Canadian law firms: Time to take stock?

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Rules that forbid non-lawyers from owning law firms are "outdated" and have become "shackles" on the ability of U.S. law firms to expand and compete globally, a New York firm argues in a suit challenging a long-established tenet of the legal profession in the U.S. and Canada.

The lawsuit, launched by personal-injury firm Jacoby & Meyers Law Offices LLP against the state judiciary that enforces the legal profession's rules, is the latest development in an increasingly global debate over whether law firms should be allowed to raise capital on the stock market just like other businesses do.

Elsewhere, it has already become reality: Recent reforms have seen the old rules scrapped in both Britain and Australia. The American Bar Association itself has recently floated a possible relaxation of the rules. It's a debate that some observers warn the Canadian legal profession can no longer afford to ignore.

The case against the concept is the ethical problems critics say it would create. In court documents, New York Attorney-General Eric Schneiderman says Jacoby & Meyers's claims "border on frivolous" and argues the current rules are designed to guarantee that a lawyer's independence and loyalty to a client are "not compromised by the conflicts that would arise when a firm becomes beholden to its investors."

Jacoby & Meyers argues in its suit filed earlier this year that it needs more capital to expand its business and better serve its low and middle-income clients. The controversial changes in England and Wales, which take effect next year, are also meant to open the door for supermarkets or other big companies to offer legal services themselves, a concept labelled in British legal circles as "Tesco law," named after a national supermarket chain.

In Australia, rule changes in 2004 allowed class-action firm Slater & Gordon to become the first publicly-traded law firm in the world in 2007.

Adam Dodek, who teaches ethics at the University of Ottawa's law school, says the profession in Canada needs to start a debate on the issue. He predicts that within a few years, the profession will be forced to confront it, perhaps when a British law firm that is publicly traded decides to take over a Canadian one.

"My message to law societies and the legal profession across the country would be, it's inevitable," Prof. Dodek said in an interview. "Be proactive. Seriously look at the issue now."

Loosening the rules could help new Canadian law firms raise capital from investors needed to launch new, more innovative legal services, he argues. Instead of "Tesco law," he suggests Canada needs "Tim Hortons law."

The country's self-regulating law societies could design new rules to address the ethical concerns, Prof. Dodek said. He points out that lawyers already face bottom-line pressures that conflict with their ethical obligations to act in the best interests of clients.

The concept has prominent critics, however. In a strongly worded opinion piece last month in Bloomberg BusinessWeek, Robert Weber, general counsel for International Business Machines Corp., calls the concept "disturbing." He asks whether companies would feel comfortable knowing that investors in their law firms also had stakes in their opponents in litigation.

He goes on to compare lawyers to investment bankers, whose business model switched from partnerships to publicly traded companies over the past few decades. That change resulted in more access to capital but more reckless risk-taking, he writes: "Only Pollyanna would think that lawyers will behave any differently."

Sam Marr, the president of the Toronto Lawyers Association, said he thinks the profession should tackle it head-on before it is forced to: "Having law firms traded on the TSX would be a profound and significant change which could potentially have a negative effect upon professionalism and ethical issues in our profession."

Malcolm Heins, chief executive officer of the Law Society of Upper Canada, which regulates lawyers and paralegals in Ontario, said the law society has been watching developments in Britain and Australia closely.

But he said he didn't see law firms or potential investors here clamouring for English or Australian-style rule changes. And he pointed out just two Australian firms have bothered to go public since the rule changes there in 2004.

"We just don't see the demand," Mr. Heins said.

Alasdair Douglas, chairman of the City of London Law Society, said the controversial changes in England and Wales will likely only have an immediate impact on the "high street" or retail end of the legal business.

For example, he said, big retailers or banks will likely move into offering "commodity" legal work such as wills, simple real estate transactions or slip-and-fall cases, perhaps wiping out small independent firms.

Mr. Douglas said he didn't expect many of the elite firms in London's financial world to go public any time soon, regardless of how tempted some partners may be to cash out and sell their stakes.

But down the road, some are bound to experiment with this new way of raising capital, he said: "My own view is that there will be firms, not maybe in five months or five years, but at some stage, significant firms will be drawn to listing some shares or taking outside investors."