Private equity has been taking meetings with elite law firms about potential investments, even though ethical rules prevent non-lawyers from owning law firms, according to Dealbreaker. Dealbreaker reports that none of the firms discussed appear ready to hand over ownership to private equity “yet,” but that the fact they are taking meetings suggests the idea has cleared an initial hurdle. Dealbreaker also reports that one rationale for considering a stake sale is artificial intelligence, described as a costly investment, including for firms interested in building bespoke AI models.
Why private equity is looking at law firms
Dealbreaker reports that private equity “sees legal as a lucrative business to enter” and can “inject a lot of cash for big capital investments,” with AI cited as an example of the type of expense prompting interest. Dealbreaker frames a key obstacle as ethical rules that prevent non-lawyers from owning law firms, and says that when entities unbound by lawyers’ professional rules take financial stakes in a firm’s success, it creates at least the appearance that a firm has obligations beyond those owed to the client and the profession.
The proposed workaround: a managed services organization
Rather than purchasing a direct stake in a law firm, Dealbreaker describes a “workaround” in which the business would bifurcate into two entities. In that structure, Dealbreaker says, lawyers would sit in a wholly lawyer-owned practice-of-law entity, while administrative and back-office work would be moved into a spinoff entity owned by private equity.
Dealbreaker calls this spinoff entity a “managed services organization” (MSO) that would collect fees for providing “all the business of law services” to the law firm. Dealbreaker adds that the MSO model is “how private equity took over dentistry,” and says the arrangement could shift expenses off the law firm’s direct books “in exchange for a big payday.”
Dealbreaker also notes that there may be efficiencies to be gained in back-office operations, and that lawyers might not be the optimal people to manage that work. In the same discussion, Dealbreaker compares bifurcation-and-fee structures to approaches that can transfer wealth via fees, and references such structures as a factor that “hastened the destruction of Red Lobster 1.0.”
A retention pitch: using MSO equity to enable non-competes
Dealbreaker reports that Infodash CEO Ted Theodoropoulos posted a conversation on his blog with two Holland & Knight attorneys described as experts on law firm MSO deals. In a LinkedIn post describing the episode, Dealbreaker says, Theodoropoulos included a line that Dealbreaker characterizes as a proposed advantage for private equity.
Dealbreaker quotes the LinkedIn post as saying: “It can help with retention. If an equity partner at a law firm has equity in the law firm, they can leave whenever they want. If they have equity in the MSO, the MSO has more latitude around, for example, non-competes, and tying lawyers up that way.” Dealbreaker says that on the podcast, both lawyers explain that every deal they work on complies with ethical rules and that there is “no reason to doubt that.”
Dealbreaker also reports that, in its view, inventing new business structures to get around the letter of an ethical rule would breach the spirit of that rule, while acknowledging the exchange was “off-the-cuff” and that there may be more nuance.
The ethical rule at issue: ABA Model Rule 5.6
Dealbreaker states that non-competes for lawyers violate ethical rules and cites Rule 5.6, quoting its core prohibitions. Dealbreaker quotes Rule 5.6 as providing that: “A lawyer shall not participate in offering or making: (a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or (b) an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a client controversy.”
Dealbreaker argues that non-competition agreements can constrain a lawyer from doing right by a client by limiting the lawyer’s ability to “freely port their client to the most advantageous platform,” and notes that conflicts can block clients from having the lawyer of their choice. Dealbreaker adds that law firms can already use tactics to entangle clients through institutional ties, and contends that using MSO-related non-competes would take the issue “to a new level,” while stating that if an MSO non-compete functionally prevents a lawyer from moving their legal business, it “should be a violation of Rule 5.6 anyway,” according to Dealbreaker.
Widely known context: ABA Model Rule 5.6 is one of the professional-conduct rules often cited in debates over lawyer mobility and client choice.
