Sun, Sea, but no Sand(box) for Florida Lawsuit Investors

What’s more likely to happen if a hedge fund buys part of a law firm? Will it deploy its capital altruistically, launching a revolution in low-cost legal services for the disadvantaged and waiving…

What’s more likely to happen if a hedge fund buys part of a law firm? Will it deploy its capital altruistically, launching a revolution in low-cost legal services for the disadvantaged and waiving aside demands from investors looking for returns? Or, as you might expect from a hedge fund, will it push the law firm to maximize profits for those shareholders, whatever the cost?

The Florida Supreme Court didn’t explicitly address that question, but the second option may have been on the Court’s mind when it replied to a controversial recommendation from a special committee of the Florida Bar Association. In its March 3 letter, the Court rejected a proposed regulatory “sand-box” that would allow nonlawyer ownership in the state’s law firms and lift the prohibition on lawyers sharing fees with nonlawyers, effectively eliminating the state’s Rule 5.4 on lawyers’ professional independence. Critics viewed this as an open invitation for litigation funders and similar interests to formalize and expand their already worrisome investment in the civil courts.

But how is this possible? How was such a misguided proposal even up for consideration?

Like most things in life, the answer is complicated. Advocates for changing Florida’s Rules of Professional Conduct for lawyers—and parallel rules in other states—have long argued that the rule restricts access to justice and keeps costs for legal services artificially high. Weakening the rule, these advocates contend, would create more competition in legal services and reduce costs.

Given the number of legal complications that can arise from selling coffee, braiding hair, or even writing online reviews, there’s an argument to be made that more affordable legal services are needed.

But, as the Florida Justice Reform Institute (FJRI) indicated in their October 2021 comments to the Court, there is “no actual data demonstrating” that the proposed changes to Rule 5.4 would “increase opportunities for lawyers, lower the costs of legal services, and improve access to justice.” Furthermore, as FJRI points out, there’s also no data to suggest these changes have been working in the two states that have already tried them.

And like smashing your iPhone to cut down on screen time, weakening Rule 5.4 would also have unintended consequences. Michael Tanner, President of the Florida Bar Association, summed it up best in a December 2021 letter to Florida’s Chief Justice Charles Canady.

Tanner communicated concerns from the Bar’s Board of Governors (not associated with the special committee) that allowing nonlawyer ownership of law firms “inevitably would compromise the independence of the self-regulated legal profession by creating an inherent conflict of interest between lawyer-owners of firms, who must adhere to ethical obligations and advance principles of public service, and unregulated nonlawyer-owners, whose primary goal would be to increase firm profitability.” The Bar’s comments on fee-splitting with nonlawyers “mirrored” their concerns with nonlawyer ownership.

The Florida Supreme Court seemed to hear these concerns loud and clear. Though it was not explicit in its reasoning, the Court seemed sympathetic to the idea that gutting Rule 5.4 would not make legal services more accessible. In the same March 3 letter, the Court flatly rejected all of the committee’s proposals, except for a measure giving more flexibility to not-for-profit legal service providers. Recognizing that concerns over access to justice remain, the Court then asked the Florida Bar to try again, requesting “alternative proposals” by the end of 2022.

This is a good outcome. But the fact that a proposal like this made it so far and that similar initiatives are moving forward across the country (including in California, with its mammoth legal services market) is cause for concern. If states open the door to nonlawyer ownership and fee-splitting, hedge funds and private equity firms operating as litigation funders could rush in and further distort the practice of law. ILR and other critics of third party litigation funding have frequently pointed to the ethical and practical danger of outside investors buying a stake in lawsuits, where a lack of transparency can allow them to exercise improper control in the litigation. By weakening Rule 5.4 states may unwittingly give litigation funders the ability to advance a quiet coup in the nation’s civil justice system, shifting the center of gravity in that system away from providing justice, and towards maximizing shareholder returns.

The movement in states like Arizona, Utah, and California to undermine Rule 5.4 and replace it with an experimental regulatory sand-box that opens the door to litigation funders is a threat to consumers everywhere – and to the integrity of the legal system itself. ILR applauds the Florida Supreme Court for shutting the door on yet another opportunity for litigation funders to leverage the law for their own ends.