Opening at $25 1/2 is big firm U.S.A.: why America may eventually have a publicly traded law firm, and why law firms can succeed without going public.

• Author: DeBuse, James K.

1. INTRODUCTION II. BACKGROUND A. The Legal Profession and Recent Trends and Changes 1. Defining a "Profession" and a Discussion of Partnership Ethos 2. Recent Trends and Changes in the Legal Profession B. The United States and Model Rule 5.4 1. The ABA Canons of Professional Ethics 2. The Model Code of Professional Responsibility 3. The ABA Model Rules of Professional Conduct i. The Kutak Commission ii. Local Variations to Model Rule 5.4 in North Dakota and the District of Columbia iii. The Failed Attempt to Allow Multi-Disciplinary Practices C. The International Movement Toward Public Ownership of Law Firms 1. Australia 2. The United Kingdom III. ANALYSIS A. Misguided Reasons to Upset the Fruit Basket: Arguments for Public Ownership B. Why the Status Quo Isn't so Bad: Arguments Against Public Ownership C. Fun with Numbers: How to Value a Law Firm 1. The Basic Approach--The PIE Valuation 2. The Advanced Approach--The Invisible Balance Sheet D. A Brief Lesson on How the Bad Guys Could Change the Current Ethical Rules IV. RECOMMENDATIONS A. The Unnecessary Costs of Going Public B. The Need to Focus on Organizational Capital V. CONCLUSION 1. INTRODUCTION

   As you brew your coffee and sit down to read the Wall Street Journal before heading to work, you look for your major stock holdings. After all, you have never been keen on waiting to retire at age 65. Thankfully, you see your two newest stocks are performing well; Latham & Watkins is up, as is Wachtell, Lipton, Rosen & Katz. While this scenario is not yet a reality, the chance of public ownership of American law firms is rising dramatically. This is due to the world's first publicly traded. (1) law firm in Australia, and the United Kingdom's recently enacted Legal Services Act--which allows for public ownership of law firms. (2)

   Every state in America currently has adopted an ethical rule that prevents public ownership (3) of a law firm. (4) Further, most states base their ethical rules on the American Bar Association's (ABA) Model Rules of Professional Conduct (Model Rules). (5) Among other prohibitions, Model Rule 5.4 states: "(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if: (1) a nonlawyer owns any interest therein...." (6) Despite this absolute rule, the commission that proposed the initial version of the Model Rules in 1982 advocated a rule that would have allowed public ownership of law firms. (7) Since the adoption of the Model Rules, scholars and lawyers have spent little time and effort considering the modification of the prohibition against public ownership. (8)

   However, things are changing internationally. On May 21, 2007, a small plaintiff's firm in Australia became the world's first publicly traded law firm. (9) Further, the United Kingdom recently enacted the Legal Services Act, which allows public ownership of law firms. (10) The international movement toward public ownership of law firms leads one to wonder whether such a thing could ever occur in the United States.

   Part II.A discusses the concept of the "legal profession," as well as recent trends and changes to the profession. Part 11.13 summarizes America's history of ethical rules regarding public ownership. Specifically, Part II.B.3.i discusses the ABA commission that recommended the Model Rules allow public ownership. Part II.B.3 also discusses two local variations to Model Rule 5.4 and, more recently, a failed attempt to amend Model Rule 5.4 to allow multi-disciplinary practices. Finally, Part ILC of this Note discusses the events in Australia and the United Kingdom and the path each country is taking toward public ownership.

   Part III begins by analyzing conventional arguments for and against public ownership of law firms. Then, Part III.C discusses how to value a law firm seeking public ownership. Specifically, this Part discusses the simple method of using a price-earnings (P/E) ratio (11) to value a company, and the advanced method that requires analysis of organizational capital and the invisible balance sheet. Finally, Part IILD summarizes the potential avenues for changing American ethical rules to allow public ownership, so that opponents of public ownership can better block any attempt to reform Model Rule 5.4.

   Part IV recommends that firms ultimately should not go public and that jurisdictions should not modify their ethical rules to allow public ownership. Rather than seek public ownership, firms should mimic going public by going through most of the steps of preparing for public ownership. In particular, firms should value themselves with an eye toward the invisible balance sheet. By analyzing themselves as if they were going public, firms will force themselves to focus on long-term stability and organizational capital.

2. BACKGROUND

   1. The Legal Profession and Recent Trends and Changes Before embarking on an analysis of something as potentially revolutionary as public ownership of law firms, it is necessary to define "profession" and to understand the current state of the legal profession. The concept of the legal profession plays into arguments for and against public ownership of law firms. The United States and the rest of the world fashioned their ethical rules with the concept of the legal profession in mind. And so, the journey begins.

      1. Defining a "Profession " and a Discussion of Partnership Ethos

         The word "profession" has many meanings. Any discussion of the legal profession requires taking inventory of different definitions of "profession" rather than deciding upon one definition. As a starting point, the foundations of most professions are a defined body of knowledge, certifying individuals with that knowledge, and maintaining standards of performance and behavior of these individuals. (12) The work of a profession creates a personal identity and grants a privileged class status. (13) In addition, professions are known for autonomy and the ability to self-regulate through peer review and ethical codes enforced by professional associations. (14) Professionals jeopardize their identities when they subordinate their autonomy and expertise to management and its focus on profits. (15)

         Whereas businesses focus on maximizing profit, under the classical view of a profession, professions focus on maximizing service to clients regardless of the effect on profit. (16) Courts have noted the different foci of businesses and the legal profession by stating, "law is not a business--it is a profession." (17) Despite the classical view, the fact that many people choose a profession with regard to its potential profitability does not trouble the modern view of professionals. (18)

         Going beyond the legal profession, the word "partner" carries many positive connotations in Western culture. (19) Scholars and analysts now use the word partnership in a variety of contexts to describe "collaborative efforts in which goals are shared and at least some measure of mutual participation is the expectation." (20) Some call this the "partnership ethos." (21)

         The best evidence of a partnership ethos, and the positive connotations of partnership, comes from corporations that attempt to imitate partnerships. (22) One example is McKinsey & Company, (23) which has made a concerted effort to identify the positive traits of partnerships and inject those traits into its own business. (24) For example, 270 of the most senior partners in McKinsey elect the Managing Director. (25) Despite the success of companies like McKinsey, one study suggests that when a professional service firm "goes public," (26) that action actually damages the clients, professional staff, owners, and society. (27)

      2. Recent Trends and Changes in the Legal Profession

         According to many scholars, the legal profession is irrevocably changing (28) perhaps even dying. (29) The core problem is the increasing corporatization of the practice of law. (30) This concern about the corporatization of law has grown into a serious problem in recent decades. (31)

         One commentator's helpful way to distinguish today's legal profession and the lawyers of the last generation is to study the differences between two fictional characters: Atticus Finch, in Harper Lee's 1960 book To Kill a Mockingbird, (32) and Mitch McDeere, in John Grisham's 1991 book The Firm. (33) Atticus Finch--representing the old legal profession--only loosely charges for his services, spends lots of time with his family, and shows his commitment to social justice by representing a black man accused of raping a white woman. (34) Mitch McDeere--representing the modern day lawyer--is a materialistic Harvard Law student who accepts a job in Memphis, Tennessee for an extremely large salary, works all the time, learns about bill padding, and discovers his law firm works for the mob. (35)

         Many factors have contributed to the corporatization of the legal profession. (36) First, law firms leverage themselves more than they used to, meaning the ratio of partners to associates has decreased. (37) Second, law firms use more "off-track" lawyers and increasingly utilize a two-tier partnership system. (38) Third, the average time for promotion to partner has increased. (39) Fourth, lawyers work longer hours. (40) Fifth, the volume of work has increased. (41) Finally, more law firms are using non-lawyer executives to manage their law firms. (42)

         The American Lawyer's annual "Am Law 100," a study that ranks the 100 most profitable law firms in America, supports the above six factors. The 2006 study found five common traits in the most profitable firms: "focused overall growth; tightly controlled growth in equity partners; effective use of leverage; a focus on productivity; and a shift toward, or preservation of, high value-added work." (43) The 2007 study also found three unique attributes of the partnership structure of the modern law firm. First, partnership requires that equity partners either...