CA Legislature Puts the Brakes on Ownership of Law Firms by Non-Lawyers

On February 25, 2022, an open session of the California State Bar’s Closing The Justice Gap Working Group (“CTJG” or “Working Group”) took place that could pause the short-term prospects of allowing non-lawyers to own and invest in law firms. Specifically, the Working Group made three potentially game-changing decisions.  

First, and most importantly, the Working Group will modify its membership and limit members to those who have experience working in California. While other states including Utah, Arizona, and Florida have all discussed the matter of nonlawyer ownership, the California State Bar agreed that relevant experience in California would be necessary to be part of the Working Group.  

Second, the minutes of the February 25 meeting show that the State Bar agreed to streamline the Working Group to reduce the administrative burden these meetings place on the State Bar’s staff. More than one participant has expressed frustration with the Working Group’s organizational structure. The Working Group itself is comprised of multiple subcommittees, which will be eliminated moving forward.   

Third, the Working Group’s Charter will be changed so that the roles of the California legislature and Supreme Court are more clearly defined. In addition, the Charter will more explicitly identify who will be allowed to participate in the regulatory sandbox. This will include stricter screening of the financial interests of those entities who would be allowed to be part of the Working Group.  

If these changes seem out of step with what the Working Group had been doing previously, it’s because they are. These changes are not an accident. They are a direct response to criticisms of the Working Group articulated by members of the California legislature.  

On December 7, 2021, a letter from the Senate was sent to the California State Bar arguing that allowing corporations to take part in ownership of law firms would cripple the integrity of justice and legal systems for consumers. The letter was co-signed by Assembly Member Mark Stone (D–Monterey Bay) and Senator Tom Umberg (D-Santa Ana). Stone and Umberg are both attorneys. Mark Stone received his J.D. from Santa Clara University of Law in 1988 and was an attorney from 1993 – 2003 before becoming county supervisor of Santa Cruz County in 2003. Tom Umberg graduated from UC Hastings in 1980 and was Assistant U.S. Attorney in Orange County before being elected to the California State Assembly in 1990.

Stone and Umberg took direct aim at the underlying rationale of the Working Group and its ability to provide more representation to the middle class and other underserved communities. “The regulatory sandbox could become an open invitation for profit-driven corporations, hedge funds, or others to offer legal services or directly practice law without appropriate legal training, regulatory oversight, protections inherent in the attorney-client relationship, or adequate discipline to the detriment of Californians in need of legal assistance.” 

Stone and Umberg also voiced concern that the “the State Bar has used a substantial amount of its resources for the CTJG, as well as the Paraprofessional Program Working Group, apparently utilizing hundreds of hours of staff time and an unknown amount of other State Bar resources.” They argue that the Working Group is preventing the State Bar from carrying on its “core mission of protecting the public by correcting the delays and defects in the attorney discipline system.” To support this contention, the letter points out that “the State Bar’s backlog of discipline cases grew by 87 percent since December 2015 and that recent changes to the system have significantly reduced its efficiency.” With the State Bar already dealing with a heavy backlog stretching over seven years, there is not enough bandwidth space to consider changes that could “fundamentally infringe on the basic and paramount obligations of attorneys to their clients.” 

The letter from Stone and Umberg had an immediate and powerful impact on the Working Group. The initial response was to put meetings of the Working Group on hold for two months. Given that the Working Group is agreeing to change its composition and its charter, it will take months if not years to put these changes into effect. Moreover, considering the rocky relationship between the State Bar and the legislature, with the legislature having almost all the leverage, it wouldn’t be surprising if the changes made to the Working Group signal that efforts to allow non-lawyers to own law firms will be put on hold in California for the foreseeable future. With Florida recently deciding not to follow the lead of Arizona and Utah, delays in implementing changes in California are likely to have repercussions throughout the country.   

The Regulatory Sandbox isn’t dead, but it is looking a lot less inevitable than it did a few months ago.  

The Most Important Trend Impacting Law Firms in 2020 – And It’s Not COVID

The biggest news story of 2020 has been, of course, the pandemic. But that hasn’t been the most significant trend impacting law firms. COVID-19 sped up quite a few processes already unfolding in the world of professional services and in the economy at large, including the growing gap between small businesses and major corporations. Along with this has come a widening divide among the law firms that serve them. As we warned in May, smaller firms have taken a disproportionate economic hit this year. As individuals and small businesses have struggled, the law firms representing them have fared worse than those that provide counsel to big companies with greater ability to weather the storm. Within the legal services industry, revenues for the top 50 firms have continued to grow more rapidly than their Am Law 200 peers, and many solos and small firms have suffered much worse from the economic downturn.

Below are five significant ways this trend will impact law firms and attorneys:

  1. The Am Law 100 will become increasingly isolated from the rest of the legal community.
  2. As firms continue to scale up, more mergers and acquisitions will mean higher compensation for the best-performing partners.
  3. Boutique firms will be able to peel off BigLaw partners who don’t want to be smaller fish in a bigger pond.
  4. The difference between successful and underperforming practice areas will grow, thereby placing a premium on the ability of leaders to position their firms strategically.
  5. There will be greater opportunities for lawyers in their forties and fifties to acquire or otherwise take over practices from older attorneys, making succession planning even more important than it is now.

So, what will happen to the firms and lawyers on the wrong side of this trend? The unfortunate reality is that smaller firms, especially solos, will face more and more price competition, and ten percent to perhaps as much as a third of lawyers will struggle to make more than $75k to $100k.