Above the Law has a roundup of articles discussing the controversial issue of whether the time has come to lift the ban on non-lawyer investment in law firms. The ban derives from the American Bar Association's Model Rule of Professional Conduct 5.4, which states:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;
(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price;
(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and
(4) a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter.
(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services.
(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:
(1) a nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;
(2) a nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation ; or
(3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.
Every jurisdiction in the U.S. has adopted some form of this rule. The District of Columbia, however, has relaxed standards and will allow partnerships between attorneys and non-attorneys in certain circumstances. See D.C. Rule of Professional Conduct 5.4, and particularly Comments 4-11.
The restrictions were intended to preserve the independence of the legal profession from financial concerns imposed by non-lawyers (who would not be bound by legal ethical rules). However, many commentators have expressed concerns that the rigid confines of Rule 5.4 restrict innovation and make law firms beholden to their bankers.