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ANALYSIS: The Big 4 Is Knocking—Are State Bars Answering?

Sept. 18, 2019, 9:01 AM

Mentioning “the Big Four” is a great way to pique people’s interest in business-of-law circles. Want someone to stand with you around a cocktail table at a legal conference? Have something to say about how or when the large accounting firms—Deloitte, EY, KPMG, and PwC—will make a formal entry into U.S. legal practice.

U.S. law firms are still somewhat insulated from competition from the Big Four by attorney ethics rules that, in theory, bar them from practicing U.S. law. When and how the large accounting firms will enter the practice of U.S. law is one of the biggest debates in the legal industry today.

Meanwhile, as the buzz over the legal tech sector reaches a din, state bars are being called on to reform their ethics rules to allow more leeway to startups that provide legal services to the public.

Companies like LegalZoom, Divorceify, and parking ticket app DoNotPay offer consumers low-cost solutions to common legal issues. The U.S.’s relatively poor rating for access to justice (ATJ) has helped feed the market; according to the World Justice Project, the United States ranks thirtieth (tied with Romania and Poland) of 126 countries in the accessibility and affordability of civil justice. Of those who had a legal problem between 2017 and 2019, only 38% were able to access the services of a lawyer, the World Justice Project found.

States like California are looking seriously at their ethics rules to allow more direct-to-consumer startups and law companies to provide legal services to under-served groups.

What do these two things—the Big Four’s business plans and access to justice initiatives—have to do with each other? If states reform their ethics rules to open the door for ATJ companies to practice law, they let the Big Four in too.

The fact that ethics rules reforms would largely operate in one broad stroke is concerning for some.

“To use the fundamental challenge in the United States, which is access to justice, as an entry point without a legitimate conversation of whether [the Big Four] should or should not be in [the market], to me is particularly troubling,” Joe Andrew, chairman of Dentons, told me. “You’re taking advantage of impoverished people in order to promote the goals and interests of some of the biggest professional service organizations in the world.”

Andrew, the former chair of the Democratic National Committee, thinks a better solution is more public funding for access to legal services.

This isn’t the first time the debate over ethics reform has arisen. The ABA’s Commission on Multidisciplinary Practice (the bar’s term for attorneys practicing in non-lawyer-owned entities) recommended in 1999 that the model rules be amended “to permit a lawyer to partner with a nonlawyer even if the activities of the enterprise consisted of the practice of law and to share legal fees with a nonlawyer.” The ABA House of Delegates rejected the proposals. And the large accounting firms backed off of their legal services initiatives following accounting scandals in the early 2000s.

Today, the movement toward attorney ethics reform is again reaching critical mass.

“The train has left the station with a lot of implications for how courts and legal service providers of routine services need to respond,” Deborah L. Rhode, a professor at Stanford Law School and director of the Stanford Center on the Legal Profession, told me. “More people are going to see ways to deliver services more efficiently and effectively with enough quality control so that the bar’s stated concerns of protecting the consumers just seem unfounded.”

As these shifts occur, waiting in the wings are the Big Four.

“There are good reasons to believe that the Big Four will be even more successful in penetrating the corporate legal services market in the decades to come,” wrote David B. Wilkins and Maria J. Esteban Ferrer, in their July 2017 piece in Law & Social Inquiry on the Big Four’s market penetration.

The Rules & the Modern Legal Market

Given the barriers they present to legal startups and the Big Four alike, it’s worth looking at which ethics rules, exactly, are most at play in today’s legal market.

“The ethics rules, particularly those pertaining to the prohibition on nonlawyer ownership (Rule 5.4) and the unauthorized practice of law (Rule 5.5), are the primary determinants of how the current legal market is structured,” William Henderson, law professor and legal industry commentator, wrote in his July 2018 Legal Market Landscape Report to the California bar.

This table is based on the ABA’s Model Rules of Professional Conduct. For states’ variations, see the ABA’s Legal Innovation Regulatory Survey, which details differences in states’ versions of the model rules.

Proposed Rule Changes

When the door to new types of legal practice does open in the U.S., it will be slow and piecemeal.

In August, the ABA released a survey of states’ proposed changes to the attorney ethics rules.

“The new survey provides state-by-state information of known efforts to reform the regulation of legal service delivery while also providing access to relevant case law,” the ABA said in a statement.

The ABA highlights “state innovations of note,” such as the District of Columbia allowing limited non-lawyer ownership of law firms and Washington’s creation of LLLTs, or limited license legal technicians.

The ABA says that 47.1% of states have already adopted “significant” changes to Model Rule 5.4(b)-(d).

Some of the changes the ABA notes as “significant” don’t necessarily seem so in terms of market impact. In Utah, the state’s reforms to 5.4 allow lawyers to practice in non-profit corporations owned by non-lawyers, provided they maintain their independent judgment. In Washington, a “significant” change to 5.4(d) is that lawyers may practice in a for-profit corporation if non-lawyers serve as the secretary or treasurer, but not as other corporate directors.

These alterations might seem significant from a regulator’s standpoint, but they are unlikely to impact the bulk of for-profit startups. Nor would they enable legal practice inside an accounting firm in these jurisdictions.

States currently considering notable reforms, according to the ABA, are: Arizona, California, Florida, New Mexico and Utah.

Some of these reforms would empower both consumer-aimed legal startups and the Big Four, while others are purely focused on ATJ. Arizona, California, and Utah’s proposals include both ATJ initiatives and changes that would potentially enable corporate, non-lawyer-owned legal practice. New Mexico is only considering allowing licensed legal technicians, placing its reforms firmly in the ATJ camp.

Florida, whose bar is notably conservative with respect to non-traditional service providers, is considering an initiative that would allow companies that are providing online legal advice to the public to register voluntarily with the bar. Florida’s special committee website refers to legal technologies as “generally unregulated (or under regulated).” Some states, similarly, may be considering restrictions along with reforms.

The Florida Bar is involved in litigation against legal startup TIKD, which charges users a flat fee to connect them with attorneys who will fight their traffic tickets. The bar won dismissal of TIKD’s federal antitrust claims in December 2018; the state case is still pending before the Florida Supreme Court.

“It’s not just out of the kindness of their hearts” that state bars are considering reform, Rhode said. “Some of it is because they’ve been sued. And some of it is also because several of the online providers like LegalZoom have fought back and successfully.”

LegalZoom won a series of victories against state bars over unauthorized practice of law charges.

Rhode is optimistic about the ability of for-profit startups to help with the access to justice problem and has written that state bars should liberalize.

“More power to them,” Rhode said. “More competition is what we need. But I’m not somebody who wants a wild west out there. And there are certain areas—for example, immigration—where there’s huge potential for abuse. There are some sectors where you really need vigorous oversight. But there are other sectors where sophisticated consumers can make their own judgments about what appropriate services look like.”

But, as legal startups and ATJ companies push for access to the legal markets, it may provide an opportunity for accounting firms that serve large corporate clients to expand their businesses.

Life in a Changed Universe

It seems clear that U.S. regulatory reform would dictate further changes in the shape and appearance of legal services.

For example, PwC opened ILC Legal in 2017 in Washington, DC, the one U.S. jurisdiction with looser rules governing corporate ownership of law firms. ILC Legal, according to its website, is “an independent law firm that is part of the PwC network,” and “is a firm of international lawyers who are authorized by the District of Columbia to practice non-U.S. law as Special Legal Consultants.”

Changes to the rules in any given jurisdiction would prompt similar shape-shifting in terms of entities and their legal services functions.

In a 2010 piece about the potential for outside investment in law firms—which would require significant Rule 5.4 revisions—Nick Baughan, a managing member of investment banking firm Marks Baughan & Co., told the ABA Journal, “If the law firms themselves can’t have outside investors, the market will continue to chip away at every part of a law firm that is not the pure provision of legal advice. Anything that can be provided legally by a third party will be.”

ALSPs and legal start-ups will continue to wend through any emerging gaps in the regulatory structure. Call it the Jurassic Park theory: innovation will find a way.

Another result of regulatory reform is that the Big Four may be permitted to fully engage in U.S. legal practice. But whether that will really hurt Big Law is another question, for several reasons.

First, the large accounting firms are already occupying a significant share of the increasingly global legal services market. As of 2015, PwC was offering full legal services in 85 countries, Deloitte was in 69 countries, KPMG in 53 countries, and EY in 69 countries, according to Wilkins and Esteban Ferrer, based on their survey of the Big Four’s websites, which includes a detailed discussion of the rise of the Big Four in global legal markets.

“For more than 70% of the countries we’re in, [the Big Four] already practice law. They’re some of our biggest best clients as well as our competitors, so it’s not a new thing for us,” Dentons chairman Andrew said. “So whether they practice law in the United States for us is just not that big a deal because as a global law firm we already deal with it all the time.”

Second, on the U.S. practice front, the Big Four get a lot of leeway from state bars, according to Rhode.

“[State bars have] come up with truces for the Big Four who can afford to fight back. So there’s doctrine out there that allows them essentially to do what tax lawyers do, and defines that as not practicing law, although it’s pretty clear that there’s quite an overlap [with traditional legal practice],” Rhode said.

The ABA in 1999 noted the “paucity of enforcement actions” against the large accounting firms as “partially attributed to a lack of regulatory resources and to the failure of the courts and regulatory authorities to formulate a workable definition of the practice of law and to a lack of regulatory resources.”

Finally, due to how legal consulting services are currently being delivered, the Big Four may already be operating under a large loophole to the U.S. ethics rules.

William Henderson details what he calls a “functional exception” in his Legal Market Landscape report to the California bar. Henderson’s explanation is worth a long excerpt:

“In 2008, the ABA issued Formal ABA Ethics Opinion 08-451, which effectively provided [alternative legal services providers] and their clients with a roadmap for compliance with ethics rules. This roadmap, however, is somewhat counterintuitive. Despite the fact that most ALSPs employ legions of licensed lawyers, the work of ALSPs is typically characterized as paraprofessional work that must to be supervised by licensed lawyers. This duty, typically memorialized in the engagement letter, assigns supervisor duties to corporate in-house lawyers or outside counsel. This is how ALSPs, many of which are owned and controlled by private equity and venture capital investors, avoid charges of unauthorized practice of law (Rule 5.5) and thus nonlawyer ownership of law firms (Rule 5.4).

Yet this construction of the ethics rules provides a functional exception to Rule 5.4 for nonlawyer-owned companies serving large organizational clients. This is because the majority of legal services in the U.S. are bought by corporations with one or more in-house lawyers. Thus, companies such as Axiom, UnitedLex, Integreon, Pangea3, Elevate and many others have become “lawyer to lawyer” businesses. Likewise, the Big Four accounting firms now routinely suppl[y] legal services to major corporations, albeit under the supervision of the companies’ legal departments.”

I reached out to the Big Four to get details on their approach to legal consulting in the U.S. Deloitte, EY, and PwC did not respond to requests for comment for this piece. A spokesperson for KPMG U.S. wrote “KPMG U.S. does not provide legal services.”

Looking to Britain

In gauging the impact of regulatory reform at home, large U.S. law firms are no doubt looking to the impacts of the Legal Services Act in the U.K.

The LSA, enacted in 2007, enabled law firms to be owned by non-lawyers in ABSs, or alternative business structures. The act also created regulatory oversight in the form of the Legal Services Board, which began issuing licenses in 2011. In 2015, the U.K. saw its first law firm IPO when Gateley PLC became publicly listed.

As of April 2019, the LSB had issued 1,306 ABS licenses. The Big Four are all licensed to practice law as ABSs in the U.K. Deloitte was the last of the Big Four to obtain its license, in June 2018.

The Lawyer, in October 2018, confirmed a U.K. legal market that “remains in rude health”—a good thing in English parlance. “The UK’s 100 largest law firms billed a record £24.1bn in 2017/18, the largest revenue ever achieved by the group and a rise of almost 10 per cent on 2016/17,” according to The Lawyer.

So, it’s possible the narrative of “Big Law versus the Big Four” is flawed. If the U.S. ethics rules are changed, it may be law’s already-struggling small and middle market firms that are impacted most.

“As the world’s largest law firm, our reaction is a little bit, ‘So what?’” Andrew said. “We compete with [the Big Four] every single day, we refer work back and forth, they represent us, we represent them. The real world is not one where we’re antagonistic to each other, we work with each other every day.”

“I don’t think it’s as much Big Law that’s scared as the rank and file of the bar,” Rhode said. “If you look at where most of the opposition to changes in rules governing unauthorized practice and cross-disciplinary providers is, it’s not Big Law. I think the people who perceive economic threat and the people who are already at lower profit margins are the ones who are supplying individual consumers.”

(A previous version of this story indicated that the Florida Bar proposal would make it a requirement for online legal service providers to register with the bar. The analysis piece has been corrected to indicate that the proposal would make it voluntary.)

To contact the reporter on this story: Meg McEvoy in Washington at mmcevoy@bloomberglaw.com