Viewpoint

Law Firms Should Spurn Outside Investments


Imagine discovering that the law firm you hired to defend your company in a business dispute is partly owned by private investors. And those investors also have financial stakes in the company that is suing you—and perhaps even stakes in the law firm representing your adversary. Would you rest easy, assured that the firm will still represent your best interests in the courtroom?

There is a growing move in the U.S. to overturn the traditional ban on non-lawyers owning stakes in law firms. It’s a troubling omen of the legal profession’s direction. Most of all, it’s worrisome for clients, whose own interests may take a backseat to the lawyers’ search for additional capital.

In almost every part of the country, laws prohibit outside investment in legal firms. But that may soon change. Jacoby & Meyers has filed suits in the Northeast to overturn this ban, and State Senator Fletcher Hartsell Jr., a Republican, introduced a similar-purpose bill in the North Carolina General Assembly. The American Bar Assn. is also considering relaxing its rule prohibiting non-lawyer ownership in law firms. Other states are watching with great interest, particularly because third-party funding of litigation—a practice long deemed illegal—is gaining traction, too.

OUTSIDE INFLUENCES

Investors can be good for many businesses, but not when that business is a law firm. These proposals open the door to ethical risks that will work to the detriment of corporate and private individuals and the overall way we conduct business in this country. They could compromise a lawyer’s obligation to protect confidential information and cause conflicts of interest between the lawyer and clients or outside financiers. These outside funders could influence a lawyer’s behavior or even the outcome of a case.

As a practicing lawyer for 35 years, I find the concept of third-party ownership and financing disturbing. From the very beginning, the lawyer-client relationship has been treated as fundamentally different from a business relationship—because it is. The relationship is protected by a unique privilege for attorney-client communication and the professional ethic that lawyers must unequivocally put client interests first.

No one expects an investor to act as a zealous client advocate. And despite boilerplate language that claims investors will have no impact on lawyer conduct, third-party sources of capital introduce an outsider who has neither a personal interest in the case nor an ethical obligation to the client, creating a temptation to let those who pay the bills call the shots.

PURSUIT OF PROFIT

I find it particularly unsettling that the threat to the traditional client-lawyer relationship comes from lawyers themselves. The past few years have seen the legal profession repeatedly putting money first. Conflict-of-interest rules are weakening, making it easier for lawyers to switch firms mid-dispute. And allowing third parties to fund and influence litigation shows a willingness to discard the fundamental client-first values that once made this a trusted and respected profession.

The chase after higher profits has also produced a relentless pursuit of growth, with already-large firms swallowing up more firms or adding new partners with their own extensive books of business. That growth creates a complex morass of client conflicts and a willingness to brush those conflicts aside in order to create bigger and bigger law firms (and presumably bigger and bigger profits).

Fortunately, the U.S. has not yet adopted many of the more radically permissive conflict rules. In some jurisdictions in Asia and Europe, for example, law partners in one office feel free to sue clients actively represented by their partners in another office. From more than three decades of experience as both a lawyer and a client, I feel confident in saying that this model is wrong.

INVESTMENT BANK ANALOGY

It’s hard to ignore the parallels with investment bankers, whose fees are the envy of many big law firms. Indeed, envy is surely at the root of many of these so-called reforms. When the investment banks morphed from partnerships to corporations, they undoubtedly increased their access to capital, yet they stopped managing their risks as carefully as they did when they were partners and their own assets were on the line. Only Pollyanna would think that lawyers will behave any differently.

Removing the lines between law and business puts both the attorney-client relationship and the entire legal profession at risk. Acting now to restore those lines may provide the last chance for lawyers to show Americans they still can entrust them with self-regulation. The profession should police itself before the government steps in.

The American Bar Assn. has an opportunity to come out on the right side of history. By holding fast to its prohibition on outside investment in law firms, the ABA can demonstrate that profits last only a short time, but ethics endure forever.

Robert_weber1
Weber is IBM's senior vice-president for legal and regulatory affairs and general counsel.

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