There has been a very exciting development take place in a couple of states (Arizona and Utah). Their State Supreme Courts have decided that a non-lawyer can have an ownership stake in a law firm or participate in fee sharing.
Lawyers that have passed the state bar will be permitted to partner up with non-lawyers in an Alternative Business Structure (ABS). There is an application and vetting process the ABS must go through.
If approved, the firm would be allowed to provide legal services to the public, with some or possibly all of the law firm’s profit going to one or more non-lawyer owners. In passing this rule change, an entire new investment opportunity has been brought into the fold.
A few opportunities come to mind; accounting firms that want to partner up with a tax lawyer would be one example. Large online companies like LegalZoom or RocketLawyer that provide things like document templates or last wills could partner up with an attorney and receive a portion of the fees generated from their clients that need upgrades. But this rule change could potentially benefit a lot of other non-lawyers in a lot of different ways.
This is not going to just benefit large accounting firms or Internet companies. There are absolutely going to be some smaller companies and savvy individuals that take advantage of the ability to invest their money and/or skill set into owning a law firm.
A Few Non-Lawyer Scenarios that Might Make Sense
Internet Marketing – people that are skilled in search engine optimization and online marketing can make good money selling leads or hosting pay-per-click display ads on a blog.
Some lawyers will pay up to $100 per click for targeted search traffic on terms like “mesothelioma” or “car accident attorney.”
However, the mere fact that lawyers are willing to pay that much money for a single click demonstrates the fact that the legal fees generated on some of these cases are substantial. Someone who had the expertise to show up #1 on Google under “Arizona dog bite lawyer” could find one attorney to form an ABS with, then start making money on individual cases instead of just sending the lead along.
Diversification – someone who is heavily invested in the stock market or owns a business that does well when the economy is booming (for instance, luxury travel or jewelry) wants to hedge her investments with something that is recession resistant.
She finds a bankruptcy attorney, divorce attorney or a probate attorney to partner up with and buys a 50% stake in their one person firm. The idea being that people go broke, get divorced or die even when there is a recession or the market is doing poorly.
Leverage Your Brand – a number of current or retired athletes such as John Elway, Julio Jones, Michael Jordan, and Evander Holyfield have owned car dealerships. It’s a natural fit; when someone in Tuscaloosa, Alabama, wants to buy a Kia, why not buy it from Julio Jones Auto Group?
Same goes for John Elway’s Cadillac, Chevrolet, BMW, Mini, and Chrysler dealerships. Beyond that, celebrities endorse products all the time, and some take ownership stakes in companies. Kobe Bryant invested $5M for a 10% stake in BodyArmor and was an early endorser of the company. By 2018, that stake was worth $200M.
A celebrity could invest in and become the face of a law firm. How about Kim Kardashian Divorce Attorneys or Gloria Estefan Immigration Lawyers?
Real Estate Brokerages – the Real Estate Settlement Procedures Act (RESPA) is meant to prevent companies providing one real estate service like brokerage from steering consumers to another company-owned real estate service provider, like mortgage, home warranty, insurance, etc.
Yet, many real estate brokerages don’t seem to care.
As long as the client signs off on being aware that the two companies share common ownership, the company is typically OK from a RESPA standpoint.
With this in mind, as bizarre as it might sound that a broker would want to take on the risk of having their client use a law firm they partly own (with full disclosure), it would not surprise me at all to see this scenario play out.
The brokerage might just figure that they are going to get sued anyway if something goes wrong, so why not make some money on the lawyering side?
Keep in mind that there are many cases where someone in a real estate transaction isn’t necessarily getting sued or suing someone; for instance, an investor buying land that needs a lawyer to assist them with a public report which is required to subdivide it. Or a homeowner that wants to know the procedure to obtain permission for an accessory dwelling unit.
Equity Instead of Debt – let’s say an attorney wanted to raise money for a real estate purchase. He wants to buy an expensive house or commercial investment property but cannot or does not want to finance the purchase with any more debt than he/she is already taking on.
Instead of making a loan at a set interest rate, you buy a stake in the attorney’s future earnings. The attorney might want a provision where he can buy you out down the road. Your stake in the ABS functions like collateral.
Fintech Companies – think about fintech companies like Intuit, CreditKarma, TrueBill, and countless others that are voluntarily given access to a lot of consumer spending data. They could be perfectly positioned to notice that consumers were being overcharged for something.
Let’s say their software noticed a pattern where a cable company charged people for extra days even though they had canceled their subscription. If they owned or partly-owned a law firm, they could be in position to file a class action lawsuit earlier than other firms, and to participate in the settlement.
There will likely be countless iterations and ideas that people think up. It will be exciting to see how much traction the concept of non-lawyers owning law firms gets over the coming years, and which ABS structures are approved.