KPMG's Arizona law license signals trouble for small firms and legal integrity

I've previously sounded the alarms about non-lawyer ownership of law firms ("Non-lawyer law firm ownership is a cure worse than the disease," Apr. 9, 2021; "Ulterior motive behind push for new legal service models?" Oct. 22, 2021).

For those California lawyers still skeptical that non-lawyer ownership of law firms ("non-lawyer ownership") threatens their livelihoods, the Arizona Supreme Court's Feb. 27 approval of KPMG's application to practice law in the state should be a jarring wake-up call.

The door to non-lawyer ownership of law firms had been opening slowly

The American Bar Association Model Rule of Professional Conduct 5.4 has long barred lawyers from sharing legal fees with non-lawyers and from allowing non-lawyers to own equity stakes in law firms. Most states have adopted Rule 5.4 in some form, with the District of Columbia being an outlier since 1991.

In August 2020, however, a unanimous Arizona Supreme Court eliminated Arizona's version of Model Rule 5.4. The court instituted a licensing system permitting non-lawyers to own law firms and for lawyers to share fees with non-lawyers, so long as non-lawyer-owned entities obtained the necessary license. News reports state that Arizona has licensed over 100 non-lawyer-owned entities.

Similarly, the Utah Supreme Court authorized in August 2020 what became a seven-year pilot program to allow non-lawyer-owned law firms in the state. Over three dozen companies took part. However, on March 3, the Utah Supreme Court ordered the program to be tweaked to exclude entities that aren't reaching Utah consumers underserved by the legal market and whose only innovative features were that they shared profits with, or were owned by, non-lawyers.

Other states have rejected non-lawyer ownership. As you might recall, here in California, Governor Newsom in August 2022 signed into law a bill blocking the consideration of non-lawyer ownership, and froze proposals for paraprofessionals to practice law until this past January. The Florida Supreme Court in March 2022 rejected non-lawyer ownership and/or fee splitting with non-lawyers.

Still others are currently evaluating non-lawyer ownership. Last December, the Washington Supreme Court ordered a non-lawyer ownership pilot project to begin. Oregon, Virginia, and Vermont released non-binding reports recommending reforms to Rule 5.4, while Michigan, New Mexico, and North Carolina created task forces to consider such reforms.

KPMG kicks down the non-lawyer ownership door

Make no mistake, KPMG's Arizona law license (held by its "KPMG Law US" entity) will revolutionize the practice of law - and not in a good way.

Unlike many non-lawyer-owned entities (often known as "alternative business structures" or "ABSs") that are private equity- or hedge fund-backed and looking to make a quick buck through personal injury lawsuits, especially mass tort litigation, KPMG is a well-run, sophisticated business entity with a strong brand - and one that happens to already practice law in almost 80 countries. (The other "Big Four" accounting firms, EY, Deloitte, and PricewaterhouseCoopers, also practice law outside the U.S.)

And, although KPMG Law US cannot (currently) provide legal services to clients for which KPMG performs financial audits, its U.S. legal aspirations go beyond Arizona. KPMG has suggested publicly that KPMG Law US, when necessary, will enter co-counsel relationships with lawyers in states outside Arizona. If KPMG is saying this publicly, imagine what it's planning privately.

KPMG's Arizona law license will eventually destroy many plaintiff/contingency law firms

Putting aside the likelihood that the remaining Big Four accounting firms also establish U.S. law practices and compete with corporate law firms that provide similar legal services to those the accounting firms will provide, it's easy to see how KPMG's law license will usher in a cutthroat, competitive landscape that will eventually crush contingency law firms.

The competition among contingency, particularly personal injury firms, is already fierce. Smaller firms are struggling to compete today because large firms are rapidly expanding into new markets and making it harder and more expensive for those smaller firms to attract clients.

But at least those smaller firms are competing against other law firms. When hedge funds and massive, well-run businesses with stellar brands and billions of dollars on their balance sheets, like Amazon, Google, and State Farm enter a legal market, these smaller law firms will have no chance of competing.

Those new entrants will likely offer reduced fees to attract clients, but then increase them over time, forcing plaintiffs to take home smaller recoveries. They'll bet that their brands, limitless advertising budgets, and perhaps even free related services (e.g., Amazon Prime) will keep those clients coming. Look no further than your earliest Airbnb, Lyft, Netflix, and Uber charges versus your most recent ones to see how these organizations initially price their services low but increase them over time - after they lock customers into their services and destroy the competition - to boost their profits and stock price.

(The potential for massive conflicts of interest boggle the mind. Google could manipulate online search results to benefit its legal entities. State Farm-owned law firms could represent clients suing State Farm insureds.)

And, given when I'm writing this, I'd be remiss if I didn't mention how large corporate entities have a marked advantage in developing and deploying artificial intelligence tools. While these tools are great for the practice of law, these entities' abilities to create and use proprietary AI tools that increase the efficiency of every aspect of both the practice and business of law, allowing their lawyers and non-lawyers to do more work in less time, will make it even harder for smaller law firms to compete.

We must keep California law firms owned by lawyers

If KPMG successfully manufactures a narrative that its legal practice benefits the public good, proponents of non-lawyer-owned law firms will lobby the California State Legislature to repeal the August 2022 law rejecting non-lawyer ownership.

If opponents of non-lawyer ownership in California don't support our counterparts in other jurisdictions who are fighting to prevent non-lawyer ownership, it could come to the Golden State. If it does, it will lead to the demise of all small and midsize firms that prioritize their clients' interests over corporate profits.