Law Firms Using 'Creative Ways' To Fund Operations

Law firms are using "creative ways" to fund their business operations under existing legal regulations, David Perla, vice chair at financial services company Burford Capital, said during a panel at the Chicago Athletic Association.

Perla noted that law firms need more capital than they can raise from their partners to acquire talent and technology. Outside capital is finding its way into law firms through channels such as marketing and back offices, he said.

He added that in the next five years, innovative companies will "push the envelope" around law firm funding, regardless of whether state regulators make formal rule changes.

"Whether or not the rules change, we think the deployment of capital into the legal industry is going to nincrease significantly," Perla said.

Burford's Chief Development Officer Travis Lenkner told Law360 Pulse in August that the company is interested in investing in U.S. law firms using a managed services organization model.

During the panel Wednesday, industry leaders discussed the pros and cons of allowing nonlawyer ownership of law firms. The panel was hosted by Texas A&M University School of Law and moderated by law professor Milan Markovic.

In 2020, the Arizona Supreme Court changed its legal rules to allow alternative business structures, such as law firms, to be owned by nonlawyers.

In February, accounting giant KPMG secured ABS approval from the Arizona Supreme Court to open a U.S. law firm, making it the first of the Big Four accounting firms to enter the American legal market.

In June, Stanford Law School's Deborah L. Rhode Center on the Legal Profession released a report finding that Arizona's ABS program is allowing more legal service providers into the market without causing consumer harm.

Earlier this week, California Gov. Gavin Newsom signed a bill into law blocking Golden State lawyers and firms from sharing contingency fees with out-of-state firms owned by nonlawyers. However, other regions have followed Arizona's stance, with Puerto Rico's top court approving rules that will allow nonlawyer ownership in June and Washington's high court relaxing its rules last year.

Wendy Muchman, professor of practice at Northwestern University Pritzker School of Law, said many attorneys are concerned about how clients' interests can be protected when accepting third-party funders and what will happen to solo and small law firms if nonlawyer ownership is permitted.

"They're not going to want to invest in a struggling main street law firm because there's no chance of return for you if you're thinking like a banker," she said.

David Rizzo, principal at KPMG Law US, noted that law firms in Arizona's ABS program have to comply with additional regulations, including appointing a compliance lawyer and conducting semi-annual audits.

"I would argue that given those safeguards, any concern around the interference with the professional judgment of lawyers is very well mitigated," he said.

Muchman added that arguments for or against nonlawyer ownership of law firms are not perfect.

"The truth always lies somewhere in the middle," she said.

--Editing by Drashti Mehta.