Are Bar Rules that Prevent Outside Funding of Law Firms Anticompetitive?
Most readers are aware that in October 2019, Axiom Law, the legal outsourcing firm which employs more than 2000 lawyers worldwide, announced that it had received a capital infusion from Permira funds, a private equity investor. Axiom stated that the investment will be used, in part, to expand its sales force (as well as to improve technology and to expand into new domestic and foreign markets). Like legal outsourcing firms, internet providers, such as LegalZoom.com, also are financed, publicly or privately, by nonlawyer investors.
By comparison, the rules of professional conduct do not permit outside investment in legal firms. Legal firms generally must fund their businesses from capital contributions, loans, and operating cash flow. To be competitive, these self-financed businesses must have the budget to create the national and global name recognition necessary to: attract prospective clients; hire the best talent; provide sales training to attorneys; establish a physical presence in more jurisdictions, if desired; and procure the state-of-the-art legal technology necessary to compete on price. Most self-financed firms do not have access to that level of funding.
Thus, the threshold question is: What is the impact on legal consumers if they are more likely to be aware of and approached by non-legal firms than by legal firms. For upmarket consumers, the potential for harm is not significant because such consumers are sophisticated and likely staffed by persons who are aware of the various providers of legal services and the differences among them. However, downmarket consumers (i.e., individuals and small business owners) do not often know the difference between types of providers. They may not realize the level of service that may be necessary to achieve their stated objectives. The potential for harm is therefore significant. Downmarket consumers need real access to both traditional and contemporary legal services so that they can choose which is better for them based upon their budget and the significance or value of the legal issue they are addressing.
In determining how to provide this access, we reach the ultimate question raised by the title of this post: Are Bar rules that prevent external funding of legal firms anticompetitive? I believe so. It seems to me that either law firms must become more visible or attorneys must practice law at non-legal firms that are adequately financed. So, by not revising our rules that prevent external financing of legal firms, we seem to be waiting for nonlawyers to come in and manage us—to tell us how much to charge, what services to provide, whether we can have a job or not, etc. Decades of passivity have led to an irreversible influx of competition. So, it seems to be that we should position ourselves to compete by revising our rules. What do you think?