Arguing Class Actions is a monthly column by Adam J. Levitt for the National Law Journal.
Reprinted with permission from the November 2, 2026, edition of the National Law Journal. © 2026 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
A law firm that generated nearly $2.1 billion in revenue last year, employed approximately 1,200 lawyers, and ranked among the world’s most distinguished legal institutions is preparing to disappear. On Oct. 28, the management committee of Weil, Gotshal & Manges recommended an orderly wind-down in the wake of prominent partner departures, unsuccessful merger discussions, and mounting uncertainty about the firm’s future.While the partnership still needs to approve that recommendation, the extraordinary prospect of a financially substantial, nearly century-old institution coming apart raises a question the American legal profession has spent generations avoiding: If restricting law firm ownership to lawyers is intended to protect clients, why does that structure still leave clients so vulnerable to the financial decisions of the lawyers who own their firms?
The question challenges one of the profession’s most entrenched orthodoxies. Under Rule 5.4 of the American Bar Association’s Model Rules of Professional Conduct, lawyers generally cannot share legal fees with nonlawyers or practice in firms in which nonlawyers possess ownership interests or certain forms of managerial authority. The principle behind that model rule is professional independence. Outside investors might pressure lawyers to maximize profits, reduce expenditures, influence settlements, or otherwise subordinate clients’ interests to commercial considerations. While those concerns are legitimate, the prohibition rests on a premise that deserves considerably more scrutiny: that lawyers who own their firms are somehow less susceptible to financial self-interest than investors without law licenses. The modern legal marketplace, with its relentless lateral recruiting, extraordinary compensation guarantees, partner defections, and institutional failures, offers little reason for that confidence.
Indeed, the profession’s fixation on outside-versus-inside ownership has obscured the economic incentives operating within traditional partnerships themselves. Large law firms increasingly compete for lawyers as much as clients, and a lateral partner’s value is often measured by the revenue that partner is expected to bring. Compensation guarantees, signing bonuses, enhanced profit shares, and promises of institutional support attract lawyers with substantial practices. Entire teams move between firms, sometimes with remarkable speed. None of this is inherently improper. Lawyers must remain free to change firms, and clients must remain free to choose counsel.But those freedoms don’t erase the reality that client relationships have become bargaining chips in a marketplace driven by portable business. The client whose interests should be paramount all too often becomes the economic foundation for a lawyer’s next compensation package.
That tension becomes acute when a partner prepares to leave. The departing lawyer seeks to maximize a new opportunity, while the existing firm seeks to preserve revenue and retain valuable matters. Disputes can arise over staffing, colleagues’ departures, file transfers, and the continued representation of clients whose cases may be approaching critical stages. Both sides have financial interests that don’t necessarily align with the client’s. Ethical rules require lawyers to respect client choice, protect confidentiality, and avoid prejudicing ongoing representations. However, a client’s legal right to select counsel isn’t a practical guarantee that the client can preserve continuity, institutional knowledge, and an experienced team when the lawyers responsible for a matter become embroiled in an economic contest.
When a firm begins to falter, these incentives can take on an existential import. Remaining partners may face declining compensation, diminished resources, uncertainty about firm obligations, and financial burdens left by departing colleagues. Leaving early may be the rational decision from an individual perspective, particularly when competing firms offer attractive alternatives. Yet, every significant departure makes the original firm less attractive to those who remain, thus encouraging an avalanche of further exits. The partners best positioned to protect themselves may leave first, while the remaining clients, associates, and staff confront consequences that they didn’t create. A partnership thus operates as a collection of individually rational actors whose collective behavior destroys the institution on which clients depend.
Yale Law School professor John Morley explained this phenomenon in his article “Why Law Firms Collapse,” 75 Bus. Law. 1399 (2020), wherein he demonstrated how major law firms can move from apparent prosperity to dissolution with extraordinary speed, often without the prolonged deterioration associated with conventional business failures. Because partners’ returns are tied to profitability, they face lost capital or exposure to obligations when their firms fail. As the most pivotal partners depart, expected profits decline and the risks of remaining increase. Further departures accelerate the deterioration. Like a run on a bank, individually rational decisions to withdraw can collectively produce the collapse that everyone fears.
Significantly, professor Morley’s analysis doesn’t establish that outside ownership would have saved Weil or that investor-owned firms are categorically superior. Rather, he identifies a structural vulnerability that conventional ownership rules largely ignore. Outside equity could provide more durable capital, separate investors’ financial risks from working lawyers’ compensation, and permit restructuring without triggering the same incentives for principal revenue producers to depart. Professor Morley discusses Australia’s Slater and Gordon, which survived severe financial distress through restructuring, as an instructive contrast. Although that example is no guarantee of investor-owned firms’ stability, it shouldn’t be assumed that traditional partnerships would automatically fare better.
The larger implication is ours to draw. The profession has devoted significant attention to protecting lawyers’ independence from outside investors, while paying remarkably little attention to protecting clients from the consequences of lawyers’ financial independence from one another. But individual professional independence and institutional independence aren’t the same thing. Even if a firm satisfies every ownership restriction, it may still fail to sustain client representations because its partners’ financial incentives are pulling it apart. Institutional continuity isn’t merely a management concern. Clients in complex litigation and transactions depend on accumulated knowledge, coordinated teams, specialized resources, and sustained representation. Abrupt departures increase costs, complicate strategy, and force clients to reconstruct relationships under circumstances that they didn’t create. Client protection requires confronting these risks alongside improper investor influence, rather than treating one as an ethical emergency and the other as an unavoidable feature of professional life.
The appropriate regulatory questions concern governance, conduct, transparency, accountability, and consequences for clients—not simply the identity of a law firm’s owners. Of course, no investor should dictate legal advice, compel an unwanted settlement, misuse privileged information, or interfere with a lawyer’s duty of loyalty, but neither should a lawyer-owner. And the strongest objection to outside ownership deserves a serious response. Private equity investors may demand aggressive returns, impose financial targets, encourage cost-cutting, or seek exits on timetables unrelated to clients’ needs. Outside capital isn’t always patient capital, and investor ownership guarantees neither independence nor stability. Those dangers, however, identify risks that regulation must address, but they don’t establish that categorical exclusion of outside ownership is the only way to mitigate those risks. The appropriate comparison is between the actual incentives and safeguards operating under different ownership arrangements—not a binary, exaggerated comparison between an unscrupulous investor and an idealized lawyer-owner.
Other jurisdictions have demonstrated that reform need not mean abandoning professional responsibility. Arizona began licensing alternative business structures in 2021, permitting non-lawyer economic participation subject to oversight and professional-independence requirements. England and Wales have long permitted alternative business structures, while Australia has extensive experience with nontraditional legal organizational structures. Utah’s more limited regulatory experimentation likewise reflected a willingness to reconsider conventional restrictions. These systems differ, and none supplies a universal blueprint. Their significance, however, is that ownership arrangements can be evaluated, licensed, monitored, and regulated, rather than rejected on the assumption that outside capital is inherently incompatible with ethical legal practice.
The consequences of the American approach are especially significant in plaintiffs’ litigation, where capital can determine whether meaningful access to justice exists at all. Complex antitrust, consumer protection, securities, environmental, and mass tort cases demand extraordinary expenditures on experts, discovery, technology, staffing, and trial preparation. Plaintiffs firms may advance those expenses for years without compensation unless they succeed. Their corporate adversaries often possess vastly greater resources and the ability to make litigation more expensive and prolonged. A meritorious claim that can’t be financed may never be brought; one that cannot be adequately prosecuted may never produce the accountability that the law promises. Capital serves not simply as a means of increasing lawyers’ profits, but as an indispensable element to effective representation.
Litigation funding and outside equity ownership are distinct arrangements, with different legal and ethical implications. Funding agreements raise questions about repayment, confidentiality, conflicts, settlement authority, and litigation proceeds; equity investments implicate governance and the firm’s long-term operations. Both require scrutiny, but neither should be condemned merely because nonlawyers expect an economic return. Properly structured funding can strengthen a firm’s ability to pursue meritorious claims and advance its clients’ interests, all while preserving client control and counsel’s independent judgment. Appropriately regulated equity can support staffing, infrastructure, and expensive litigation without leaving firms dangerously dependent on partners’ personal resources. The relevant question is whether the arrangement succeeds in serving clients both by fulfilling professional obligations and providing needed financial backing.
That distinction matters in evaluating recent legislation in Illinois and California. Illinois enacted Public Act 104-0801 in August, restricting certain relationships between law firms and non-lawyer-owned or controlled entities. It addresses interference with professional judgment, authority over staffing and confidential information, and compensation arrangements tied to firm revenues or profits, subject to specified criteria and exceptions. California enacted AB 931 in 2025, restricting certain fee-sharing arrangements involving out-of-state alternative business structures, followed by AB 2305 in September, addressing corporate legal funders’ involvement in litigation practices. The latter restricts specified forms of funder control, while preserving qualifying nonrecourse litigation financing; relevant contract provisions take effect in 2027. These laws differ, and none prohibits all outside financing. Restrictions that prevent actual interference with professional judgment warrant support and broader limitations should be justified by demonstrable client-protection benefits.
The identity of some supporters of these legislative initiatives makes the debate particularly revealing. In Illinois, the Illinois Trial Lawyers Association supported HB 5487, as did the Illinois Defense Counsel—an unusual alignment between organizations whose members ordinarily occupy opposite sides of the courtroom. In California, Consumer Attorneys of California sponsored AB 2305, supported by several local trial-lawyer associations. While these organizations are entitled to advocate for measures that they believe protect clients, their positions warrant scrutiny when restrictions on outside capital may burden smaller and emerging plaintiffs firms while reinforcing established practices’ competitive advantages. The question isn’t whether these advocates sincerely believe they’re protecting clients; rather, it’s whether the restrictions actually do so, and whether their benefits justify the costs to lawyers who lack substantial existing financial resources.
Established plaintiffs firms with significant reserves, banking relationships, and recurring revenue may finance major cases internally. Emerging firms and lawyers developing new areas of complex litigation may lack those options. Restrictions that make financing more difficult or expensive can, therefore, reinforce incumbent firms’ positions while narrowing choices for clients with resource-intensive claims. That consequence need not be intended to warrant concern, nor does it make every restriction on funders misguided. Prohibiting outsiders from directing strategy, exploiting confidential information, or controlling settlement decisions protects clients in precisely the way professional regulation should. To justify broader restrictions, proponents should explain the harms they prevent, the evidence supporting them, and why less restrictive safeguards would be insufficient. Client protection should be demonstrated, not presumed.
A responsible reform agenda would begin by authorizing meaningful minority outside equity investments, subject to licensing, ownership disclosure, conflict protections, confidentiality requirements, governance safeguards, and enforceable prohibitions against interference with professional judgment. Regulators should evaluate client outcomes, complaints, financial stability, and compliance, rather than assume problematic conflicts of interest. Minority ownership, however, should be a starting point, not an arbitrary endpoint. There’s no coherent ethical principle under which a 49% nonlawyer interest necessarily preserves independence, while a 51% interest destroys it. Control creates additional risks that may require additional safeguards, but those risks should be examined directly. The objective is a framework that protects clients regardless of the source or proportion of a firm’s capital.
Weil’s predicament makes the distinction impossible to dismiss as an academic abstraction. One of the country’s most prominent law firms, celebrated for helping major businesses navigate financial distress, now faces the prospect of its own disappearance after a loss of confidence among the partners whose practices sustained it. That development establishes neither misconduct by Weil’s lawyers nor the likelihood that another ownership structure would have produced a different result. It does, however, expose the weakness of an orthodoxy that treats partner ownership as a guarantee of client protection. Clients need more than the technical independence of the individual lawyer advising them. They need the continuity, resources, competence, and financial durability of the institutions entrusted with their most consequential legal problems.
The profession has spent generations worrying that outside investors might turn clients into assets to be monetized. Meanwhile, it has built an ownership system in which client relationships are routinely valued and leveraged in negotiations among lawyers, and in which the departure of a handful of highly compensated partners can threaten an institution responsible for representing thousands of clients.
The answer isn’t to abandon professional independence. Rather, it’s to stop confusing professional independence with professional ownership. Clients deserve protection from financial self-interest regardless of whether the person exercising it possesses a law license. And when a venerable firm begins to unravel, its clients shouldn’t discover that the profession’s supposedly protective ownership rules offered little protection against the incentives of the lawyers who owned it. Until the profession accepts that distinction, restrictions defended as protections for clients will remain vulnerable to the charge that they also protect the traditional law firm business model from competition and change.
Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups. He can be reached at [email protected]
