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CA Legislature Puts the Brakes on Ownership of Law Firms by Non-Lawyers

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On February 25, 2022, an open session of the California State Bar’s Closing The Justice Gap Working Group (“CTJG” or “Working Group”) took place that could pause the short-term prospects of allowing non-lawyers to own and invest in law firms. Specifically, the Working Group made three potentially game-changing decisions.  

First, and most importantly, the Working Group will modify its membership and limit members to those who have experience working in California. While other states including Utah, Arizona, and Florida have all discussed the matter of nonlawyer ownership, the California State Bar agreed that relevant experience in California would be necessary to be part of the Working Group.  

Second, the minutes of the February 25 meeting show that the State Bar agreed to streamline the Working Group to reduce the administrative burden these meetings place on the State Bar’s staff. More than one participant has expressed frustration with the Working Group’s organizational structure. The Working Group itself is comprised of multiple subcommittees, which will be eliminated moving forward.   

Third, the Working Group’s Charter will be changed so that the roles of the California legislature and Supreme Court are more clearly defined. In addition, the Charter will more explicitly identify who will be allowed to participate in the regulatory sandbox. This will include stricter screening of the financial interests of those entities who would be allowed to be part of the Working Group.  

If these changes seem out of step with what the Working Group had been doing previously, it’s because they are. These changes are not an accident. They are a direct response to criticisms of the Working Group articulated by members of the California legislature.  

On December 7, 2021, a letter from the Senate was sent to the California State Bar arguing that allowing corporations to take part in ownership of law firms would cripple the integrity of justice and legal systems for consumers. The letter was co-signed by Assembly Member Mark Stone (D–Monterey Bay) and Senator Tom Umberg (D-Santa Ana). Stone and Umberg are both attorneys. Mark Stone received his J.D. from Santa Clara University of Law in 1988 and was an attorney from 1993 – 2003 before becoming county supervisor of Santa Cruz County in 2003. Tom Umberg graduated from UC Hastings in 1980 and was Assistant U.S. Attorney in Orange County before being elected to the California State Assembly in 1990.

Stone and Umberg took direct aim at the underlying rationale of the Working Group and its ability to provide more representation to the middle class and other underserved communities. “The regulatory sandbox could become an open invitation for profit-driven corporations, hedge funds, or others to offer legal services or directly practice law without appropriate legal training, regulatory oversight, protections inherent in the attorney-client relationship, or adequate discipline to the detriment of Californians in need of legal assistance.” 

Stone and Umberg also voiced concern that the “the State Bar has used a substantial amount of its resources for the CTJG, as well as the Paraprofessional Program Working Group, apparently utilizing hundreds of hours of staff time and an unknown amount of other State Bar resources.” They argue that the Working Group is preventing the State Bar from carrying on its “core mission of protecting the public by correcting the delays and defects in the attorney discipline system.” To support this contention, the letter points out that “the State Bar’s backlog of discipline cases grew by 87 percent since December 2015 and that recent changes to the system have significantly reduced its efficiency.” With the State Bar already dealing with a heavy backlog stretching over seven years, there is not enough bandwidth space to consider changes that could “fundamentally infringe on the basic and paramount obligations of attorneys to their clients.” 

The letter from Stone and Umberg had an immediate and powerful impact on the Working Group. The initial response was to put meetings of the Working Group on hold for two months. Given that the Working Group is agreeing to change its composition and its charter, it will take months if not years to put these changes into effect. Moreover, considering the rocky relationship between the State Bar and the legislature, with the legislature having almost all the leverage, it wouldn’t be surprising if the changes made to the Working Group signal that efforts to allow non-lawyers to own law firms will be put on hold in California for the foreseeable future. With Florida recently deciding not to follow the lead of Arizona and Utah, delays in implementing changes in California are likely to have repercussions throughout the country.   

The Regulatory Sandbox isn’t dead, but it is looking a lot less inevitable than it did a few months ago.  

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.