Key Takeaways
- • Above the Law's Joe Patrice reports that a parody video by Johnny Hilbrant mocking private equity's push into law firm ownership circulated widely over a couple of days, spotlighting PE's use of management services organizations (MSOs) as a workaround to Model Rule 5.4.
- • The MSO model splits a firm into a lawyer-owned practice entity and an investor-owned MSO that charges fees for technology, billing, marketing, intake, and staff, letting investors earn returns on a firm's legal work.
- • Critics cite concerns that some PE-backed structures could be used to circumvent Model Rule 5.6, which bars non-compete agreements restricting a lawyer's right to practice after leaving a firm.
- • California's AB 2305 bars MSOs, private equity, hedge funds, and other capital providers from steering firms' professional litigation decisions, including client selection, fee setting, settlement timing, and strategy.
- • Arizona's alternative business structure license is cited as a transparent, regulator-supervised alternative to back-door nonlawyer control of firms.
Summary
A parody video by Johnny Hilbrant, who has critiqued private equity on social media for some time, drew wide attention in recent days for satirizing PE's interest in acquiring law firms despite the ethics rules that restrict nonlawyer ownership. According to the Above the Law report by senior editor Joe Patrice, most U.S. jurisdictions prohibit nonlawyers from owning law firms under Model Rule 5.4, and states such as California explicitly bar outside investors from indirectly influencing firms.
Private equity has pursued a workaround through the management services organization. Under this structure, a firm divides into two parts: a lawyer-owned practice entity that retains legal control, and an investor-owned MSO that handles technology, billing, marketing, intake, and staff, charging the firm fees for these services. The article acknowledges that this arrangement can offer benefits, including relieving lawyers of business administration and generating capital for AI-enabled practice modernization.
The article raises concerns that some deals go further. It cites a podcast in which an attorney advising PE funds allegedly floated using the structure to bypass Model Rule 5.6's prohibition on non-compete agreements. Patrice argues that an MSO designed to accomplish what Rule 5.6 forbids is problematic.
California's AB 2305 responds to such concerns by prohibiting MSOs, private equity, hedge funds, and other capital providers from directing a firm's professional litigation decisions. Patrice notes that many observers view the law as largely restating existing rules applicable to MSOs. Carolyn Elefant has argued that solo and small firms should avoid these deals, drawing a parallel to the foreclosure mill scandals of the 2000s, which involved robo-signed documents and fabricated affidavits.
The piece concludes that Arizona's alternative business structure license offers a transparent path to nonlawyer ownership under regulatory oversight, in contrast to the opaque back-door control that MSO structures may enable.
Private equity has pursued a workaround through the management services organization. Under this structure, a firm divides into two parts: a lawyer-owned practice entity that retains legal control, and an investor-owned MSO that handles technology, billing, marketing, intake, and staff, charging the firm fees for these services. The article acknowledges that this arrangement can offer benefits, including relieving lawyers of business administration and generating capital for AI-enabled practice modernization.
The article raises concerns that some deals go further. It cites a podcast in which an attorney advising PE funds allegedly floated using the structure to bypass Model Rule 5.6's prohibition on non-compete agreements. Patrice argues that an MSO designed to accomplish what Rule 5.6 forbids is problematic.
California's AB 2305 responds to such concerns by prohibiting MSOs, private equity, hedge funds, and other capital providers from directing a firm's professional litigation decisions. Patrice notes that many observers view the law as largely restating existing rules applicable to MSOs. Carolyn Elefant has argued that solo and small firms should avoid these deals, drawing a parallel to the foreclosure mill scandals of the 2000s, which involved robo-signed documents and fabricated affidavits.
The piece concludes that Arizona's alternative business structure license offers a transparent path to nonlawyer ownership under regulatory oversight, in contrast to the opaque back-door control that MSO structures may enable.
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