In this Comment, I analyze how the current economic crisis has exposed many of the vulnerabilities of the conventional business model for law firms. After years of unprecedented but unsustainable growth, large law firms are stagnating, shrinking, or even disappearing entirely. Many law firms flourished amidst a frenzy of cheap and easy debt, high leverage, and inexhaustible billable hours—but were left without a net when work and collections rates dried up with the credit markets. Law firms are now left with only a few unpalatable options to raise working capital.
I aim to link the crippled state of the legal profession with the traditional prohibition on external investment in law firms. Cut off from investor capital, law firms are forced to rely on perilous amounts of debt and inefficient business practices in order to simply survive.
Contrary to the conventional justification for prohibiting outside investment, regulating the business structure of law firms is neither necessary nor sufficient to ensure ethical lawyering. Without access to modern capital structures, U.S. law firms are handicapped in building transnational legal presences and remain trapped in a failing business model. I propose a system in which law firms can access an outside pool of capital as publicly traded partnerships, while adopting more formal ethical structures that protect professional standards and prevent possible conflicts of interest.
The U.S. legal profession should take advantage of an ongoing paradigm shift to emerge from the crisis with liberalized business structures that allow firms to build sustainable, competitive practices that deliver more efficient services to their clients. I hope my discussion of these issues adds a new perspective to the debate concerning outside investment in U.S. law firms, and strikes a balance between ethical considerations and the evolving market for legal services.