Steve German is Managing Partner at Scout Law Group based in Phoenix, Arizona.
Alternative business structure law firms were first introduced in Utah in 2020 under a pilot project and permanently allowed in Arizona as of 2021. These firms remove a long-established rule that prevented law firms from sharing ownership with non-lawyers. A mainstay of the legal industry, this rule has been in place for years.
The alternative business structure was created with the idea of expanding access to justice for underrepresented communities and encouraging innovation in the way law firms operate. ABS firms, like the one I own and manage in Arizona, allow attorneys to share ownership of a law firm and combine efforts with private equity.
What are the potential benefits of ABS firms?
From my perspective, this structure not only has the potential to benefit plaintiffs but also break down some of the legal field’s highest barriers to entry. This includes the cost of attending law school, as well as the historical discrimination and structural barriers that have made obtaining a legal education and finding employment more difficult for people of color. A report from the National Association for Law Placement, released in January 2023, revealed that while the legal field has started to make progress in diversity and inclusion efforts, there is still more that needs to be done to achieve equity in the profession. The report found that, currently, only 4% of all law firm partners are women of color. The ABS law firm model can help open the door to minority ownership and encourage outreach to help ensure those most in need are afforded access to justice.
In addition to lifting restrictions on law firm ownership, the Arizona Supreme Court eliminated long-standing rules that prohibit lawyers from sharing their fees with non-lawyers. Arizona, like every other state and jurisdiction in one form or another, had previously adopted the American Bar Association’s Rule 5.4, which considered fee-sharing with non-lawyers a significant ethical violation with severe consequences. The rule change in Arizona makes it the only state in the country to eliminate its 5.4 rule entirely and allow lawyers to share fees with anyone, including paralegals on staff, marketing professionals, business development managers and others that refer clients to a law firm.
When non-lawyers have increased access to ownership and equity, better legal representation regardless of social status can result. When employees from various backgrounds have increased equity in the firm, they’re brought closer to the work and have a voice in deciding how to best represent clients or steer the business forward.
What should you know before starting an ABS firm?
Starting an ABS law firm is a unique and exciting venture, but there are several key steps a lawyer must take and keep in mind when pursuing this path. Firstly, working with a financing partner has countless benefits, but also carries unique challenges and vulnerabilities.
Decisions on representation and how cases are prosecuted must be exclusively reserved for the attorney to decide. However, the attorney must have a mutual understanding and be able to trust a non-lawyer owner will fulfill their promises to fund the firm. An attorney must never lose control over decisions on how a client’s case is handled. The non-lawyer must be walled off from client communications and anything having to do with how cases are prosecuted. It cannot force an attorney to compromise the handling of a client’s case.
However, budgeting decisions and timing of when funds are available is something that must be agreed to before joining with a non-lawyer. An attorney does not have exclusive control over a law firm’s financing and access to funds.
As with any partnership, it is imperative that an attorney looking to open an ABS law firm ensures non-lawyers understand the consequences of their actions. They need to realize that the lawyer must prohibit any conduct that compromises the client’s best interests or quality of representation.
An attorney’s ability to provide appropriate representation to clients is dependent on a non-lawyer owner living up to their promises. A client’s case will suffer harm if promised funds are withheld and an attorney cannot pay filing fees, expenses related to depositions, expert witness fees and so on. A law firm’s reputation can easily be destroyed if it cannot afford to pay the basic costs and expenses needed to represent a client.
Reputation and image are key factors to consider as well. Similar to launching any new business, but especially true when launching an ABS law firm, the founders must prioritize and invest in their brand image to generate awareness and build a unique profile for their businesses. In the legal industry, differentiation from competitors is critical, and building a uniform brand image that aligns with the mission of your ABS law firm will be very useful in the long term. Logo development, a cohesive mission statement, marketing and PR campaigns, and a user-friendly website are necessary steps when forming an ABS law firm.
Launching an ABS law firm in our current landscape provides founders a unique opportunity to set industry standards and be a leader in the space. I’m finding that more and more states are carefully monitoring Arizona’s ABS firms and evaluating whether to allow non-lawyer ownership. There is both an opportunity and a responsibility for ABS law firms to create benchmarks for the industry and help to promote a structure best leveraged to increase access to justice and spark further innovation in the field.
ABS law firms by their very design were created to provide greater access to the justice system. At the same time, these firms are creating more opportunities for people with diverse backgrounds to participate in the legal services industry and spurring innovation in an industry that I believe is long overdue for change.
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