External ownership and the forked tongue of ethics

Nine US general counsel have come to the conclusion, reported in Legal Futures, that there is no need for external ownership of law firms and “that the inevitable chipping away at the profession’s professionalism ultimately will do a disservice not just to the business clients we serve, but to all clients who seek the trusted and confidential advice of counsel”.

I would not presume to disagree with their judgement about their own clients. But I would seriously beg to differ with the general sentiment implicit in the conclusion that ‘non-lawyer’ (I still hate that expression) ownership will necessarily erode professionalism, undermine lawyer-client relationships, compromise confidentiality, and encourage unethical, profit-maximising behaviour. It is perhaps worth remembering that, despite the rapid growth in the number of lawyers in the past quarter-century, ‘non-lawyers’ still constitute the overwhelming majority of the population. It is a bold claim indeed to suggest that members of this group are, or would inevitably become, unethical when they acquire an ownership stake in a law firm.

There is, in fact, absolutely no evidence to support this. In part, this is because so few jurisdictions currently allow such external ownership (which makes the suggestion a contestable hypothesis, not a fact). In part it is because, in jurisdictions where external ownership is allowed (such as New South Wales, and England & Wales), there are no facts that suggest that unethical behaviour follows.

It is, of course, possible that such evidence will emerge over time: but even if it does, it will take a long time for that evidence to reach the current tally of unethical and unprofessional behaviour of lawyers around the world.

The fundamental problem with the opposition to external ownership is that ethics is a state of mind, not a state of ownership. There are ethical and unethical lawyers, just as there are ethical and unethical ‘non-lawyers’. Until the legal professions rid their ranks of the unethical, the high horse of professional ethics is not a secure vantage point from which to resist ownership by those outside the ranks.

By siding with the status quo and suggesting that the case for change is not made out, opponents of external ownership conveniently side-step their own need to justify a restrictive practice whose public interest foundations and justification are tenuous and for which the supporting case in the 21st century has also not convincingly been made out.

The foundations of lawyer-only ownership seem to be built on three propositions:

  1. that lawyers need protecting from outsiders (so much, then, for their professionalism and independence, which would surely enable them to resist inappropriate pressure and temptation);
  2. that clients need protecting from unprofessional behaviour by law firms (which might be true for some clients, but does not seem to me to depend on whether or not the firms are owned by lawyers – and, given that the restrictive rules on ownership originated in an era of 100% lawyer ownership, hardly puts lawyers on the front foot); and
  3. that ‘non-lawyers’ will exert unprofessional or unduly economic pressures – or, in other words, that compared to lawyers they are inherently unethical (which, as I suggested earlier, is a bold statement – and possibly even insulting).

Where, then, is the public interest case for lawyer-only ownership? In the battle between assertion and evidence, assertion is best for lawyers because there is no evidence that external ownership is bad for clients or law firms.

While we’re looking at ‘non-lawyer’ ownership, let me also suggest that this should not be read as being synonymous with ‘external’ ownership. What about all the other people working in law firms who help it to create value for clients and the owners? They are internal, not external.

On what basis – other than simply because they are ‘non-lawyers’ – could anyone suggest that these individuals should be excluded from an ownership stake in the businesses they work in? I’ve never heard a convincing defence of their exclusion.

Nor could I accept that these individuals – simply because they are ‘non-lawyers’ – would necessarily apply unprofesssional or unethical pressure if they became part-owners; or, to put it in slightly different words, that they would contribute to “the inevitable chipping away at the profession’s professionalism [and] ultimately … do a disservice … to all clients who seek the trusted and confidential advice of counsel”. If such a proposition were even remotely tenable, how come these sorts of people are already working in law firms?

The resistance to ‘external’ ownership is not on secure ground. The principle of lawyer-only ownership does not hold water. In fact, it leaks terribly – and with a rather unpleasant whiff of self-interest.

Let us instead address the real challenges. Of course there is a risk that ‘non-lawyers’ will behave badly – just as there is a risk that lawyers will, too. If the risk of unethical behaviour exists, let us address the risk: otherwise, the principle that the possibility of unethical behaviour must exclude certain people from ownership should, logically, in the interests of fairness and non-discrimination, exclude lawyers as well.

We should therefore recognise the risks and take steps to minimise and mitigate them. That’s what the regulatory framework of the Legal Services Act does. For example, it imposes the same professional objectives on the whole business as it does on the individual lawyers. It also imposes a statutory obligation on ‘non-lawyers’ not to do anything which causes or contributes to a breach by a lawyer or the firm of the regulatory and professional obligations imposed on them.

So ‘non-lawyers’ who behave inconsistently with professional requirements, or inappropriately pursue profit at the expense of professionalism and professional obligations, run the risk that their opportunity to be an owner, officeholder or employee in a legal business will be taken away from them. Just as it is for lawyers.

Equal opportunity and treatment seems justifiable to me; prejudicial and self-interested bias does not. The argument, then, shouldn’t be about whether or not ‘non-lawyers’ should be allowed any ownership interest or control in law firms. It should be about how we manage the risks that any owners – whether lawyers or not – might pose to the public, professional and client interests.

There is no inevitability about any behaviour, just potentiality and risk. We need to manage the risks as they in fact exist and not as we might prefer them to be.

Let us stop insulting the intelligence of clients, and casting doubts on the motivations and ethics of those who do not hold a professional qualification or badge of ‘lawyer’. Let us remove the forked tongue of ethical bias and withdraw insinuations of unprofessional, profit-driven behaviour by ‘non-lawyers’. Because, of course, we might suggest (with tongue now firmly in cheek) that it has only been altruism and selfless client service that has made so many lawyers around the world multi-millionaires….

12 thoughts on “External ownership and the forked tongue of ethics

  1. I have many comments on this, and should probably write up my own blog post. But here are my thoughts. First, the ABA does not speak for all American lawyers so please don’t lump all of us in the same pile. Even though I am a member of the ABA, I joined because it was the only way to stay on top of what it does and try to effect change from within. But it does not mean that the ABA represents my interests and it certainly does not represent the issues of solo and small firm practioners in the US who are my constituency.
    Second, just as it is arrogant for lawyers to assume an entitlement to differential treatment, it is equally arrogant to assume that lawyers fear competition. Most solo and small firm lawyers do not worry about competing with non-lawyer services like Legal Zoom because many of the clients they serve were never hiring lawyers to begin with, but instead, were filling in forms on their own (it’s not rocket science to download an LLC form from the secretary of state’s office and incorporate) or they weren’t hiring lawyers at all (that’s why we have intestacy statutes). In my own case, I am an energy regulatory attorney. I practice before an agency where companies can be represented by non-lawyers. Most of the companies that I “compete” with are “regulatory experts,” i.e., environmental engineers or policy folks who read and advise on regulations. Yet in spite of these constraints, I have never been busier because I am really good at what I do and I know what my value points are and how to convey them. So please do not assume that the reservations that I or other lawyers here in the US occasionally express about non-lawyer ownership come from protectionism. (And for the record, I have never supported the lawsuits to shut down Legal Zoom
    http://myshingle.com/2010/03/articles/trends/to-win-the-hearts-and-minds-of-consumers-lawyers-need-to-sell-not-sue/, even though I do believe that lawyers bring something extra to the table – http://myshingle.com/2012/01/articles/trends/solos-take-back-the-law/
    In my view, there are two sources opposition to non-lawyer ownership. One is ignorance – and even though I consider myself well read on ethics, I confess guilt on this count. I read over the ABS model for licensing and it is quite sound and robust and if it works as it should, I believe that it will ensure protection for consumers, in many instances far better protection than our system of regulation in the US can provide. The second source of opposition is history. Here in the US, consumers have been the subject of all types of schemes run by non-legal entities that coopted stupid lawyers and scammed clients (some examples are here – http://myshingle.com/2010/03/articles/ethics-malpractice-issues/how-good-solos-suffer-when-the-greedy-sell-out-for-125-a-pop-2/). These were non-lawyer entities (though some were in cahoots with lawyers) and they caused grave damage. I know this first hand because I spent nearly 2 years trying to repair the credit of, secure a refinancing for a client who was scammed by one of these groups (http://myshingle.com/2010/02/articles/client-relations/i-can-unbundle-the-case-but-i-cant-unbundle-my-heart/) To be sure, these non-lawyer entities weren’t regulated any better than lawyers – and presumably would be weeded out under the ABS structure in the UK. But this is part of the context in which non-lawyer ownership is being proposed – and it does raise concerns in lawyers like myself who really do care about our clients and access to justice.
    Finally, just as you have not heard solid arguments raised in response to non-lawyer ownership, I have not been sold on the economic benefits. Many of the first non-lawyer online services that I have seen (bidding services and forms) do not address the underlying costs that drive cases here in the US (see this post – http://myshingle.com/2012/03/articles/myshingle-solo/the-start-ups-that-give-access-to-justice-are-already-here/) such as the cost of $5/page for reporter transcripts or lawyers having to sit around in court for hours for a 10 minute status conference. Those must be addressed as well.
    I do not think that my position is unique. Many other solo and small firm practitioners like myself leverage technology every day in an effort to improve the quality of legal services for our clients. We compete against non-legal providers (in fact, some lawyers get rich off correcting non-lawyers’ mistakes). We did not go into law to get rich but rather to defend people, solve problems and stand by them in time of need, and earn an honest living. Many of us have found ways to use technology to successfully defend clients against wealthy corporations and powerful government entities and to do so affordably and in a way that brings value. Simply because we have reservations about non-lawyer ownership does not mean that all of use are quaint luddites or avid protectionists but rather, professionals (to use an evil term) who are genuinely concerned about clients and meaningful access to justice.

    • Thanks, Carolyn, for your eloquent and heartfelt reply. I certainly did not intend to tar all US lawyers with the protectionist brush – merely those who use it.

      My approach is to assess the actual risk rather than the presumed one. You give valid examples of where the risks could prove to be real and concerns well-founded. But there are also risks with some lawyers that courts and regulators deal with. I think they are also capable of dealing with risks created by non-lawyers.

      Many lawyers provide dedicated, excellent and high-quality service. If allowed, I believe many non-lawyers would, too. So why not let them try, and then deal with the charlatans and incompetents both outside and within the legal profession as and when it proves necessary.

  2. Josh is right: ‘There is nothing inherently special about the law…’

    Mr Twist: the UK’s law firm market is not the most liberalised – it is one of the most protectionist. It is trying to ramp up protectionism through the Legal Services Act rather than deal with the real problems – and will do so even at the risk of damaging itself for the greater good in some sense (see debates on legal traiing elsewhere).

    Andrew – the market for legal services is (long term) growing, and growing fast. Other legal services markets typcially remained static or even continued to grow through ’08-11 when the law firm market fell by 3bn. The problem is that law firms are getting less and less of the new legal services work. Fine – it is their choice; and if you want a contentious dispute resolution specialist – they remain the best. It’s just that most would rather stick needles in their eyes, especially in commerce. This genie came out of the bottle in the 1970s and possibly before. There are now more ‘differently qualified’ lawyers in business than in the profession, and they are not idle.

    Alastair: the IFA parallel is apt. I remember IFAs carrying luggage holders on wheels to take the mountain of paperwork to clients in the nougties while the RBS/ABN deal was being nodded through in Edinburgh and the City. Nothing from the new regulators suggest they will be any more effective. A proliferation of regulators is usually a sign of obfuscation, not insight.

    It is unfair to call the profession ‘luddites’ – they are exceptionally good at what they do, in the main. Its just that the pressures to avoid getting to a point where you need them are rising so fast – and, yes – the alternatives are now getting really quite good. These are not technologically driven (sorry, Prof S) but they are usually technologically enabled. There is rarely a metaphorical ‘loom’ to break, as usually the tech components are deeply embedded within the overall service.

    Lawyers have long forgotten that they are the second oldest ‘profession’. The key lesson of the oldest is that the perceived value of services diminishes radically as time elapses after performance. The corollary of this is that fixing a price of something uniquely personal and engaging in advance is hard, and best charged for at the finale. Hence we have a profession which sees a different person in the mirror to what the rest of the world sees, and also one addicted to a commercially unattractive business model.

    I find it intriguing that it is large GCs taking this position. Could it be that they are the ones most under pressure to be seen as ‘special’ when the cost of being an effective ‘chief-sales-prevention-officer’ is challenged by CFO, CIOs, CPOs and other CxOs with access to better legally compliant solutions?

    Thanks Stephen – apposite and eloquent as ever.

  3. Pingback: External ownership and the forked tongue of ethics | Law Practice Strategy

  4. Stephen, terrific post. I’m GC for a US organization (albeit one far smaller than those represented by the august 9) and I share your views about insularity of thinking here. There’s nothing inherently special about the law that requires that only practitioners participate in ownership. I posted along these lines earlier this week: http://lawyernomics.avvo.com/2012/04/non-lawyer-ownership-of-law-firms-lets-stop-treating-law-as-a-special-case/

  5. Stephen highlights that, novel to the British legal market with the Legal Services Act, law firms can be owned. and cases funded by third party investment, including hedge funds, who will recover outlay and profit from successful judgments and awards. Yes, this is the arrival of the investment business in our £23bn legal service marketplace here in the UK.

    The Legal Services Act has given England and Wales one of the most liberalised legal markets in the world. But is this really a good thing for the client? Is it right that 3rd party business should be allowed to invest in litigation? Should lawyers be working under the direction and financial control of an alternative business structure, whose executives may be totally focussed on profit rather than justice.

    Stephen is correct that lawyers have no monopoly on probity, but they are directly accountable to the courts and their professional bodies. Whilst judges regularly call the lawyers to appear before them to explain and justify their actions – the investors will simply pass the buck.

    • Thanks for your comment, Stephen. It might be good for clients. It might be right to have third-party investment in litigation. And both might not. But I don’t believe it’s right to have a blanket rule that says these things are prohibited. Let’s recognise the risks, treat everyone as grown-ups, and then regulate and manage the risks rather than a prohibition. The regulatory framework under the LSA won’t make it easy for investors to pass the buck, without running the risk of having the investment divested and losing the ABS’s licence to practice. That’s probably more expensive, financially and reputationally, than the quick buck that might be gained.

  6. The external ownership issue is surely a red herring. I perceive the real fear in the legal profession regarding external ownership is the threat of competition. External owners – ‘non-lawyers’ will seldom come from the third sector, education or government. They will come from profitable and ambitious enterprises with proven track records in customer acquisition and profit generation.

    Firms that have been immune to commercial pressures from astute and efficient enterprises now see the threat from well-run businesses that may intrude into the legal services community. While SOME law firms have tight fiscal controls, measure and test marketing activity, monitor true customer satisfaction levels, invest in staff soft skills and engage in rigorous strategic planning, MANY do not.

    It is the MANY that are right to keep their fingers in the dam. Because they are resistant to change. But the genie is out of the bottle (at least in England and Wales) if you forgive the mixed metaphors. The SOME will rise at the expense of the MANY I believe because the market is not getting any bigger.

    Non-lawyers will be the ones who bring changes in fee structure, methods of treating customers like kings and effective marketing processes. Who can blame the ‘establishment’ for trying to resist change when that change brings a threat to the status quo? Daily I speak to thrusting young fee earners and partners – often not career solicitors – who see the opportunity these changes bring.

  7. The main point of this article is entirely correct. It is the risk of unethical behaviour from anyone in a law firm that needs to be addressed, lawyer or non-lawyer.

    May I suggest we can draw some evidence of how unethical behaviour could develop from the independent financial advisors sector. It appears to be standard practice for an IFAs to sell the product that best fits a person’s needs that pays the best commission to the IFA. This may be mildly unethical but a process that does ‘chip away’ at the ‘professionalism’ of financial advisors. If challenged by the regulators the sold service is defensible but a matter of opinion that produces a grey area around what is correct advice.

    It is still to be seen how these commercial pressures will develop for solicitors in the new legal services market and how well the regulations will deal with it.

    • Thanks Alistair. You are right about how things could develop, and there’s every likelihood that they will. But it happens with lawyers, too, so that’s not a reason for preventing ownership. I’ll be the first to criticise unethical behaviour by the owners of law firms – whoever they are!

  8. I totally agree. Earlier today, on Google+, I noted:

    “The GCs of 9 major US companies express hostility to outside ownership of law firms. Their arguments are quaint! If they genuinely worry about the “independence” of their outside counsel, for example, they might want to look at some of the loan agreement terms under which their outside lawyers have borrowed.”

    Regrettably, the GCs views are widely held. They echo much that has been said within the ABA with respect to ABS and generally to outside ownership of law firms. It is the same point of view reflected in that amazing letter the presidents of the ABA and CCBE wrote to Christine Lagarde of the IMF, taking umbrage at the thought that the Troika dared suggest the profession might benefit from competition.


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