Law firms to own other law firms in New Jersey?
The blog MyShingle discussed a New Jersey ethics opinion which tackled the issue of whether one law firm may own another:
We are asked by a law firm (the “Firm”), organized pursuant to the Professional Services Corporation Act, whether it may form, and be the sole shareholder of, a limited liability company or a professional services corporation, which would engage in the practice of a specialized area of law. According to the Firm, one or more of its existing shareholders and associates will be employed by the new entity (the “Subsidiary”) and will direct and handle its operations. The Subsidiary will maintain its own books and records, bank accounts, and trust accounts and will open its own files. It may, however, share office space with the Firm. The Firm indicates that it is prepared to cross reference all conflict searches with the Subsidiary and refrain from representation where a conflict exists.
This was determined to be a question of first impression:
The Committee has never considered whether a law firm may form a wholly-owned subsidiary of any type. Furthermore, the Rules of Professional Conduct do not expressly address the proposed business arrangement. Rule 1:21-1A, which governs professional corporations, and Rule 1:21-1B, which governs limited liability companies, do provide us with some guidance and serve as the starting point for our analysis.
The answer seems to be "yes."
We also 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, provided that the requirements and limitations set forth in Rules 1:21-1A and -1B are followed. Such an arrangement does not violate the general prohibition on the corporate practice of law. The central goal of that prohibition is to keep the rendition of legal services from being under the control and direction of nonlawyers. As the New Jersey Supreme Court recognized in In re Education Law Cntr., Inc., “[a]n overriding fear in this regard is that the corporation may place its own interest, whether political goals or profits, ahead of the interests of its clients . . . .” Id. at 135. Those concerns are not present when lawyers are employed by a corporation actively engaged in the practice of law. In that scenario, lawyers will be working “for lawyers fully aware of pertinent standards of ethics and professional responsibility and subject to the discipline of this Court.” Id. at 134 n.4. Furthermore, the relationship of confidentiality and undivided loyalty that is the centerpiece of the lawyer-client relationship will not be threatened by the financial or political interests of a corporation owned and managed by nonlawyers. Id.
We do, however, stipulate that to avoid the possibility that clients and members of the public may be misled as to who controls and owns the subsidiary, it is necessary that this ownership/subsidiary relationship be disclosed in all subsidiary advertising and marketing materials and upon the first contact of a new client with the subsidiary firm.
Having reached that conclusion, we find also that the distribution of profits from the Subsidiary to the Firm is ethically permissible. Such an arrangement does not violate RPC 5.4(a), which prohibits a lawyer from sharing fees with a non-lawyer. As discussed above, because the Firm is a professional corporation governed by Rule 1:21-1A, only lawyers will be receiving the fees generated by the Subsidiary.
We are asked by a law firm (the “Firm”), organized pursuant to the Professional Services Corporation Act, whether it may form, and be the sole shareholder of, a limited liability company or a professional services corporation, which would engage in the practice of a specialized area of law. According to the Firm, one or more of its existing shareholders and associates will be employed by the new entity (the “Subsidiary”) and will direct and handle its operations. The Subsidiary will maintain its own books and records, bank accounts, and trust accounts and will open its own files. It may, however, share office space with the Firm. The Firm indicates that it is prepared to cross reference all conflict searches with the Subsidiary and refrain from representation where a conflict exists.
This was determined to be a question of first impression:
The Committee has never considered whether a law firm may form a wholly-owned subsidiary of any type. Furthermore, the Rules of Professional Conduct do not expressly address the proposed business arrangement. Rule 1:21-1A, which governs professional corporations, and Rule 1:21-1B, which governs limited liability companies, do provide us with some guidance and serve as the starting point for our analysis.
The answer seems to be "yes."
We also 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, provided that the requirements and limitations set forth in Rules 1:21-1A and -1B are followed. Such an arrangement does not violate the general prohibition on the corporate practice of law. The central goal of that prohibition is to keep the rendition of legal services from being under the control and direction of nonlawyers. As the New Jersey Supreme Court recognized in In re Education Law Cntr., Inc., “[a]n overriding fear in this regard is that the corporation may place its own interest, whether political goals or profits, ahead of the interests of its clients . . . .” Id. at 135. Those concerns are not present when lawyers are employed by a corporation actively engaged in the practice of law. In that scenario, lawyers will be working “for lawyers fully aware of pertinent standards of ethics and professional responsibility and subject to the discipline of this Court.” Id. at 134 n.4. Furthermore, the relationship of confidentiality and undivided loyalty that is the centerpiece of the lawyer-client relationship will not be threatened by the financial or political interests of a corporation owned and managed by nonlawyers. Id.
We do, however, stipulate that to avoid the possibility that clients and members of the public may be misled as to who controls and owns the subsidiary, it is necessary that this ownership/subsidiary relationship be disclosed in all subsidiary advertising and marketing materials and upon the first contact of a new client with the subsidiary firm.
Having reached that conclusion, we find also that the distribution of profits from the Subsidiary to the Firm is ethically permissible. Such an arrangement does not violate RPC 5.4(a), which prohibits a lawyer from sharing fees with a non-lawyer. As discussed above, because the Firm is a professional corporation governed by Rule 1:21-1A, only lawyers will be receiving the fees generated by the Subsidiary.
posted by Lawrence B. Ebert at 4:41 AM
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