Disruptive Innovation in Legal Services

Volume 1 • Issue 2 • January 2015
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How Regulation Is—and Isn’t—Changing Legal Services

Broad agreement exists that regulatory change in the law is needed, but what will such changes bring? The answer still seems to be anybody’s guess.

The United Kingdom’s Legal Services Act took effect in 2012, and in doing so introduced regulatory changes to the venerable U.K. market that sent shock waves through the legal world. With the act’s creation of alternative business structures (ABSs), nonlawyers are now permitted to own a stake in U.K. law firms.

Many firms were quick to take advantage. By January 2015, hundreds of ABS licenses had been granted under the aegis of the Legal Services Board, which oversees the changes. The changes follow the rapid adoption of similar hybrid firms in Australia, which has allowed some form of nonlawyer ownership since 1999.

At the Center on the Legal Profession’s conference on disruptive innovation in 2014, then Legal Services Board head Chris Kenny reported on the U.K. law’s aftermath: “Western civilization has not ended,” he said. “The rule of law has not been abolished. Law firms up and down the country have not been taken over by supermarkets or DIY stores or garages or anybody else.”

 

 

Kenny’s comments were tongue in cheek. (His post has since been taken up by Richard Moriarty.) Yet the possibility of nonlawyers profiting from the practice of law is controversial—and for good reason. While broad agreement exists that regulatory change is needed, such changes represent a massive social experiment on a scale the law has never seen. What will they bring? The answer still seems to be anybody’s guess.

A brief history of regulation

Worldwide, regulation of the law occurs amid a cluster of often archaic rules and norms. Services are controlled in most markets around two categories: the practice of law and ownership of law firms. (A third and final restriction, on geography, will be examined in a future issue of The Practice on globalization.)

The practice of law is generally defined to include advice, transactional work, and court representation. In the United States, the judicial branch is largely self-regulating: state supreme courts control legal regulation, working in consultation with bar associations. And under current regulation, the practice of law and any profits from that practice are limited to licensed attorneys.

Critics say that in restricting the practice of law to licensed attorneys, lawyers are merely protecting their own interests. Yet historically, arguments for regulation have centered around the protection of consumers.

Now, calls for regulatory change are coming from an unlikely alliance of legal innovators, corporate and business interests, and access to justice advocates. Access to justice advocates argue consumers are not in fact protected when so many are underserved, particularly in lower income brackets. Meanwhile, innovators and business interests say the practice of law is inefficient and in desperate need of a tune-up that more closely aligns firm interests with business imperatives. Representatives from both camps have argued for allowing nonlawyer ownership in the United States, as well as other forms of liberalization, such as multidisciplinary practices and the easing of restrictions on the unauthorized practice of law (see “Addressing unmet need,” below).

On monopoly

Confusion over the purpose of restricting the practice of law to lawyers alone—in effect, amounting to what some term a monopoly—is longstanding. As Laurel Rigertas of the Northern Illinois University College of Law points out, an American Bar Association committee wrote as early as 1931: “The practice of law by unauthorized persons is an evil because it endangers the personal and property rights of the public and interferes with the proper administration of justice. It is not an evil because it takes away business from lawyers.”

When the Washington Supreme Court began allowing limited-license legal professionals to provide advice in the area of family law in the state in 2012, it echoed the sentiment: “Protecting the monopoly status of attorneys in any practice area is not a legitimate objective.”

In corporate law, forms of nonlawyer ownership are becoming more common worldwide, with many innovators flying under the radar in the U.S. market. Some observers suggest corporate—as opposed to consumer—law is, in fact, de facto unregulated. Legal services outside the boundaries of lawyers’ traditional monopoly continue to multiply; some even flourish. For example, the legal staffing firm Axiom is registered as a corporation, but skips around UPL restrictions by conducting its work under the supervision of in-house corporate counsel. (For more on Axiom’s rise, see “Axiom: An Innovator’s Journey.”)

Meanwhile, the world’s largest accounting firms are taking advantage of the United Kingdom’s relaxed ownership restrictions to re-enter the market for legal services they abandoned in the post-Enron age, when legislation like Sarbanes-Oxley prohibited U.S. accounting firms from offering legal advice. PricewaterhouseCoopers, Ernst & Young, and KPMG were granted ABS licenses in 2014. All three, along with Deloitte, have been expanding legal hiring across Europe and Asia. Despite complications involving conflicts of interest among clients and even more stringent regulation set to take effect in Europe this year, all four are aggressively building legal divisions—and their global staffs, which dwarf even the largest law firms, make their efforts a threat to corporate law practices, particularly in America.

It’s unclear what will result from allowing nonlawyer ownership. Australia has built checks and balances into its nonlawyer ownership regulation, explicitly specifying that nonlawyer-owned firms’ first duty is to the court and legal system; then, to clients; and finally to shareholders. A 2008 study by Australia’s Office of the Legal Services Commissioner, which regulates the firms, found that consumer complaints dropped by two-thirds following the law’s mandatory ethical and procedural self-assessment requirements.

But as Center for the Legal Profession Research Fellow Nick Robinson cautions, available evidence from Australia and the United Kingdom is still scanty at best. In “When Lawyers Don’t Get All the Profits: Non-Lawyer Ownership of Legal Services, Access, and Professionalism,” Robinson suggests consumers may not in fact benefit substantially from this form of regulatory change, since investors are most likely to be attracted to high-profit practice areas like personal disability rather than areas of greatest need, such as housing or family law. He notes that nonlawyer ownership also presents distinct professional concerns, particularly when enterprises offering legal services also offer commercial services that create the possibility for conflicts of interest.

Opening the floodgates

In August 2014, the Canadian Bar Association issued a report recommending broad changes to the Canadian legal services market, including permitting nonlawyer ownership, multidisciplinary practices, and fee splitting with nonlawyers. The changes are controversial but, if approved, are sure to be watched closely below the border.

In the wake of the American Bar Association’s Commission on Ethics 20/20 failure to recommend significant changes to U.S. legal regulation in 2012, the American Bar Association has also created the Commission on the Future of Legal Services. The commission is examining innovations in legal services delivery and ways to improve access to justice, and it will hold public meetings and a conference before issuing a report at the summer 2015 ABA annual meeting.

What results from these changes remains to be seen. Either way, broad agreement exists that current regulatory regimes present significant barriers to innovation. The U.K. changes may have opened the floodgates.

“We are moving into,” the U.K’s Kenny observed at the Center on the Legal Profession conference, “a significant sharpening of competition and the creation of conditions in which disruptive innovation may happen in the future in a way that wasn’t foreseeable a few years ago.”

Addressing unmet need

In 2004, insurance agent Ernest Chavis agreed to help his South Carolina neighbor, a 91-year-old woman, draft a will. Using Quicken will-making software, he created a will at her request, which she signed two months before her death. When disgruntled heirs sued, Chavis ended up in court. The will itself appeared to reflect the woman’s wishes and wasn’t invalid “simply because it was drafted by a nonlawyer,” the court ruled—but Chavis’ act still amounted to the unauthorized practice of law.

Outcomes like these are enough to make anyone cautious. The unauthorized practice of law (UPL) is a legal thicket that courts have largely failed to regulate coherently. Yet given unmet legal need in the U.S. consumer market, zealous UPL enforcement is unpopular—and an area in which regulatory changes may soon be on the horizon.

After decades of wrangling over legal forms (published by, for example, Nolo Press), courts now generally—but not always—agree that providing self-help kits and legal forms does not constitute the practice of law. That, they say, requires a personal relationship or consultation, along with tailored advice. Still, legal document generator LegalZoom has been the target of lawsuits in Missouri, California, and other states. And the battles continue: the North Carolina state bar, which first filed suit against LegalZoom over UPL in 2001, opposed legislation that would have allowed LegalZoom to operate in the state in 2014.

Yet the Legal Services Corporation, which coordinates legal aid in the United States, reports turning away nearly a million people for lack of resources each year. The number of those who don’t seek help at all is surely far greater. What would help reduce the unmet need for legal services?

Proposals for changes abound. One frequently mentioned is the creation of affiliated legal technicians who are trained to provide limited services, not unlike nurse practitioners in medicine. Washington state recently implemented a form of this licensing; California is also considering it. In 2014, New York state launched a pilot “Courtroom Navigator” program to help consumers in housing and debt cases, in which more than 95 percent of defendants are currently unrepresented. As part of the program, trained, nonlawyer navigators will accompany defendants to court and help with paperwork; they can respond to a judge’s questions in court, but any further representation would require a referral to formal legal aid. Another state program will provide similar aid to homebound seniors. If the programs are successful, the state may move to implement them more broadly.

Advocates for such programs say prices for legal services are beyond the reach of average consumers, and that being unable to afford a lawyer is antithetical to principles of democracy. Others believe creating limited-license legal professionals will only result in calcifying the two-tier, corporate-consumer system that has long dominated the law. They suggest yearly pro bono activity should be made a condition of bar membership and advocate for greater legal aid.

Whether a new form of legal service professional will ultimately benefit consumers will depend on how those professionals are trained, licensed, and regulated—and will undoubtedly continue to be a source of debate. We’ll return to these topics in upcoming issues of The Practice focused on legal education and law as a profession.

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Disruptive Innovation in Legal Services Volume 1 • Issue 2 • January 2015

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