By Anthony S. Volpe
Special to the Legal
The fight over allowing non-lawyers to become investors in law firms is heating up, and there are now at least three suits challenging the current prohibition against non-lawyer investment. In no small way, this bears a striking resemblance to the fight over lawyer advertising, with the big exception being that investing will not be immediately apparent, as is the case with an advertisement.
While the debate is one over changing a tradition, there are issues of transparency. And, if there is transparency, will the majority of the public or clients really grasp the meaning of the disclosed investor information?
Lawrence J. Fox, a respected ethics expert, has expressed the concern that non-lawyers will not understand that our duty is to the client and not firm shareholders. A valid point, for sure, but an overstatement of the issue.
Firms, especially larger firms, often have bank covenants that require certain cash flows, stabilities in the "rainmaker" ranks, and limitations on contingencies. While these are not "investors" as such, the banks are clearly making an investment. The demise of more than one firm has been tired to banking obligations and the exit of rainmakers when the banks impose certain conditions like personal guarantees for future financing.
When those lawyers leave the firm over financing issues, does it serve their clients? Are these banking considerations about their client service or personal interest?
On the other hand, Fox is not a "Chicken Little." Concerns about attorneys serving their own financial interest by recommending outcomes that increase cash flow using client funds and the like are a constant blemish on the practice.
Such self-serving practices bring out another issue: what will the public perceive as the motivation for the investments? Will this be seen as lawyers becoming "investment bankers" who are only concerned with huge salaries and bonus?
Much of the power of law comes from the public's view of the ends the laws are serving. Will non-lawyer investment look like greedy lawyers selling a share in the client's matter as a hedge against a negative outcome? Anything that further erodes public trust in lawyers will adversely reflect on all lawyers and the legal system as a whole.
Some advocate the non-lawyer investment pool as a way to finance small firms that will take on risky matters; the David and Goliath argument. Big firms are against new investment because it will make smaller firms better able to compete. In a nutshell, big firms raise concerns about ethics and client service as a way to protect their finances. The counter to that is that small firms want the investment so they can take less meritorious cases and have the investors bear the risk.
I have no strong view either way. For sure, lawyers already accommodate changing practice rules and economic conditions with guidance from experts like Fox. If we are honest about identifying the real concerns and address them honestly, perhaps through the use of professionals managers, like a COO or CFO, these issues may be resolved within the bar without the loss of public confidence in the profession.
Anthony S. Volpe is a founding partner of Volpe & Koenig. He can be reached at TVolpe@volpe-koenig.com.