The Fight Over Who May Own a Law Firm Splits the Right Against Itself

The Tennessee Supreme Court is taking public comment on a set of regulatory reforms aimed at access to legal representation, Docket No. ADM2025-01403. Issue seven asks the hardest question in the set: whether to modify, or eliminate, the rules prohibiting nonlawyer ownership of law firms and fee-sharing with nonlawyers — Tennessee Rules of Professional Conduct 5.4 and 1.5(e).

On April 30 the leading organizations representing the civil defense bar, joined by business and civil-justice groups with Tennessee employers among their members, filed in opposition. Their comment applauds the access-to-justice goal and argues the means will not serve it: weakening the rule would, they write, impair professional independence by "inviting outside financial interests whose primary goal is a return on investment." They lean on ABA Resolution 402, adopted in August 2022, which declared nonlawyer fee-sharing and ownership "inconsistent with the core values of the legal profession."

Tennessee is deciding this against a live national experiment. Arizona eliminated its Rule 5.4 effective January 2021 and has since approved more than a hundred alternative business structures, roughly forty percent of them backed by hedge funds or private equity. In February 2025 the Arizona Supreme Court approved KPMG Law US by Administrative Order 2025-43, the first Big Four firm to own a U.S. law practice, subject to conditions: no legal services to KPMG audit clients, semi-annual internal compliance audits, and co-counsel or staffing arrangements for work outside Arizona.

The interesting thing about this fight is that it does not run along the usual line. Both sides of it are conservative arguments, and they are incompatible.

The case for opening the market is the standard critique of occupational licensing. Rule 5.4 is a restraint on trade written by the incumbents it protects, defended in the language of professionalism and enforced by the profession's own courts. It raises the price of legal services, forecloses capital that would fund technology, and cannot explain why a lawyer's judgment is corrupted by an outside shareholder but not by a partner's compensation formula, an insurer's panel rates, or a lender's covenant. Anyone who has argued that certificate-of-need laws and hair-braiding licenses are cartels dressed as consumer protection owes an account of why this one is different.

The case against it is the litigation-finance argument, and it is not hypothetical. The Tennessee comment marshals the growth of third-party litigation funding — the Westfleet 2024 market report putting dedicated commercial funders at $16.1 billion under management with $2.3 billion committed to new financing that year, and a GAO study finding the industry more than doubled between 2017 and 2021. Its sharpest point is about incentives at the margin: a funder may push counsel to refuse a settlement that serves the client in pursuit of a larger verdict, or to take one early because it wants a guaranteed return. Tennessee's own legislature passed a bill this session to require disclosure of funding agreements.

The strongest version of the deregulatory case is that the opposition proves too much. Every objection to nonlawyer ownership — divided loyalty, profit pressure, conflicts — describes conditions that already exist inside conventional firms, which are businesses whose partners have equity, leverage targets, and origination credits. If those pressures are compatible with professional independence when the owner holds a bar card, the licensing status of the owner is doing less work than the argument requires.

The strongest version of the opposition case is narrower and better: it is not about ownership in the abstract but about who is buying. Roughly two in five Arizona ABS entities are backed by hedge funds or private equity. That is a specific kind of owner with a specific time horizon and a specific exit, and the concern is not that they are unlicensed but that their return depends on litigation outcomes they are positioned to influence. A rule aimed at that is a conflicts rule, not an ownership rule.

Which suggests the two positions are less opposed than the filings make them look. Arizona did not simply repeal its rule; it built a licensing regime around what replaced it, and the KPMG order is a conflicts instrument — the audit-client restriction is the whole ballgame in that approval. A jurisdiction could open ownership while regulating funder control of case decisions directly. Nobody in this debate is arguing for that, because both sides are fighting over the rule rather than the risk.

Watch whether Tennessee separates the two questions. A court that treats ownership and litigation funding as one subject will keep Rule 5.4 and consider the matter closed. A court that treats them separately may produce the first serious American attempt to permit outside capital while constraining outside control — which is the version other states could actually copy.

For buyers of legal services, the near-term effect is jurisdictional arbitrage rather than a change in what is available. Texas Ethics Opinion 704, issued in February 2025, held that a Texas-licensed lawyer practicing in Texas may not join a firm with nonlawyer owners even when the firm is based where that is lawful, and pointedly left the separate question of fee division unanswered. Florida and California have reaffirmed the traditional rule while Arizona, Utah, and the District of Columbia have moved the other way. Multistate structures will keep being built around that map, and the compliance cost of the map is real.

The commercial reading is simpler than the ethical one. Legal buyers have spent a decade routing work to providers that are not law firms — managed services, analytics, review platforms, research and intelligence shops. Rule 5.4 has never governed that market; it governs who may put a shingle up. The rule's defenders are protecting a boundary that the buying has already walked around.

Bennet's market-intelligence desk tracks ABS approvals, state rule changes, and the funding market for clients evaluating provider structures across jurisdictions.