Ethics Opinion Opens Gold Mine for Law Firms

Creating a potential gold mine for law firms, an ethics ruling in New Jersey now allows a law firm to own another law firm as a wholly-owned subsidiary.  This is groundbreaking news, because up to now, a law firm could only own another business, like a consulting firm, as an ancillary business.

"We...conclude that a professional corporation covered by Rule 1:21-1A may form a subsidiary to provide legal services and that such a subsidiary may be organized as either a professional corporation or a limited liability company," the opinion states.

This means:

* Law firms can buy and sell other law firms as investments.
* Law firms can hire a pinpoint boutique to handle a spike in client demand, and then sell it off or shut it down when the demand falls off.  The owner firm wouldn't have to fire any of its own staff, as happened when the technology bubble burst.
* The owner law firm can acquire a smaller firm without having to charge big-firm rates or pay big-firm salaries.  A large firm could own, for example, an insurance defense firm, pay the lawyers bottom dollar, and be able to bill out at $100 an hour.  This means big law firms won't leave money on the table.
* Owner law firms can acquire less glamorous practices, like collection law firms (which are very profitable and make a 40% commission on debts collected) without having to sully its own reputation.  This can be very handy when the big firm has a bank as a client, and is happy to do its securities and acquisition work, but doesn't want to foreclose on mortgages.  It makes the owner law firm a full-service firm.
* Big firms can get into profitable areas they won't touch now - like matrimonial law and plaintiff's personal injury law - without having to have their own lawyers do the work.  Of course, the subsidiary PI firm would be conflicted out of suing clients of its owner.
* Law firms can market themselves like General Motors, and have separately branded divisions, like Cadillac, Chevrolet, Pontiac and Buick.
* Or, law firms can market themselves like General Mills, with individual brands like Betty Crocker, Pillsbury, Green Giant and Häagen-Dazs.

The ruling came down April 27, 2006 as a joint opinion: Opinion 704 of the Advisory Committee on Professional Ethics and Opinion 37 of the Committee on Attorney Advertising of the Supreme Court of New Jersey.

The opinion states that the parent law firm can reap the net profits of its subsidiary, but "the ownership/subsidiary relationship be disclosed in all subsidiary advertising and marketing materials." 

One or more of the parent law firm's shareholders and associates must direct and handle the operations of the subsidiary; this is a role that cannot be served by a non-lawyer.  "The central goal of that prohibition is to keep the rendition of legal services from being under the control and direction of nonlawyers," the opinion states.

"The Subsidiary must include the names of one or more of the attorneys who are principally responsible for the legal services provided by the Subsidiary.  Nevertheless, we conclude that to ensure clear disclosure, the name of the Subsidiary also must contain the following phrase beneath or next to the Subsidiary's name "a subsidiary of X law firm."

This opinion illustrates the trend among law firms to behave more like business corporations. Of course, it's an ethics opinion that applies to only one state.  However,

New Jersey

is a bellwether, and I see other states adopting a similar approach soon. 

To read the ethics opinion, click

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