Phoenix, AZ — Arizona has become a burgeoning hub for the legal industry following the state’s decision to remove prohibitions against non-lawyers owning law firms. This groundbreaking move has attracted a notable influx of private equity firms and litigation financers keen to capitalize on this newly opened market.
The change stems from the elimination of a rule that previously barred non-lawyers from holding ownership stakes in legal practices. Since this change was enacted in 2020, Arizona has approved 76 alternative business structures (ABS), applications, many of which include investments from private equity or litigation finance firms.
Prominent players in the private equity world, such as Melody Capital Management and Kayne Anderson, along with litigation funders like Pravati Capital and Virage Capital Management, have established stakes in law firms across the state. Moreover, new entries to the market like Ninth Avenue Capital, led by principal Greyson Clymer—a founder at the now-defunct hedge fund Melvin Capital—illustrate the growing appeal of Arizona’s loosened regulations.
Ninth Avenue Capital, based in Missouri, plans to focus its efforts initially on mass torts and personal injury cases, looking to partner with entities like Golden West LLC, showcasing a profound transformation in how legal services are managed and delivered.
Similarly, the Pravati Capital CEO has launched 1787 Legal Group in Scottsdale, sharing an office with Pravati and emphasizing a new norm of shared resources and localized management under non-traditional law firm ownership models.
Moreover, Armadillo Litigation Funding, based in Texas, has revealed plans for collaborating with law firms like Houston’s Johnson Law Group to facilitate extensive client services, further demonstrating the sweeping effects of Arizona’s regulatory changes. The setup involves key administrative services like case marketing and medical record retrieval being managed by established legal firms, with investment guidance and market share evaluation provided by the financier, signifying a complex integration between legal and financial entities.
The broader impacts of these structural changes are also evident outside Arizona. The concept, while originating in Arizona, has inspired similar “sandbox” models in Utah and adjusted regulations in Washington D.C., which may position Arizona as a pioneer in a nationwide transformation of the legal industry.
Crispin Passmore, a consultant active in Arizona’s legal scene, notes that while Arizona’s primary goal was to enhance legal service competition within the state, its pioneering stance might naturally extend its influence on a national scale. The strategic positioning of these ABS firms allows law firms to leverage financial and technological resources to expand their reach beyond state lines.
This extension across state boundaries carries implications for local economies and the national legal framework. According to Boris Ziser, a New York-based finance partner, the shift to equity investments rather than traditional debt financing in legal cases can significantly benefit law firms, particularly in long-drawn mass tort cases where financial pressures can be intense.
Detractors, however, raise ethical concerns. The U.S. Chamber of Commerce has criticized the model, suggesting it might lead to profit-driven practices at odds with client-focused legal ethics. Critics argue that Arizona might inadvertently become a factory for mass tort litigations that could affect its legal landscape negatively.
Despite such criticisms, proponents like Andy Kvesic, an attorney and member of the Arizona ABS Committee, emphasize the program’s potential for innovation and its stringent regulations aimed at maintaining ethical standards.
As Arizona continues to adapt and other states watch closely, the experiment with non-lawyer owned law firms showcases both the opportunities and challenges of integrating business and law in new ways, potentially leading to significant shifts in how legal services are structured and delivered across the country.