The Rise of Internal Law Firms in Corporations: Regulation Changes to Rule 5.4 Promote Nonlawyer Law Firm Ownership

Major corporations are increasingly establishing affiliated or internal law firms. This change allows corporations to sell legal services like consulting and contracting. These new legal business extensions of major corporations have become possible due to states loosening restrictions on law firm ownership. Arizona and Utah were some of the first states to change regulations that previously barred non-lawyers from owning law firms. A cited major benefit of the non-traditional law firm model is easier access to affordable services while breaking up the monopoly of traditional law firms. However, as major corporations begin to utilize the non-traditional law firm model to start their own law firms, critics of these regulations cite concerns about corporations not being held to the same ethical standards as traditional firms.

The status quo of law firm ownership in the United States had always been that a lawyer must own the law firm. This condition stems from Rule 5.4: Professional Independence of a Lawyer, where in 1983, the American Bar Association outlined rules for law firms and associations. Rule 5.4 specifically states, “A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law,” barring law firm ownership by nonlawyers. In recent years, several states have enacted changes to non- lawyer ownership and Rule 5.4 with varying regulatory limits in place. In the District of Columbia, lawyers can practice law with nonlawyers who hold a financial interest in the firm as long as the nonlawyers are offering professional services that aid in providing legal services and as long as they abide by several other restrictions such as abiding their rules of conduct. Utah  recently extended its seven year “regulatory sandbox” pilot program to oversee nonlawyer ownership in law firms. In Arizona, the Supreme Court unanimously modified Arizona’s legal ethics code to eliminate Rule 5.4, and as of 2021, nonlawyers, with prior approval by the Arizona Supreme Court, can hold ownership interests in corporations providing legal services through Arizona’s Alternative Business Structure (ABS). According to the Arizona courts, some advantages of the ABS system include the ability for legal firms to receive greater capital infusions, potential for technological innovations in the public delivery of legal services, and reduced need for outsourcing with non-traditional firms being able to provide legal and non-legal services. Regulatory changes like the elimination of Rule 5.4 have paved the way for major corporations to offer legal services in the United States. 

One major corporation entering the non-traditional law firm ownership model to provide legal services is KPMG. Known as one of the Big Four accounting firms along with Deloitte, EY, and PwC providing professional services such as financial advisory and risk management, KPMG is the first to establish their own law firm, KPMG Law US. The Big Four firm received licensure from the Arizona Supreme Court through Arizona’s ABS system as an alternative legal business, allowing the firm to provide legal services. However, the Arizona Supreme Court added stipulations to KPMG Law’s approval order including that the firm “…operate in a manner consistent with the representations it has made as part of its ABS application…” and to “...not perform legal services for clients for which KPMG LLP or other KPMG member firms conduct financial statement audits or attestations.”. The second stipulation in particular demonstrates the Arizona Supreme Court imposing ethical standards onABS firms to ensure impartiality throughout the legal process. 

There is strong criticism against the non-traditional law firm model and regulations that are being enacted in states as seen in Arizona and Utah. However, certain states, such as Florida and California, have reaffirmed their commitment to upholding Rule 5.4. In Florida, there have been attempts to amend Rule 5.4, but the Supreme Court of Florida rejected the proposed amendments, as did The Florida Bar’s Board of Governors. California recently approved a new provision, § 6034.1, of Assembly Bill 2958 (2021-2022) which reaffirmed Rule 5.4 in regards to the licensing of nonlawyers so as to “…exclude corporate ownership of law firms and splitting legal fees with nonlawyers, which has historically been banned by common law and statute due to grave concerns that it could undermine consumer protection by creating conflicts of interests that are difficult to overcome and fundamentally infringe on the basic and paramount obligations of attorneys to their clients.” The danger to impartiality through the non-traditional law firm ownership model is a key concern in the debate of allowing major corporations to provide legal services.

The tension between amending law firm ownership regulations stems from states looking to innovate the justice system while maintaining professional integrity for the lawyers, nonlawyers, and clients involved. In order to uphold an effective justice system free from bias, state supreme courts considering regulation changes to Rule 5.4 must set strict guidelines to ensure that collaboration between the parent company and the subsidiary is prohibited, as the Arizona Supreme Court did in approving KPMG Law, and that for-profit interests do not overtake the legal profession’s public duty to justice.

Dre Boyd-Weatherly is a junior at Brown University concentrating in International and Public Affairs. She is a staff writer for the Brown Undergraduate Law Review and can be contacted at dre_boyd-weatherly@brown.edu.

Simon Juknelis is a first-year concentrating in computer science and history. He is an editor for the Brown Undergraduate Law Review and can be reached at simonas_juknelis@brown.edu.