The Arizona Supreme Court last year enacted sweeping rules that revolutionize the practice of law in Arizona. While the general rule across the United States was that only lawyers could own and share profits in law firms, Arizona took a bold approach in turning that rule on its head, now allowing non-lawyers to own, profit from and participate in the management of law firms. This new business model is otherwise known as an Alternative Business Structure, or ABS.
What does this mean for the legal industry? It doesn’t change who can practice law in Arizona — one still has to be a licensed attorney in Arizona to provide legal services here. But for non-lawyer business owners, there are now endless opportunities to couple legal services with other professional services, and profit from each. A review of the approved ABS entities in Arizona confirms this concept is a driving factor. Estate planning attorneys have combined with wealth planners under one roof. Tax attorneys are now working side by side with accountants and sharing each other’s fees. Personal injury firms are teaming up with litigation finance companies to tap a new source of capital. Even traditional law firms with ABS licenses are exploring the addition of new professional services — such as real estate brokerage, private equity, and insurance — to complement their existing practice groups.
Becoming an ABS is not easy and requires a lengthy application with extensive background checks on decision makers and anyone who owns more than 10%. The Arizona Supreme Court has appointed a committee of active and retired attorneys, along with private businesspeople, to review applicants and make their recommendations on whether an ABS should be approved. The Arizona Supreme Court makes the final decision on who gets a license.
Some “old school” lawyers are critical of this revolutionary new model, believing it will jeopardize client interests and put profits ahead of ethical responsibilities. But others, including the Arizona Supreme Court, view this as a needed change to improve the legal profession, modernize law firms and provide more access to justice. Law firms can now attract a new source of capital from non-lawyers and offer equity ownership in the law practice. Non-lawyer owners who are successful businesspeople can now provide their human capital to law firms and focus on operations, technology and scaling, while the lawyers focus on practicing law and serving their clients. Law firms have the ability to transform from traditional legal service providers to a one-stop-shop for legal and non-legal services to clients. And to ensure that ethical responsibilities remain intact, all ABS entities must have a Compliance Lawyer who is an active member of the Arizona State Bar and who is responsible for supervising the business and ensuring compliance with professional rules governing attorneys.
While Arizona remains the first and only state to enact such progressive rules, other jurisdictions are watching closely. Utah, for example, has created a temporary regulatory sandbox to test new legal service ownership models. Other jurisdictions, like Washington, D.C, and California, are likewise considering relaxing the rules on the ability for lawyers and non-lawyers to share fees within the same business. But for now, Arizona remains the only jurisdiction where a person doesn’t have to be a licensed attorney to own a law firm.
Should clients be troubled about all these changes? Probably not, because the ABS rules are not a mechanism for unlicensed people or disbarred lawyers to practice law. Arizona lawyers are still bound by the rules of professional responsibility whether they work at an ABS or not. What clients can be enthusiastic about, however, is the potential that their lawyer, accountant, real estate broker and financial advisor, for example, will one day all be working at the same firm, all communicating with each other about the client’s needs, and all working with an aligned interest to achieve the client’s desired goals. If it allows law firms and clients to succeed together, the Arizona ABS program should be considered a huge success.
Andy Kvesic is the CEO and managing partner of Radix Law, the first multi-lawyer traditional law firm in the country to be approved as an Alternative Business Structure. Kvesic is a former prosecutor and commercial litigator who now serves as outside general counsel to public agencies and private businesses.