Bloomberg Law Interviews Pera on Growing Market of Alternative Business Structures

Adams & Reese Partner Lucian Pera was interviewed by Bloomberg Law in the article, “Fortress Law Firm Investment Signals Shift in Legal Industry.”

The article discusses how Fortress Investment Group’s economic stake in a Phoenix personal injury law firm continues a growing market of Alternative Business Structures, also known as ABS. These are organizational business models that allow non-lawyers and non-law firms to own or invest in law firms, which can increase access to capital, promote innovation, and allow for multidisciplinary services under one roof. 

“It’s not a surprise to me at all that the big investors would find ABS’ to be a field they would want to put some money in,” said Pera, one of the nation’s leading legal ethics practitioners who consults with businesses forming alternative business structures and management service organizations. “What I’m hearing from investors is that there is a growing interest in the legal space and they are exploring all kinds of ways to put their funds at work.”

Fortress Investment Group has a 20% economic interest in Arizona-based Esquire Law, which focuses on representing individual clients injured in car accidents. Also, recently, litigation funder Burford Capital said it’s looking to invest more directly in firms, including possibly through Arizona’s alternative business structures program.

These investment managers and litigation funders are targeting Arizona and other states that have loosened restrictions on non-lawyers owning firms,and others, Bloomberg Law reports, are seeking workarounds through management service organizations (MSOs), which split the legal side of firms from the back offices to allow outside investment.

Pera told Bloomberg Law that the ABS and MSO routes give investors more skin in the game and a direct piece of the profits, and investors in a state such as Arizona may help a law firm in the state acquire cases across the country and then refer the matters to lawyers in other jurisdictions and split the fees.

“The whole range of the legal space of lawyers and people who work in the legal space has had this expansion of its imagination about what’s possible because of a number of developments slowly, gradually as a result over the last several years because of the ABS program,” said Pera.

In June, Puerto Rico's high court allowed non-lawyer investment in law firms in order to spur economic development in the territory. Arizona, the only state that has done away with the ABA rule, in 2020, now has over 100 law firms that are open to outside investors with large companies like KPMG and Rocket Lawyer now owning law firms in the state outright.

Traditionally, law firms have operated as partnerships among attorneys, where equity partners own shares in the firm and help manage it. Ethically, ABA Model Rule 5.4(d) largely prevents nonlawyers from owning law firms or from having the right to control the professional judgment of a lawyer. But as a workaround, law firms can set themselves up as two corporate entities, Pera said. One is the law firm itself, composed exclusively of lawyers and owned only by lawyers. The second is the service organization, which can be owned by anyone and acts as a vendor for the law firm. It is essentially the back office, taking care of all non-lawyer tasks, including marketing, accounting, human resources, real estate leases, and employing paralegals. The two corporate entities enter into a long-term contract.

According to Pera, no state bars have issued ethics opinions that expressly bless the MSO model, but no court or regulator has found a problem with it, either.

Recently, Pera published “The Playbook: How to Extend the Reach of an Arizona ABS Law Firm to the Entire United States,” in which he provides a practical survey of tools and models now used by innovators to deliver legal services and extend the reach of ABSs.

At Adams & Reese, Pera is a Partner in the national law firm’s Memphis office. For more than 30 years and licensed in Tennessee and Arizona, Pera has practiced in commercial litigation, media law, legal ethics, and lawyer regulation – advising lawyers, law firms, and businesses on legal ethics, compliance, risk management, and innovative legal service models. Within that practice, Pera counsels clients on whether an ABS fits their business model to deliver legal services, and the geographic reach of an ABS under current law.