Traditionally, ethics rules have strictly prohibited fee-sharing between lawyers and nonlawyers, but things are changing around the country.

Many states have adopted some version of Rule 5.4 of the American Bar Association’s (ABA’s) Model Rules of Professional Conduct. That rule strictly prohibits fee sharing between lawyers and nonlawyers, except in limited discrete circumstances.

But this landscape is changing. Jurisdictions around the country are reconsidering Rule 5.4 and whether a revision to the rule is justified.

Historical Concerns About Fee-Sharing

Traditionally, the legal ethics rules in various states have expressly forbidden the formation of law firm structures or partnerships in which lawyers share fees with nonlawyers.

The ABA Model Rule 5.4, for instance, provides that “[a] lawyer or law firm shall not share legal fees with a nonlawyer,” except in defined circumstances in which it is permitted (including the disbursement of legal fees to a lawyer’s estate, a retirement plan that includes nonlawyers, or sharing court-awarded legal fees with a nonprofit).

Moreover, Rule 5.4(b) of the ABA Model Rules provides that “[a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.”

As a result, law firms in states that have adopted some version of this Model Rule, therefore, are often diligent about the rules against fee-sharing with nonlawyers when they design their partnership structure.

In some instances, for example, law firms have created subsidiaries to house nonlawyer professionals—such as lobbyists, consultants or accountants—who typically would not be permitted to share a partnership under Rule 5.4.

Some Jurisdictions Are Changing

Previously, in what was understood as a nod to the intersection between government and law within the District of Columbia, that was the only jurisdiction in which fee-sharing between lawyers and nonlawyers was permitted. In the last few years, Arizona and Utah have joined the District, prompting discussion nationwide.

In 2020, Arizona instituted a procedure in which entities run or managed by both lawyers and nonlawyers, or an ABS, can apply for licensure with the state’s committee. The state requires that an ABS have at least one lawyer on board as compliance counsel.

The committee’s approval or denial of a proposed ABS considers a number of factors, including whether the entity will “promot[e] access to legal service” and “advanc[e] the administration of justice and the rule of law.”

Adopting a less permissive approach, Utah created a two-year pilot program in which new potential ABS could submit proposals to the state’s Office of Legal Services Innovation to receive a license to offer legal services. Utah instituted this program in direct response to the identified and unmet legal needs of its citizens, particularly after the rise of the COVID-19 pandemic.

To be approved for legal practice, new lawyer/nonlawyer entities are required to provide low-cost legal services to individuals who cannot otherwise afford them. As a result of the new rule, over 30 lawyer/nonlawyer entities have formed with the purpose of providing low-cost legal services to communities in need. These entities largely address areas of law that are of particular need to lower income clients, including immigration, divorce and certain personal injury matters.

Why Are Some Bars Considering a Change?

Proponents of the Rule 5.4 change argue that allowing legal firms to share fees among lawyers and nonlawyers (or form partnerships between lawyers and nonlawyers) increases the public’s access to justice. Proponents also argue that law firms will benefit by providing clients with a wider array of solutions to their problems, become more efficient and provide the opportunity to increase their equity capital.

On the other hand, opponents of the change maintain that there is good reason to gate-keep the practice of law, and that permitting lawyer/nonlawyer partnerships could lead to a decrease in the overall quality of legal services provided to the public. Critics have said that amending the rule could upend the legal industry, positioning law firms as vulnerable to potential extinction from big accounting firms that could directly compete with law firms for business.

Notably, in August, the ABA passed a non-binding resolution discouraging changes to the Model Rule 5.4, encouraging states instead to find other methods of increasing public access to justice.

The Rule Is Still Evolving

Notwithstanding the position of the ABA’s House of Delegates, other state bars are still considering whether to relax restrictions on fee-sharing and partnership-forming between lawyers and nonlawyers. California, Michigan and North Carolina are reportedly considering making changes, and other states may follow (if only to review these developments).

However, it remains critical for lawyers and firms to continue to follow the binding rules of their states. But industry insiders are continuing to review what could be one of the biggest changes to law firm partnerships in recent memory.