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Rule 5.4 and the Chance that American Law Firms Will Eventually Go Public

Currently, every jurisdiction in the United States prohibits public ownership of law firms.1 Though each state is free to adopt its own ethical rules, most base their ethical rules on the American Bar Association’s Model Rules of Professional Conduct, which prohibit profit sharing with non-lawyers in Rule 5.4.2 The only exception is that in Washington, D.C., law firms with lobbying practices are allowed to have non-lawyers as partners, but there has been resistance to expanding even that limited exception to other jurisdictions.3 This has been the standard across the world for years, but other countries are beginning to relax their rules, which has allowed for the world’s first publicly traded law firms.4 When, if ever, will the United States begin to allow for publicly traded law firms?

 

Those who support the repeal of Rule 5.4 (and a corresponding repeal of the similar ethics rules in each state) argue that allowing law firms to sell stock would encourage investment in the long-term growth of the firm over short-term gains.5 Law firms are generally funded by the one-time capital contributions of equity partners, who take that capital with them if they leave the firm or retire.6 Allowing partners to have long-term equity in the firm which they can hold on to after they retire, similar to employees of publicly traded companies that receive stock options as part of their compensation, would incentivize partners to prioritize the long-term health and growth of the firm and contribute in ways that will benefit the firm in the long run, for instance taking time to train young lawyers.7 They also say that it will make law firm finances more stable by allowing firms to raise capital that is not dependent on equity partners, who can take their capital contributions with them when they leave the firm, and that is more flexible than lines of credit from banks.8

 

The vast majority of practicing attorneys, however, oppose the change and argue that it would threaten the professional independence that is necessary for lawyers to fulfill their obligations to clients.9 Some attorneys have gone so far as to claim that it “would be the end of the profession and a disaster in the making.”10 Those who support the current rules claim that public ownership and the fiduciary duties that the firm would owe to outside shareholders are irreconcilable with the firm’s fiduciary duties to its clients.11 Shareholders will prioritize maximizing profits, which might also sacrifice other ethical obligations of attorneys that do not generate profit for the firm, like pro bono work.12

 

Any change to the rules would have to come on a state-by-state basis, and there are no states currently considering changes to their ethics rules that would allow law firms to be publicly traded.13 The world’s first publicly traded law firm, Slater & Gordon of Australia, is already embroiled in a securities class action lawsuit after losing nearly $700 million dollars in an acquisition of an insurance claims processing company, and will likely make U.S. attorneys even more nervous about the problems that could come with public ownership of law firms.14 Coupled with the general lack of support from practicing lawyers for amending the ethics rules to allow for profit-sharing with non-lawyers, publicly traded U.S. law firms are likely a long way away.15

 

 

 


  1. James R. DeBuse, Opening at $25 1/2 Is Big Firm U.S.A.: Why America May Eventually Have A Publicly Traded Law Firm, and Why Law Firms Can Succeed Without Going Public, 34 J. Corp. L. 317, 323 (2008). 

  2. Id.; Model Rules of Prof’l Conduct R. 5.4 (2003). 

  3. Elizabeth Olson, A Call for Law Firms to Go Public, N.Y. Times, February 18, 2015, http://dealbook.nytimes.com/2015/02/18/a-call-for-law-firms-to-go-public/?_r=0. 

  4. DeBuse, supra note 1 at 329. 

  5. Catherine Ho, A law firm IPO? Not so fast., Washington Post, February 16, 2015, https://www.washingtonpost.com/business/capitalbusiness/a-law-firm-ipo-not-so-fast/2015/02/16/d8085ff6-b09b-11e4-827f-93f454140e2b_story.html. 

  6. Id. 

  7. Id. 

  8. Olson, supra note 3. 

  9. Lance Duroni, US Law Firms Still Flirting With Going Public, Law360, July 1, 2015, http://www.law360.com/articles/671281/us-law-firms-still-flirting-with-going-public. 

  10. Id. 

  11. Id. 

  12. DeBuse, supra note 1 at 336. 

  13. Ho, supra note 5. 

  14. Sara Randazzo, World’s First Publicly-Traded Law Firm Facing Securities Class Action, The Wall St. Journal, October 12, 2016, http://blogs.wsj.com/law/2016/10/12/worlds-first-publicly-traded-law-firm-facing-securities-class-actions/. 

  15. Duroni, supra note 9. 

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