Stranger Things: Will California Legalize Nonlawyer Ownership of Law Firms?

On July 11, 2019, the State Bar Board of Trustees voted to put out for public comment the recommendations of the Task Force on Access Through Innovation of Legal Services (ATILS).  ATILS was formed in July 2018 following the Board’s consideration of a report from Prof. William Henderson of the University of Indiana Maurer School of Law.

Prof. Henderson is well known for the groundbreaking scholarly work on the dynamics of the legal marketplace and the effect those dynamics have on the legal profession.  The Board commissioned Prof. Henderson to report on those changing dynamics.  His Legal Market Landscape Report concluded that

There is widespread consensus among lawyers, judges, legal academics, regulators and sophisticated clients that the legal market is in a period of significant tumult.  Further, there is also agreement that this tumult may be the early stages of a fundamental transformation. Yet, what is new and disconcerting for many is that these changes are not being driven by licensed lawyers or the organized bar. Rather, the causes are powerful external market forces that cannot be easily categorized using our familiar and well-established frameworks. At a minimum, our frameworks need updating.

Now, after a year of study, ATILS has produced an outline of how those frameworks could be updated.  The recommendations, while still tentative, are nothing less than revolutionary.  They include creating new exceptions that authorize the practice of law by nonlawyers in specified areas, allowing certified nonlawyers to provide legal services through technology (e.g. Legal Zoom), and changing the rules that prohibit nonlawyers from having ownership interest in entities providing legal services, principally California Rule of Professional Conduct 5.4 “Financial and Similar Arrangements with Nonlawyers.”

There is a lot to unpack in the ATILS report. It deserves close attention from every lawyer who represents private clients, and especially from lawyers who represent real people as clients, what Prof. Henderson calls the PeopleLaw sector of the profession. These changes could fundamentally change your professional life.

The proposed changes to Rule 5.4 are perhaps the most revolutionary. The current Rule, only adopted November 1, 2018, but reflecting legal principles long held, says

(a) A lawyer or law firm shall not share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law, … [limited exceptions];

(b) A lawyer shall not form a partnership or other organization with a nonlawyer if any of the activities of the partnership or other organization consist of the practice of law.

(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s independent professional judgment or interfere with the lawyer-client relationship in rendering legal services.

(d) A  lawyer  shall  not  practice  with  or  in  the  form  of  a  professional  corporation  or other organization authorized to practice law for a profit if: (1) a nonlawyer owns any interest in it, except that a fiduciary representative of  a  lawyer’s  estate  may  hold  the  lawyer’s  stock  or  other  interest  for  a reasonable time during administration; (2) a  nonlawyer  is  a  director  or  officer  of  the  corporation  or  occupies  a position of similar responsibility in any other form of organization; or (3) a  nonlawyer  has  the  right  or  authority  to  direct  or  control  the  lawyer’s independent professional judgment.

(e) The Board of Trustees of the State Bar shall formulate and adopt Minimum Standards for Lawyer Referral Services, which, as from time to time amended, shall be binding on lawyers.    A lawyer shall not accept a referral from, or otherwise participate in, a lawyer referral service unless it complies with such Minimum Standards for Lawyer Referral Services.

(f) A  lawyer  shall  not  practice  with  or  in  the  form  of  a  nonprofit  legal  aid,  mutual benefit or advocacy group if the nonprofit organization allows any third person to interfere with the lawyer’s independent professional judgment, or with the lawyer-client  relationship,  or  allows  or  aids  any  person  to  practice  law  in  violation  of these rules or the State Bar Act

Rule 5.4 has been described as a rule necessary to preserve lawyer control over the provision of legal services because nonlawyers, not being fiduciaries, might not provide those services consistent with the best interest of the clients but in the best interest of the entity providing those services. Put another way, in the ever-present tension between law practice as profession and law practice as business, non-attorney ownership or control will tilt things too much to the business side.

With that in mind, ATILS proposes two alternative ways to change Rule 5.4.

Alternative 1 would continue to impose a general prohibition against forming a partnership with, or sharing a legal fee with, a nonlawyer. “The Alternative 1 amendments would: (1) expand the existing exception for fee sharing with a nonlawyer that allows a lawyer to pay a court-awarded legal fee to a nonprofit organization that employed, retained, recommended, or facilitated employment of the lawyer in the matter; and (2) add a new exception that a lawyer may be a part of  a  firm in which a nonlawyer holds a financial interest, provided that the lawyer or law firm complies with certain requirements including among other requirements, that: the firm’s sole purpose is providing legal services to clients; the nonlawyers provide services that assist the lawyer or law firm in providing legal services to clients; and the nonlawyers have no power to direct or control the professional judgment of a lawyer.”

Alternative 2 reflects a more radical revision. “Alternative 2…would largely eliminate the longstanding general prohibition and substitute a permissive rule broadly permitting fee sharing with a nonlawyer provided that the lawyer or law firm complies with requirements intended to ensure that a client provides informed written consent to the lawyer’s fee sharing arrangement with a nonlawyer.”

The bedrock of these proposed changes is the idea that the current regulation scheme is preventing the efficient delivery of legal services and access to justice. “To the extent these rules promote consumer protection, they do so only for the minority of citizens who can afford legal services. Modifying the ethics rules to facilitate greater collaboration across law and other disciplines will (1) drive down costs; (2) improve access; (3) increase predictability and transparency of legal services; (4) aid the growth of new businesses; and (5) elevate the reputation of the legal profession.” Henderson Legal Market Landscape Report, at page 7.

These changes, along with the others recommended by ATILS, would erode the monopoly over the provision of legal services currently held by lawyers.  Of course, any change in the Rules of Professional Conduct must be approved by the California Supreme Court (Bus. & Prof. Code § 6077).  There will be winners and losers if these ideas are enacted, and some of those losers are going to be lawyers.

The independence of the legal profession has almost become a religious principle to some lawyers.  Yet, the marketplace changes described by Prof. Henderson are very real.  Rule 5.4, and its equivalent in other states, is being violated every day by hundreds, if not thousands, of legal services providers.

Avvo Legal Services prompted a backlash that resulted in a number of legal ethics opinions (including San Diego County Bar Association formal ethics opinion 2019-2).  The new owner of Avvo Legal Services pulled the plug on the business, but a similar model exists for many others.  And there are many other legal services providers where non-lawyer participation and control is hidden.

Will California allow legalize non-lawyer ownership of legal services providers?  We don’t know, but stranger things have happened.

 

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