Arizona Becomes First State to Allow Outside Ownership of Law Firms: Legal Trends

I’m interested to see what the reaction is to this story and have been looking forward to covering it for days now.  According to a recent article, Arizona is the first jurisdiction to scrap Rule 5.4, which has historically barred non-lawyers from both fee sharing and from having an economic interest in a law firm.

According to Legaltech® News (Arizona OKs Outside Ownership of Law Firms, written by Dan Packel), Arizona is set to become the first jurisdiction in the United States to allow outside ownership of law firms, after the state’s Supreme Court voted last week to eliminate rules prohibiting fee sharing.

The justices’ move follows on the efforts of a task force, led by Vice Chief Justice Ann A. Scott Timmer, which spent the last two years identifying reforms aimed at reducing the cost of legal services.

“The court’s goal is to improve access to justice and to encourage innovation in the delivery of legal services. The work of the task force adopted by the court will make it possible for more people to access affordable legal services and for more individuals and families to get legal advice and help,” Arizona Supreme Court Chief Justice Robert Brutinel said in a statement. “These new rules will promote business innovation in providing legal services at affordable prices.”

The most significant part of the reforms is the elimination of Rule 5.4, which has historically barred nonlawyers from both fee sharing and from having an economic interest in a law firm. New entrants, known as “alternative business structures,” will have to secure licenses. The change is set to go into effect Jan. 1, 2021.

The Arizona changes also allow for a new licensure process to create “legal paraprofessionals.” Intended to serve as the legal profession’s equivalent of “nurse practitioners” in the medical field, these individuals would have to meet certain standards before being allowed to provide limited legal representation to clients. This process will also go into effect at the start of 2021.

Two other states have been flirting with changes as well to Rule 5.4 and the practice of law as well:

  • Utah, which also acted earlier this month to liberalize the practice of law, stopped short of this step, instead opening up a “regulatory sandbox.” That program will allow approved businesses, which can be led by nonlawyers, to experiment with the provision of legal services. But the program is limited to the next two years, after which the state’s Supreme Court will decide whether it should continue.
  • California, where a task force considered similar changes to Rule 5.4. But after a flood of public comments expressed concerns about the entry of the Big Four accounting firms and worries that lawyers would be subsumed by the gig economy, the group settled on more limited reforms, including fee sharing with nonprofits and the creation of a “regulatory sandbox” there too. When these scaled-back recommendations went to the State Bar of California, the organization hit pause on the entire effort in March, before agreeing in May to revisit the issue.

Hat tip to Cash Butler for sharing the story on LinkedIn.  Several people commented on his post, with most (but not all) in favor of it, with a couple of people noting that the United Kingdom has had alternative business structures for several years now.  It seems to me it’s only a matter of time before it expands to at least a few other states.  Which one will be next?

So, what do you think?  Is this a good thing or bad thing for law firms and the legal profession?  Please share any comments you might have or if you’d like to know more about a particular topic.

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