In Formal Opinion 499 issued September 8, the ABA Ethics Committee dealt with the ethical propriety of a lawyer’s passive investment in an alternative business structure (“ABS”), an entity that allows for nonlawyer ownership. While ABSs are allowed in both the UK and Australia, they have only limited authorization in the US. Only three jurisdictions: the District of Columbia, Utah, and Arizona recognize AWBSs, and the scope of the authorization varies significantly among these three. Nonetheless, while three jurisdictions can hardly be viewed as the “wave” of the future, they can at least be considered as a ripple of interest.
What does Formal Opinion 499 allow? Under ABA Model Rule 5.4, which is the rule in most jurisdictions, with certain exceptions, a lawyer may not share legal fees, form a partnership or other legal entity with, or allow control of the lawyers’ legal work by a nonlawyer. Suppose a lawyer is admitted or authorized to practice law in a jurisdiction that has these limitations. May the lawyer make a passive investment in an entity that is in a jurisdiction that allows an ABS? The answer of Formal Opinion 499 is “yes,” provided the investment is purely “passive.” The lawyer may not have access to client information of the ABS without client consent; the lawyer may not be involved in the management of the ABS; the lawyer may not perform legal services through the ABS; and the ABS may not hold the lawyer out as affiliated with the ABS. The opinion recognizes that a situation could arise in which the lawyer with the passive investment may have a conflict of interest with a client represented by the ABS; in this case normal conflict of interest rules apply, especially Rule 1.7.
The ABA opinion offers lawyers who have been successful in their private practices the opportunity to invest in ABAs where such ABAs are authorized to practice, for example Arizona. However, such lawyers must only be private investors without active role in the activities of the ABS.
I do have two objections to the opinion. First, the opinion employs a choice-of-law analysis under ABA Model Rule 8.5 to decide that the ethics rules of the jurisdiction where the ABS is authorized to practice, rather than the rules of the jurisdiction in which the lawyer practices, governs the lawyer’s conduct. When the matter is pending before a tribunal, the ethics choice-of-law rule followed in all jurisdictions is that “for conduct in connection with a matter pending before a tribunal” the rules of the jurisdiction in which the tribunal sits apply. The committee reasoned that this rule did not apply because a passive investor would not be engaged in conduct in connection with a matter pending before a tribunal. (See note 8). Suppose, however, that the passive investor is investing only in litigation matters. In that case it would seem that the investor’s conduct is in connection with a matter pending before a tribunal. If the matter is not pending before a tribunal, ABA Model Rule 8.5(b)(2) provides that the rules of the jurisdiction in which the “predominant” effect occurs apply and that jurisdiction would be the one in which the ABS is authorized to engage in activities. However, not every jurisdiction has the predominant-effect rule. In particular, New York Rule of Professional Conduct 8.5(b)(2)(i) provides that if a lawyer is admitted only in New York, New York Rules govern the lawyer’s conduct.[1] Thus, a New York lawyer admitted only in New York may not be able to be a passive investor in an ABS because New York Rule 5.4, which basically follows ABA Model Rule 5.4, does not allow for nonlawyer participation in law firms, would apply.
In my opinion the Committee erred in applying a choice-of-law analysis. The committee recognized that lawyers often make personal investments in various businesses, and as long as the lawyer’s activities do not involve the practice of law there is no need to apply the ethics rules to such investments. Of course, if in representing a client in a matter in which the ABS is involved, the ethics rules apply to the representation of the client, but the rules do not apply to the passive investment itself. If the choice-of-law analysis is eliminated, lawyers, including those admitted only in New York, would have no problem being passive investors in an ABS in either a litigation or a transactional matter.
The second difficulty I have with the opinion is the restriction of the passive investor’s conduct in connection with the ABS. The opinion recognizes that lawyers could invest and could have managerial roles in various business entities without violation of ethics rules. I see no reason why a lawyer who is an investor in an ABS could not have similar active investment involvement so long as the lawyer does not provide legal services through the ABS and the ABS does not hold the lawyer out as providing legal services.
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[1] N.Y. State Bar Ethics Opinion 1093 (2016) opined that a lawyer admitted in New York but admitted and practicing in the UK would be subject to UK rules because the predominant effect is in the UK. The opinion, however, involved a lawyer who was admitted in both New York and the UK, so NYRPC 8.5(b)(2)(i) did not apply.