I had the honor of speaking at ReInventLawSiliconValley, a conference on innovation and the legal system sponsored by the ReInvent Law Laboratory at Michigan State Law School, co-founded by Professors Dan Martin Katz and Renee Newman Knake. This was a great learning day for me and I suggest if you are interested in the subject of change in the legal profession and legal education that you watch the videos when they are published on the ReInventLaw Law Channel. See also on Twitter #ReInventLaw and my pre-conference post on this Conference.
I am interested in the subject of how to get private capital into law firms to spur innovation despite the prohibitions of 5.4 of the ABA Model Rule of Professional Conduct. This is the rule that prevents a non-lawyer from owning an equity interest n a law firm in all US states, except on a limited basis in the District of Columbia. This is a controversial issue in the US, and the the ABA Ethics 20/20 Commission decided not to address the subject in its recent deliberations. The ABA House of Delegates and almost all state bar associations are dead set against any change to this rule.
Jacoby & Meyers, the pioneering consumer law firm, has filed a suit against the judiciary in New York, New Jersey, and Connecticut in Federal court to overturn the rule, but that’s another story.
I am interested in finding out if clever lawyers have figured out away around the rule. I discovered at least two instances where law firms have created a business model that enables private capital to fund technology and management support that would be beyond the ability of the law partners to fund by themselves.
The law firms are Clearspire and RajPatent, recently re-branded as LegalForceLaw. Both law firms are built around the same concept – a law firm that is supported by an independent management company that provides technology and management services to the law firm.
Clearspire invested over $5,000,000 in a technology and management platform to support the delivery of legal services to corporate legal clients. The firm is growing rapidly and recently opened a San Francisco Office.
LegalForceLaw was founded by a solo practitioner, Raj Abhyanker. The underlying company is called Trademarkia, Inc., which created the Trademarkia web site, the legal web site with the most traffic on the Internet. Like Clearspire, Trademarkia developed a technology to make it easy for non-lawyers to do a trademark search. The traffic to the Trademarkia site generates business for the law firm. [See previous post on LegalForce ].
In both cases, a separate management and independent management company provides services to the law firm. In theory the management company could serve other law firms, but in these cases the management company only has one client.
The arrangement raises more questions and the answers are not apparent.
I would like to learn more about how these management companies price their services to the law firms they serve. They can’t take a percentage of the legal fees or it would be a violation of Rule 5.4 How much of the cash generated by the law firm can be siphoned off by the management contract between the management company and the law firm? What is the pricing mechanism between the management company and the law firm? Is it a cost plus contract or are market rates charged for the services provided?
Why would an investor put funds at risk within the management company as there would be no easy exit. The law firm can’t go public and if the managing partners of the law firm were hit by a bus the law firm would go out of existence. The brand belongs to the law firm, not the management company. The financial return to the management company is limited because of the 5.4 prohibition. So where is the upside for the investors in the management company?
I think that these innovative law firms should be more transparent about the nature of the management agreement between their management company and their law firm, so that other law firms interested in replicating this business model can experiment.
Maybe these management agreement should be scrutinized and approved by the ethics counsel from the bar associations in the jurisdictions where these law firms are located, so there is no question that there is no violation of 5.4?