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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.

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.