Fee splitting in two acts

I read with some interest Ron Friedmann’s recent blog post entitled Why Alternative Legal Provider Market Share May be Limited.

In brief, Ron argues that LPOs seemed to have reached an unexpectedly low ceiling, law firms themselves are innovating, and the growth in alternative legal service providers hasn’t been as robust as one might have expected. I don’t have much to critique, it’s a solid piece, especially given the fact that Ron lived a bunch of this. But, at least based off of my recent experience, I wanted to add one more limitation on their alternative legal provider market share: prohibitions on fee-splitting between attorneys and non-lawyer service providers.  

Let me offer two examples.

Act One

I’m currently in dialogue with a couple of legal tech service providers. I’m going to refer to them both fairly generally so as not to draw too much regulatory scrutiny to them. Both are not run by attorneys and both are intentionally not law firms. [1] Both do a good job of finding consumers where they are, offering a compelling value proposition, and ultimately, when needed, delivering the consumers to a lawyer. Lawyers are happy with the service as well. They get qualified cases that in which the scope of work is clear and the fee, in many cases, already negotiated.  In the case of one of the service providers, the one getting more traction, the online reviews for the service are very positive, much better, in fact, than those of a large well known law firm that is a direct competitor. And yet both are having trouble recruiting not clients but lawyers. Even though lawyers are happy and consumers are well-served – better, in fact, in one case than they are by the more regulatorily kosher alternative – these startups can’t grow and scale to help more people because the fee-splitting regulations either prohibit their partnering with lawyers or, if we want to take a more progressive interpretation of the rules, the rules cast a shadow that makes lawyers incredibly nervous.

Act Two

A few weeks back I also met with the partner of a small but growing firm. This partner and his fellow partners embarked on their entrepreneurial journey right out of law school. They struck out on their own and have built, what most would consider to be, a pretty impressive practice. This particular partner expressed a desire to move on and do something different. He enjoyed building and growing the firm but wanted to do something else – maybe legally related, maybe not. Regarding the possibility that he might stay in legal or grow another firm he observed “I now understand why building a book of business is so important in legal. Listen, I know how to build a law firm business. I know how to set it up, find clients, and run it. That skill is an asset just like it is for someone who knows how to run a restaurant, or build a software company, or the like. That’s why it’s really frustrating that I can’t raise outside money to go and build another law firm. Instead, I have to put my home or some other asset on the line (a bank is unlikely to offer me an uncollateralized loan of any real size) and start completely from scratch. That’s crazy.”

Listen, wouldn’t say I am absolutely for the absolute elimination of fee-splitting regulations. To the extent that I’ve advocated on the topic, I’ve lobbied against rigid and mechanical interpretation and application of 5.4 and associated rules. I think there are good and valid reasons that the rule exists.

And yet, I look at the examples above and I have to shake my head. Fee splitting in both of these case would likely lead to a net positive for both lawyers and, most importantly, for clients and consumers. Is the market share for alternative legal service providers limited? Maybe. Is it currently limited artificially (for good and maybe bad reasons)? Absolutely.  

[1] At least, not yet.


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