by Joseph Brophy for the Maricopa Lawyer, a publication of the Maricopa County Bar Association
Five years ago, Arizona became the first state to allow non-lawyers to have ownership interests in law firms. This was not popular in many circles. The ABA passed a resolution affirming its commitment to law firms owned exclusively by lawyers, rebuking what Arizona did under the guise of protecting the public from non-lawyers who are driven by profit motive. When California (where the idea of these reforms originated) tried to pass similar measures, big law firms killed those reforms in the state legislature, giving some credence to those who say that the rules prohibiting non-lawyers from owning law firms exist to protect the business interests of lawyers rather than the public. The debate over litigation funding in Arizona’s new ethical framework continues. This begs the question: five years later, what hath Arizona wrought?
A recent report by Standford Law School’s Center on the Legal Profession entitled “Legal Innovation After Reform: Five Years of Data on Regulatory Change” takes stock of the effects of legal services reform five years out from the changes made by Arizona. It seems predictions of Arizona’s descent into a lawless, unethical hellscape were not accurate.
The authors of the report correctly note that the primary concerns over Arizona’s regulatory reforms centered around the belief that relaxing/eliminating Rule 5.4 would erode the professional independence, ethical standards and client focused delivery of legal services. Arizona, more so than Utah (the only other state to go as far down this road as Arizona), is evidently popular with private equity firms and litigation funders. The presence of these groups in Arizona’s legal market was apparently large enough to cause the U.S. Chamber of Commerce comment: “Arizona should not allow hedge funds, litigation funders, and others to set up volume-focused, for-profit claims mills, advertising and collecting claims for out-of-state plaintiffs. There is no benefit to Arizona and its citizens in unintentionally making itself the mass torts capital of the United States.”
The Chamber of Commerce may have overstated the case. According to the Stanford report, there are 17 legal entities in Arizona with a clear indication of ownership by private equity or litigation funders, and of those entities, 14 practice in the personal injury or broader contingency fee space. Those numbers seem a bit modest to declare Arizona the mass tort capital of the United States, although until the Suns or Cardinals win a championship we should probably just accept such accolades where we can find them. However, the Chamber of Commerce might want to look at how mass torts play out in states such as California and Illinois before declaring Arizona the king of the hill.
Arizona has not ignored this potential issue. In February of 2024, a petition was submitted to the Arizona Supreme Court by the state and regional chambers of commerce, along with business interest groups (we’ll let you guess which ones) seeking to amend the rules to require disclosure of third-party litigation funder ownership of ABSs (“TPLF”). The Supreme Court then established the Task Force on Alternative Business Structures (ABS), which was charged with determining: (1) whether additional disclosures for those funding ABS entities were warranted; (2) whether ABSs should be approved for the sole purpose of soliciting mass tort business; (3) whether ABSs must be required to provide substantial services to people in Arizona; and, later, (4) examining third-party financing of civil litigation and the ramifications for ABSs. The Task Force’s final report and recommendations noted: “[a]ny concerns with TPLF are not specific to ABSs . . . unlike traditional law firms, which may also receive third-party litigation funding, ABSs have extensive application and disclosure requirements and are subject to renewal. ABSs would additionally be subject to the same recommended disclosure rules as other law firms.” The Task Force also noted that ABSs may be organized for the sole purpose of mass tort litigation and are not required to provide substantial legal services in Arizona, which puts them on the same footing as other law firms. “Most of the Task Force members do not perceive any problems with the current approach.”
Regarding consumer/client harm from Arizona’s reforms, the Sanford report identified, as of the first quarter of 2025, 136 ABS in Arizona. In the last five years, as of April 30, 2025, two Arizona ABS entities have been the subject of official disciplinary proceeding, with the compliance officers (attorneys responsible for ensuring that the entity’s lawyers and nonlawyers comply with applicable ethical obligations and who has a duty to the state bar to report substantial breaches of these obligations) for those entities the subject of separate proceedings.
In the first proceeding, the State Bar of Arizona brought an action against the ABS for violations pertaining to the ABS’s advertising content and representation agreements. The ethical misconduct was negligent in nature and not intentional. Moreover, the orders entered by the State Bar recognized “potential harm to the profession, the legal system, and the public.” In other words, no actual harm appears to have occurred.
In the second proceeding against an Arizona ABS, at issue were sufficient safeguards regarding nonlawyer assistants and communications, perceptions of nonlawyer decision-making ability and the unauthorized practice of law, and issues regarding diligent processing of cases and client communication. The order entered against the ABS’s compliance lawyer noted “no actual harm to the clients, the profession, the legal system or the public.”
In short, Arizona’s allowance for alternative business structures has not caused the sky to fall or for the public to be harmed. The Stanford report described the resulting consumer harm as “de minimis.”
Although the report makes a compelling case that Arizona’s reforms have spurred innovation and provided consumers with more options for legal services, including allowing smaller firms through litigation funding and investment, to compete with bigger firms, it is unclear whether this increased competition and innovation has materially brought down the cost of legal services, thereby increasing the public’s access to justice. While the report, which is favorably disposed to the path Arizona has taken, strongly suggests that the public has benefited from these reforms, it is light on actual data in this area.
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