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Utah and Arizona Moving Forward With Nonlawyer Ownership of Law Firms

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.

CA State Bar Innovation Task Force Takes a Pause

As we have previously reported (see posts here and here), a task force assembled by the State Bar of California has encountered significant pushback from the legal community. The Task Force on Access Through Innovation of Legal Services (ATILS) was created to address issues of access to justice in the state. Charged with “identifying possible regulatory changes to enhance the delivery” of legal services, the group offered sixteen recommendations last summer, which, most notably, included proposals for non-lawyers to share in ownership and fees.

The outcry suggested that such changes would put consumers at risk, with some referencing the state’s recent issues with “notarios.” These unlicensed immigration consultants were banned by the state assembly after allegedly “tak[ing] advantage of vulnerable populations,” and many argue the existing regulations around who is eligible to provide legal services protect clients from unethical practices. Other state bar associations have also expressed their opposition to allowing non-lawyers to invest in firms and share law firm profits.

On Thursday, March 12, the bar tabled recommendations from the task force, describing the move as “an attempt to make sure we have the best information in front of the board at the right time.” The regulatory body credited “political headwinds” for its decision to delay approving any recommendations. Among the next steps held off by trustees was the launching of a group to study a regulatory sandbox much like the one established in Utah. Such a pilot program would test recommendations on a small scale to predict the impact of each proposed shift.

Members of the task force expressed disappointment as the foundational issue remains unaddressed. Nearly 4,000 Californians were surveyed in the California Justice Gap Study which ATILS used as the basis for its recommendations. The data expressed that people in the state “regardless of income” were often “navigating critical civil legal issues without legal representation or meaningful legal assistance.” With Californians receiving “inadequate legal help” if any for eighty-five percent of legal issues, the survey concluded, “Failure to access legal services is a result of both a service gap (supply) and a knowledge gap (demand).”

These findings led the task force to its viewpoint that “something more than modest tweaks to the existing regulatory environment is needed,” and the group set out to evaluate such regulations as those concerning fee splitting from the get-go. ATILS endorsed “the twin goals of public protection and enhanced access to legal services,” but many of the 3,000 public comments received in reply questioned the ability of the task force’s recommendations to meet those aims. The opposition proved enough to postpone the bar’s efforts, at least for the next few months.