Seeking Shelter in the Minefield of Unintended Consequences - The Traps of Limited Liability Law Firms

This article addresses the overlooked negative consequences of law firms transitioning from a traditional partnership to a limited liability partnership or company. Part I of this article introduces the topic by providing a brief history of the development of LLCs and LLPs and noting the lack of attention given to the detrimental consequences of such firm structures. Part II reviews the forces behind the limited liability movement and the emergence of limited liability law firms. Part III surveys the statutory approaches to limiting vicarious liability in LLCs and LLPs. Part IV then examines possible internal consequences of attorneys’ practicing as limited liability firms. Using an economic analysis to evaluate possible outcomes of attorneys’ limiting their vicarious liability through limited liability firms, Part V examines the external effects of the elimination of vicarious liability. After showing how the limited liability rules under LLP and LLC legislation adversely affect incentives to assure quality legal services, Part VI proposes an alternative approach to limited liability that eliminates strict vicarious liability for the acts and omissions of partners, while creating incentives for firms to monitor attorney conduct through reasonable risk management controls. This alternative approach limits attorneys’ liability while protecting clients and other members of the public. Part VII concludes by summarizing the key points of the article and reasserting the benefits of the alternative approach to limited liability