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Utah and Arizona Moving Forward With Nonlawyer Ownership of Law Firms

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As California considers major regulatory changes that would allow non-lawyers to own stakes in law firms, we are closely following updates in Utah, where similar shifts are a step ahead.

Citing “crisis levels” of demand for affordable legal services stemming from the effects of COVID-19, the Utah Supreme Court on August 14 announced its decision to permit nonlawyer ownership and investment in law firms as a move toward greater access to justice. Accompanied by changes to the Rules of Professional Conduct, the regulatory sandbox created a two-year trial period, at the end of which the Utah Supreme Court can make these changes more permanent.

With the exception of one solo practitioner offering a 10% stake to his paralegal, the initial batch of organizations allowed into Utah’s pilot project is largely comprised of legal technology firms.

LawHQ is sharing revenues with software developers in relation to an application which would allow users to report spam communications and join lawsuits against those behind the messages or calls. 1Law is offering legal advice via chatbots, and LawPal would automatically generate legal documents for matters of divorce, custody, eviction, and property-seizure. The last of those announced so far is Rocket Lawyer, which the ABA Journal emphasized in its coverage earlier this month. The platform, which has already been serving as a middleman between consumers and attorneys, along with assisting in the creation of legal documents, is taking this opportunity to hire lawyers directly.

Arizona followed Utah just weeks later, eliminating rules that previously blocked nonlawyers from having financial stakes in firms, and the state went a bit further. The Arizona Supreme Court at the same time created a category of nonlawyer licensees permitted to represent clients in court. These “legal paraprofessionals” are expected to adhere to the same ethical requirements applicable to lawyers, and one must “meet education and experience requirements, pass a professional abilities examination, and pass a character and fitness process” to qualify.

The changes in Arizona have gone into effect without a temporary trial period, but alternative business structures will have to go through a “rigorous application process.” Arizona’s Task Force on the Delivery of Legal Services cited technology and free market competition as benefits of this change that could lead to greater access to justice. Rocket Lawyer is also expected to play a role in Arizona.

It remains unclear how nonlawyer ownership in law firms will evolve. For example, will the Utah Supreme Court or other proponents of this shift prevent venture capital and private equity firms from backing legal technology firms that are, in turn, permitted to own or invest in law firms? The answer to this question may have a huge impact on the financial fortunes and independence of lawyers, especially as California considers moving in the same direction as Utah and Arizona.

CA State Bar Innovation Task Force Takes a Pause

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As we have previously reported (see posts here and here), a task force assembled by the State Bar of California has encountered significant pushback from the legal community. The Task Force on Access Through Innovation of Legal Services (ATILS) was created to address issues of access to justice in the state. Charged with “identifying possible regulatory changes to enhance the delivery” of legal services, the group offered sixteen recommendations last summer, which, most notably, included proposals for non-lawyers to share in ownership and fees.

The outcry suggested that such changes would put consumers at risk, with some referencing the state’s recent issues with “notarios.” These unlicensed immigration consultants were banned by the state assembly after allegedly “tak[ing] advantage of vulnerable populations,” and many argue the existing regulations around who is eligible to provide legal services protect clients from unethical practices. Other state bar associations have also expressed their opposition to allowing non-lawyers to invest in firms and share law firm profits.

On Thursday, March 12, the bar tabled recommendations from the task force, describing the move as “an attempt to make sure we have the best information in front of the board at the right time.” The regulatory body credited “political headwinds” for its decision to delay approving any recommendations. Among the next steps held off by trustees was the launching of a group to study a regulatory sandbox much like the one established in Utah. Such a pilot program would test recommendations on a small scale to predict the impact of each proposed shift.

Members of the task force expressed disappointment as the foundational issue remains unaddressed. Nearly 4,000 Californians were surveyed in the California Justice Gap Study which ATILS used as the basis for its recommendations. The data expressed that people in the state “regardless of income” were often “navigating critical civil legal issues without legal representation or meaningful legal assistance.” With Californians receiving “inadequate legal help” if any for eighty-five percent of legal issues, the survey concluded, “Failure to access legal services is a result of both a service gap (supply) and a knowledge gap (demand).”

These findings led the task force to its viewpoint that “something more than modest tweaks to the existing regulatory environment is needed,” and the group set out to evaluate such regulations as those concerning fee splitting from the get-go. ATILS endorsed “the twin goals of public protection and enhanced access to legal services,” but many of the 3,000 public comments received in reply questioned the ability of the task force’s recommendations to meet those aims. The opposition proved enough to postpone the bar’s efforts, at least for the next few months.

The State Bar’s Innovation Task Force

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The State Bar of California is currently considering recommendations issued last summer by its Task Force on Access Through Innovation of Legal Services (ATILS) that relate to non-lawyers having ownership in law firms and even delivering legal services and legal advice. The theory behind such moves is that the increase in supply will reduce costs in the marketplace and thus make legal services more accessible to those in the low-to-middle income brackets.

While the stated mission of the task force is to increase access to justice, such systemic changes would inevitably create a shift in how all consumers interact with the legal services market. If legal advice can be obtained from a tech platform for one-tenth of the average attorney’s hourly rate, many are likely to turn to these sites for contract creation, automated legal analysis, and the like.

The competition may drive many smaller firms and solo practitioners to the breaking point as they continue to face the same overhead costs. This subset generally works with the lower-income clientele being targeted by the task force’s proposals, so these firms are at the highest risk of folding due to such a major adjustment in the industry.

Bloomberg Law reported on the flood of negative comments that came in response to the announcement of the group’s recommendations. Following a bill from the state assembly banning the use of unlicensed immigration consultants known as “notarios,” many expressed concern that inviting non-lawyers to provide legal services would allow others to “take advantage of vulnerable populations” in the same way.

As a number of states address similar options, rules of professional conduct will need to be expanded to hold accountable all those practicing in this market. In its call for public comment, ATILS recognized this necessity, including in its recommendations “the establishment of ethical standards comparable to those imposed on lawyers and law firms” and, in regard to fee-sharing, “a provision prohibiting interference with a lawyer’s independent professional judgment.” It remains to be seen whether it’s actually possible for a lawyer to retain their professional independence if they are financially controlled by non-lawyers.

At the national level, the American Bar Association is discussing a resolution asking state regulatory bodies to consider the same category of innovations toward improving the “accessibility, affordability, and quality” of legal services. Past and present leadership from the New York State Bar has been vocal in opposing the proposed move, issuing a letter that describes these changes as a threat to the core values of the profession.

Every member of the legal community should be following these updates as bar associations and state regulators are considering the most sweeping regulatory changes to the legal profession in a generation.

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Something else to think about.

These recommendations don’t come from neutral third parties. For a glimpse into the makeup of the task force, check out this post from our archives.

The Biggest Change to the Legal Profession Lawyers Might Be Missing

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The makeup of a task force assembled last year by the State Bar of California is a cause for concern for many of the bar’s members. Created to address potential regulatory changes that could improve the accessibility of legal services, the group includes a number of tech industry insiders who stand to benefit financially from the proposed shifts.

Six of the committee’s twenty-two members are current or former executives for legal technology companies – see details below.

Andrew Arruda – CEO & co-founder, ROSS Intelligence (legal research platform using artificial intelligence)

Dan Rubins – CEO & co-founder, Legal Robot (automated legal analysis of documents)

Joshua Walker – co-founder, Lex Machina (legal analytics); author, On Legal AI

Simon Boehme – COO & co-founder, Disputly (security deposit recovery in California)

Johann Drolshagen – CTO/CIO, Level Playing Field Solutions (case management and administrative tools)

Allen Rodriguez – former director of attorney services, LegalZoom (connection to legal services through independent attorneys)

While some attorneys argue this is not substantially different from lawyers overseeing their own regulatory body, others worry the guidance offered by the task force is biased by conflicts of interest and not purely presented in service of its stated mission.

The sixteen recommendations issued by the committee this past summer included “allowing non-attorneys to own or have financial interests in legal entities,” as explained by ABA Journal. In response, attorney Carolin Shining of Culver City asked the panel on October 7th for “a pledge… to not profit, take salaries or any kind of benefit from entities that arise from the result of [its] work.”

The State Bar maintains that the task force is not subject to conflict-of-interest provisions because it is only providing advice. The diversity of backgrounds represented in the group, according to a statement from the organization, will result in recommendations that are better-informed and broader in perspective.

Regardless of whether or not members of the bar approve of the direction, this move toward involving non-lawyers in the industry could signify the beginnings of an enormous shift in the power structure of the legal profession. Changing the financial incentives of those who provide legal services has the potential, in the case of non-lawyer ownership, to result in the status and compensation of lawyers declining dramatically as client relationships transfer from attorneys to corporations and these companies seek to eliminate costs.

It appears that the committee’s recommendations are based on the assumption that for-profit tech companies can help increase access to justice by reducing costs associated with running a law firm.  But pursuing justice is at best an imperfect market good or service.  It is, therefore, far from clear that allowing non-lawyers to own and invest in law firms and the resulting reduction in lawyer power and economic clout will actually increase access to justice.  By contrast, it’s easier to trace how the regulatory changes being considered by the task force will economically benefit legal tech companies. Lawyers who ignore the work of the task force do so at their own peril.