ABA Formal Opinion Approves Lawyers’ Passive Investment In Law Firms With Nonlawyer Owners – Litigation, Mediation & Arbitration

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ABA Formal Opinion confirms passive investment by attorneys in law firms with non-attorney owners

September 23, 2021

Holland & Knights

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Highlights

• Arizona and Utah recently began allowing non-attorneys to set up law firms or become part-owners of law firms, raising the question of whether attorneys licensed in jurisdictions that do not allow non-attorneys to participate in a law firm passively invest in law firms If the owners are not lawyers, the states that allow such an alternative business structure (ABS).
• In Formal Ethics Opinion 499, the American Bar Association (ABA) answered yes, albeit with reservations, to address confidentiality and conflict issues.
• This Holland & Knight warning looks at the current law firm ownership landscape, provides an overview of the ABA Formal Opinion 499, and provides several considerations for attorneys looking to diversify their portfolios with such an investment.

The Formal Ethics Opinion 499 of the American Bar Association (ABA) takes a small step forward in allowing alternative business structures (ABS) in legal practice. Recently, Arizona and Utah began allowing non-lawyers to set up law firms or become part-owners of law firms. That raised the question of whether attorneys licensed in jurisdictions that do not allow non-lawyers to have a stake in a law firm could passively invest in non-legal owned law firms in states that do so. The ABA answered yes to this question, albeit with reservations, in order to address confidentiality and conflict issues.

The current law firm ownership landscape

Under ABA Model Rule 5.4, which has been adopted in almost all U.S. jurisdictions, attorneys are prohibited from sharing legal fees with a non-attorney or practicing in a law firm that a non-attorney is involved in, or as an officer or director is working. The ban, considered by some to be outdated, was intended to preserve the professional independence of lawyers. Arizona and Utah each changed their version of Rule 5.4 to allow for an ABS and legal fee sharing with non-attorneys.1 In 2020, the Utah Supreme Court launched a pilot program that allowed judicial entities to accept non-legal owners into law firms . And in 2021, Arizona repealed its rule 5.4 in favor of a system where an ABS with non-attorney owners or investors can be certified by the Arizona Supreme Court.

The regulatory changes in Arizona and Utah prompted the ABA to inquire “whether a lawyer working in a jurisdiction that adheres to Model Rule 5.4 (that is, a jurisdiction that strictly prohibits ownership of law firms without attorneys) should be admitted to the bar Is a ‘passive’ investment capable of acquiring interest in an ABS? “

The Impact of Formal ABA Opinion 499

In Opinion 499, “passive investment” was defined as follows:

For the purposes of this statement, a “passive” investment interest means that a lawyer pays money into an ABS with the aim of generating a monetary return on this investment. Passive investments do not include scenarios in which the investing lawyer practices law through the ABS, administers or holds a corporate or managerial position in the ABS or is otherwise involved in the day-to-day business of the ABS.

In addition, passive investment, as used in this statement, means that the investing attorney has no access to the information protected by Model Rule 1.6 without the informed consent of the ABS client.

According to this definition, Opinion 499 concludes that a lawyer in a country that complies with Model Rule 5.4 can make a passive investment in an ABS in a country that has approved the ABS structure without breaking rule 5.4 violated.

The Opinion dealt extensively with the conflicts of interest that may arise from an attorney’s passive investment in an ABS that is wholly or partially owned by non-attorneys, as follows:

• Current customer conflicts: Before investing in an ABS, the attorney must analyze whether one of his current customers within the meaning of model rule 1.7 (a) (2) is negative towards the customers of the ABS at the time of the investment. If such a conflict arises, the attorney must either refrain from investing or address it appropriately in accordance with model rule 1.7 (b).
• Potential or future conflicts in general: However, any potential or future conflict does not prohibit passive investment any more than such circumstances prevent a lawyer from investing in a publicly traded company.
• Doing business with a customer: Lawyers who ask a client to invest in an ABS, or who invest in an ABS that is a client, should consider whether they must comply with Model Rule 1.8 (a).
• Attribution: Alone the passive system, which by definition does not allow the investing lawyer “access to information protected by the model rule 1.6 without the informed consent of the ABS customer”, does not create the kind of relationship to the ABS that allows conflicts to be attributed according to the model rule requires 1.10 between attorney and ABS. As explained in Opinion 499, “personal conflicts of interest are generally not attributed to other lawyers in the same firm, unless those interests involve a significant risk of significantly limiting the representation of a client by the remaining attorneys in the Model Rule Lawyer firm.” See model rule 1.10 (a) (1). Outside the context of a personal conflict of interest, traditional imputation analysis would be required.
• Continuous monitoring for conflicts: Lawyers should, however, pay attention to simultaneous conflicts that could arise, for example, due to the legal representation of a client whose interests conflict with a client of the ABS. In such a situation, legal representation of the client would be “substantially limited” by the attorney’s investment interest in the ABS, but other lawyers in the firm could probably represent this client.

The committee also looked at the conflict of laws issue raised by annexing an ABS by a model rule jurisprudence attorney and concluded that the law of the jurisdiction in which the ABS is allowed should apply , “Because according to rule 8.5 (b.)) (2), the passive investment of a model rule lawyer in ABS would prevail in the jurisdiction (s) in which the ABS would be permitted.”

Finally, the opinion cautions that attorneys considering investing in an ABS “should exercise due diligence to avoid confidential customer information held by the ABS or other associations that could lead to a determination that the Model Rule Lawyer is part of it the ABS ”firm. ‘”

Conclusion and takeaways

Lawyers looking to diversify their investment portfolios can conveniently consider a passive investment in an ABS, or in the words of ABA Formal Opinion 499, an investment where the “attorney has no access to the through without the ABS client’s consent Model Rule 1.6 has proprietary information “. Informed Consent. “Lawyers considering such an investment should pay particular attention to conflicts of interest under Model Rules 1.7 and 1.8 both at the time and after the investment (just as they should with more traditional investments) and be careful not to disclose confidential information ABS customers can find out about model rule 1.6 in order to avoid the risk of ABS conflicts being taken into account.

footnote

1 The District of Columbia allows individual non-attorneys to be partners in law firms in certain circumstances as long as those non-attorneys provide professional services to assist the firm in the provision of legal services rather than legal advice. However, the District of Columbia does not allow passive investment in law firms.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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