Abstract:
Management
service
organizations
(MSOs)
—
private-equity-backed
companies
that
buy
a
law
firm’s
operational
infrastructure
and
manage
it
back
under
long-term
contract
—
are
being
pitched
as
a
novel
workaround
to
the
prohibition
on
nonlawyer
ownership
of
law
firms.
They’re
not.
The
legal
profession
has
already
experimented
with
MSO-like
dual-entity
structures,
from
the
benign
failures
of
Clearspire
and
Atrium
to
the
devastating
foreclosure
mills
of
the
2000s,
where
the
separation
of
business
operations
from
legal
practice
led
to
robo-signed
documents,
fabricated
affidavits,
and
mass
harm
to
homeowners.
Today,
only
one
ethics
opinion
—
Texas
Ethics
Opinion
706
—
directly
addresses
MSOs,
and
it
leaves
critical
questions
about
long-term
governance
unanswered.
This
article
examines
how
MSOs
operate,
how
they
differ
from
PEOs
and
other
outsourcing
arrangements
solos
already
use,
what
the
ethics
rules
actually
say,
and
why
solos
and
small
firms
may
be
better
served
by
the
alternatives
that
have
always
been
available
to
them.
For
a
profession
powered
by
precedent,
lawyers
have
remarkably
short
memories
when
it
comes
to
the
past.
Today, managed
service
organizations (MSOs)
—
private-equity-backed
companies
that
purchase
a
law
firm’s
entire
operational
infrastructure
and
then
manage
it
under
long-term
contract
—
are
regarded
as
some
new
kind
of
end
run
around
the
prohibition
on
outside
law
firm
ownership.
But
the
reality
is
that
legal
has
already
experimented
with
MSO-type
arrangements
in
the
past
with
disappointing
and
in
the
case
of
foreclosure
mills,
devastating
results.
Still,
MSO
deals
are gaining
traction in
the
legal
market
and
it’s
only
a
matter
of
time
before
these
models
reach
solos
and
small
firms.
So
it’s
worth
understanding
now
what
these
arrangements
actually
involve,
and
whether
the
alternatives
to
outside
ownership
and
exit
strategy
that
have
always
been
available
might
get
you
where
you
want
to
go
without
taking
the
profession
down
with
you
So
let’s
take
a
step
back
and
look
at
how
an
MSO
actually
operates.
A
private-equity-backed
company
acquires
all
of
a
law
firm’s
non-legal
operations
—
technology,
HR,
payroll,
marketing,
facilities,
client
intake,
data
infrastructure
—
and
then
manages
those
functions
back
to
the
firm
under
a
long-term
management
services
agreement. The lawyers
keep
practicing
law
and
the
MSO
runs
everything
else.
But
an
MSO
differs
from
a
passive
vendor
like
a
professional
employer
organization
(PEO)
that
manages
HR
or
an
IT
company
that
operates
your
tech. MSOs
are
intricately
involved
with
day
to
day
operations
that
can
impact
clients
–
like
client-intake
or
imposing
timelines
for
resolving
litigation. And
because
law
firm
owners
often
own
a
piece
of
the
MSO
which
is
the
asset
with
the
real
resale
value,
there’s
an
incentive
to
follow
the
MSO’s
strategy
at
potential
detriment
to
law
firm
clients. As
one
recent article by
Lev
Bryedo
describes
it,
“the
MSO
hires
the
practice’s
office
manager,
then
its
billing
staff,
then
its
scheduling
coordinator,
then
implements
intake
systems
that
channel
patients
based
on
revenue
optimization.
Each
individual
step
may
be
defensible
as
a
business
function.
Cumulatively,
they
can
transform
the
MSO
from
a
service
provider
into
a
de
facto
practice
manager.”
And
because
law
firm
owners
often
own
a
piece
of
the
MSO
—
which
is
the
asset
with
the
real
resale
value
—
there’s
an
incentive
to
follow
the
MSO’s
strategy
at
potential
detriment
to
law
firm
clients.
The
legal
profession
has
already
dealt
with
MSO-like
structures. As
Bob
Ambrogi reported several
years
back,
some
have
been
benign
failures
—
ambitious
experiments
that
simply
didn’t
work
out. For
example,
a
venture
called Clearspire launched
in
2010
with
the
idea
of
splitting
a
law
practice
into
two
entities:
one
to
practice
law,
the
other
to
handle
technology
and
operations.
It
shut
down
four
years
later.
Then
in
2017, Justin
Kan,
who’d
previously
sold
Twitch
to
Amazon
for
$970
million, launched
Atrium
with
$75
million
in
venture
capital
and
the
same
basic
concept:
a
law
firm
on
one
side,
a
technology
services
company
called
Atrium
LTS
on
the
other,
handling
all
operations,
marketing,
and
workflow
software.
By
January
2020,
most
of
the
lawyers
had
been
let
go.
In
both
cases,
no
clients
suffered.
These
were
just
business
models
that
couldn’t
sustain
themselves.
But
other
experiments
with
this
kind
of
structure
had
far
worse
consequences. During
the
foreclosure
crisis,
high-volume
mills
like
David
Stern’s
in
Florida
and
Steven
Baum’s
in
New
York
sold
their
document
processing
and
operational
infrastructure
to
outside
entities
while
the
lawyers
kept
their
licenses
and
stayed
on
as
clients
of
the
very
companies
they’d
sold
to. Once
the
business
side
was
running
the
show,
pressure
to
increase
case
volume
and
profit
led
to
robo-signed
documents,
fabricated
affidavits,
and
impossible
caseloads
that
burned
through
lawyers
and
left
thousands
homeless. The
scandal
could
have
continued
for
years
were
it
not
for heroic
solo
and
small
firm
lawyerswho
stumbled
across
the
massive
abuses
while
doing
their
job
of
representing
their
clients.
Some
chalk
up
the
foreclosure
crisis
example
to
bad
actors.
Not
so. It’s
the
unavoidable
by-product
of
pressure
to
generate
returns
combined
with
technology
built
for
efficiency. AI
raises
the
stakes.
As
I
said
earlier,
right
now
high-profit
operations
like
big
PI
and
mass
torts
hold
the
most
appeal
for
MSOs.
But
they
may
soon
move
down
the
food
chain
and
consider
a
grab
for
solo
and
small
firm
markets.
And
if
they
do,
solos
and
small
firms
need
to
understand
the
ethics
landscape.
To
date,
only Texas
Ethics
Opinion
706 (February
2025)
directly
addresses
MSOs
by
name
It
draws
two
bright
lines.
First,
the
opinion
holds
that
paying
an
MSO
a
percentage
of
your
firm’s
revenues
constitutes
impermissible
fee-splitting
with
a
nonlawyer.
The
fee
has
to
be
flat,
cost-plus,
or
otherwise
untethered
from
what
you
earn
from
clients.
Second,
lawyers
can
own
equity
in
an
MSO
–
but
only
if
the
MSO
doesn’t
practice
law,
the
investment
doesn’t
impair
professional
judgment,
and
any
referrals
between
the
firm
and
the
MSO
comply
with
conflict-of-interest
rules.
For
everything
else,
we’re
working
from
analogy.
As
this Holland
&
Knight
post summarizes,
state
bars
have
been
approving
PEO
arrangements
for
decades
—
New
Hampshire
in
1989,
Michigan,
North
Carolina,
Connecticut,
Texas,
Colorado,
Ohio,
New
York,
all
following
with
essentially
the
same
conditions:
the
law
firm
stays
in
control,
no
fee-splitting,
protect
client
confidences,
supervise
nonlawyer
staff. DC
Bar
Ethics
Opinion
304 is
a
good
example.
It
approved
a
firm
outsourcing
all
its
HR
functions
to
an
employee
management
company
but
only
because
the
firm
retained
“full
management
and
supervisory
authority”
and
the
management
company
had
“no
say
in
directing
lawyers
or
legal
assistants
what
duties
to
perform.”
That’s
a
PEO
staying
in
its
lane.
By
contrast,
an
MSO
that
controls
your
intake,
your
case
processing
times,
your
technology,
your
marketing,
and
your
staffing
is
a
fundamentally
different
animal
that
no
regulators
have
approved
to
date..
To
be
honest,
I’m
not
opposed
to
non-lawyer
ownership
of
law
firms.
Arizona
ripped
off
the
band-aid
by
abolishing
its
version
of Model
Rule
5.4,
with mixed
results
for
consumers. At
least
it’s
clear
to
consumers
where
a
law
firm
stands.
it’s
either
owned
by
lawyers
or
it’s
not. MSOs
are
too
clever
by
half:
they
incubate
a
blurred
netherland,
allowing
a
firm
to
hold
itself
out
as
owned
by
attorneys
when
VC
is
calling
the
shots.
What’s
more,
it’s
not
clear
that
MSOs
offer
solos
and
small
firms
much
they
can’t
already
get
on
their
own.
Many
of
the
operational
services
an
MSO
would
provide
—
technology,
billing,
marketing,
intake
systems
—
can
now
be
handled
in-house
with
AI
tools
and
off-the-shelf
software
at
a
fraction
of
the
cost
and
with
none
of
the
strings.
And
if
the
appeal
of
an
MSO
is
really
about
an
exit
strategy,
a
solo
or
small
firm
would
be
better
off
building
up
the
practice
for
an
outright
sale
than
handing
over
its
operational
infrastructure
at
a
discount
under
a
long-term
management
services
agreement.