ABA Approves Lawyers' Passive Investment in Nonlawyer Firms

• Pages: 9-9
• Date: 01 April 2023
• Author: Leslie R. Snider
• Subject Matter: Civil Law

he ABA Standing Committee

on Ethics and Professional

Responsibility has decided law-

yers may now passively invest in

law f‌irms that include nonlaw-

yer owners, also known as “Alternative

Business Structures” (ABS). ABA Formal

Opinion 499 addresses the ethical obli-

gations of attorney investors, while

considering choice-of-law conf‌licts with

non-ABS permissive jurisdictions. ABA

Litigation Section leaders advise inves-

tors to proceed with caution.

ABA Model Rule of Professional

Conduct 5.4 generally prohibits law-

yers from sharing legal fees, forming

partnerships, and practicing in busi-

ness structures with nonlawyers. While

most jurisdictions have adopted Model

Rule 5.4, Arizona, Utah, and the District

of Columbia have modif‌ied the rule

to allow the sharing of legal fees with

nonlawyers.

Considering these modif‌ications,

Opinion 499 states that “the question

raised is whether a lawyer admitted

to practice law in a jurisdiction adher-

ing to Model Rule 5.4 . . . may acquire

a ‘passive’ investment interest in an

ABS?” Opinion 499 answers the ques-

tion armatively and further addresses

how attorneys in Model Rule 5.4 juris-

dictions are to proceed.

According to Opinion 499, “a ‘pas-

sive’ investment interest means that a

lawyer contributes money to an ABS

with the goal of receiving a monetary

return on that investment.” Opinion

499 makes clear, however, that pas-

sively investing lawyers cannot prac-

tice, hold a managerial position, or

participate in day-to-day operations

through the ABS. Additionally, pas-

sively investing lawyers cannot have

access to conf‌idential information

under ABA Model Rule 1.6 without a cli-

ent’s informed consent.

Opinion 499 clarif‌ies that passively

investing attorneys must still identify

potential conf‌licts. Attorney investors

are not precluded from investing in an

ABA Approves Lawyers’ Passive

Investment in Nonlawyer Firms

ABS simply because a future conf‌lict of

interest may arise between the lawyer’s

practice and the ABS. However, if a

personal conf‌lict is present at the time

of investment, the attorney must refrain

from investing or address the conf‌lict

under ABA Model Rule 1.7.

Opinion 499 notes that “[a] pas-

sive investment in an ABS, without

more, does not mean that the Model

Rule Lawyer is practicing law through

the ABS.” But to avoid the appearance

of practicing law, the ABS must avoid

identifying or holding out the attorney

investor as a lawyer associated with

the ABS. And further, “[n]othing about

a passive investment necessarily cre-

ates the “close, regular and personal

relationship” characteristic of ‘of coun-

sel’ arrangements.” Accordingly, pas-

sive investments by attorneys do not

obligate imputation of conf‌licts under

ABA Model Rule 1.10 between the

attorney investor, that investor’s f‌irm,

and the ABS.

Opinion 499 specif‌ically provides

guidance to attorneys in jurisdictions

that abide by Model Rule 5.4, which

do not allow an ABS (Model Rule

Lawyers). When a Model Rule Lawyer

becomes a passive investor in an ABS

permissive jurisdiction, a choice-of-

law question arises. Is the investor still

compelled to abide by his or her juris-

diction’s Model Rule 5.4 that does not

allow nonlawyer ownership in f‌irms?

According to Opinion 499, “even if the

lawyer is admitted to practice law in

a jurisdiction that does not authorize

nonlawyer ownership of law f‌irms,” the

attorney is still allowed to passively

invest in an ABS.

In that case, ABA Model Rule 8.5

applies to resolve conf‌licts. “In the

committee’s view, the conf‌lict-of-law

issue in the passive investment context

is resolved by applying the law of the

jurisdiction in which the ABS is autho-

rized to operate[.]”

Litigation Section leaders advise

that lawyers ought to make an

By Leslie R. Snide r, Litigation News Contributing Editor

informed decision and proceed with

care before investing in an ABS. “While

the Standing Committee’s Formal

Ethics Opinions carry great weight,

it is also the State Bar opinions that

lawyers will want to see in evaluating

whether to make the passive invest-

ment,” advises John M. Barkett, Miami,

FL, cochair of the Section’s Ethics &

Professionalism Committee. “There is a

reason why there is a rarity of lawyers

going into business with their clients in

the legal profession.”

Passive investments change the

risk calculus,” states Margaret Monihan

Toohey, Cleveland, OH, Newsletter and

Web Editor for the Section’s Ethics &

Professionalism Committee. “How do

passive investments in an ABS impact

the legal profession in the eyes of the

public? A primary concern is whether

the passive investments with nonlaw-

yers may undercut a lawyer’s status as

a professional,” adds Toohey.

Section leaders have advice for those

who want to invest and how to address

and mitigate the risks of conf‌lict. “Avoid

actually practicing law in the f‌irm,”

Toohey counsels. “If a lawyer makes a

referral to the ABS, I recommend the

lawyer also make disclosure of their

interest in the ABS. I would also recom-

mend that the passive investing lawyer

tell the client or non-client to evalu-

ate the ABS independently and make

an independent decision whether to

engage the ABS,” concludes Barkett.

SPRING 20 23 • VOL. 48 NO. 3

9 | A BA LITIGATION SECTION

ETHICS STRU GGLES IN THE LEGAL WOR LD