Perspectives on Legal Services Regulation

Volume 7 • Issue 2 • January/February 2021
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Enter the Sandbox

Utah’s bold experiment in lawyer regulation

Regulation about who can and cannot operate in the legal services market is a hotly contested space. As Nick Robinson notes in “When Lawyers Don’t Get All the Profits: Non-Lawyer Ownership, Access, and Professionalism,” debates over this type of regulation, such as whether and to what extent to allow nonlawyer ownership of legal entities, tend to emphasize one of two possible outcomes: that changes will improve access to justice or that they will create new concerns over ethics and professionalism. The two, he adds, are not necessarily in conflict with each other.

And yet, as Robinson outlines, a number of jurisdictions around the world have taken major steps to reform the regulation of their lawyers to allow for new types of players in the market for legal services. With the passage of the Legal Services Act of 2007, the United Kingdom created new ways to receive and address the grievances of legal services consumers, allowed for new types of entities to offer legal services, and established an independent regulatory body to protect the public by overseeing the individuals and entities offering legal services. Notably, the Legal Services Act of 2007 allowed for so-called alternative business structures, firms offering legal services with owners, investors, or managers who may not be lawyers themselves. Likewise, jurisdictions in Australia such as New South Wales enacted a number of reforms to broaden the legal services market, including allowing for “incorporated legal practices” and “multidisciplinary partnerships,” which offered entities a means of offering legal services alongside other services. Departing from the U.K. model, these entities did not have to be licensed by a regulator but could be disqualified by the Supreme Court if found to be in violation of conduct rules. “In other words,” Robinson summarizes, “it is a registration, not a licensing, process.” (For more of Robinson’s analysis and findings, see “Under New Management.”)

In August 2020 the Utah Supreme Court unanimously approved major changes to the regulation of legal services that include allowing nonlawyer ownership and investment in law firms…

In recent years, calls for similar regulatory reforms have grown increasingly audible in North America, too. Fred Headon, former president of the Canadian Bar Association (CBA) and chair of the CBA Legal Futures Initiative, notes that Canada has been considering changes to both entity regulation (whether to allow for new entrants like alternative business structures) and professional regulation (expanding the limits on who can provide legal services)—both of which are outlined in a 2014 report. Some jurisdictions have moved ahead with their own efforts, such as Ontario, which now allows nonprofits to register with the Law Society of Ontario so that their lawyers and paralegals can provide legal services to the public in their capacities as employees of those nonprofits.

The United States has seen its own initial steps down the path of regulatory reform. As Becca Donaldson covers in “Who Accesses Justice,” Washington State introduced a new type of legal professional—limited licensed legal technicians (LLLTs)—into the legal services landscape in 2012. Meanwhile, some jurisdictions like Washington, DC, already allow some degree of nonlawyer ownership of legal services entities and have considered further reform.

In this article, we take an in-depth look at one state—Utah—that has perhaps gone further than any other to introduce regulatory reforms that allow for new actors and structures in the market for legal services. In August 2020 the Utah Supreme Court approved a two-year “regulatory sandbox,” a restricted and closely watched space for experimentation with new regulatory reforms that allow for nonlawyer ownership, integrated services, and more. Below, we look at how this effort finally came about, how it is going, and where it might be headed next.

Three Augusts in Utah: Building momentum for reform

In August 2018 then-president of the Utah State Bar, H. Dickson Burton, wrote a letter to the Utah Supreme Court expressing concern at ongoing access-to-justice problems in the state and asking the court to establish a working group to explore possible regulatory reforms that might expand the availability and affordability of legal services. In the fall of 2018, Utah State Supreme Court Justice Constandinos “Deno” Himonas and former Utah State Bar president John Lund began putting together such a group that ultimately included legal scholars like Gillian Hadfield (University of Toronto Faculty of Law) and Margaret Hagan (Stanford Legal Design Lab) in addition to a mix of practicing lawyers like Burton, as well as several experts trained in areas apart from the law, such as economist Thomas Clarke.

In August 2019 the working group submitted its report to the Utah Supreme Court, calling for a two-phase overhaul of legal services regulation by way of a “regulatory sandbox” to allow for experimentation and innovation in a controlled environment and with regulatory oversight. The first phase, a pilot program suggested to last approximately two years, would see an implementing task force obtain funding for the sandbox, recommend necessary rule changes to the court, establish a regulating body under the authority of the court to oversee the sandbox, carefully track data on all players in the sandbox throughout the pilot, and submit final recommendations to the court. The second phase would likely establish an independent regulatory body with authority over some portion of legal services going forward, pending a detailed recommendation to the court from the first-phase regulator that considers the lessons learned from throughout the two-year pilot. The court accepted the recommendations of this initial report, and the Office of Legal Services Innovation (“Innovation Office”) was created shortly thereafter to carry out the first phase of the project.

Like the working group and task force that preceded it, the Innovation Office is made up of members with a mix of professional backgrounds and areas of expertise.

In August 2020 the Utah Supreme Court unanimously approved major changes to the regulation of legal services that include allowing nonlawyer ownership and investment in law firms as well as relaxing some restrictions on entities offering legal services under the regulatory oversight of the Innovation Office. Lund, the former president of the Utah State Bar who helped spearhead the effort, took on the role of chair of the Innovation Office, which now oversees admission to and activity within the regulatory sandbox. For the next two years, the development and oversight of the sandbox would be driven by just one regulatory objective set by the court: “to ensure consumers access to a well-developed, high-quality, innovative, affordable, and competitive market for legal services.” Put differently: innovation to improve access.

The Innovation Office

To start, it is important to underscore that this regulatory reform in Utah is only months old and still taking shape. As the task force laid out in its report, the current phase is about building infrastructure and thoughtful experimentation so that subsequent efforts and expansions will rest on a solid foundation of data and experience. Thus, while the possibilities are seemingly endless, at present the operation is quite small. Currently, the Innovation Office’s website lists 11 members with just over a dozen entities permitted to the sandbox (more on them later).

Like the working group and task force that preceded it, the Innovation Office is made up of members with a mix of professional backgrounds and areas of expertise. Relying on these diverse backgrounds, Lund says, the Innovation Office is more capable of parsing through the data it needs to reach informed decisions on charting a course forward with potential rule changes. He explains:

As lawyers, we often think we know all the answers. We’ll write objections to rule changes and say, “If you allow this, then X, Y, Z is going to happen.” Most social scientists, economists, or other similar experts in the world would say, “Well, where’s your data to support that? Where’s your data to say that if you let these kind of people in, there’s going to be some kind of other harm to consumers?” It was really important to have other participants in the process who could offer that perspective, and that’s why our team is made up of all these different backgrounds.

Indeed, the Innovation Office is not just home to lawyers and law professors but also a data scientist, an economist, an accountant, a marketing professor, a business executive, and legal self-help advocates. As we see in the following section, these diverse areas of expertise serve critical roles in assessing would-be entrants to the sandbox. The Innovation Office, after all, is tasked with gauging the potential success of businesses that might never have been possible before the Utah Supreme Court’s recent regulatory reforms—a variation of “Shark Tank” where instead of judging whether a company will deliver value to investors, the Innovation Office is trying to determine if it will improve access to justice.

In this article, we take an in-depth look at how Utah has perhaps gone further than any other to introduce regulatory reforms that allow for new actors and structures in the market for legal services.

“What we’re trying to accomplish is a mix of accessibility and affordability,” says Lund. “And it’s not just the people who qualify for a pro bono program, because they’re under 200 percent of federal poverty guidelines. It’s a wide, wide swath of the public that we want to reach with these reforms.” While reforms like nonlawyer investment in law firms are trailblazing in the U.S. context, it is also important to remember that the central goal of these reforms is not innovation in and of itself but rather innovation in service of expanding access to legal services. Thus, as we explore further in subsequent sections of this article, the vision is not so much blowing up the market for legal services as it exists, but adding to it in a way that invites in others who were previously left out.

Why Utah?

Why is this trailblazing regulatory innovation happening in the state of Utah? (For more about why different states may see difference regulatory outcomes, see “The Politics of Lawyer Regulation.”) “I’ve been asked that question numerous times,” Lund says with a laugh. “People seem quite curious about what those conditions are, and I do think it’s to some extent about conditions that have been established in Utah over a matter of some decades.” As Lund describes, the relevant actors in the Utah legal profession are organized in such a way that allows them to act more nimbly and streamline some of the decision making. He explains:

One element is that we have a unified court system that’s overseen by a statewide judicial council. That means our Utah Supreme Court chief justice not only wears the hat of chief justice of the Supreme Court, but he is the lead administrative official for the entire court system. He has a board called the judicial council, which gives us the ability to be unified in decision making. We also have a unified bar system and a strong relationship between court and bar. I also think it’s the right-size state for this. I think other states have much more unwieldy sort of bureaucratic structures around the committees that would look at these things, and the lawyers who would need to be involved, and the stakes are a little bit higher. So in a way we were able to stay focused on a Utah project and to that extent stay under the radar while we were doing our development of the recommendations.

The process

Lund is careful to emphasize that while there might be a vision for a more independent regulator down the road, the Innovation Office is currently an arm of the Utah Supreme Court, to whom the state constitution grants the authority to regulate the practice of law. This setup, Lund explains, requires an iterative process to “assess, recommend, and monitor” players in the sandbox. So how does that process play out? How does one gain admission to play in the sandbox, and what is required to stay?

First, there is the intake. When entities—whether they be existing players in the legal profession like law firms or comparatively new ones, like technology companies or public interest organizations—apply for admission into the sandbox (the application is on the Innovation Office’s website), they must provide details about the legal services they are proposing to provide, describe the proposed business model, detail their target consumers, outline their proposed ownership structure, specify what practice areas they are anticipating to cover, provide their own risk assessment, and more. Critically, they must also provide evidence that their proposed entity/service/product is eligible for the sandbox, such as confirming that no one financing more than 10 percent of the venture is a disbarred or suspended lawyer.

“The more potential risk of consumer harm, the tighter the data requirements, the more substantial the data requirements,” says John Lund, chair of the Utah Office of Legal Services Innovation.

Once the application is submitted, the Innovation Office will often begin its assessment with a follow-up call. “Usually this is from our executive director, Lucy Ricca, who queries them about certain aspects of their proposal,” says Lund. “Once we are confident we understand the proposal, we bounce it around and we decide what recommendation to make to the court. We write up a recommendation, which is essentially a four- or five-page-long explanation of the proposal.” As part of that recommendation, the Innovation Office offers its own risk assessment of the applying entity. “We’ve developed a whole risk matrix to figure out where we think applicants fit in terms of potential risk to consumers,” Lund explains (see example below), noting the Office only puts forward candidates for approval deemed to pose low to moderate risk of consumer harm.

This five-by-five matrix extends shows three different categorizations of risk across the 25 squares: "acceptable," "ALARP," and "Not acceptable." The Y-axis "Severity," ranges from "No impact" to "Extensive." The X-axis, "Probability," ranges from "Highly unlikely" to "Very likely."

Source: Narrowing the Access-to-Justice Gap by Reimagining Regulation (August 2019)

As the sandbox is an experiment, assessing—and monitoring—risk is an essential function of the Innovation Office. The Innovation Office will classify the risk of each new player to the sandbox, and with that level of risk comes requirements that the new player submit certain data on a regular basis (typically monthly or quarterly). “Roughly speaking, the more the model departs from traditional practice of law, our current working theory presumes there is more potential risk for consumer harm,” says Lund. He explains:

The more potential risk of consumer harm, the tighter the data requirements, the more substantial the data requirements. As you move up the risk spectrum, you start to have to provide case-specific data about financial outcomes, nonfinancial outcomes, a variety of additional data points. Whereas if you have a simpler model, you might just have to only report consumer complaint data.

“Compare that to what is required from a lawyer who gets sworn in and goes off to practice law,” he adds. “It’s a reminder that what we have now is a total black box. These new participants in the sandbox will be much more transparent with all this data we’re collecting.”

This is likely just the beginning as lawyers and others consider the possibilities under Utah’s new regulation.

Finally, once they have completed their assessments, the Innovation Office makes their recommendations to the court. There may be some iteration between the court and the Innovation Office—the court may ask questions not explicitly considered in the recommendation, for example. If the court ultimately agrees with the recommendation, they issue an order admitting the given entity into the sandbox, typically for two years.

From there, Lund explains, the job is all about data collection and monitoring. The players in the sandbox must keep to their data requirements as well as adhere to the confines of the regulation. For example, the court determined that bare-referral-fee arrangements between lawyers and nonlawyers might pose significant ethical concerns beyond the scope of the other regulatory reforms, and thus the court has currently tabled authorization of such arrangements. As they continue to monitor and collect data on the players, the Innovation Office makes regular reports to the court. If a player wants to change their model, they need to seek an amendment to the order granting them access to the sandbox to be considered by the Innovation Office and the court.

Enter the sandbox

With the structure in place and the regulators in position, who is playing in the sandbox? In keeping with their guiding principle of transparency, the Innovation Office publishes the authorization documents for each approved player. As of this writing, there are 16 total approved entities in the sandbox—three designated as low risk, five designated as low-to-moderate risk, and eight designated at moderate risk. Most (12) employ lawyers but are managed by nonlawyers, while some (five) have more than 50 percent nonlawyer ownership. A significant number (seven) are modeled as software providers with some degree of lawyer involvement (none are modeled as software providers with no lawyer involvement).

The regulatory changes have made space for not just new actors in legal services but for market incumbents, such as traditional law firms, to innovate new ways of structuring their organizations and of packaging and delivering legal services. “We have seen some lawyer-led innovations where they’re bringing in some investment opportunity or some other members of a team in order to expand on what they’re already doing with their law license,” says Lund. “But we’ve also seen Rocket Lawyer and others expanding their service model and taking advantage of the flexibility to do that here in Utah. I would say that is the primary thing we’re seeing.”

Even with just 16 admitted so far, the goals and approaches vary considerably from one entity to the next. LawHQ, a law firm based in Salt Lake City, entered the sandbox so that it could offer equity partnership to software developers as well as offer software products, including the ability for customers to not just report unsolicited calls and other communications but also join mass tort litigation brought by LawHQ against the offenders. Estate Guru, a technology company that assists users in estate planning, entered the sandbox seeking to become a “quasi-law firm,” both helping to forge partnerships between lawyers and financial planners as well as directly employing lawyers to whom they might refer customers. Meanwhile, a partnership between Sudbury Consulting, a consulting firm founded and led by Utah lawyer Noella Sudbury, and Code for America, a 501(c)(3) nonprofit organization based in San Francisco, aims to develop technology that will enable users to discover whether they are eligible for expungement of criminal records under the state’s “clean slate” law and potentially offer related legal advice.

Even with just 16 players admitted so far, the goals and approaches vary considerably from one entity to the next.

This is likely just the beginning as lawyers and others consider the possibilities under Utah’s new regulation. Within the sandbox’s two-year window, many are likely to get a chance to test their ideas in the market and see results. The Innovation Office, with each application that comes through, will be looking for applicants to demonstrate that “[t]he likelihood that the average person will experience a harm using the applicant’s service is not greater than the likelihood that the average person who might use their service will experience harm without the service.” Put short, they are looking for innovators to introduce legal services of value to would-be consumers who are not helped by the status quo.

What about the incumbents?

Mark Morris has been a lawyer for 35 years, most of which he has spent in Utah as a trial lawyer for the law firm Snell & Wilmer. By the time then-bar president H. Dickson Burton wrote to the Utah Supreme Court pushing for regulatory reform in 2018, Morris was also a bar commissioner under his leadership. Like many lawyers, Morris had his reservations about some aspects of regulatory reform—that there is an ethical dimension to the provision of legal services, and that regulation is intended to protect the client’s interests—but at the same time he had ethical and practical concerns about the growing access-to-justice crisis in Utah. “One statistic that kept surfacing was the fact that, of all the lawsuits filed in Utah in a given period, over 90 percent of them have a party that was not represented by a lawyer,” Morris recalls. “And while you don’t want people who are irresponsible or unethical handling other people’s legal problems, you have to ask, ‘Are there ways to meet people’s legal needs that would be more affordable, more accessible?’”

The question for law firms is, if new players are indeed successful in one hemisphere, how might they cross the equator?

Both Morris and Lund agree that a chief aim of the sandbox is to help enable the market for legal services reach people previously left out. In Morris’s view, this is more likely to look like an expansion of the market rather than a major disruption. “My sense is if law firms and private practice lawyers are already meeting a demand, what does it mean to offer legal services to people who aren’t currently in that marketplace?” Morris says. “In one sense, there might be no disruption over here, because it’s a completely separate group of people who aren’t using lawyers now who might start using these services that are being offered by people coming into the sandbox. In other words, it’s an unmet need, rather than an unmet demand.”

Morris’s analysis echoes a key finding of John Heinz and Edward Laumann’s Chicago Lawyers: The Social Structure of the Bar (1982), in which the authors famously described the legal profession as one separated into two hemispheres—one that serves a clientele of large, sophisticated organizations and another that serves smaller organizations and often individuals. “Most lawyers,” they conclude, “reside exclusively in one hemisphere or the other and seldom, if ever, cross the equator.” To Morris’s credit, if the overwhelming majority of litigants in Utah are attempting to navigate their cases without the benefit of legal counsel, there is reason to believe that an entire hemisphere of the legal market is hardly being served at all. The question for law firms is, if new players are indeed successful in one hemisphere, how might they cross the equator?

Morris and a group of other lawyers at Snell & Wilmer decided to put together a committee to consider this and other questions surrounding the new regulatory sandbox in Utah, as well as some similar regulatory changes in Arizona where the firm’s largest office is located. The committee is composed of senior partners, junior partners, and associates alike. As Morris notes, some of the lawyers who have been out of law school for less than a decade have often been the most vocal in their meetings, certainly more tech savvy and perhaps reflecting an increasing willingness of newer lawyers to think outside the box. “The goals of the committee are to evaluate what impact these changes might have on our practice, on our ability to help our clients, and certainly look out for negative impacts if we can anticipate them,” says Morris. “One of the biggest questions we ask is, ‘Are there also opportunities here?’”

So what have they found? Some aspects of law firm practice may be ripe for change, Morris explains. Just as so-called alternative legal service providers have demonstrated in recent years, legal tasks that can be systematized and even automated (for example, document review) likely will be. And this may have significant impacts on some practice areas more than others. “Wills and estates is a practice area, one where people of limited means and assets don’t hire lawyers, that might lend itself more to people checking boxes and filling out forms rather than sitting down with a professional and saying, ‘Here’s my situation,’” says Morris. “Some of those things I think may be more susceptible to a more homogenous treatment.”

“If law firms and private practice lawyers are already meeting a demand, what does it mean to offer legal services to people who aren’t currently in that marketplace?” asks Mark Morris, a partner at Snell & Wilmer.

At the same time, Morris is not expecting big disruptions in litigation resulting from the regulatory sandbox just yet. “Because when people go to court, every situation is different—every single one,” he says. And yet, Morris adds, we may see certain types of litigation, such as family law, grow significantly as a result of the sandbox. As he puts it, the new players are likely to go where there is currently a lot of need but little utilization.

Lund, who in addition to leading the Innovation Office is also a law firm lawyer, echoes Morris in both the potential for opportunity as well as the relative security of incumbent firms’ business as he sees it. “Well, the business of most large firms is to work for corporations and work for very well-heeled individuals who really can afford the billable rate structure that most law firms have in place,” he says. “So, I suppose I don’t see, in the short term, these sort of innovations meaningfully chipping away at that market for those types of top-level clients that are out there.” To be clear, Lund does note that these types of clients have indeed been pushing for greater efficiencies and cost-saving measures from their firms. “That’s a market impact in and of itself,” he adds, noting that the ability to create strategies around ancillary business models is now within large firms’ grasp.

With his former-bar-president hat on, Lund is more focused on the other hemisphere in the legal profession. “The bigger element of the current legal market that I am concerned about is the small law firms and solo practitioners who really don’t have the wherewithal to advance in the market,” he says. “The question I think we need to consider for that group is will these different business structures really support them better in providing legal services?” With the introduction of integrated services and new possibilities in the way of augmenting legal services with technology, change is going to come to the legal service landscape in Utah with the regulatory reforms in place. What that change means for all players remains to be seen.

A brave new world?

It is worth emphasizing that the regulatory sandbox is due to sunset after two years. Per the Innovation Office, the clock started on September 1, 2020, which means that in the second half of 2022 it will be up to the court to measure the success of the regulatory sandbox and determine whether to end the experiment or extend it, temporarily or indefinitely. After all, Lund reiterates, the sandbox and the Innovation Office are part of a pilot project to see if regulatory reform can help leverage innovation in the legal services market to reach more people who could benefit from those services. “The rationale for the experiment was access to justice,” says Lund. “If, upon looking at the data, we have no impact on the access-to-justice gap pursuant to any of the innovations that come in, I think the court could credibly ask us, ‘Well, what’s the point of this?’” Indeed, just months before the sandbox was officially up and running, the Washington Supreme Court decided to sunset its LLLT program, designed in part to increase access to justice, when it determined it was “not an effective way to meet these needs.”

And yet there is another motivation behind the regulatory sandbox in Utah: the hope that it might be replicated elsewhere. “Justice Himonas and I certainly have felt if we can nudge the broader national legal industry or the regulators in other jurisdictions toward these sorts of things, that’s a measure of success,” Lund adds. “Because most of these things make a lot more sense when they’re brought up the scale, if it’s not just Utah that you can do them in.” Time will tell how many other states and jurisdictions follow their lead, but Utah is already not alone in their efforts. Regulatory reforms in Arizona just went into effect on the first day of 2021 to allow nonlawyer investment in law firms as well as the licensing of alternative business structures. States like California, Florida, Connecticut, and others appear to be organizing efforts to follow in Utah’s footsteps, with many respective task force and committee reports scheduled to finalize in 2021. The timeline remains unclear, but a future in which sandbox players can scale their services up to a national level seems more and more possible with each new jurisdiction that takes a serious look at reform.

“The question I think we need to consider for small law firms and solo practitioners is will these different business structures really support them better in providing legal services?” asks Lund.

In the end, both Lund and Morris hope that innovations coming out of the regulatory sandbox are better able to reach people who could benefit from legal services. One key problem, after all, is not just that a significant portion of the population cannot access quality legal services but that they might not even be aware that their problems are ones with legal remedies. “I think it’s less of a demand and more of a need for legal services that is not being met,” says Morris. “Outside of litigation, I don’t think there are all these people out there screaming, ‘I want a lawyer,’ even if, objectively, they could really use one.”

As Lund notes, by the time many people realize they need a lawyer, it could be too late. “Look, for example, at the question of evictions—a known issue and really worsened right now by the pandemic,” he says. Lund explains:

The lawyer interface on that is maybe on a pro bono basis, when they finally get down to court and it’s the possession bond hearing and the question is whether that person is going to be able to stay in their apartment or not. More often than not, by the time that case gets to that stage, their goose is cooked, right? There’s no good option. It’s just a matter of the landlord using the process to get the order of eviction. Well, what if somebody could have given that tenant some tidy little useful advice about what to do with their lease rights months before—in a setting before they’re in crisis, in a setting when they’ve got some understanding of what their lease rights are, and they can be counseled about that, and maybe get to the point where they don’t lose their place to live over it? I mean, I see that as not just a different market than what Mark Morris and I do with our days, our billable days, but as broadening the whole concept of what it is that amounts to legal service that somebody might take advantage of and benefit from.

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Perspectives on Legal Services Regulation Volume 7 • Issue 2 • January/February 2021

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