A video showing a private equity bro describing his new strategy to take over law firms — despite the “Rule 5.4 drama” — made the rounds over the last couple days. Johnny Hilbrant has skewered private equity on social media for a while now, but he recently took aim at PE’s new obsession with law firm ownership:
Most of the country prevents nonlawyers from owning law firms. Model Rule 5.4 makes sure of it and where there’s any doubt, states like California get explicit about banning outside investors from even indirectly influencing firms. But private equity is nothing if not creative, and has embraced the management services organization, or MSO, as a workaround for getting in on the legal industry. Essentially, the firm splits in two, with lawyers maintaining control of a lawyer-owned practice entity, while everything else — tech, billing, marketing, intake, staff — moves into an investor-owned MSO that charges the firm fees for its services. Sort of a fully captive back-office/ALSP that allows the investors to make money off the firm’s legal work.
This isn’t necessarily bad. Many lawyers chafe at the “business of law” role, so sending all that work to another entity can free the lawyers up to do what they’re actually trained to do. And building out an AI-enabled practice can get expensive, and an entity that can take outside investment to cover those expenditures can help the practice modernize.
But a lot of these PE deals aren’t stopping there.
On a recent podcast, an attorney advising PE funds in building these arrangements floated the idea of using the structure to skirt ethical rules preventing lawyers from being bound by non-compete agreements. Model Rule 5.6 bars agreements that restrict a lawyer’s right to practice after leaving, specifically so clients can follow their lawyer to the best platform. An MSO structure designed to accomplish what Rule 5.6 forbids is not great.
California’s new AB 2305 bars MSOs, private equity, hedge funds, and other capital providers from steering a firm’s professional decisions in litigation, including which clients to take, how to set fees, when to settle, and what strategy to pursue. Many shrugged that the law mostly restates rules that already apply to MSOs, but if it really does then there’s no harm in putting an underline on it.
Carolyn Elefant made the case that solo and small firms should stay away from these deals, pointing to the profession’s last experiment with business-side control when we had foreclosure mills in the 2000s. That ended with robo-signed documents and fabricated affidavits.
That’s how these things go wrong. Nobody in the fleece vest says “make the lawyers cut corners.” They say “the EBITDA targets need to be more aggressive,” or “the intake funnel needs more volume,” or some other business school jargon.
If people want nonlawyer ownership of law firms, there’s an honest route. Arizona will issue an alternative business structure license, out in the open, with regulators watching. But there’s too much spread between a back office entity and back door to firm control.
Earlier: Private Equity Investment In Law Firms Floated As One Neat Trick To Get Around Ethical Obligations
California Tells Private Equity To Keep Its Hands Off Litigation Decisions
The Richest Law Firms Are Looking At Private Equity Cash Because I Guess They Don’t Have Enough Money
Why MSOs Are A No-Go For Solo And Small Law Firms
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter or Bluesky if you’re interested in law, politics, and a healthy dose of college sports news.
