Let’s Get Ethical: Arizona’s Law Firm Ownership Rule Change Propels the Legal Industry into the 21st Century

By Alexandra Nathe.

Every lawyer has a duty to promote equal access to our justice system and advocate for improvements to the law. The Model Rules of Professional Ethics were created to codify this and other legal duties while acting as a guide to ensure right and proper conduct in the practice of law. But what happens when the rules that are supposed to advance access to the legal industry actually work to restrict it?

The Task Force on Delivery of Legal Services

In 2014, the Arizona judiciary created a strategic agenda to further one simple objective—advancing justice. Goal number one of this agenda was “Promoting Access to Justice.” To assist in reaching this goal, the Arizona Supreme Court created the Task Force on Delivery of Legal Services to review the regulation of the delivery of legal services in Arizona and make recommendations on how to improve access to and quality of these services. Among others, the Task Force recommended an amendment to Ethical Rule 5.4 (Arizona’s codification of Model Rule 5.4). E.R. 5.4 prevented nonlawyers from having an economic interest in law firms and prohibited the sharing of legal fees between nonlawyers and lawyers.

The Arizona Supreme Court took this recommendation one step further and became the first state to eliminate the rule entirely. When deciding on the fate of E.R. 5.4, the chair of the Task Force, Vice Chief Justice Ann A. Scott Timmer, said the justices had to ask “are these rules necessary to protect the public? Or are they restraints on the practice of law?” The justices ultimately decided that the rule acted primarily as a restraint on both legal practices and legal innovation, and suggested that there were other ways to protect the public,including a new regulatory framework that will license these new types of lawyer-nonlawyer owned businesses.

This decision will have a far-reaching and long-lasting impact on an industry that has been slow to accommodate social and economic changes. This rule change is a significant step in ensuring law firms remain competitive businesses in the 21stcentury.

Improved Access to Legal Services

In the court’s statement announcing the order to eliminate the rule, Arizona Supreme Court Chief Justice Robert Brutinel stated that “[t]he Court’s goal is to improve access to justice and to encourage innovation in the delivery of legal services.” By allowing outside ownership of law firms, the cost of legal services should be driven down for several reasons. Investors can now inject capital into law firms the same way they do with other corporations and startups. Entrepreneurs and innovation leaders finally have an economic incentive to bring their creativity and perspective to the legal industry. More players in the legal space will lead to increased competition, which will drive the need to create more efficient and cheaper ways of delivering high-quality services.

The same order that eliminated E.R. 5.4 also approved the licensing of nonlawyers as “legal paraprofessionals” (LPs). LPs will act as the equivalent of nurse practitioners in the legal field and will have the authority to provide limited legal services to the public, including representing clients in court. To become an LP, a candidate must meet education and experience requirements, pass a professional abilities examination, and pass a character and fitness process. LPs will only be able to practice in specific fields that include family law, administrative law, debt collection, and landlord-tenant disputes, with limited jurisdiction in criminal and civil matters.

It has long been recognized that there are significant economic and social barriers to adequate legal counsel. By driving down costs and increasing availability of adequate counsel, this order brings Arizona a massive step closer to ensuring equal access to legal services.

Renewed Industry Relevance: Big Law vs. Big Four

While the motivation behind this order was primarily public interest based, it is also likely to have a far-reaching impact on the free market. Model Rule 5.4 has prevented law firms from operating in the same sphere as consulting firms and accounting firms like the Big Four (EY, KPMG, PwC, and Deloitte). Big Law and the Big Four have been slowly encroaching on each other’s turf for years. For example, Deloitte created its U.S. Legal Business Services practice and the law firm Ropes & Gray now offers consulting services such as data analytics and regulatory compliance and education work. However, up until now they have been insulated from direct competition with each other. With the barrier to outside ownership now removed, firms will be able to recruit the same talent that the Big Four attracts. This competition will allow law firms to occupy their necessary position within the legal industry while also enabling them to expand to different avenues.

It is an irrefutable fact that the world is changing at an ever-increasing velocity. If the legal field refuses to change with it, it will be left behind. Arizona’s modification to law firm ownership will likely inspire similar moves from other states, and while this is only the first step in modernizing the legal industry, it is indicative of the massive changes looming on the horizon.

"The Firm" by Baiglmeijer is licensed with CC BY-SA 2.0.