Law Firm Ownership Rule Change Supporters Vocal at Calif. Forum

The proposals by the State Bar of California to allow nonlawyers to share in law firm profits and provide legal advice received vigorous backing from notable law professors and several other speakers at a public hearing Aug. 10.

The support for many of the 16 proposals put forth by the state bar’s Task Force on Access Through Innovation of Legal Services came in contrast to the clear-cut opposition the proposals have received so far in written comments to the bar.

The impassioned remarks on both sides of the issue foreshadow what could be bruising battles within several state bars studying these issues. It could ultimately lead the American Bar Association, which has resisted efforts in the past to loosen their model rule restrictions, to revisit the issue of the its Model Rule 5.4, which addresses law firm fee sharing and partnerships with nonlawyers.

Proponents say changing the standards around non-lawyer firm ownership could increase access to justice for individuals who may struggle to afford lawyers.

Another consequence could be new legal apps and consumer-facing legal service websites, as well as more room for non-legal businesses, like big U.S. corporations or the Big Four accountancies to hang shingles in the space.

Although the rules on law firm ownership, fee-sharing, and unauthorized practice of law have held fast for many years, the tide may be turning in favor of reform, said speakers at the hearing in San Francisco.

The task force has been taking “critical and necessary steps” to advance the cause of access to justice to help provide affordable services for middle-income and poorer Americans, said Andrew Perlman, dean of Suffolk Law School who served as the inaugural chair of the governing council of the ABA’s Center for Innovation.

Objectors have said that the sky will fall if reforms are enacted, Perlman said. But that just means the task force should ask for evidence, because, he said, the worst clearly hasn’t occurred in the U.K. and other countries that years ago opened up to letting nonlawyers back legal practices.

Several speakers noted that other state bars are following California’s lead.

“The great thing you’ve done now is creating the stage for the conversation.” said Stephen Gillers, a renowned New York University School of Law legal ethics professor who has taught there since 1978.

‘The Right Direction’

California’s current bar rules impede modernization, said Ralph Baxter, an adviser to law firms, law departments, and legal tech companies, and a former chair and CEO of the law firm Orrick Herrington & Sutcliffe.

"[We] need to modernize the way we do things,” Baxter said at the meeting. The proposed rule changes “go in the right direction of liberalizing who can participate.”

Yet not everyone spoke in favor of the proposed changes. Some suggested that new entities allowed to provide legal services could market them to the public in unscrupulous ways without regulatory protections.

The last commenter of the hearing, David Sosin, the newly installed president of the Illinois State Bar Association, expressed concerns that the full effects of regulatory changes in England, Australia, and New Zealand haven’t yet been fully told.

“Has access to justice been enhanced in these other jurisdictions?” Sosin asked the task force. “We haven’t seen it.”

Written Commentary

Eleven of the commenters at the public hearing showed clear support for the proposals, versus six that expressed opposition, and three who declined to say if they supported the task force proposals.

The hearing followed weeks of written comments to the bar. And those commenters, in the aggregate, roundly made it clear they oppose change.

In the first two weeks the written comment period was open, the state bar was swamped with 420 comments from roughly 250 commenters, according to newly public state bar data. A sizeable majority of those who responded from July 23 through Aug. 5 came out strongly against the proposed changes. Nine out of ten comments were against the proposals.

The comments came in fast and furious. More than 100 were filed in the 24 hours after the bar issued notice that the 60-day comment period had begun, according to a bar spokeswoman.

On the Horizon

Panels in Arizona and Utah also are weighing changes to their bar rules, as is the Association of Professional Responsibility Lawyers, a small but influential national bar group made up of lawyers who focus on legal ethics-related issues. Several additional states are now just beginning to consider similar ideas.

Leaders of each of the three state panels out west have publicly stated that increasing access to justice is necessary, and a priority. But they’re quick to add that a desire for reform needs to be tempered by the traditional ethics-related arguments in favor of state bar Rule 5.4—specifically, that the professional independence of lawyers should be sacrosanct, in large part as a protection to the public.

After the public comment period ends in California on Sept. 23, the task force will weigh reactions and then finalize its proposed changes. The state bar’s board of trustees will vote on them in January.

One group that could benefit from a change in 5.4 are the Big Four accountancies—Deloitte, EY, KPMG, and PwC. They have already steadily grown their legal operations outside the U.S in countries in Europe and Asia that don’t have ownership restrictions.

In fact, some of the written comments objected to California’s proposed rule changes out of concern that the Big Four could use them to access the U.S. legal market and directly challenge traditional law firms.

This may be true, said one commenter at the public hearing. Whether for better or worse, said Eli Edwards, emerging technologies research librarian with the Santa Clara University School of Law, “the Big Four will utilize these changes to come into this market.”