The ability of attorneys to maintain their professional independence is critical to effectively protecting and serving the public. To this end, the American Bar Association (ABA) adopted Model Rule 5.4 in 1983, which restricts an attorney’s capacity to share legal fees with nonlawyers or enter into business partnerships with them. The ABA asserted that allowing attorneys and nonlawyers to combine their businesses would inherently create tension between the client’s interests and the commercial goals of the entity.
In recent years, however, barriers to access to justice have become increasingly apparent. Many attorneys are struggling to meet the surge in demand and competition. This gap is often being filled by do-it-yourself service providers who operate with little or no attorney involvement and are not held to the same ethical standards as lawyers. Consequently, numerous states and the ABA are reassessing Model Rule 5.4 to determine if modifications are necessary in the modern legal landscape.
Benefits and Burdens of Restricting Nonlawyer Ownership and Fee Sharing
During the decades that the current ABA Model Rule 5.4 has been in place, its efficacy and necessity have prompted continuous debate. Since its passage in 1983, the legal profession has been divided on the ABA’s decision to exclude nonlawyers from the business of law. Although the debate remains steady, there are notable shifts occurring.
Protection of Professional Judgment and Independence
Attorneys owe ethical duties to their clients, requiring the provision of competent legal services and sound legal advice that prioritizes the client’s interests and specific situation. A rule prohibiting nonlawyers and lawyers from sharing legal fees or co-owning legal businesses aids in achieving this fundamental goal.
Without the constraint of Model Rule 5.4, attorneys would inevitably be influenced by the financial and professional incentives stemming from a partnership with a nonlawyer. This could potentially expose the public to manipulation by unscrupulous individuals. Furthermore, even well-intentioned attorneys would be subject to the inherent influences of a business relationship with nonlawyers.
Conflict of Interest Mitigation
As noted by the Illinois Bar Journal in 2013, the legal profession is fundamentally a profession, not merely a business. When providing clients with legal counsel, attorneys must be able to advise fully and freely, unpressured by business relationships or financial partnerships, and without considering obligations to shareholders or other parties.
If lawyers and nonlawyers were to co-own businesses, certain inherent pressures and obligations would arise from those organizational structures. Attorneys would risk creating a conflict of interest between what is genuinely best for their client and what is profitable for the business and its shareholders. This outcome constitutes a disservice to the attorney, the client, and the public.
Addressing Regulatory Inconsistencies for Nonlawyers
Attorneys are held to the highest standards of ethics and professional responsibility. Those who fail to meet these rigorous standards face disciplinary action and penalties from the highest state court, which is essential for maintaining the profession’s integrity and public trust.
Nonlawyers, however, are not universally subject to the same regulatory and ethical standards across the nation or within each state. Furthermore, courts do not possess the same disciplinary authority over nonlawyers as they do over attorneys. This disparity potentially impedes the court’s ability to regulate and address nonlawyer activity that might otherwise be unethical or represent a violation of an attorney’s professional responsibilities.
Arguments Against ABA Model Rule 5.4
Proponents for changing the rule argue that the legal profession’s insular nature makes its services cost-prohibitive and potentially irrelevant in modern times. They maintain that the legal field must adapt to new technologies to remain competitive and avoid being overshadowed by technology companies offering legal-adjacent services.
Current Rules Contribute to Cost-Prohibitive Legal Services
Existing rules restrict the profession’s capacity to grow and innovate, thereby sustaining a cost-prohibitive billing system for consumers. Allowing lawyers and nonlawyers to share fees would increase revenue streams for firms nationwide. The intended effect is a reduction in the cost of legal services and an increase in the number of competitive firms.
Modernization Could Increase Access to Justice
According to a September 2021 report released by the Institute for Advancement of the American Legal System (IAALS) and The Hague Institute for Innovation of Law (HiiL), America faces a pervasive crisis regarding access to justice. Approximately 66% of the 10,058 study participants had experienced at least one legal problem in the preceding four years, and about 51% of those problems remained unresolved during that period.
If the rules were modified to permit attorneys to share fees with nonlawyers, attorneys could partner with various companies to provide more affordable legal services. Without these changes, the public is often forced to navigate legal issues alone or rely on DIY services that may not fully inform them of their rights.
The Legal Profession Must Adapt to the Changing Landscape
With the market now saturated with DIY software companies offering legal services, it is evident that the pressure is mounting on attorneys. The profession must make timely decisions or risk becoming irrelevant. Permitting alternative business structures (ABS) involving lawyers and nonlawyers could enable attorneys to remain relevant and actively participate in a transforming landscape that threatens the survival of traditional legal practice. The walls are closing in on attorneys and the profession must decide soon or risk becoming irrelevant.
State Perspectives on Nonlawyer Fee Sharing and Firm Ownership
Many states have considered the possibility of modifying the rules governing nonlawyer fee sharing and business partnerships with attorneys. Not every state agrees that allowing nonlawyers to share fees or work with attorneys in these capacities is the correct solution, but some jurisdictions have begun to embrace change.
- Arizona – On August 27, 2020, the Arizona Supreme Court unanimously voted to eliminate Rule 5.4, which had prohibited nonlawyer ownership and fee sharing with attorneys. Arizona now permits organizations, including law firms, to apply for an Alternative Business Structure (ABS) license, provided they meet specific requirements. Under Arizona rules, only attorneys and authorized legal professionals can provide legal services to the public. This significant rule change was enacted to address the public’s growing interest in allowing lawyers and nonlawyers to form partnerships. The licensing requirement helps increase access to justice while allowing the Arizona Supreme Court to regulate and monitor the profession.
- California – California was expected to follow states like Arizona in modernizing its rules to allow nonlawyers to share fees and operate businesses with lawyers. However, this changed when the California legislature, which regulates the State Bar of California and attorneys, passed legislation on September 18, 2022, explicitly forbidding the practice. Even so, the bill encourages the State Bar to explore ways to provide limited licenses to practice law to law students and to use technology to increase access to justice. For now, the question of nonlawyer fee sharing or ownership in legal businesses remains closed.
- District of Columbia – The District of Columbia is unique in that it has, since 1991, permitted nonlawyers and lawyers to form businesses together, though it still restricts the capacity of nonlawyers to receive payment for legal services. DC’s rules are limited: the business relationship between lawyers and nonlawyers must have the sole or primary purpose of providing legal services. Furthermore, nonlawyers entering into business with lawyers must agree to adhere to DC’s ethical standards and professional responsibility rules for lawyers.
- Florida – Florida also considered whether to change its rules to permit nonlawyers to form business partnerships and share fees with lawyers. In March 2022, the answer was a unanimous “no.” The Florida Supreme Court did approve one recommendation from its Special Committee to Improve the Delivery of Legal Services: to allow not-for-profit legal service providers to form a corporation and permit nonlawyers to serve on the board of directors. The Florida Bar Association acknowledges that improvements are necessary to increase access to justice and is committed to identifying appropriate changes.
- Georgia – Georgia declined to permit its attorneys to share legal fees or form partnerships with nonlawyers. However, the Georgia Supreme Court did open the door for licensed Georgia attorneys to conduct business with authorized ABS organizations in other jurisdictions, provided the arrangement is legal in that other jurisdiction. Additionally, the fee arrangement between the Georgia attorney and the ABS must not otherwise violate the Georgia ethics rules.
- Illinois – In Illinois, the Chicago Bar Association and Chicago Bar Foundation formed a Task Force on the Sustainable Practice of Law & Innovation. The Task Force aimed to identify areas where the legal profession lags and to develop methods to help the public access necessary legal help. After extensive deliberation, they issued a report on September 28, 2020, recommending ways to encourage a more sustainable, modern, and equitable legal profession. Despite substantial support and acknowledgment of the Task Force’s core assertions, the Illinois State Bar Association rejected the recommendations to explore ways for lawyers to “responsibly partner with other disciplines.” Instead, the Illinois State Bar Association drafted the resolution eventually adopted by the ABA, reaffirming ABA Model Rule 5.4.
- Massachusetts – Like many other jurisdictions, Massachusetts has resisted efforts to allow nonlawyers to hold an ownership interest in businesses engaged in the practice of law. Massachusetts is distinct, however, in its rules concerning fee sharing between nonlawyers and lawyers. Massachusetts’s ethics rules permit a qualified legal assistance organization to share in specific legal fees earned by an attorney for legal work provided to a client referred to the attorney by that organization. This arrangement is permissible if the client is informed of this at the beginning of representation and provides informed consent.
- New Mexico – The New Mexico ethics rules allow lawyers and specific non-profit organizations to share in court-awarded legal fees. The rules allow this fee-sharing arrangement if the non-profit organization “employed, retained, or recommended” the lawyer’s services in the matter. New Mexico is exploring other ways to expand access to legal services. For instance, in 2019, the New Mexico Supreme Court began studying the possibility of allowing nonlawyers to provide legal aid to clients in limited circumstances.
- Utah – Task forces in Utah have been studying methods to increase access to justice and modernize the legal profession since August 2018. Their work culminated in August 2020 with the Utah Supreme Court’s creation of the Office of Legal Services Innovation. This Innovation Office oversees the regulatory sandbox initiative, where lawyers and nonlawyers develop new and creative ways to serve the public’s legal needs. Organizations apply to the Innovation Office to form a business providing legal services to the public. The Innovation Office reviews the application, assessing factors including the risk level involved in the provision of the proposed legal services. If approved, the organization can provide legal services to the public and must maintain its registration with the Innovation Office. In 2020, the first law firm founded by nonlawyers opened with permission from the Innovation Office. One such firm, for example, allows clients to pay a low-cost monthly subscription fee to have 24/7 access to lawyers via telephone, subject to the terms of the subscription.
- Washington – Washington has taken steps to encourage access to justice and modernize the legal profession. In 2012, the Washington Supreme Court authorized the creation of Limited License Legal Technicians (LLLTs) to provide affordable legal services to people in limited types of cases. The Washington Supreme Court did not change its rules prohibiting nonlawyers from sharing fees or owning a legal business with lawyers. However, in 2020, the Washington Supreme Court decided to sunset the LLLT program because it was deemed not to have achieved its desired outcome. As a result, a June 2023 deadline is imposed for new LLLT applicants to meet the requirements for a license and take the exam. Whether Washington State will revisit this program remains to be seen.
The Initial Impact of Transformative Change
Jurisdictions across the nation are pursuing different strategies to address barriers to access to justice and modernize the legal profession. While not every state agrees on the optimal path forward, recent actions clearly indicate that addressing these challenges is a consensus priority. Regardless of one’s position in the debate surrounding Model Rule 5.4, the paramount concern is that the profession continues to find practical and innovative ways to advocate for the public. This discussion is vital for Human&Legal.
Michael Abdan is a licensed attorney in the state of New York and Florida and a Partner at CloudLex.
