Practicing Law: Who Can And Who Cannot?

The unauthorized practice of law by non-lawyers is generally prohibited. However, there are limited circumstances where non-lawyers can have ownership interests in law firms and provide certain legal services. Rule 5.4, established by the American Bar Association (ABA), prohibits lawyers from forming partnerships with non-lawyers and sharing legal fees with them if the partnership involves the practice of law. Nevertheless, some states like the District of Columbia, Arizona, and Utah have relaxed their interpretations of Rule 5.4, allowing non-lawyers to hold financial interests in law firms and even employ lawyers to provide legal services. These developments have sparked debates about increasing access to legal services, reducing costs, and maintaining professional independence and ethical duties.

Non-lawyer ownership of law firms

The American Bar Association's Model Rule 5.4, subsection (a), states that " [a] lawyer or law firm shall not share legal fees with a nonlawyer". Subsection (b) holds that " [a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law". The rule was first released in 1983 and has been adopted by state bar associations.

The rule effectively prevents non-lawyer ownership of law firms. The reasoning behind this rule is to prevent non-lawyer owners, who are typically not bound by professional conduct rules, from prioritizing profits over meeting ethical duties and providing good legal services. Another aim is to protect attorney-client confidentiality by preventing non-lawyers from accessing client information.

However, there is a growing recognition that non-lawyer ownership of firms may not be as harmful as previously imagined. In fact, non-attorney-owned legal practices have worked well in other countries, and breaking down this blanket prohibition may serve the public well. As a result, several states have relaxed their Rule 5.4 requirements. For example, in 2020, Utah and Arizona made significant reforms to allow and regulate non-lawyer investment and ownership. Utah instituted a regulatory "sandbox" to oversee non-traditional firms with non-lawyer ownership, creating the Utah Office of Legal Services Innovation to license and regulate ABSs and ALPs within the state. The Utah model allows for the licensing of traditional law firms with non-lawyer ownership, as well as non-lawyer-owned entities employing lawyers to practice law. Arizona eliminated its Rule 5.4 entirely, creating a new licensing requirement for Alternate Business Structures ("ABS") that are partially owned by non-lawyers but that provide legal services.

Other states have taken more modest steps. For example, a 2021 amendment to California's version of Rule 5.4 permits greater fee sharing with non-attorney-owned organizations that qualify as nonprofits under IRS rules. A Massachusetts firm may share fees with a "qualified legal assistance organization" as long as the fee-sharing is disclosed to and approved by the client.

Despite these changes, most other jurisdictions in the United States are not currently following Utah and Arizona's example, and some remain explicitly opposed to non-lawyer ownership of law firms.

Sharing legal fees with non-lawyers

The American Bar Association's Model Rule 5.4, subsection (a) states that " [a] lawyer or law firm shall not share legal fees with a nonlawyer". However, there is ongoing debate about the validity of this rule in the modern legal landscape. Critics of the rule argue that it stifles innovation in legal service delivery and perpetuates a cost-prohibitive billing system for consumers. They suggest that allowing lawyers and non-lawyers to share fees would increase revenue streams for law firms, reduce the cost of legal services, and increase the number of competitive firms.

Proponents of change point to the success of online providers of legal forms and legal-adjacent services, such as Rocket Lawyer and LegalZoom, as evidence that the legal industry needs to adapt to modern technologies to stay relevant and accessible. Additionally, they argue that the rule restricts the profession's ability to grow and limits opportunities for law firms to provide comprehensive services.

In response to these criticisms, some states have considered or implemented changes to their rules regarding non-lawyer fee-sharing and business partnerships with lawyers. For example, Arizona eliminated Rule 5.4 in 2020, allowing non-lawyer ownership and fee-sharing with attorneys under specific conditions. Similarly, California was set to join Arizona in modernizing its rules until the state legislature passed legislation expressly forbidding the practice in 2022.

On the other hand, the District of Columbia has allowed non-lawyers and lawyers to form businesses together since 1991, albeit with restrictions on non-lawyers receiving payment for legal services.

The Association of Professional Responsibility Lawyers (APRL) has also submitted a letter to the American Bar Association (ABA) urging significant revisions to Model Rule 5.4. APRL's proposed revisions include maintaining professional judgment, supervision of non-lawyers, reasonable fees, and obtaining client consent when sharing fees with external non-lawyer entities.

While there are valid arguments on both sides of the debate, it is clear that the legal profession is facing increasing pressure to adapt to a changing market and ensure access to justice for all.

Non-lawyers directing lawyers' professional judgement

The American Bar Association (ABA)'s Model Rule 5.4, subsection (a), states that " [a] lawyer or law firm shall not share legal fees with a nonlawyer". Subsection (b) holds that " [a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law".

These restrictions were considered essential for keeping lawyers independent in their legal advice and preventing the possibility of non-lawyer owners who might prioritise profits over duties to clients. However, some argued that preventing law firms from expanding into ancillary practices managed and partially owned by non-lawyers limited opportunities to provide comprehensive services and to charge lower rates to clients.

The Rules of Professional Conduct outline the professional responsibilities of lawyers, including the requirement to be competent, prompt, and diligent, to maintain client confidentiality, and to conform to the requirements of the law in both professional service to clients and in the lawyer's business and personal affairs.

While non-lawyers cannot practice law, they can own shares in law firms. Recent developments in several states suggest new possibilities for non-lawyer ownership stakes in law firms, indicating a potential shift in the way legal services are provided.

Non-lawyers prioritising profits over duties to clients

The potential for non-lawyers to prioritise profits over their duties to clients is a key concern in the debate over non-lawyer ownership of law firms. The American Bar Association's Model Rule 5.4, released in 1983, states that " [a] lawyer or law firm shall not share legal fees with a nonlawyer" and that " [a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law". This rule was established to ensure the independence of lawyers and prevent non-lawyer owners from prioritising profits over ethical duties and providing good legal services.

The rule has been challenged by law firms, who argue that it prevents them from accessing non-lawyer investment and fully representing clients against larger, better-funded opponents. Some argue that it limits opportunities for law firms to provide comprehensive services and charge lower rates due to multiple revenue streams. Additionally, Rule 5.4 has been criticised for preventing commercial legal clinics from offering low-cost legal services, reducing equal access to the court system.

However, the potential for non-lawyer owners to prioritise profits over duties to clients remains a valid concern. Lawyers have a duty to act in their clients' best interests, maintain confidentiality, and provide effective and timely communication. Non-lawyers, who are typically not bound by professional conduct rules, may not uphold these ethical standards. This could result in a conflict of interest, hindering their ability to represent clients effectively and potentially leading to negative consequences for the client.

While there is a growing recognition that non-lawyer ownership may not be as detrimental as previously thought, and several states have relaxed their Rule 5.4 requirements, the potential for profit prioritisation remains a key consideration in the ongoing debate. The success of online providers of legal forms and the expansion of accounting firms into legal services highlight the demand for efficient and cost-effective legal services, driving the conversation about non-lawyer ownership and the future of Rule 5.4.

Non-lawyers' access to client information

The American Bar Association's Model Rule 5.4, subsection (a), states that " [a] lawyer or law firm shall not share legal fees with a nonlawyer". Subsection (b) holds that " [a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law".

Despite this, non-lawyers may still have access to client information in certain circumstances. The basic attorney-client privilege protects client communications with the attorney. It also extends to responsive communications from the attorney to the client. The attorney-client privilege is a rule that protects the confidentiality of communications between lawyers and clients. Under this rule, attorneys may not divulge their clients' secrets, nor may others force them to. The purpose of the privilege is to encourage clients to openly share information with their lawyers and to let lawyers effectively represent their clients. The duty of confidentiality prevents lawyers from discussing information related to their clients' cases with others. They must ordinarily keep private almost all information related to representation by the client, even if that information didn't come from the client.

However, there are exceptions to this rule. For example, clients who speak to their lawyers about pending lawsuits in private, with no one else present, can reasonably expect secrecy. If someone were to secretly record the conversation, that recording would probably be inadmissible in court. Nevertheless, a client cannot protect certain facts from disclosure simply by communicating them to their lawyer. If the information may be gathered from another source besides the privileged communication, then the underlying information itself is not privileged. Clients must bear this in mind: merely conveying something to an attorney will not prevent the underlying facts from compelled disclosure if they can be discovered from a non-privileged source.

Furthermore, most states allow or require attorneys to disclose information learned from a client that will prevent death or serious injury. Many have a similar rule where revealing otherwise confidential information would prevent or help recover money lost due to a crime or fraud.

Frequently asked questions