Earlier this month, the Arizona Supreme Court approved its first two Alternative Business Structures (ABSs) just three months after the rule came into effect. The new system allows for non-lawyers to have ownership in a law firm, making Arizona the first state to approve anything to this extent.

On August 27, 2020, the Arizona Supreme Court ruled unanimously to remove Ethics Rule 5.4. Prior to this, the rule was in line with many other states by barring fee-sharing between lawyers and non-lawyers, excluding lawyers and non-lawyers to partner up to practice law, and prohibiting working with or in a law-practice firm owned in whole or in part by non-attorneys.

The rule change went into effect on January 1, 2021. The first two companies were recommended for approval by the Committee on Alternative Business Structures to the Arizona Supreme Court on March 9, 2021. Just eight days later, the Arizona Supreme Court approved Trajan Estate LLC and Payne Huebsch PLC as the inaugural companies to operate as an ABS.

Trajan Estate LLC, located in Gilbert, is an estate planning firm that will operate as a traditional law firm but with 50% ownership by non-attorneys. Payne Huebsch PL, located in Mesa, will add legal assistance to its tax and accounting services it currently offers. Three other companies have also applied for ABS authorization and are currently waiting for approval.

The committee on Alternative Business Structures is composed of 11 members. They are tasked with reviewing the applications by businesses and then voting on whether to recommend the businesses to the Arizona Supreme Court., which has the final say on whether a license is approved or not.

This new framework of licenses allows a law firm to have non-lawyers as a decision-making authority or for non-attorneys to have an economic interest in the firm. There are a few requirements the legal entity must adhere to in order to be considered for the license. The business must employ at least one person who is active and in good standing with the State Bar of Arizona. This individual must supervise the practice of law in accordance with Arizona’s Ethics Rule section 5.3. The business must be licensed pursuant to the Arizona Code of Judicial Administration section 7-209. Lastly, legal services can only be provided by authorized individuals under the Rules of the Arizona Supreme Court.

The Arizona Supreme Court approved the rule to spur innovation in the legal sector and to create more affordable services. In an interview with the ABA Journal, Arizona Supreme Court Vice Chief Justice Ann A. Scott Timmer stated that “We found as a task force, and later as a court, that this rule really protected the lawyers and not the public,” which led them to approve the amendment. Timmer also commented that she had heard technology companies “interested in infusing money into existing law firms to expand their technological wherewithal so that they can reach more people.”

While the amendment was a unanimous vote to approve, a few concerns have been brought up since its passing. Arizona will be a test-case to see how the system works and whether the Big Four accounting companies will begin to compete directly with law firms in Arizona. The Big Four is the nickname that refers to the four largest accounting firms in the United States, measured by revenue. The four include Deloitte, Ernst & Young, PricewatherhouseCoopers, and Klynveld Peat Marwick Goerdeler. Currently, these companies offer auditing services, tax and management consulting, valuation, market research, and assurance. If they are able to add legal services, it has the potential to make these Big Four even bigger and run smaller firms out of business, reversing the intent of the amendment.

Since the Arizona amendment passed, Utah has also begun to test whether a system like ABS would work in the Beehive State. The state has begun a two-year “Sandbox” pilot program. The Sandbox is for non-traditional legal providers and services to test new business models, one of which is Arizona’s ABS framework.

Washington, D.C. has permitted non-lawyer ownership in legal firms for years, but they include a wide range of restrictions that Arizona is not currently employing in its ABS framework. However, D.C. is currently considering reducing those restrictions and employing a multidisciplinary practice form of ABS that would provide both legal and non-legal services all under one business license.

Victoria Shannon Sahani, the Associate Dean of Faculty Development and Professor of Law at the Sandra Day O’Connor College of Law at Arizona State University, stated in an interview with the Phoenix Business Journal that this rule change may have national ramifications. “If it works, it’s earth-shattering for the legal profession.” She continued in the interview to state that all eyes will be on Arizona, “Whether they’re interested in doing this or not.”