ARIZONA’S ALTERNATIVE BUSINESS MODEL (ABS) 3 YEAR UPDATE | LEGAL MASTERMINDS

If you are an attorney, ask yourself the following questions:

• What is the impact on your practice by not being able to fully fund your firm and cases with investment money from non-attorney investors?

• What could your firm and practice look like if you you were to receive additional investment funding for things like more and better clients and cases, technology upgrades, etc.?

• How could a non-attorney investment or business partner potentially benefit the growth and potential of your practice?

• How could additional investment and innovation potentially expand consumer access to law and legal services?

If you have ever asked any of these questions of yourself, then Arizona’s recent Alternative Business Structure changes may be of interest to you…

Watch Our Interview with Lynda Shely

In a groundbreaking move in 2021, Arizona emerged as a trailblazer in the legal industry by effectively eliminating the standard 5.4 model rules and replacing them with new Legal Alternative Business Structures (ABS), allowing for non-attorney ownership in law firms for the first time in the state of Arizona. Along with this change, there was also a modification of rule 7.2b, allowing for fee sharing with non-attorneys, a practice still prohibited in other states.

The goal of these sweeping changes in the Arizona legal community was to open doors to innovation and efficiency, offering attorneys new avenues to thrive in an evolving legal landscape. In late 2020, I conducted an interview with renowned ethics attorney Linda Shely on the details of these changes before their implementation and what attorneys could expect moving forward.

Now, three years have passed since that initial interview, and we have decided that this would be a good time to reconnect and discuss what we have learned, the current status, and what we can expect moving forward after three years of the ABS model taking hold in Arizona.

SOME OF THE MAJOR TOPICS IN THIS CONVERSATION INCLUDE:

ABS Implementation in Arizona: As of the interview, 65 ABS entities are registered in Arizona, covering various practice areas such as personal injury, business law, estate planning, civil litigation, immigration, family law, intellectual property, and more. An additional 35 ABS applications are currently in the certification process.

Comparison with Other States: Arizona and Utah are the only states actively testing ABS models. Linda notes that Texas has recently published a report recommending ABS for certain practice areas, primarily focusing on serving clients below the poverty line.

Renewal and Approval Process: ABS entities in Arizona currently undergo an annual renewal process, and Linda explains the steps involved in adding new investors or owners. The approval process includes thorough background checks and compliance with ethics rules.

Referral Fee Changes: Arizona’s elimination of Ethics Rule 7.2b has allowed attorneys to pay referral fees to non-attorneys, leading to a change in the dynamics of fee-sharing within the legal community.

Co-Counseling and Referral Fees: Attorneys from other states can co-counsel with Arizona ABS lawyers, and referral fees can be shared. The modification of Rule 7.2b also allows Arizona ABS attorneys to pay referral fees to other referring parties, including non-attorneys, in other states.

Non-Attorney Investors: A non-lawyer may own up to 100% of an Arizona ABS Law Firm as long as they employee and Arizona compliance lawyer and meet all of the ABS requirements, rules, and restrictions. “Authorized” owners are typically those who own 10% or more and/or can make decisions in the firm. Passive investors that don’t make decisions and own less than 10% ownership of an ABS are not required to complete background checks and disclose their ownership interest in the ABS.

Safeguards and Concerns: Safeguards have been implemented to address concerns about non-lawyer control in ABS entities. Linda mentions that, so far, the safeguards appear effective, with minimal bar charges against ABS entities.

Future Trends: Linda emphasizes that ABS is not a “get rich quick scheme” and encourages serious consideration for those interested in applying. The legal community is still adapting to these changes, and other states are cautiously observing Arizona and Utah’s experiences.

THE OVERALL POTENTIAL BENEFITS OF ABS IN ARIZONA AND BEYOND

Whether you agree with Arizona’s recent changes to an Alternative Business Structure and referral fee reforms or not, there are many good arguments as to the potential benefits to both consumers and the legal community by implementing such changes. Some of the most common benefits cited include:

Unleashing Innovation:

Arizona’s decision to embrace ABS marks a departure from traditional legal structures, allowing attorneys to collaborate with professionals from diverse fields. This move fosters a culture of innovation, breaking down silos and encouraging creative problem-solving. By incorporating business expertise into legal practices, attorneys can now leverage a broader skill set to provide more comprehensive and effective solutions for their clients.

Enhanced Client Service:

Legal ABS in Arizona promotes a client-centric approach by encouraging attorneys to streamline their operations and enhance service delivery. With this potential infusion of business strategies, law firms can optimize processes, improve client communication, and reduce costs. This ultimately translates into a more efficient and responsive legal service, ensuring clients receive top-notch representation tailored to their specific needs.

Access to Capital and Resources:

One of the key advantages of Legal ABS in Arizona is the newfound ability for law firms to attract external investment outside of the legal community. This infusion of capital allows firms to expand their operations, invest in cutting-edge technologies, generate more clients and cases, and hire top-tier talent. The result is a legal industry that can be better equipped to adapt to the demands of the modern world, providing attorneys with the resources needed to stay ahead of the curve.

Diversity and Inclusion:

Legal ABS fosters diversity by encouraging collaboration between legal professionals and individuals with diverse backgrounds and skill sets. This inclusivity can not only enhance the overall effectiveness of legal teams but also contributes to a more representative and accessible legal profession. Arizona’s commitment to diversity and inclusion in the legal sector sets a precedent for other jurisdictions to follow, creating a more equitable legal landscape.

Adapting to Changing Times:

The legal profession is not immune to technological advancements and changing societal needs. Alternative Business Structures (ABS) positions Arizona’s attorneys at the forefront of these changes, enabling them to adapt and thrive in an environment characterized by constant innovation. By embracing this new approach, attorneys in Arizona should be better positioned to navigate the complexities of an ever-evolving legal landscape.

In Conclusion:

Arizona’s adoption of Legal Alternative Business Structures represents a significant leap forward for the legal industry. By promoting innovation, enhancing client service, providing access to capital, and fostering diversity, this progressive approach has positioned Arizona as a leader in shaping the future of legal practice. As other jurisdictions contemplate similar reforms, Arizona stands as a shining example of the benefits that can be realized when the legal profession embraces change and adapts to the needs of the 21st century.

– Dustin Ruge

Additional Resources:

• AZ Courts ABS FAQ’s: https://www.azcourts.gov/accesstolegalservices/Questions-and-Answers/abs
• The Shely Law Firm, PC: https://shelylaw.com/

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