Rule 5.4: Potential Changes to the Ownership Structure of Law Firms

By: Gurshaan Chattha

Under Rule 5.4, nonlawyers in the United States cannot hold ownership in law firms, partner with lawyers, or share legal fees with attorneys. However, this policy has changed in certain US states and could even change nationwide. A repeal of Rule 5.4 could benefit larger law firms, while hurting the bottom line of smaller ones.

policy background 

Rule 5.4 was originally intended to protect lawyers’ professional judgment from the influence of nonlawyers. It safeguards against the influence of investors and outside holding parties in the legal landscape. Unlike the standard US corporation, which can be owned and influenced by diverse members, the US law firm structure has long been limited to lawyer shareholders.

potential impact of changing rule 5.4

With recent changes to law firm ownership laws in Australia and multiple European countries, the United States may soon reconsider its regulations, too. Advocates argue that having nonlawyer shareholders in the legal landscape enables more underserved individuals to gain access to legal services.

In August 2020, Arizona became the first US state to make changes to this rule. The state now allows investment by nonlawyers and opportunities for fee-sharing at certain law firms that meet rigorous standards. Utah and Florida also made changes to Rule 5.4 with pilot programs to allow nonlawyers to hold less than 50% equity in law firms. These pilots would ban passive ownership by third parties.

New York, North Carolina, Connecticut, and Illinois are all considering implementing changes to Rule 5.4.

Although many of these changes are in the early stages, the potential consequences could be significant. Many different players will have a lot to gain and lose. For big law and accounting firms, a relaxation of ownership laws could lead to financial gains. Other legal web services could leverage these ownership changes for growth. However, ownership changes could have adverse effects on the bottom line for smaller to mid-size law firms, especially if large law firms become more powerful.

Conclusion

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