Who really owns law firms?

A couple of interesting posts on the Forbes magazine site serve as timely reminders for those debating fee regimes and ABSs in the UK that when thinking about the current deregulation of legal services we need to to think realistically about the World we live in. What do I mean? When criticising ABSs, we need to compare the risks posed against a realistic assessment of risks posed under the current system. We should not, for instance, claim that ABSs promise the ruin of commercialisation of law, if that commercialisation has already taken place. Similarly, and somewhat contrarily, just because there are problems with ‘regular’ moedls of legal practice does not mean we should brush those aside when thinking about ABSs.  We should think critically about the way we regulate lawyers – particularly the intractable conflicts posed by money. Still not following? Please bear with me.

One of the Forbes posts talks about the potential introduction of outside ownership of law firms in North Carolina. It makes the good, not easily over repeated, point that the conflicts associated with outside ownership are in fact of a very similar nature to the conflicts associated with current systems of ownership. Law firms, whether internally or externally owned, are subject to commercial pressures which threaten their professional ideals. What caught my eye about this is the way in which the North Carolina draft legislation hopes to constrain the ethical problems associated with such problems. Not that there is anything very novel about the approach. Daniel Fischer puts it like this:

“Non-lawyer shareholders would be barred from interfering “with the exercise of professional judgment by licensed attorneys,” and in the case of a dispute among lawyers, shareholders and clients it shall be resolved according to the following schedule:

“1. The duty to the Court shall prevail over all other duties.

“2. The duty to the client shall prevail over the duty to shareholders

“That language is designed to allay concerns that lawyers would answer to investors instead of their own clients, or the courts of which they are considered officers.”

I imagine most readers would immediately have concerns about whether this would work. To use current regulatory jargon, much used in discussions of banking regulation and the Murdoch BSB takeover, the response to the problem is behavioural not structural. And in relying on a couple of simple rules, it appears to be a rather weak form of behavioural regulation. Lawyers are placed a little on the back foot here in arguing against it though: rules are what they sell and if rules don’t work on our own kind, when do they work?  For me this points to the need for different forms of regulation which take a much closer look at institutional structures and the financial incentives at work in law firms and ABSs, but I will not hold my breath waiting for it.

The same post emphasised how ABSs were just a particularly topical form of existing conflict problems caused by funding arrangements. I think it is fair to say that it is impossible to think of a funding system which does not involve a conflict of interest between the lawyer and someone (bar Bill Gates ringing you up one day and saying, “Sue x – the sky’s the limit”). That someone is usually the client or a third party funder. The post linked to here to discuss the problems caused by lawyers having to (let’s put it this way) ‘chivvy their cases along’ to service interest on debt purchased to service cases. This reminded me of one of the most commonly asserted claims made against CFAs – that they lead to undersettlment. Detailed explanations tended to suggest this was principally as a result of cashflow pressures. Firms need to keep business coming in and so might be tempted to settle cases earlier than they would all things being neutral. The final thought that struck me, prompted I think by a comment from Neil Rose (@legalfutures) on twitter is that these kinds of pressures flow from most kinds of work and the pressure from outside owners is not a million miles away from the pressures normal creditors. Which led me to wonder, when resisting outside ownership, have firms with significant overdrafts thought about who really owns their firm?  Or, to put it another way, should we be worrying about something else?

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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