By SCP Fellow Rachel Wasserman | Part of our Special Series: Always Canada. Never 51. | This post first appeared in Bloomberg Law
Rachel Wasserman of Wasserman Business Law says law firms should decentralize, not consolidate, to provide good service and keep lower overhead.
Private equity firms are quietly buying up and consolidating dental, accounting, medical, and veterinary practices, turning smaller independent firms into corporate chains. These firms offer professionals handsome payouts in exchange for ownership of their practice. Law firms are the final frontier for these consolidators. Recent developments in Arizona may finally give private equity the door into the legal industry that it’s been waiting for.
If we allow for private equity ownership of law firms, it isn’t unreasonable to expect a similar result as we are seeing in other professions—lower quality of service and work for clients and lower job satisfaction for lawyers. As these firms consolidate, it will be even harder for independent lawyers to compete against the economies of scale of these corporate behemoths.
In the longer term, this could mean less upward mobility for future generations of lawyers. It isn’t impossible for equity participation to disappear entirely if these corporate chains take over the market, which could also lead to the commodification of our profession. On the bright side, at least a handful of already rich partners and investors will have gotten even richer.
The scale advantage that once insulated big law is disappearing. Thanks to AI and legal technology, large-scale projects such as due diligence and discovery no longer require armies of associates. Boutique firms, with lower overhead and without the burden of luxury offices and top-heavy compensation structures, are now able to compete, offering sophisticated legal services at a fraction of the price. We don’t need investment capital or consolidation to make law firms more efficient—the future lies in decentralization.
Firm Ownership Matters
Legal regulatory bodies have largely prohibited nonlawyers from owning law firms, but these protections are starting to erode. Regulatory rollbacks often operate under the guise of altruism, purporting to promote access to justice. But maybe large multinationals and investors who have been shut out from this high-margin industry are just looking for access to more profits?
One example of this is the alternative business structure now permitted in Arizona. The regime still prohibits non-licensed attorneys from practicing law, but nonlawyers are now entitled to the economic interests and decision-making authority of law firms.
Nonlawyers having equity in a legal practice is a fantastic way to motivate non-legal professionals to deliver the best result for firm clients. But there is a significant difference between ownership in and control of a firm. Those in control dictate the firm’s values, performance expectations, and culture.
Once law firms are controlled by private equity, such firms will be required to juggle fiduciary duties to both their investors and their clients. Private equity’s interest in owning law firms is merely a means to an end. Whether it’s practicing law or manufacturing widgets, these firms seek out the most lucrative investment opportunities for their investors and themselves.
They don’t really care how the sausage gets made—as long as the sausages keep selling. Private equity firms are eager to capitalize on economies of scale through the consolidation of smaller practices, while also benefiting from the streamlined operations and reduced headcount enabled by adopting artificial intelligence.
Cautionary Tales
To understand the impact private equity ownership could have on the legal profession, we don’t have to look far. There are countless examples of PE firms’ impact on other professions that have already undergone significant PE consolidation.
A study published in the Journal of the American Veterinary Medical Association found that veterinarians working for large corporations reported more pressure to generate revenue than independent practices. An employee at two different corporate vets recounted that one of them had five price increases in one year, each between 3% and 6%, with no justification provided.
The cost for veterinary care outpaced general inflation by 2.7 times in the US last year. As the cost of care rapidly increases, many vets are now being forced to euthanize pets because the price for care has become out of reach for some clients.
Medical care also has suffered under private equity ownership. When private equity buys a hospital or physician practice, costs usually rise, as do the number of costly procedures and serious medical errors.
Sen. Sheldon Whitehouse (D-R.I.) went so far as to say “private equity has infected our health care system, putting patients, communities, and providers at risk” after a scathing bipartisan report on the subject was released earlier this year. In nursing homes, private equity ownership is associated with an 11% higher mortality rate and a 50% greater chance of being sedated, which reduces demands on staff and helps to lower labor costs.
Thinking law firms wouldn’t be faced with similar issues would be naive.
Lawyers are no more virtuous than the countless veterinarians, doctors, and other professionals who have sold their practices to investors. Many senior partners have already built immense personal wealth, and if private equity begins consolidating law firms, they’ll undoubtedly be enticed by the same kinds of lucrative offers that younger lawyers will be unable to match.
Protecting Our Professions
Clients come to us for independent, expert advice—not guidance shaped by firm profitability. We can’t allow the legal profession to be stripped of its integrity and independence in the name of efficiency and returns.
Lawyers must not only resist private equity control within our own profession—we must also stand alongside other professionals facing the same threat. Our skills, our judgment, and our commitment to the public trust are needed now more than ever.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
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