Legal Ethics: Alternative business strictures: New professionalism legislation

By Jim Doppke

One of my recent columns looked at management service organizations (MSOs) and other such non-traditional business structures in the legal industry. While I don’t want to seem like a one-trick pony, it’s appropriate to revisit the subject in light of legislation in Illinois and California that affects how lawyers can work and contract with such entities – and how our profession can be expected to be regulated going forward.

The Illinois bill (HB 5487), which has passed both houses of the Legislature and is awaiting transmission to Gov. JB Pritzker, is aimed at restricting lawyers’ ability to contract with nonlawyer-owned entities if those entities “interfere with the professional judgment of attorneys in representing clients,” or if they are given control over, or delegated the power to engage in:

• Accessing, owning, or determining the content of client records;
• Accessing any attorney-client communications;
• Selecting, hiring, or terminating attorneys or allied legal staff; or
• Setting competency, productivity, or proficiency parameters” for attorneys or staff.

This all sounds common-sensical, in a way. Isn’t it true that lawyers shouldn’t allow nonlawyers to control their professional judgment about such things? Yes, but the bill doesn’t limit itself to the concept of control. It says that lawyers can’t delegate tasks involving, say, accessing client communications to entities controlled by nonlawyers. What about e-discovery vendors, IT firms, and other such service providers? They may have or need access to client communications as part of their work, and clients may grant their consent to that in order to achieve their objectives. Yet this bill purports to restrict such ordinary lawyer-vendor relationships.

Professional judgment and fee-sharing

The bill simply does not address or acknowledge the existing prohibitions on nonlawyer ownership of law firms; on lawyers dividing fees with nonlawyers; or lawyers ceding control over their professional judgment to anyone. And when it comes to divisions of fees, the bill becomes still more draconian: It prohibits lawyers from sharing fees, “directly or indirectly,” with an out-of-state entity that provides legal services while allowing non-attorney ownership or decision-making (i.e., an “alternative business structure” (ABS) of the kind recently authorized in Arizona).

So an Illinois lawyer can enter into a fee-sharing agreement with an out-of-state lawyer that is fully compliant with Rule 1.5 and all other Rules of Professional Conduct; but if the out-of-state lawyer has a business arrangement that falls under the heading of an ABS, the Illinois lawyer could be found to have shared legal fees “indirectly” in violation of HB 5487, even if the fee division agreement was only between the lawyers and had nothing to do with the ABS.

And what happens when there is such a violation? The bill purports to create a private right of action for clients of lawyers who contract with MSOs or ABSes, giving them a right to recover statutory or actual damages without defining just what the actual damages could be or how they could arise. It also suggests that attorneys who violate the statute could be subject to declaratory or injunctive relief, and that they could be the subject of “discipline imposed by the [Illinois] Attorney Registration and Disciplinary Commission.” 

Nobody likes it when the ethics lawyer gets pedantic, but this part of the bill is just wrong, as that agency does not itself impose discipline. The Illinois Supreme Court does. That difference points up a structural infirmity in the bill: The Court regulates the practice of law, not the legislature, and there is no reason why there should be encroachment on that when it comes to MSOs, ABSs, or anything else.

California regulations 

California attorneys are much more accustomed to legislative involvement in the regulation of their bar, and they have already seen a clampdown on ABSs pursuant to legislation enacted last year. Now, the California State Assembly has passed AB-2305, which, like the Illinois bill, purports to limit the ability of nonlawyer financiers to make case-specific decisions or determinations. Again, there are preexisting ethical rules that forbid lawyers from ceding control over their professional judgment, and other statutes that forbid the unauthorized practice of law. This bill simply adds civil penalties to the measures already available to address that same conduct. 

The bill purports to disclaim any intent to “prohibit the practice of nonrecourse litigation finance” or define that practice as “impermissible fee sharing,” but that industry is the obvious target here, and the bill would sharply restrict the manner in which financing can be provided. It would require financing contracts to “contain[ ] a specific dollar amount or maximum dollar amount to be paid to the law firm”; to provide for a return “limited to a multiple of the funded amount or a rate of interest thereon”; and to preclude the use of funds for solicitation of future matters.

Why it matters

All lawyers should be concerned about these attempts by lawmakers in large legal markets to restrict ordinary commercial relationships in the name of professional independence – even those lawyers who oppose ABSs, MSOs, or the Arizona approach to regulation in principle. Critics of such structures can and do voice their opposition to them along with their support for existing restrictions in ethics Rule 5.4 and other sources, and they have defeated efforts to institute pro-ABS changes (most prominently in California in 2022). 

But the broad scope of the California and Illinois bills will not protect professional independence significantly more than Rule 5.4 already does, and their enforcement measures may hamper both competition in legal markets and access to legal services. Consider that the Illinois bill is applicable only to lawyers and law firms a) whose annual revenue is less than $300 million; or b) who regularly represent clients on a contingent fee basis and have derived more than 50% of their revenues from contingent fee agreements over 3 calendar years. That gives large global firms free rein to maneuver in the ABS space, along with law firms whose practices do not rely on contingency fees for more than half of their revenue. ABS supporters may say: Fair enough. But why should some firms have their professional independence questioned more than others? Why should enforcement be sought against mid-sized firms and small firm practitioners, when Rule 5.4 itself applies across the board?

The legal profession has long prided itself on its ability to self-regulate without need for the intervention of other governmental bodies. The public looks to us to continue that. We gain little when we invite or encourage the passage of legislation that imposes new standards on existing concepts, uses incorrect terminology, and disrupts standard contractual arrangements. 

The specter of a statute that threatens attorneys with disciplinary action is unusual to say the least; the further threat of civil causes of action and statutory awards for allegedly unprofessional conduct is still more daunting. Lawyers in all jurisdictions and markets should keep close tabs on these trends – for their implications for business structures and for the regulation of our profession alike.

 

Jim Doppke is a partner at Robinson, Stewart, Montgomery & Doppke in Chicago, Ill. His practice involves representing attorneys in legal ethics and professional responsibility proceedings. He can be reached at [email protected].