Bloomberg Law
Nov. 14, 2022, 2:00 AM

ANALYSIS: Nonlawyer Ownership Faces Uphill Climb in Legal Market

Mary Shields
Legal Content Specialist

The momentum to advance nonlawyer involvement in the legal market has stalled, and it’s unlikely to pick up the pace into 2023. Instead, any changes in the year to come will likely be in the form of limited advances, similar to those that have occurred in the past year.  

This isn’t where we expected to be two years ago, when several state bar developments pointed to imminent watershed changes to the regulatory restrictions on nonlawyer involvement. These advances include Arizona’s elimination of its version of Model Rule 5.4 and creation of a certification regime for entities with nonlawyer owners or investors; Utah’s opening of its regulatory sandbox for new legal service models, including those with nonlawyer ownership; and the California State Bar Board of Trustees‘ approval of a sandbox program of its own.

Despite these steps toward rethinking nonlawyer regulation, actions taken by states since then have been to preserve the status quo.   

States Preserve Status Quo in 2022 

Last year, the Florida Bar’s board of governors unanimously rejected proposals to permit lawyers to share fees and partner with nonlawyers. In September of this year, California’s legislature put the brakes on the state bar’s development of its regulatory sandbox, and required any potential sandbox to exclude corporate ownership of law firms. Although a handful of state task forces continue to explore potential changes to Rule 5.4, there’s no indication that any are prepared to leave the study phase in the near future.

On top of these state actions, the ABA’s House of Delegates passed a non-binding resolution in August that affirmed its opposition to nonlawyer ownership of legal practices.

Recent Developments Are Minor

Recent actions on regulatory changes to nonlawyer involvement in the legal market look more like a chipping away at the the edges than a total overhaul. 

In 2021, the ABA responded to the regulatory changes in Arizona and Utah by issuing Formal Ethics Opinion 499, which held that lawyers could have a “passive” investment in alternative business structures (ABS)—entities engaged in the practice of law that include nonlawyer owners or investors—if the structure operates in a jurisdiction where such ownership or investment is permitted. The opinion explained that the jurisdiction in which the passive investment “occurs” is the jurisdiction where the ABS is permitted to operate, so that a state’s ethics rules would apply to the conduct under Model Rule 8.5 choice-of-law provisions, rather than the rules of the investing attorney’s home jurisdiction. 

Relying on a narrow application of what counts as the “unauthorized practice of law” has been another means by which non-law-firm entities can provide legal services without running afoul of professional conduct rules or unauthorized practice of law statutes. This reasoning found support in a Southern District of New York opinion from May that enjoined enforcement of the state’s UPL laws against Upsolve, an organization that aids debtors in filling out state debt collection forms. In finding that the laws likely violate Upsolve’s First Amendment free speech rights, the court noted that there are less restrictive alternatives available to regulate the unauthorized practice of law than a blanket ban on dispensing legal advice.  

Small Splashes of Change, But No Tidal Wave  

So what does it mean for the future of nonlawyer involvement in the legal industry if things stay as they are? Probably not much, since the options for working around the rules have only gone so far in changing how legal needs are met.

In other words—the restrictions set out in the rules of professional conduct and UPL statutes haven’t stopped law firms and companies from responding to the demand for streamlined, technology-enhanced, and, above all, less costly legal services. They’ve achieved this through various models that skirt around Rule 5.4 and 5.5 restrictions, such as law firms or in-house law departments using alternative legal service providers to assist with non-legal practice functions, or businesses enabling individuals to perform do-it-yourself legal services, such as LegalZoom or Hello Divorce.   

Still, as a 2021 article by Neville Eisenberg and Richard Susskind for Harvard Law School’s The Practice argues, this current method of working around the rules through disaggregating legal services (that is, leaving traditional, complex legal work to lawyers while using alternative legal service providers to handle routine, administrative tasks) has “not driven a degree of innovation in law firms and alternative providers that delivers clients the outcomes they want.”

A fully-integrated model involving both lawyer and nonlawyer expertise could provide such outcomes, but the mainstream adaptation of such a model is unlikely without further regulatory change. 

The modest developments in 2022 ultimately foretell incremental, and no major, changes in the year to come. ABA Opinion 499 cracks open the door for the regulatory changes in Arizona and Utah to reach beyond those jurisdictions, even if indirectly. And the Upsolve case affirms litigation as a viable means to implement regulatory change—even if state bars continue to move at a snail’s pace.  

Access additional analyses from our Bloomberg Law 2023 series here, covering trends in Litigation, Transactional, ESG & Employment, Technology, and the Future of the Legal Industry.

Bloomberg Law subscribers can find related content on our Manual of Professional Conduct page.

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