It’s Time to Scrap Rule 5.4 (and Allow Outside Investment in Law Firms)

April 15, 2022

The American Bar Association’s (ABA) Model Rule of Professional Conduct 5.4, adopted in most states, effectively prohibits investment in law firms by non-lawyers. Designed to protect the judgment of lawyers from outside interference, the Rule instead contributes to the “low innovation and high cost of services that characterize the U.S. legal market today,” according to a Stanford Law study. As a result, in 2020, 60% of small businesses facing a crucial legal issue could not find a lawyer to help, and nearly 80% of civil cases involved “at least one party without an attorney–double the percentage in 1980.” 

Rule 5.4 aims to protect the “professional judgment of a lawyer,” but there is little evidence that it actually achieves this goal. In fact, jurisdictions which allow outside investment, including D.C., have not experienced any escalation of related disciplinary problems. There is likewise no indication that in-house lawyers in corporate legal departments–who share the same fiduciary responsibilities as outside counsel–are unable to discharge their duties ethically simply because they are employed by non-lawyers. What’s more, without the ability to offer equity to investors, law firms are limited to revenue and debt as the only means to grow their businesses. This leaves them overexposed to market instability while at the same time being deprived of the expertise that outside investors often provide. 

In the end, rather than benefiting lawyers and consumers, Rule 5.4 hurts law firms, clients, and consumers who want to be clients. It’s time to scrap this anti-competitive and outdated prohibition.

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