Finding A Path Forward To Regulate The Legal Industry

By Gerald Knapton | October 22, 2020, 6:26 PM EDT

Gerald Knapton
Gerald Knapton
Some important changes for the legal profession are underway and a sea change seems possible. The most important decision to be made is whether lawyers will continue to regulate themselves or if a new supervisory body — probably some form of an independent, nonprofit regulator with delegated authority over some or all legal services — will come into being, as happened in the U.K. in 2010. 

The changes are being forced by this truth: A client of substantial means can get very good legal representation for civil or criminal matters. The same is not true for civil legal problems of the less wealthy or poor. This group is large, better informed and unwilling to have their rising level of expectations ignored.

The Problem

The problem facing our profession is devising a system that helps those with common but smaller legal problems with clear links to the dimensions of poverty, including access to economic assets (e.g., inheritance, marital assets), income (e.g., alimony/child support, labor disputes) and housing (e.g., landlord-tenant disputes), as well as those that would have negative health impacts (e.g., domestic violence, assault).

A large portion, perhaps 86%, of civil legal problems reported by low-income Americans receive little or no help, according to data from the Utah Work Group on Regulatory Reform.

A Path Forward

Most of those unhelped are internet literate to some degree. The Utah working group reported that at least 88% of adults across demographic groups have internet access, three-quarters have searched for online help with the most common being a search for forms and information about a legal problem they are experiencing. When asked, a majority want ownership of law firms to be by lawyers, but only 46% say that about a legal advice website.

The Bottleneck

The rules of ethics prevent attorneys from sharing fees with other disciplines and this is said to increase the cost of legal services. Much hand-wringing has occurred over what, if anything, to do to help the underserved and there is now a ground swell of alternatives underway that might develop some decent options in the next few years.

The American Bar Association has adopted a resolution encouraging state bars to consider innovate approaches to expanding legal services. The Chicago Bar Association launched a task force on this in the fall. Washington, D.C., has approved alternative business structures. California, Utah and Oregon are in some stage of experiments. Arizona recently abolished Rule 5.4 of its Rules of Professional Conduct that prohibited sharing of fees with nonlawyers.

The ABA House of Delegates will continue to debate outside ownership of law firms. Some lawyers have called this potential relaxation of controls as madness, pointing out that even some admitted attorneys are barely competent. But it is now clear that real, concerted evaluations of alternatives are going to be explored in the coming two or three years following a so-called regulatory sandbox process.

Regulatory Sandbox Explained

A regulatory sandbox is an authorized approach allowing a safe space for that which would have been prohibited by existing rules. The sandbox is typically one summarized in writing and published, that allows live, time-bound testing of innovations under a regulator's oversight. Novel financial products, technologies and business models can be tested under a set of rules, supervision requirements and appropriate safeguards. There are many underway in the world including some for legal services.

The American experiment furthest along is Utah's approach. Utah is a small bar with only about 8,362 practicing lawyers, but it is a well-researched effort with some powerful assistance from Stanford Law School and the courts. It is now underway with some early experiments. In my view it is best to try bold experiments in a small setting and then apply the learning to larger state bars such as the big five: California, New York, Texas, Florida and Illinois.

The Utah Supreme Court's Standing Order No. 15, effective Aug. 14, establishes the Office of Legal Services Innovation, to operate under the auspices of the Supreme Court. The Innovation Office will have 11 members, all volunteers, with no authority to regulate any individuals, entities or activities that are beyond the Supreme Court's constitutional scope and mandate to govern the practice of law.

Utah's process will have two elements: Track A will focus on easing the restrictions on lawyers, with a loosening of the advertising and solicitation rules; referral fees; and allowing nonlawyers to own or control law firms. Track B will zero in on creating a new supervisory body, probably an independent, nonprofit regulator with delegated authority over some or all legal services.

Track B will also have two phases. In Phase I, the task force will run a legal regulatory sandbox, from which the task force will develop and refine a data-driven regulatory framework focused on the identification, assessment, mitigation and monitoring of risk to consumers of legal services, and an enforcement approach designed to respond to evidence of consumer harm as appropriate to support the core objective of improving access to justice.

In Phase II, the task force will use what it learns in Phase I to implement a regulatory approach across the Utah legal market more broadly.

Utah's Phase I is nicely summarized by this graphic:



The data collection began in January. At the end of the two-year period, in Phase II, some form of an independent, nonprofit supervisor with delegated regulatory authority over some or all legal services will be created. But what happens in Phase II will be determined by the outcome of Phase I. Phase II could proceed in multiple different directions as long as the goal: a low risk to consumers approach remains its key objective.

Status

Illinois and California are at sluggish earlier stages and their possible changes will need the results of the Utah project if they are going to overcome the inevitable opposition. There is considerable resistance to overcome. The California Board of Trustees will, no later than July 31, 2021, explore options to increase access through licensing of paraprofessionals, limited license legal technicians, and other paraprofessionals.

Illinois

A joint task force between the Chicago Bar Association and the Chicago Bar Foundation on the sustainable practice of law and innovation convened its first meeting on Oct. 7, 2019. Committee work by the task force focuses on the following areas:

  • Modernizing lawyer referral and law firm models to open the door to expand opportunities for lawyers to represent clients in an affordable and financially viable manner;

  • Optimizing the use of other legal professionals or paraprofessionals to assist clients and provide a variety of legal services such as community legal navigators or limited licensed legal technicians;

  • Partnering with online legal service providers and other business and technology entities to make legal forms, documents and self-help resources more readily available to the public;

  • Undertaking a critical review and assessment of the Illinois Attorney Registration and Disciplinary Commission professional rules of responsibility with a focus on a renewed, plain language approach; and

  • Assessing whether the limited-scope rules for lawyers in Illinois should be expanded beyond civil cases in state court to include misdemeanor, quasi-criminal or federal court cases.

The Chicago Bar Association and Chicago Bar Foundation task force will review and build on the knowledge and work product created by these task forces as it reimagines the regulation of the business of law in Illinois to:

  • Improve opportunities for lawyers to connect with legal consumers and practice law in a more sustainable, financially viable and customer-centric manner; and

  • Provide more cost effective and efficient legal support to the public by, where appropriate, optimizing the use of other legal professionals, partnering with online legal service providers and other business and technology entities, and expanding the limited scope rules.

The goals of the Chicago Bar Association and Chicago Bar Foundation task force are said to be twofold. First, the task force aims to submit recommendations regarding ethics rule changes to the Illinois Supreme Court by this fall. And second, the task force will then continue to identify, track and assess ongoing legal innovations and initiatives in other jurisdictions to ensure that Illinois remains at the forefront on these issues.

Arizona

The Arizona Supreme Court has made two important changes effective Jan. 1, 2021. One change is a licensure process that will allow nonlawyers, called legal paraprofessionals, to provide limited legal services to the public, including being able to go into court with their client. The other truly important change is the elimination of the rule prohibiting fee sharing and prohibiting nonlawyers from having economic interests in law firms.

Some expect this to allow the Big Four accounting firms — EY, Deloitte, KPMG LLP and PwC — and other alternative legal service providers to take a more direct competitive stance against U.S. law firms, especially if several larger states adopt such changes.

ABA Model Rule 5.4 — on which all states' versions are based, including Arizona's — prevents lawyers from sharing legal fees with nonlawyers, or from forming partnerships with nonlawyers if any of the activities of the partnership consist of the practice of law.

Eliminating the rule could result in a professional non-lawyer administrator in a law firm having an ownership interest, or a Fortune 500 company becoming a passive law firm investor.

It also could mean that law firms could attract investors, technologists, marketers and other nonlawyers by giving them equity in the firm.

California

The State Bar of California formed the Task Force on Access Through Innovation of Legal Services with seven specific recommendations. Most notably, a long list of rule changes and a new regulatory framework designed to draw technology into the legal market was proposed. These planned changes include a far more permissive regulatory structure that would let lawyers split fees with nonlawyers.

The public comments have been reviewed and will now be reviewed by either a task force, a working group or the state bar's Standing Committee on Professional Responsibility and Conduct, and will be providing a report to the board with its recommendations. Any regulatory changes will likely need the blessing of the California Supreme Court and the Legislature, a difficult challenge given that numerous legal groups, including the Consumer Attorneys of California and Public Counsel remain opposed.

Connecticut and Oregon

A Connecticut bar task force in December also held a launch meeting for a study of alternative legal businesses and law school training. And last fall, the board of the Oregon State Bar voted in favor of liberalizing regulations to let licensed paraprofessionals provide some legal services without a supervising lawyer, aiming to make the justice system more accessible.

American Bar Association

The ABA House of Delegates resolution, titled Encouraging Regulatory Innovation, wouldn't change any rules or regulations on its own. But it would urge jurisdictions to adopt changes that could let nonlawyers perform services typically provided by licensed attorneys, or even allow nonlawyers to own law firms.

United Kingdom

Most of the changes under consideration are using the U.K.'s experience with the Legal Services Act, effective Jan. 1, 2010, as a guide on how to try alternatives — but none of the state bars in the U.S. have yet adopted the LSA's creation of a separate regulatory entity (i.e., the Legal Services Board) not controlled by lawyers and answerable to Parliament. 

Forged just before the banking crisis, the LSA was seen at the time was highly revolutionary. Its most eye-catching provisions allowed law firms to be owned by those outside the legal profession. These new types of firms are known as alternative business structures. It also transferred the complaints handling function from professional bodies to an independent legal ombudsman.

Finally, the LSA recast the regulatory framework with an oversight regulator, the Legal Services Board, which could drive change within regulators, ensure that the representative functions of professional bodies was separate from their regulatory functions, and approve new regulators and new rules put forward by those regulators.

It is important to grasp how radical these regulatory structures are compared to the rest of the world. The dominant regulatory model in both the U.S. and Europe is for the regulation to be carried out by a body that is also the representative body of lawyers in that jurisdiction. These bodies do not permit external ownership of law firms and generally are resistant to change.

There are exceptions. New South Wales in Australia was a template for the LSA. Singapore has opened up its legal market as part of its push to be a regional and world legal hub. A number of Canadian law societies are exploring more liberal regulatory regimes including forms of alternative business structures and entity regulation.

Conclusion

It remains to be seen what kinds of alliances between nonlawyers will be formed in Arizona as a result of their elimination of Rule 5.4. Once the Utah bar's sandbox experiment is concluded, the results should help guide development of alternatives to deliver needed services.

The single most important question is whether the regulation of legal services will remain within the profession or be transferred to an outside regulator.



Gerald G. Knapton is a senior partner at Ropers Majeski PC. Previously he was the chair of the California State Bar's standing committee on mandatory fee arbitration.

"Perspectives" is a regular feature written by guest authors on access to justice issues. To pitch article ideas, email expertanalysis@law360.com.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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