Arizona’s Supreme Court recently bulldozed the state’s longstanding prohibition against non-lawyer firm ownership in a major game-changing decision that will have serious implications for lawyers all across the country!
Under Arizona’s recent decision, non- lawyers now have the opportunity for firm ownership and to enter into legal business ventures with the Court’s express approval and encouragement. The Court formally gutted Ethics Rule 5.4, which has long barred non-lawyers from holding any economic interest in law firms and accompanied the decision with a framework to license these new “alternative business structures.” The Arizona Supreme Court also instituted a new licensing process that will allow non-lawyers to begin providing limited legal services, as “paraprofessionals, “including the ability to go into a court with clients.
The idea behind Arizona’s sweeping decision is to address what the Court perceived as an “access to justice” gap and to encourage more affordable and innovative legal industry.” (Reuters 9/28/2020, Merken) Effective January 1, 2021, these changes are just the beginning. Several other jurisdictions, including Chicago and the District of Columbia, are also working towards making a recommendation for similar changes. The Utah Supreme Court has voted unanimously to establish a regulatory sandbox for non-traditional legal providers and services to test new business models. California has also taken a big step in this direction. In May 2020, the California State Bar Board of Trustees voted 9 to 2 to form its own temporary regulatory sandbox for non-attorney law firm ownership.
What does all this mean for you and your law firm?
While the judicial intent behind these measures is to increase the availability and accessibility of legal services to consumers, many lawyers are scared that these non-lawyer ownerships will run them out of business. They fear that non-lawyer participation and ownership will reduce the practice of law to just another commodity, and not a profession. Other lawyers are looking forward to this new development, as it will reduce their operational costs and give them sources of investment cash they never had before.
Although the concerns are obviously understandable, I believe these new measures will change the landscape of law firm ownership to some degree but will not be the death sentence many lawyers fear. Consider the impact Walmart’s emergence had on small businesses many years ago. Before Walmart, the mom and pop privately owned business were the standard across the country. Walmart drove many of these small businesses under because they could not compete with Walmart’s lower prices. The small retailers that remained strong were those that offered something Walmart could not- expertise and a more personalized quality client experience. The businesses that survived and thrived were those that did not attempt to compete with Walmart’s low prices but decided to differentiate themselves instead. The ones that were left standing learned to adapt and change so they could meet the competition head-on.
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As we think about the inevitable competition that these non-lawyer business entities will create, the No. 1 rule is that you should never compete on price. Those small businesses that have survived the “Walmart effect,” never tried to compete with Walmart on price. Instead, they worked on being unique and having a unique selling proposition. They worked on building relationships and positioned themselves as a trusted source for goods and services.
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With that model in mind, I suggest that now, more than ever, small firms and solo practices will have to up their game and work to preserve their client base. Can it be done? Absolutely! The small businesses that have competed and won against Walmart maintained authenticity, offered a unique product, and never attempted to compete on price. These surviving businesses have raving fans that give them 5- stars google reviews and referrals. Law Firms can and should do the same!
Now, if you are a larger firm owner, you may want to look at this emerging non-lawyer development as an opportunity to position yourself as a target for being bought out or invested in by a non-lawyer hedge fund group. I believe we should anticipate that the larger firms who are run efficiently and have a strong firm culture, seamless infrastructure, solid leadership, and effective marketing will likely be the target of Hedge funds over the next several years.
If you happen to be a Mass torts law firm in Arizona, you will most likely see hedge fund investors offering to buy out a large portion of your law firm. This will come quickly as hedge funds are already familiar with loaning money to Mass torts firms, so it will be a logical business response since hedge funds are already comfortable in the mass tort area and will naturally build on that familiarity. You may even see out of state Mass Torts firms placing offices in Arizona so that they can get investors to back massive Mass Torts Campaigns.
You should also anticipate the emergence of powerhouse accounting firms seeking to get in on the non-lawyer legal opportunities by merging with big transactional firms.
Long Term Ramifications: We can look to the United Kingdom and Australia for insights regarding the long-range impact of non-attorney owned firms. Both countries have allowed non-lawyer alternative business structures for many years, and the impact has been relatively minimal. In both countries, lawyer-owned firms continue to significantly outnumber the non-lawyer firms. While non-lawyer alternative structures have found a place in the legal community, they have by no means rendered a death sentence to traditional law firms.
Although this new legal development will definitely have some impact on the traditional law firms, the effects for small practices, domestic practices, criminal practices, and even personal injury practices will not be as dramatic as many fear. However, small firms that fail to up their game by increasing their grass root and trust-based relationship marketing will probably fall by the wayside. As with the Walmart effect on small retail businesses, the emergence of non-lawyer owned firms will not mean the end of traditional law firms – but it will change the game.
