Puerto Rico Allows ABS Law Firms, but Program Is Still in Progress

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On June 17, Puerto Rico’s Supreme Court, the Tribunal General de Justicia, released a new set of Rules of Professional Conduct for the Commonwealth’s lawyers, primarily based on the American Bar Association’s Model Rules. The new rules, however, relaxed the prohibition of nonlawyer ownership of law firms, allowing firms to sell ownership stakes of up to 49% to nonattorneys.

Puerto Rico’s rule change follows Arizona’s 2020 decision to allow nonlawyers to own law firms, as well as Utah’s creation of a “regulatory sandbox” enabling nonlawyers to perform certain legal tasks and experiment with alternative business models.

Nonlawyer law firm ownership has come as part of a broader trend toward experimenting with new legal services delivery methods, as courts struggle with heavy dockets and potential clients face access to justice challenges.

William Large, president of the Florida Justice Reform Institute, told Legaltech News that recent moves to open up firm ownership came in an environment where larger plaintiffs firms had become more profitable, and thus more appealing to investors.

“I think many enterprising lawyers who own these valuable commodities realize it would be an infinitely greater value commodity if they could sell it to non lawyers, and that’s why you’ve seen this push in the last 10 or 15 years to restructure Rule 5.4,” he said.

For Puerto Rico, however, it is slightly more challenging to determine the impetus for the rule change. The amendment to Rule 5.4 was not contained in the recommendations of a court­ appointed committee that was largely responsible for formulating the new rules, and the majority that adopted the new rules did not provide an explanation for the change.

A Work in Progress

Under Puerto Rico’s new rules, nonlawyers can own stakes of up to 49% in law firms, provided the firms adhere to a number of requirements, including the provision of free legal services to indigent persons and the continued prohibition of unlicensed practice of law.

Suzanne Porter, founder and managing attorney of NewMarket Law and the former legal service innovations officer at the Arizona Supreme Court, told Legaltech News that Puerto Rico’s alternative business structure (ABS) program will differ in important ways from Arizona’s.

“Arizona goes farther than any other jurisdiction, initially, in doing a background [check] basically like an attorney character and fitness check,” she said. ‘The court will be looking at governance structures that have to exist in the filings and are reviewed by three levels … right down to corporate resolutions that say you will not interfere with the independent professional judgment of the lawyers.”

By contrast, Puerto Rico is not requiring nonlawyer owners to submit applications. Beyond reiterating ethical obligations and affirming attorneys must be solely responsible for legal decisionmaking, the court there appears poised to flesh out more comprehensive rules based on the early operation of the system.

‘There’s an order out there for a rules subcommittee to come up with a disciplinary process,” Porter said. ‘That’s not necessarily disclosures or background, but they’re going to come up with some more granular rules around how this might work, and reevaluate this within three years.”

Firms will be required to provide information to the Puerto Rico Supreme Court every year about nonlawyer owners and dividends paid out to them, and the program is set to be assessed within three years.

Implications

Whether Puerto Rico’s change is a harbinger of further moves toward allowing ABS models in other states remains to be seen, particularly as they have so far largely been adopted by jurisdictions with smaller legal industries.

But the new rules heighten the urgency for other states to determine how they will address the presence of ABS firms from the jurisdictions that allow them. Arizona-licensed ABS firms, including the recently launched KPMG Law US, have announced their intentions to explore co­ counsel and fee sharing agreements with out of state firms. Such plans have been met with opposition in some states, including in California, where assembly bill 931, currently under consideration, would ban fee-sharing with out of state ABS law firms.

Opinions diverge widely as to the effects of permitting ABS firms to operate. Proponents of ABS models hope to see lower prices and new models utilizing better technology or combining legal services with other needs.

“I do think we’re going to see pricing innovations. We’re going to see technological innovations,” said Natalie Knowlton, assistant director for legal innovation at Stanford Law School’s Rhode Center on the Legal Profession.

She also pointed to the importance of “one-stop shops.” “For consumers who are struggling with human issues that have legal solutions and legal ramifications, to have that under one roof where you can have your financial, your estate planning, your legal issues dealt with, that’s an innovation in and of itself.”

Opponents of such changes fear that they threaten to erode the traditional ethical obligations between lawyers and clients. For Large, the presence of outside ownership risks attorneys choosing case strategies that may not be in their clients’ best interest.

“If you have a corporate entity that has sent some type of financial remuneration to a law firm, that could begin to bend concerns about professional independence,” he said. “I think it would really endanger the attorney’s duty of loyalty to their client, who deserves that.”

The impacts are likely to be heavily concentrated in certain practice areas. Plaintiffs firms in particular may be keen to access outside funding, as contingent fee models can make their revenue streams more irregular.

However, if Arizona’s experience is indicative, a wide array of business models and practice areas may take advantage of the new rules.

‘The highest percentage is, is mass tort and personal injury … but they’re not the only ones,” Porter said. ‘The first few were financial, so wealth planning and legal goes together, estate planning or tax…. There’s patent, there’s a couple of trademark and IP firms, there really is quite a range.”

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