Reform or Revolution? California's Bid for Nonlawyer Ownership Could Spread
Nonlawyer investment in law firms is closer than ever in California, as a bar group accepts public comment on its recommendations. Where might it go next?
August 01, 2019 at 09:00 AM
6 minute read
Blue jeans. Organic farming. Skateboarding culture. They're entries on the long list of trends that have exploded out of California and spread across the nation.
It's looking increasingly likely that nonlawyer investment in law firms could be next.
A task force convened by the State Bar of California spent much of the last year looking at ways to increase access to justice for the state's residents. Somewhat predictably for California, much of the focus was on how to yoke technology to traditional legal practice.
The bar group's board of trustees voted in July to allow 60 days of public comment on the recommendations, which include changing bar rules to allow "technology-driven delivery systems" to provide legal assistance and also to permit some degree of fee-sharing with nonlawyers.
"Attorneys have been unsuccessful in bridging the justice gap. We have got to try something to fix it for the consumer out there," says Joanna Mendoza, a solo practitioner who sits on the board of trustees and served on the task force. "Scalable technology could fill some of that gap."
It's fair to say that the fee-sharing ideas proposed by the task force pose the greatest opportunity for disruption. Rather than advance one definitive proposal, the group—split between attorneys and members of the public—agreed to circulate two approaches, one narrow, one bold.
California's reputation for openness to novel ideas helps explain why this push is emerging in the Golden State first. But credit also goes to the 2018 split that separated the California bar's regulatory functions from its lawyers association.
"They're capable of acting a lot more independently than if the lawyers were still involved," says attorney and writer Keith Lee, whose networking community, LawyerSmack, connects lawyers.
The first fee-sharing option would allow attorneys to cut nonlawyers in only if their firm remains solely focused on providing legal services. An economist who helps lawyers assess the value of their prospective claims or a technologist building a proprietary app would thus be entitled to invest in the firm and take home a share of its earnings.
A more revolutionary step would be to do away with the existing prohibition on fee-sharing and allow nonlawyer investment under any circumstances, as long as a firm's clients consent.
"That would be a major change in the rules and go further than any other state has gone," says James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center.
Without the opportunity to cash in, there are limited incentives for technology entrepreneurs to direct their energy toward the legal sector. Ventures such as Atrium, the Silicon Valley startup that's divided between a law firm wing and a legal technology wing, are thus far exceptions, not harbingers of a wider transformation. And there are even fewer attempts to fuse technology and law to benefit individuals who are currently priced out of the system.
A separate recommendation, which works to the same end, suggests creating a new regulatory structure to vet entities that use technology to provide legal services. Imagine a scenario in which a nonprofit refers clients facing foreclosure to a law firm, which then sets up an independent entity to operate a software product that generates filings to assist those clients in retaining their homes.
"They're creating a safe harbor," Jones says.
Entities would be able to do this work without the fear of being dinged for the unauthorized practice of law.
If the question were solely about improving access to justice, all this would likely be an easy sell to the attorneys and other interested observers who can speak up during the public comment period. After the public weighs in, the task force will make a final set of recommendations, and the board of trustees will decide whether to embrace them. The Supreme Court of California will then have the final say on the matter.
But lawyers at all rungs of the profession in California are likely to see a change in their fates if the rules are liberalized. Lee says the majority of lawyers in the state are solo practitioners, many of whom are already doing this kind of work.
"It's not pro bono, it's low bono," he says.
And he's concerned that so many Americans who are scraping by financially will never be able to enter the market for legal services, regardless of how much technology can help drive down the cost.
On the other end of the spectrum, could this be the opening that the Big Four accounting firms have been waiting on to compete with Big Law in the United States? The size of the market is certainly inviting: If California were an independent nation, it would have the fifth-largest economy in the world.
Deloitte or PwC might not immediately be able to purchase an existing California law firm outright and put it under its umbrella, but these organizations could likely envision creative ways to invest in a legal services business while keeping it distinct from the rest of their operations. In certain practice areas, they'd quickly become formidable competitors to the larger firms in the state.
"They are so operationally efficient," Lee says of the Big Four. "They're accountants. They're so good at business strategy, business optimization, running lean. They kill at that stuff."
While the ultimate decision will be in the hands of a small group of Californians, the ramifications of any change will undoubtedly extend far beyond the state.
"California is an enormously important jurisdiction. When it takes the lead on something, it obviously gets attention," Jones says, "particularly if it's a rule change that is seen to give California lawyers any kind of competitive advantage."
Look for bar associations in New York and Washington, D.C., to be early followers, depending on the evidence. Mendoza, from the board of trustees and the task force, notes there will be plenty to consider. The bar is concurrently putting together a first-of-its-kind study on the justice gap in the state. That will provide a baseline for any future assessments.
"Ideally, if it works well and gets adopted here, it would have an impact across the country, but we'd have to prove that it's not a threat to the legal industry for that to happen and that it really helps access to justice," Mendoza says.
Proof of the former will be just as important as proof of the latter. If attorneys outside the state only see increased competition and erosion of opportunities, the reform could end up in a different category, lumped in with direct democracy: institutions that make California unique.
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