legal services.

In fact, many of the interest pushing deregulation of the practice of law are actually trying to DECREASE access to justice. They’re the same interests who push tort reform, private and confidential arbitration instead of trials, and new eDiscovery rules that will make it even more expensive to litigate in federal court. Look beyond the words, and the notion that this argument will increase access to justice just melts away.

2) Investments in new processes and technology is NOT inhibited by prohibiting non-lawyer ownership.

One of the most ridiculous arguments I’ve heard was actually the basis for the Prism Legal article. The post discusses an attorney who claims to have “an innovative and entrepreneurial idea” to open a law firm that utilizes automation. In other words, he wants to open a law firm. But he can’t get the funding to “build and market the new technology.” So revolutionary is this new law firm idea, automating insurance claims, that it’s really MORE than just a law firm.

Here’s the thing, if you could only get investors for your new idea by giving them a stake in your law firm in exchange for investment, it wasn’t a great idea.

The author makes another leap that is common in these articles: “Lets’ stipulate that automating corporate legal work benefits both clients and society by reducing legal costs.”

No, let’s not. Automating legal work is nothing new, and it happens all the time. Yet even as legal work has been automated more and more over the last 30 years, has it reduced overall legal costs? Why do we allow these arguments to make such huge assumptions without any factual support?

The amazing thing is that the author actually turns investment capital on its head. The reason that not every invention gets investment is because sometimes it works, other times it doesn’t! He gives no thought to the possibility that potential investors in this guy’s automation process considered any investment to be too risky. The fact that your friend wasn’t able to get funding on the side for his automation project means he has to do what every other attorney does to open a new firm: GET A LOAN.

If it’s so difficult to get money for innovations while ALSO being a lawyer, why isn’t that the case for doctors? It scares me to think that doctors would be smarter than lawyers about starting a company to test and market the new drug or device.

The prohibition has nothing to do with precluding lawyers from seeking out investment money for innovations (or pursue professionally rewarding paths, an argument so stupid it’s not worth its own section). The prohibition prevents greedy investors from obtaining a portion of the law firm in the event the innovation doesn’t work. And what if this guy’s innovation sucks? Any investor gets to recoup their losses through law firm profits that may have gone to such things as capital and technology upgrades.

No new technology or process has died just because the lawyer who thought it up wasn’t able to capital without using his law firm as collateral. Arguing otherwise is ridiculous.

Continued in Part 2.