The New Arizona Rule for Alternative Business Structure Law Firms vs. Multidisciplinary Law Firms; What This Means for You!

“Multidisciplinary Law Firms” vs “Alternative Business Structure Law Firms”

If your firm is involved in Mass Tort Litigation, you are most likely aware that DC Bar Rule 5.4(b) allows for non-lawyer ownership in DC Law Firms. These types of law firms formed in accordance with DC Bar Rule 5.4(b) are generally referred to as “Multidisciplinary Law Firms”.

As of August 27th, 2020, the State of Arizona has, via an order handed down by the Arizona Supreme Court amended the States Bar Rules to allow for non-lawyer ownership in law firms. The new Arizona rules are arguably more liberal than the DC Rules and should be viewed by Plaintiffs co-counsel as an event worth celebrating. Several other States are likely to follow Arizona’s lead over the next year.

Although there are a number of differences in what is and is not permissible under DC Bar Rule 5.4(b) which allows for non-lawyer partners in Multidisciplinary Law Firms and Arizona’s newly revised rules allowing for Alternative Business Structure Law Firms, the difference most Plaintiffs’ attorneys are likely to be interested in centers around the allowance of passive investment by non-lawyers.

DC Bar Rule 5.4(b) DOES NOT allow for passive” stockholder” investment. Although a plain reading of DC Bar Rule 5.4(b) might lead one to believe that the DC rule does permit passive investment, the DC Bar has explicitly opined on numerous occasions to the contrary.

In contrast, Arizona’s newly adopted rules allowing for “Alternative Business Structures” explicitly permits Arizona firms to raise capital from passive investors under a typical “stockholder” type arrangement. Arizona’s new rules specifically state that a Law Firm may exist as a Corporate Entity (a Corporation), which is not allowed under DC’s rules. DC rules restrict law firms from forming as Corporations as well as LLCs. The DC rule allows for non-lawyer partners, not members (LLC) nor stockholders (Corporation), therefore firms established under DC rules that wish to function as an entity are limited to one of the various types of Partnership Structures allowed by the DCRA (The DC equivalent of the Secretary of State).

All State Bar Associations have enjoyed ample time to evaluate DC Bar Rule 5.4(b) and opine on the propriety of attorneys governed by their State rules fee sharing with a DC Firm, which includes non-lawyer partners. MTN research of the various “other” states’ opinions on this matter reveals no state which has opined in a manner that would place a blanket restriction on attorneys governed by their State Bar Rules from co-counseling with, as well as sharing fees with a DC Firm that includes non-lawyer partners.

Although each State Bar that has opined on this matter has worded their opinions in various and differing ways, it is fair to summarize these opinions as concluding:

“When an attorney governed by the Bar Rules of the given State enters a fee sharing agreement with a DC firm that’s members or partners consist of attorneys as well as non-attorneys, the firm governed by that specific States rules is not fee sharing with the non-lawyers in the DC firm but instead is fee sharing solely with the DC Attorney(s) named in any co-counsel/fee sharing agreement. Once the DC attorneys receive their fee share, those attorneys, as permitted by DC Bar rules may share those fees with their non-lawyer partners however, the firm governed by the Rules (other than DC rules) would not have fee shared with the non-lawyers and therefore would not be in violation of their governing bar rules.”

More simply stated, every State Bar appears to have green lighted (via official opinions) attorneys governed under their specific State’s rules fee sharing with DC Multidisciplinary firms, with various caveats and minor restrictions that stop far short of a general prohibition.

None of the various State Bars (and Courts) have yet had time to consider Arizona’s new rules allowing for “Alternative Business Structure Law Firms” and therefore have yet to opine on the propriety of attorneys governed under their State’s rules fee sharing with Arizona firms which may include non-lawyer partners as well as passive “stockholders”.

The various States Bar Opinions related to fee sharing with firms formed in DC under DC Bar Rule 5.4(b) may reasonably appear to cover fee sharing with an Arizona “Alternative Business Structure Firms” however, acting on such an assumption might present unacceptable risks. Each State Bar that has opined on the matter arising from the DC Rule has specifically referenced the DC Rule in their opinions. Until such time as the Specific State Bar any non-Arizona attorney is governed by, issues an opinion specially referencing the new Arizona Rules, it may be unwise for any firm to assume that that specific Bar will opine on the new Arizona Rule in the same manner that Bar has previously opined on the DC rule. There are simply too many differences in the respective rules (DC vs AZ) to make any assumptions based on Bar opinions specific to the DC Rule.
The most reasonable course of action for Mass Tort firms, given the fact that fee sharing among firms governed by multiple States’ Bar rules is common in the practice area, would be to form a coalition for the purpose of informing and guiding the various State Bars outside of Arizona in the formation and issuance of opinions regarding non Arizona firms fee sharing with Arizona firms that include non-lawyer stakeholders, including passive investors. Please fee free to reach out to our staff if you wish to be part of such a coalition.

MTN will remain active and informed in this new and exciting development which promises to help level the “financial” playing field between Mass Tort Plaintiff firms and Mass Tort Defense firms and defendants. As a general rule, Mass Tort defendants already finance their legal fees via funds provided by passive investors in that most Mass Tort defendants are themselves corporations owned and funded primarily by passive investor stockholders. Historically, Mass Tort defendants and the firms that they pay (with stockholder funds) to represent them, have enjoyed a significant advantage that allowed the “defense side” to engage in wars of attrition against the Plaintiffs their products and actions injure, the change in Arizona’s rules may well be the first step in reducing this advantage previously enjoyed by the “wrong doers” in these matters.

Disclaimer: This article was written by John Ray. John Ray is not an attorney nor a legal ethicist. Nothing in this article should be construed as legal advice nor legal ethics advice.

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