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Capital Ideas

December 2007

As sure as the devil's in London, as the English used to say, equity investors are coming to law firms. Investors already own a personal injury firm in Australia, and they're about to be set loose in the United Kingdom. Competitive pressure will then do the rest—champerty and maintenance be damned. An American lawyer with the moniker Adam Smith, Esq. says you can bank on it.
      Bruce MacEwen, a former New York securities lawyer who runs the Adam Smith, Esq. blawg focusing on the economics of law practice, thinks big firms should be able to raise capital like any other enterprise. Earlier this year MacEwen and free-market academics Milton Regan Jr. at Georgetown University Law Center and Larry E. Ribstein at the University of Illinois College of Law began a threaded conversation about the ethically unthinkable: defying the plain language of the ABA Model Rules to further the business of global law practice.
      What began as a series of email exchanges became a law review article. (Law Firms, Ethics, and Equity Capital: A Conversation, 21 GEO. J. LEGAL ETHICS, December 2007.) Next April the law review article will serve as the outline for a symposium at Georgetown on the future of the global law firm. Attendees won't be the usual band of pointy-headed intellectuals: According to MacEwen, they will include the managing partners of Orrick, Herrington & Sutcliffe; Reed Smith; Latham & Watkins; Fenwick & West; Mayer Brown; and Wilson Sonsini Goodrich & Rosati. That same month Ralph Baxter, Orrick's chair and CEO, intends to focus his annual Law Firm Leaders Forum in San Francisco on the same topic.
      But wait a minute. Didn't the ABA put multidisciplinary practice (MDP) to rest in 1983 with Model Rule of Professional Conduct 5.4? The language of that rule, adopted in most states, seems clear enough. It reads in part, "(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit" if a nonlawyer "owns any interest therein," "is a corporate director or officer thereof," or "has the right to direct or control the professional judgment of a lawyer."
      In 2000, after the ABA's MDP commission suggested that under limited conditions "lawyers should be permitted to share fees and join with nonlawyer professionals," the ABA House of Delegates overwhelmingly rejected the idea. In June 2001 the State Bar of California Task Force on Multidisciplinary Practice released its own report, which concluded that existing prohibitions on fee sharing with nonlawyers and "directly or indirectly transferring to nonlawyers ownership or control over entities practicing law" should not be revised. Case closed.
      But last May, Slater & Gordon—an Australian personal injury firm with 21 branch offices—launched the world's first publicly traded law firm. Even more compelling, the United Kingdom is about to enact the Legal Services Bill, which will permit regulated "alternative business structures" that include nonlawyers. The bill had its origins in the Clementi Report, a 2004 initiative for promoting competition and innovation in legal services that was endorsed as a white paper by Tony Blair's government in October 2005.
      These developments intrigued MacEwen, Regan, and Ribstein. Regan's concerns include the ethical perils associated with outside ownership—potential interference with a lawyer's judgment and "practicing to the share price." But the initial problem the three faced is practical. MacEwen asked the others: "Could law firms, consonant with ethical rules, create a derivative financial instrument, tradable as if it were a stock, engineered to reflect the implicit value of the firm? And, could this financial instrument be sold to and bought by: (1) lawyers within the firm; (2) C-suite executives and other nonlawyers at the firm; or (3) outside investors, presumably 'accredited,' such as private equity funds?"
      Regan and Ribstein thought such an instrument could be created, but Regan doubted any bar association would be likely to accept it. So why seek outside investors? The reasons include greater access to capital for expansion, opportunities for individual compensation consistent with other professionals, and competition from global law firms that conduct business under different rules.
      Few think that outside investing in law firms will be permitted soon, or doubt that bar associations will oppose it. "In the U.S., the ABA and the state bars will resist like crazy," says Ward Bower, principal at Altman Weil consulting in Newtown Square, Pennsylvania. "But if this experiment is successful at making legal services affordable in the U.K., public pressure could force Congress and the state legislatures to get involved."
      In early 2008 the State Bar's Commission for the Revision of the Rules of Professional Conduct plans to release for comment a new version of Model Rule 5.4—which is likely to look much like the existing rule. "There is no burning desire to revisit MDP," says Mark L. Tuft, a partner at Cooper, White & Cooper in San Francisco and co-vice chair of the commission. But should U.K. firms gain a competitive advantage, Tuft says, "I suspect we'll see some rattling around here."
      So now all eyes are on the U.K. "The Legal Services Bill will pass this fall," predicts Tony Williams, principal at London-based Jomati Consultants and former worldwide managing partner of Andersen Legal and Clifford Chance. "It may be 2011 or 2012 before new business structures come into force, but this bill will be a body blow to the old guild system, and bring law into the 21st century."
      In the United States, most of the would-be revolutionaries are conservatives—MacEwen's alter ego, after all, is Adam Smith, Esq. He sees destruction of the guild system of law as inevitable. "If Clifford Chance takes advantage of the Legal Services Bill," he says, "managing partners in this country immediately will demand a level playing field. And they will be right. The Darwinian process then will take hold."
      "The critical questions are global," says Orrick's Baxter. "To what extent should law firms be permitted to raise capital like other businesses? Clifford Chance, for instance, is a U.K. firm that is also a New York firm. European-origin firms now have a substantial presence in the U.S. So which rules apply? Ultimately, it would be difficult to answer that question separately in different countries."

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