New Partnerships Mean New Opportunities to Support Clients
How and Why Arizona Eliminated ER 5.4 and ER 5.7, Allowing Lawyers and Nonlawyers to Work Together
Photo: Robert Murray
How Arizona Changed the Legal Playing Field
On August 27, 2020, the Arizona Supreme Court, pursuant to Order No. R-20-0034, Amended certain Arizona Rules of the Supreme Court and Arizona Rules of Evidence. These changes became effective on January 1, 2021. Among the changes was the removal of restrictions on the mixing of lawyers and nonlawyers, with Ethical Rules (“ER”) 5.4 and 5.7 being abrogated.
Prior to the order, ER 5.4 restricted law firms and lawyers from sharing legal fees with nonlawyers, lawyers from forming partnerships with nonlawyers to practice law, and nonlawyers from having an economic interest or decision-making authority in a firm that offers legal services. Further, former ER 5.7 stated that a lawyer could provide law-related services either in circumstances indistinguishable from the lawyer’s provision of legal services or through a separate entity. With the removal of these two Ethical Rules, and changes to the other Rules of the Supreme Court, Arizona became the first state to open the legal field to outside investment and ownership. Some key ramifications of these changes include the following:
1. Non-Attorneys Can Own Law Firms...Under Certain Circumstances
Non-attorney ownership of law firms is now permitted with the removal of rule 5.4; however, this does not mean that just anyone can go out and own or invest in a law firm. Rules 31, 33.1, and the Arizona Code of Judicial Administration - Section 7-209 provide important regulations and procedures. For example, to have a non-lawyer partner, owner, director, officer, or person in control of a firm offering legal services, the firm must first seek permission and be licensed as an Alternative Business Structure (“ABS”). This new structure also requires that the firm employ at least one attorney who is an active member in good standing of the State Bar of Arizona who can supervise the practice of law provided by the firm and ensure that the firm complies with all rules and regulations regarding the provision of legal services, such as conflicts of interest, confidentiality, professional independence of lawyers, maintenance of records, disclosures, and consent, and also to prevent nonlawyers in the firm from interfering with the lawyers’ ethical duties to clients. Legal services and the practice of law may only be provided by lawyers or persons otherwise authorized to do so, and only in compliance with the Rules of the Supreme Court. Accordingly, the mere act of becoming an owner of an ABS does not grant the nonlawyer owner of an ABS, as an individual, the right to practice law or provide legal services. The individuals within the firm actually providing legal services must each, individually, be authorized and licensed to do so.
2. Legal Fees Can be Shared with Non-Lawyers
The previous prohibition on sharing fees with nonlawyers was eliminated with the abrogation of ER 5.4. With the elimination of the restriction on fee sharing, a lawyer or law firm may now share legal fees with a nonlawyer – a necessity if nonlawyers are to have an economic interest in firms providing legal services. Otherwise, the nonlawyer owners would not be able to share in the income or profits generated by the firm.
3. Law Firms Can Provide Ancillary, Non-Legal Services to Clients
With the elimination of ER 5.7, it would follow that a lawyer may now provide ancillary services that are distinct from the provision of legal services through the same entity rather than being required to provide them through a separate entity. However, again, rules and guidelines remain in place to ensure ethical implementation of this opportunity. In an ethics opinion issued by the State Bar of Arizona prior to the changes, the Bar outlined rules relevant to offering ancillary services to clients, many of which still apply. For example, when providing ancillary services, the lawyer must fully comply with disclosure requirements of ER 1.8, they must determine if there is a conflict of interest under ER 1.7, and confidentiality and other obligations to clients must be maintained per ER 1.6 and 1.9.
Why Were These Rules Changed?
In October 2019, when these changes were being considered, a Task Force on the Delivery of Legal Services issued a Report and Recommendations. In the Report, the Task Force stated the following (emphasis added):
“ER 5.4’s negative effect was evident during the great recession, when many lawyers expressed interest in partnering with nonlawyers to be a “one-stop shop” for consumers who wanted to refinance home loans, stop foreclosures, or participate in short sales. Typically, lawyers endeavored to create partnerships with mortgage brokers and real estate agents to help customers. But ER 5.4’s bar to partnering with a nonlawyer to provide legal services prohibited lawyers from forming these relationships. And yet creating single entities to offer all those services may have served consumer-clients’ best interests.
“The legal profession cannot continue to pretend that lawyers operate in a vacuum, surrounded and aided only by other lawyers or that lawyers practice law in a hierarchy in which only lawyers should be owners. Nonlawyers are instrumental in helping lawyers deliver legal services, and they bring valuable skills to the table.”
Ultimately, the elimination of ERs 5.4 and 5.7 allows for the one-stop-shops dreamed of for so long as a way to better serve clients and meet their diverse needs. Further, because other rules are still in place, legal and other services can still be provided in an ethical and responsible way.
