More on Axiom and Rule 5.4

November 10th, 2013

Bill Henderson has a post asking if Axiom is the Bellwether for disruption in the legal industry. Bill writes on how Axiom gets around Rule 5.4.

Over at the E-Lawyering Blog back in April, Richard Granat did a very careful job trying to answer this question, and concluded that the answer was “no.” In fact, Axiom is a Delaware C-Corp with nonlawyer investors as equity shareholders.

So, how is Axiom getting around the Rule 5.4 ban on fee-splitting with nonlawyers?  The answer to this question has a lot to do with the nature of outsourcing and managed services within legal departments.   A general counsel for a corporation controls the legal functions of the company. Because he or she can’t do all the work themselves, they hire in-house legal staff and outside counsel.  In recent years, legal departments have also contracted directly with LPOs, particularly on matters related to e-discovery and M&A due diligence. When it comes to non-law firm options, such as LPOs, the general counsel and his or her staff are “supervising” the work within the meaning of the legal ethics rules.

When a general counsel of a corporation uses a managed service provider, such a Axiom, they are diverting a tranche of work they control.  The value of the managed service provider is process expertise plus economies of scale and scope.  Axiom, through a contract with the legal department, manages some of that legal workflow that supports in-house lawyers in their counseling and compliance roles.  Yet, the buyer of the managed services is himself a lawyer, and that lawyer is ultimately responsible for advising the corporation on legal risk.

On one level, Axiom is a niche business.  As Granat notes, “If you don’t have an in-house counsel, then you can’t use Axiom’s services. Not being a law firm, Axiom cannot provide services to the public (individuals or organizations) directly.”  Yet, this niche accounts for a huge proportion of the entire legal services market.  In this American Lawyer article, one of Axiom’s venture capital investors, opined “With a worldwide legal market that is a trillion dollars each year, there is plenty of running room to build a successful business.”

In the case of Axiom, however, the person making the buying decision is a highly sophisticated lawyer who is struggling to manage his or her organization’s legal needs within a budget.  Stated bluntly, the GC of a multinational corporation does not want the kind of consumer protection that a formalistic construction of Rule 5.4 would provide.

Recently the Houston Business Journal profiled Axiom, which has a growing office here in town.

Update: More from the ABA Journal:

Early on, Axiom was described as a high-end temp service for legal departments, Henderson says. It was said to be staffed with disaffected BigLaw lawyers looking for more autonomy and better work-life balance. But now the fastest growing part of Axiom’s business could be its managed services practice, in which lawyers work with technology and other consultants to manage entire projects, according to this ABA Journal Legal Rebels article.

Axiom’s CEO Mark Harris says his company isn’t a legal process outsourcer, and it’s not a law firm. The company doesn’t give legal advice and its structure allows it to accept money from nonlawyer investors, he told Bloomberg Law. He also said an initial public offering isn’t being considered right now, but it’s an option in the future, the Legal Whiteboard previously reported in a summary of the interview.