Can investors buy in to Big Law? Burford Capital bets on it

By Sara Merken and David Thomas

Aug 21 (Reuters) - (Billable Hours is Reuters' weekly report on lawyers and money. Please send tips or suggestions to D.Thomas@thomsonreuters.com.)

What would it take for outside investors to own a stake in a major U.S. law firm's business? It's a question that's gaining new urgency, after litigation finance giant Burford Capital BURF.L revealed it is in talks to take such a step.

Publicly traded Burford is already among the largest third-party backers of individual lawsuits or litigation portfolios, which it funds in return for a share of potential settlements or judgments. Now, according to Burford chief development officer Travis Lenkner, it is in "meaningful discussions" with U.S. firms to partner with them more directly.

Burford is exploring two paths, Lenkner said: Investing in firms through Arizona's alternative business structure (ABS) program and backing firms via managed service organizations (MSOs), a model that legal ethics experts and deal advisors said has been gaining traction.

"This is law firms seeing what's happening in other jurisdictions, in other professions, and responding to the competitive challenges in their own market, and looking for a solution to the otherwise inefficiency of the partnership structure," Lenkner said.

He said Burford has fielded interest from firms of different sizes and expects to deploy capital "relatively soon," though he did not name specific firms or provide a timeline for its U.S. plans. Outside the United States, Burford in 2020 acquired a 32% stake in a U.K.-based litigation firm.

Ethical rules in nearly every U.S. state prohibit non-lawyers from owning U.S. law firms or receiving a percentage of their fees. Arizona in 2020 became the first U.S. state to implement a workaround, creating an ABS program to allow co-ownership with court approval. Earlier this year, KPMG became the first of the Big Four accounting firms to win approval from Arizona's Supreme Court to launch a law firm in the state.

Under a managed service organization model, a law firm’s back-office operations—billing, IT, marketing—are spun off into a separate MSO entity. That entity, funded by outside investors, provides services to the law firm for a fee. The MSO doesn’t share in the firm’s profits, sidestepping the provisions against non-lawyers owning law firms or receiving a cut of legal fees.

"It has the promise of modernizing the practice of law in a really material way,” said Trisha Rich, a partner at Holland & Knight who is advising both law firms and investors on MSOs.

Rich said such arrangements can help lawyers shift time from administrative tasks to their practices. She said she’s currently working on 10 such transactions and has closed others, though she declined to name clients.

Lucian Pera, a partner at Adams & Reese and legal ethics expert who has advised on both MSOs and ABS arrangements, said interest in MSOs is “exploding.” While most deals involve a single MSO serving a single firm, there's room for other structures, he added.

Despite the appeal, MSOs face constraints. Existing ethics rules mean an MSO could not charge law firms a percentage of their revenue or profits as a fee, said Paul Haskel, a Crowell & Moring partner.

Lawyers also can’t sign non-compete agreements, Rich said, meaning investors must accept that key talent can walk away at any time.

While not specific to MSOs, some attorneys have balked at efforts to expand the financial stakes of non-lawyers in the legal profession. Programs like Arizona's have stalled or been rejected in California and other states after critics warned that client interests could be harmed by the influence of investors or corporations that are not bound by attorney ethics rules.

Ethics aside, some experts said law firm partners might resist an arrangement like an MSO for business reasons.

Bruce MacEwen and Janet Stanton of law firm consultancy Adam Smith Esq predicted "the great majority will reject the notion of an MSO for their firm for (misplaced) fear of its diluting their control of the law firm as a business."

"We see no reason an MSO interest would taint or dilute zealous client representation," they said in an email, since the MSO would not dictate management of the firm.

These structures have been used in other professions, such as healthcare and public accounting, Burford's Lenkner said. He said law practice traditionally didn't require significant upfront investment, but that has changed with the pace of technological change and heightened competition for talent.

“It's not clear why law has been left for last, but it is clear why firms are now realizing the need for these structures,” Lenkner said.

– The Justice Department's bankruptcy watchdog has asked a federal judge to set a trial date in its case challenging legal fees awarded to law firm Jackson Walker by a former bankruptcy judge David Jones, whose undisclosed romantic relationship with one of the firm's partners sparked an ethics scandal and cast uncertainty over the firm's fees in dozens of cases.

The Office of the U.S. Trustee's request was included in a Friday filing in opposition to an individual settlement reached by Jackson Walker with a bankruptcy client whose case was overseen by Jones.

The U.S. Trustee said the proposed settlement with Seadrill Partners would "prematurely and improperly short circuit" its effort to hold the firm accountable.

Five similar proposed settlements totaling more than $2.3 million are now pending before U.S. District Judge Alia Moses, who is overseeing a legal effort by the U.S. Trustee to force Jackson Walker to disgorge all of the fees it was awarded by Jones.

Instead of weighing those individual deals and others that are in the works, Moses should schedule the matter for trial, the Trustee said.

"A full trial is necessary to ensure the Court can consider all evidence and remedies within a single proceeding," the U.S. Trustee said.

– A U.S. judge in Alabama this week approved more than $759 million in legal fees and expenses for lawyers at 38 firms who secured a $2.8 billion antitrust settlement with Blue Cross Blue Shield on behalf of a class of health care providers.

Chief U.S. District Judge R. David Proctor on Tuesday granted the request for $657.1 million in fees and at least $102 million in expenses as part of the settlement, which resolved claims that hospitals, physicians and other health professionals were underpaid for reimbursements.

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