Can a New York lawyer invest in or do business with an alternative business structure (ABS) law firm that operates legally in a state like Arizona or Utah that allows nonlawyer ownership?
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This page answers the general question as of 2024. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.
Plain-English summary
The opinion addresses whether a New York lawyer may hold a financial interest in, or do business with, an alternative business structure (ABS), meaning a firm that provides legal services and permits nonlawyer ownership, lawfully operating in a jurisdiction (such as Arizona or Utah) that allows such entities. New York itself prohibits nonlawyer ownership of law firms under Rule 5.4.
The opinion reaches three conclusions on business dealings. First, a New York lawyer is not permitted to practice law as part of an ABS if the predominant effect of the lawyer's conduct is clearly felt in New York, because NY Rule 8.5(b) makes the New York rules govern in that situation. Second, drawing on ABA Formal Opinion 499, a passive investment in a lawful ABS is permitted. Third, a New York firm may enter an ongoing, arm's-length fee-sharing arrangement with an ABS provided the two operate as legally separate entities, consistent with ABA Formal Opinion 464 and Opinions 2015-8 and 2020-1.
On passive investment, the opinion concludes that NY Rule 5.4 does not apply because the lawyer's investment is not the practice of law. Rule 5.4(a) addresses the lawyer who shares fees, not a passive investor collecting a return; Rule 5.4(b) and (d) address partnerships and practicing in the form of a nonlawyer-owned entity, neither of which a passive investor does. The opinion notes its reasoning differs slightly from ABA Op. 499 because NY Rule 8.5(b)(2) applies the New York rules to a New-York-only-admitted lawyer regardless of predominant effect, so the opinion grounds its conclusion in the fact that passive investment is simply not the practice of law and does not implicate Rule 5.4's purpose of protecting professional independence.
In practice
Under this opinion, a New York lawyer may treat a genuinely passive stake in a lawful out-of-state ABS like any other business investment, and may maintain an ongoing fee-sharing relationship with an ABS so long as the New York practice and the ABS are separate legal entities and the lawyer does not provide or direct the ABS's legal services. The opinion is explicit that the fee-sharing arrangement does not need to be re-negotiated on a case-by-case basis.
The boundary the opinion draws is active practice with predominant New York effect: if the lawyer practices law through the ABS and that conduct's predominant effect is in New York, NY Rule 5.4's bar on nonlawyer ownership and fee sharing applies and the arrangement is prohibited. The opinion notes that if the lawyer is involved in providing or directing the ABS's legal services, Rule 5.4(a) would be implicated.
Common questions
Q: Can I invest in an Arizona or Utah ABS law firm if I'm only admitted in New York?
A: Yes, if the investment is genuinely passive. The opinion concludes NY Rule 5.4 does not reach a passive investment because it is not the practice of law, agreeing with ABA Formal Op. 499 that a passive investor in an ABS is not practicing law in the ABS jurisdiction.
Q: Can my New York firm share fees with an ABS?
A: Yes, at arm's length. The opinion permits an ongoing fee-sharing arrangement with an ABS provided the New York firm and the ABS operate as legally separate entities, citing ABA Formal Op. 464 and Opinions 2015-8 and 2020-1.
Q: Can I practice law as a partner in an out-of-state ABS?
A: Not where New York is the predominant effect. The opinion concludes a New York lawyer may not practice with an ABS if the predominant effect of the lawyer's practice is clearly felt in New York, because NY Rule 8.5(b) then makes the New York rules (including Rule 5.4) govern.
Q: Does collecting a return on my ABS investment count as sharing fees with a nonlawyer?
A: No. The opinion concludes Rule 5.4(a) governs the lawyer who renders the legal services and shares fees, not a passive investor receiving an investment return over which the lawyer exercises no direction or control.
Background and rules framework
The opinion interprets NY Rule 5.4 (professional independence; bars on fee sharing with nonlawyers, partnerships with nonlawyers to practice law, and practicing in a nonlawyer-owned for-profit entity) and NY Rule 8.5 (disciplinary authority and choice of law). It contrasts NY Rule 8.5(b)(2) with Model Rule 8.5(b)(2): the New York version applies New York's rules to a New-York-only-admitted lawyer's multijurisdictional conduct regardless of predominant effect, while the predominant-effect test applies only to dual-admitted lawyers. The opinion relies on ABA Formal Opinions 499 (passive ABS investment) and 504 (choice of law and ABS practice), New York State Opinions 889, 911, and 1234, and New York City Opinions 2015-8 and 2020-1.
Citations and references
Rules of Professional Conduct:
- MR / NY RPC 5.4 (professional independence; fee sharing; nonlawyer ownership)
- MR / NY RPC 8.5(b) (disciplinary authority; choice of law)
- NY RPC 1.0(m) (definition of "partner")
Other opinions cited:
- ABA Formal Op. 499 (2021): passive investment in an ABS
- ABA Formal Op. 504 (2023): choice of law and ABS practice; pro hac vice
- ABA Formal Op. 464: division of fees with nonlawyer-owning firms
- New York State Op. 889 (2011): NY/DC lawyer joining a DC ABS
- New York State Op. 1234 and Op. 911: New York's bar on nonlawyer ownership
- New York City Op. 2015-8 and Op. 2020-1: fee sharing with nonlawyer-permitting firms
See also
- ABA Ethics Op. 499: Passive investment in alternative business structures
- ABA Ethics Op. 464: Fee division with firms that share with nonlawyers
- NYC Bar Ethics Op. 2020-1: Ongoing relationships with alternative legal business entities
- NYC Bar Ethics Op. 2015-8: Fee sharing with firms that permit nonlawyer interests
Source
- Landing page: https://www.nycbar.org/reports/formal-opinion-2024-4-lawyers-associating-with-alternative-legal-business-entities/
- Original PDF: https://www.nycbar.org/wp-content/uploads/2024/07/20221320_ABSOpinion.pdf
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