New York: court fight over ban on non-lawyer investment in law firms
The German Bar has called on its American counterpart to form an international coalition against alternative business structures (ABSs).
The news comes as the American Bar Association (ABA) prepares to publish a proposed rule change that would allow minority non-lawyer ownership of law firms and the New York courts are set to rule on whether US law firms should be allowed to accept external investment.
Responding to an ABA discussion paper that opened the door to ABSs, the German Federal Bar said the introduction of ABSs in the UK “are a major concern for us”.
It said non-lawyer ownership represents “a serious threat to the independent professional judgement of the lawyer employed by such a firm”. It reiterated the point made in 2006 to the parliamentary committee examining the draft Legal Services Bill that ABSs will not be allowed to practise in Germany.
The ABA’s 20/20 Ethics Commission has ruled out passive external ownership of law firms, which the German bar welcomed. It said: “We think our bars should join forces in order to express our common stand on the international scene.”
However, in his response, Legal Services Board chief executive Chris Kenny explained the legislative set-up in England and Wales and questioned whether the commission had considered it before ruling out passive external investment.
The ABA commission has also ruled out US law firms listing on the stock market and forming multi-disciplinary practices. But it will next month put forward a proposed change to the ABA model rules which would allow minority ownership by a non-lawyer (an individual, rather than a company) of good standing.
A final vote will be taken next August and, if approved, it would then be for the legal authority in each state – the courts – to decide whether to adopt the rule.
Meanwhile, US law firm Jacoby & Meyers – which in the 1970s challenged the then ban on lawyer advertising and was the first law firm in the US to advertise – has brought cases in New York, New Jersey and Connecticut to end the ban on non-lawyer ownership. Last week it issued a strong rebuttal to the New York state attorney general’s attempt to have the action thrown out.
Attorney General Eric Schneiderman said the ban is “designed to ensure that a lawyer’s independence and loyalty to his client – the very foundation of the profession – is not compromised by the conflicts that would arise when a firm becomes beholden to its investors”.
Jacoby & Meyers told the court it needs external investment to pay for improvements in technology and infrastructure “to provide access to representation for those most in need”. It argued that there is no inherent link between the financing and ethical conduct: “The ethical practitioner will not become less so if adequately capitalised and the unethical practitioners exist even with the present proscriptions.”
The firm added: “While US lawyers and law firms are barred from raising capital from non-lawyer investors, the ever-increasing demand for more cost-effective means to provide legal services has left other entrepreneurial entities such as Pangea3 (outsourcing legal services) and LegalZoom (Internet legal services) to fill the void.”
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