Lawyers owe duties that ordinary businesses do not. We owe loyalty, confidentiality, independence, and professional judgment to our clients. A plaintiff’s firm is still a business, but it is supposed to be a business constrained by ethics and built around service to its clients.
As alternative business structures (ABS) expand in places like Arizona, and as investor-backed Management Service Organizations (MSO) style arrangements become more common, the legal industry is being pushed toward a new model; a model that floats away from client obligations and instead runs towards profits.
That is why Red Lobster is worth talking about.
Red Lobster is a useful case study in what happens when a recognizable brand becomes a target for its profit potential. In 2014, Darden sold Red Lobster to Golden Gate Capital for approximately $2.1 billion. The transaction also included a separate $1.5 billion sale-leaseback of much of Red Lobster’s real estate, with those proceeds supporting the financing of the acquisition. In other words, Red Lobster sold most of its already owned real estate, and leased those properties back, with the profits being used to pay the debt acquired by investors to purchase Red Lobster in the first place. Now, Red Lobster, which owned a large part of its footprint, had to live with major rent obligations. This form of asset-stripping is common in these types of private equity acquisitions.
Years later, Red Lobster filed for Bankruptcy. The bankruptcy came in the aftermath of unfavorable leases, inflation, and management mistakes, including the losses associated with the infamous Endless Shrimp promotion. But the Endless Shrimp was not the whole story, and it was certainly not the only reason the company collapsed.
The point is once a business is engineered around short-term financial return, subsequent mistakes become more dangerous. The business has less room to absorb bad decisions because its margin for error has already been narrowed. It is already carrying weight that may serve investors well in the short term but weaken the business over time. That is the part of the Red Lobster story plaintiff’s lawyers should pay attention to.
Because that same logic is applicable to law firms.
Arizona’s alternative business structure regime expressly allows nonlawyers to have an economic interest or decision-making authority in entities providing legal services. Here is where private equity interests clash with those of lawyers. Decisions that should be guided by client interest and professional judgment compete with decisions driven by profits and dividend payments to investors.
This is where the conflict begins. Anyone who studied Business Associations knows that directors owe a duty to their investors, but that simply cannot be the case in the ownership of law firms. Money gets in the way of service.
That is the real danger of investor-driven plaintiff’s practice. Not because someone else makes money. Plaintiff firms should make money. Profits are necessary. But profit cannot be the organizing principle of a profession that owes duties to clients, many of whom come to lawyers during the worst periods of their lives.
Red Lobster did not owe fiduciary duties to its customers. On the contrary, Red Lobster owed a duty to those who acquired it—the same people who were trying to get paid back. Plaintiff’s lawyers, on the other hand, do owe duties to their clients. That difference is everything.
That is why so many plaintiff lawyers are uneasy about ABS models and MSO-style arrangements. They understand that monetary influence will influence the duties owed to clients.
History tells us that ABS and MSO are here to stay. At one point in our profession, lawyers could not even advertise. But it is up to the profession to safeguard the practice and determine to what extent private equity will dictate how lawyers practice law. Private equity will do what private equity does, but if we remember Red Lobster, I am hopeful we can stop it.
