Some who now manage or have managed law firm technology believe that legal software has never reached its full potential. One impediment is now under attack. 

Ethics rules bar non-lawyer investment in law firms. As a result, law are thinly capitalized; partners want to get cash out annually, not invest in the business. Arguably, if firms had more capital, they would invest more in technology, both infrastructure and applications to support lawyers.

Moreover, rational investors in law firms likely would be more aggressive about alternative fees arrangements (AFA). They would see that AFA allow for greater profits if service delivery became more efficient. Owners so motivated to drive efficiency would likely invest more in legal tech.

So I was interested to see a challenge this week to ethics rules barring non-lawyer investment in law firms. Jacoby & Meyers’ Newest Fight: Helping Nonlawyers Own Law Firms in the Wall Street Journal reports on Tuesday that J&M is challenging rules that restrict non-lawyer investment in law firms. Read the article for quotes illustrating both sides of the debate. See also Suit Challenges N.Y. Prohibition of Non-Lawyer Firm Ownership (NYLJ, 20 May 2011)

I suspect greater investment in technology is not likely to sway the discussion about outside investment in law firm. The debate on this issue has long seemed poorly informed. Neither side cites data to support their views. Many seem to treat the issue as one of philosophy, logic, or even human nature. Why not test different answers, collect data, then assess and adjust policy.

Fortunately, an evidence-based approach will soon be possible. Australia has allowed publicly traded law firms for a couple of years. The UK is about to pull the trigger on alternative business structures (via the Legal Services Act), which will allow outside investment in firms.

If the bookies were taking bets, my money would be on a showing that clients are not harmed by outside investment. If so, woe to the advocates of the current rule who have staked their claims on philosophy and supposition rather than data.