Can a lawyer in a state that bans nonlawyer firm ownership passively invest in a firm with nonlawyer owners in a state that allows it?
ABA Formal Opinion 499: Passive Investment in Alternative Business Structures
Short answer: The opinion concludes that a lawyer admitted in a jurisdiction that follows Model Rule 5.4 (and so bars nonlawyer ownership of law firms) may make a passive investment in an alternative business structure, a firm with nonlawyer owners operating in a jurisdiction that permits such entities, without violating Rule 5.4, provided the lawyer does not practice law through the firm, is not held out as a lawyer associated with it, has no access to its clients' Rule 1.6 information without consent, and refrains from or resolves any conflict that exists under Rule 1.7(a)(2) when the investment is made.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the American Bar Association's Model Rules of Professional Conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
The opinion addresses whether a lawyer in a jurisdiction that follows Model Rule 5.4, which prohibits nonlawyer ownership of law firms, may invest as a passive owner in an "alternative business structure" (ABS), a law firm with nonlawyer owners, operating in a jurisdiction (such as Arizona, Utah, or the District of Columbia) that permits such firms. The opinion concludes the investment is allowed: "a Model Rule Lawyer who makes a passive investment in an ABS does not violate Model Rule 5.4." It defines the limits of "passive," explaining that passive investment "does not include scenarios in which the investing lawyer practices law through the ABS, manages or holds a position of corporate or managerial authority in the ABS, or is otherwise involved in the daily operations of the ABS."
On choice of law, the opinion applies Rule 8.5(b). Because a passive investment is not conduct before a tribunal, 8.5(b)(2) governs and the predominant effect of the investment occurs where the ABS operates, a jurisdiction whose rules the investment does not violate. The opinion reasons that a genuinely passive investor is not practicing law in that jurisdiction, "just as a lawyer who is an investor in a mutual fund that includes widget company stock in its portfolio is not deemed to be making widgets." It grounds the result in its earlier cross-border fee-division opinion, Formal Opinion 464.
The opinion then addresses imputation and conflicts. It concludes that "the mere fact of a passive investment by a Model Rules Lawyer in an ABS does not require imputation of conflicts under Model Rule 1.10 between the Model Rule Lawyer (or that lawyer's firm) and the ABS," because a passive investment lacks the close, regular relationship of an "of counsel" arrangement. It distinguishes future from present conflicts: "the fact that a conflict might arise in the future between the Model Rule Lawyer's practice and the ABS firm's work for its clients does not mean that the Model Rule Lawyer cannot make a passive investment in the ABS." But "if, however, at the time of the investment the Model Rules Lawyer's investment would create a personal interest conflict under Model Rule 1.7(a)(2), the Model Rule Lawyer must refrain from the investment or appropriately address the conflict pursuant to Model Rule 1.7(b)."
The opinion adds two cautions. The lawyer must have no access to the ABS clients' Rule 1.6 information without the clients' informed consent, and the opinion notes that because a passive investment may be hard to liquidate, a conflict that arises after the investment can be harder to resolve, potentially leaving informed consent or withdrawal as the options.
In practice
Under this opinion, a lawyer in a Model Rule 5.4 jurisdiction may hold a passive ownership interest in a nonlawyer-owned firm operating where such firms are permitted, so long as the investment stays passive: no practicing law through the firm, no managerial or operational role, and no being held out as its lawyer. The opinion holds that such an investment does not by itself impute the ABS's conflicts to the investing lawyer's own firm under Rule 1.10. It treats a conflict that already exists when the investment is made, for example where the lawyer is adverse to an ABS client, as a personal-interest conflict under Rule 1.7(a)(2) that the lawyer must avoid or resolve under Rule 1.7(b); a conflict that only might arise later does not bar the investment. The opinion also requires that the lawyer have no access to the ABS clients' confidential information without their informed consent.
Common questions
Q: I'm licensed in a state that bans nonlawyer firm ownership. Can I invest in an Arizona or Utah ABS?
A: Per the opinion, yes, if the investment is genuinely passive. The opinion concludes that a passive investment in an ABS operating where such firms are permitted does not violate Model Rule 5.4.
Q: What makes an investment "passive"?
A: The opinion says the lawyer must not practice law through the ABS, must not manage it or hold corporate or managerial authority, and must not be involved in its daily operations.
Q: Does investing in the ABS impute its conflicts to my own firm?
A: The opinion says no, not from the investment alone. A passive investment lacks the close, regular relationship that would trigger imputation under Rule 1.10, so the ABS's conflicts are not imputed to the investing lawyer or that lawyer's firm.
Q: What if I'm currently adverse to one of the ABS's clients?
A: The opinion treats that as a personal-interest conflict under Rule 1.7(a)(2) existing at the time of investment. The lawyer must refrain from the investment or address the conflict under Rule 1.7(b); a conflict that merely might arise in the future does not bar the investment.
Background and rules framework
The opinion interprets Model Rule 5.4 (professional independence of the lawyer, including the bar on nonlawyer ownership) and applies Model Rule 8.5(b) (choice of law) to locate the predominant effect of a passive investment where the ABS operates. It applies Model Rule 1.10 (imputation of conflicts), Model Rule 1.7 (concurrent conflicts, including personal-interest conflicts under 1.7(a)(2) and their resolution under 1.7(b)), Model Rule 1.8 (business transactions implicating clients), and Model Rule 1.6 (confidentiality of the ABS clients' information).
Citations and references
Rules of Professional Conduct:
- ABA Model Rule 5.4 (professional independence; nonlawyer ownership)
- ABA Model Rule 8.5(b) (choice of law)
- ABA Model Rule 1.7(a)(2), 1.7(b) (personal-interest conflicts and resolution)
- ABA Model Rule 1.10 (imputation), 1.8 (business transactions), 1.6 (confidentiality)
Other opinions cited:
- ABA Formal Op. 464 (2013): cross-border fee division with a firm having a nonlawyer partner
- ABA Formal Op. 484 (2018): lawyer's financial interest in client financing
- ABA Formal Ops. 90-357, 94-388: "of counsel" relationships
See also
- ABA Formal Op. 504: Choice of Law Under Rule 8.5
- ABA Formal Op. 507: Office Sharing Arrangements
- ABA Formal Op. 497: Materially Adverse Conflicts
Source
- Landing page: ABA Formal Ethics Opinions index
- Original PDF: aba-formal-opinion-499.pdf