Lawyers across the US are playing in the sandbox

No, as enjoyable an image as it may conjure up, chances are that you probably won’t be seeing a large number of your bar colleagues rolling up their pantlegs and making castles from finely divided rock and mineral particles. But California lawyers are on a collision course with a regulatory sandbox that feels like a fait accompli.

Undeniably, less than all practitioners have embraced the concept. When the State Bar of California’s Task Force on Access Through Innovation of Legal Services put on a series of town halls throughout the state, it might be charitable to say that the most vocal lawyers failed to warmly embrace ideas such as allowing nonlawyer ownership in firms, fee sharing with nonlawyers, and the licensing of paraprofessionals to conduct independent services. Indeed, by some accounts, the absence of torches and pitchforks might be attributed to the fact that such implements were not conveniently available to the attendees. But then something odd happened. Two nearby states embraced these reforms. And now, shortly after, lawyers from other states have begun to look at ways to take advantage of new opportunities.

In February 2020, the ABA House of Delegate approved Resolution 115, which encourages “U.S. jurisdictions to consider regulatory innovations that have the potential to improve the accessibility, affordability and quality of civil legal services.” And its suggestion “to find ways to revise, rather than eliminate, regulatory structures so that any new services are appropriately regulated in the interests of the public and clients” made clear that regulatory revolution, rather than deregulation, was the preferred path. This, of course, is not a novel concept. In New State Ice Co. v. Liebmann, U.S. Supreme Court Justice Louis Brandeis famously described how “a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” And to date, a couple have done so.

Effective Aug. 14, 2020, Utah revised its version of Rule 5.4 to permit lawyers to share fees and practice with nonlawyers by allowing authorizing new legal business models and service delivery approaches. In such circumstances, lawyers must still not allow interference with their independent professional judgment or their duties of loyalty or confidentiality. And lawyers who either share fees with nonlawyers or have nonlawyers with a financial interest in the organization, must provide disclosures to clients and, in the case of the alternative business structures, must obtain Supreme Court approval. Utah also began to permit nonlawyers to provide certain traditional legal services.

This spring, the Utah Supreme court unanimously approved expanding the state’s legal regulatory sandbox pilot program from two to seven years, noting that objectives for regulatory reform are significant and needed time to create real change in the state’s legal services market. At the time of that press release, 26 entities had obtained permission to operate within the new regulatory sandbox, with additional applications pending.

This included Law on Call, which is believed to be the first nonlawyer-owned law firm in the United States. It operates with a subscription basis model for answers to simple questions or document review. That is, it is not designed to replace traditional firms, but to provide services in a model that economically and operationally makes sense for both the firm and potential clients.

Utah is not the only state to look at how regulatory changes may facilitate an evolution in legal services. Shortly after Utah’s announcement, on August 27, 2020, the Arizona Supreme Court issued an order that eliminated Rule of Professional Conduct 5.4 entirely effective January 1, 2021. That is, Arizona’s change is a permanent elimination of the prohibition on fee sharing and nonlawyer ownership in law firms.

Arizona, like Utah, requires proposed alternative business structures to go through a rigorous application process. Additionally, these new type of businesses must comply with a code of conduct, and have an internal compliance attorney.

The Arizona Supreme Court also approved a new category of nonlawyer licensee called “Legal Paraprofessionals,” who will be known as LPs and practice as licensees of the state bar, subject to the same ethical rules and enforcement as lawyers. These LPs are able, without lawyer supervision, to prepare and sig documents, provide legal advice, draft and file documents, negotiate on behalf of a client and even appear before a court or tribunal. But such services are currently limited to areas involving many family law matters (though not involving Qualified Domestic Relations Orders, division or conveyance of a business or commercial property, or appeals), limited civil jurisdiction matters before a municipal or justice court, limited jurisdiction criminal matters where incarceration is not a possibility, and administrative law matters before an administrative law agency that permits it (though again, not on an appeal).

Some accounts have indicated that, although no lawyer supervision is necessary, some LPs are finding that associations with law firms are beneficial because the law firm has an existing footprint in the legal market and its clients can benefit from the lower costs of services that the paraprofessionals provide and the firms’ lawyer may concentrate their efforts on more sophisticated and more lucrative work.

These different approaches in the first states to enact changes designed to address access to legal services issues demonstrates that we should not expect a uniform approach. Nor should we expect that these are the only types of changes that we will see. In fact, these could lead to new questions. Several have begun to appear to determine how lawyers in other jurisdictions may fulfill their obligations in relation to what is going on in these jurisdictions. Some are straight forward, such as whether other jurisdictions will allow their licensees to participate either directly in, or at least share fees with, the novel entities being created in Utah and Arizona. And some lawyers have begun to look at whether they should become inactive in their present jurisdiction to begin practicing in a state like Arizona that permits broader opportunities for practice. And even once these issues begin to sort out, there are still other issues to tackle, such as reconsideration of cross-border unauthorized practice of law rules are consistent with a legal profession that just received a significant pandemic-induced nudge into the virtual.

Of course, California had a substantial overhaul to its Rules of Professional Conduct, with a new set becoming effective in November 2018. Though there were some important changes to how lawyers were asked to practice, there was no significant thematic departure to the past. That is, the rules continued to serve the same core concepts. And likely for that reason, it was easy to accept and adapt to the changes. But it is a healthy exercise to step back, look at what regulations are trying to accomplish, observing what unintended and undesirable consequences may be coming out of existing regulations, and then look at potential new solutions.

Make no mistake about it. Any proposal that comes from the State Bar will have had as part of its vetting a thorough discussion about what is necessary to protect the public. And regulatory changes such as those instituted in Utah and Arizona offer opportunities not just for increased access to legal service providers, but for lawyers to operate at a higher level of service and efficiency. 