What happens when a big four accounting firm is given permission to own and operate a private law firm? We are about to find out.

For decades, only lawyers could own law firms. The American Bar Association drafted Model Rule 5.4 providing that, “a lawyer or law firm shall not share legal fees with a nonlawyer…,” and that, “a lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.” The rule was intended to protect the sanctity of the third branch of government by maintaining lawyers’ independence and preventing the prioritization of profits over ethical and fiduciary duties owed to clients.

In 2020, the Arizona Bar eliminated Arizona Rule 5.4, creating a licensing program for Alternative Business Structures (ABS). Under that program, a panel of licensed Arizona lawyers, judges and others review applications and recommend approval or denial to the Arizona Supreme Court. The Court then grants or denies the applications. An ABS is required to have an Arizona-licensed compliance lawyer, but the investors and other lawyers do not have to reside in Arizona. Through 2024, over 25% of the ABS applications approved by the panel and the Arizona Supreme Court have included ownership interests held by private equity or litigation finance firms.

In February, the Arizona Supreme Court took an even larger step, approving an application from KPMG to create an ABS, KPMG Law US. KPMG Law US will operate as a wholly owned subsidiary of KPMG, with the stated intent of providing contract advice to corporate clients.

The creation of KPMG Law US raises as many issues as it answers. For one, what happens when KPMG Law US provides legal advice in Arizona for a client located in Texas? How will it prevent contracts it drafts for clients from being used in other jurisdictions with or without the KPMG Law US’s consent? Will allowing a large, for-profit consulting firm owned by non-lawyers put profits over ethics? Will it make attorney’s owning equity in law firms and more generally, law firm partnerships, dinosaurs?  Will it transform owners into permanent at-will employees of large corporations much like what has been occurring to physicians in medicine?

Notably, KPMG’s formal entry into the legal market was prefaced by years of large consulting firms offering legal support services to clients. Those services, which are not considered the practice of law, have proven to be profit centers and placed the consulting firms in direct competition with law firms that provide similar services. And, all the while KPMG Law US will be completing with law firms for representation of large companies, on the other end of the spectrum, Legal Zoom and others have provided generic legal forms for consumers and business with small or limited budgets. The impact of Arizona’s recent action in combination with other market forces has the potential to disrupt and transform how law is practiced throughout the country.

The attorneys in our Austin and Dallas are available to answer any questions you may have. Please contact us at info@gstexlaw.com.

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