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N.Y., Others Mull Moves to Allow Companies to Co-Own Law Firms

Nov. 23, 2020, 9:45 PM

New York and Illinois are joining a growing list of states considering legal system rules changes that could give companies more opportunities to compete with law firms.

Connecticut, North Carolina, and Florida are exploring similar moves designed to boost low-income consumer access to legal services. The changes may pave the way for more nonlawyer co-ownership of law firms and open the market to Big Four accounting firms and technology companies.

“Large barriers have been removed for these issues to be normalized,” said Zack DeMeola, director of legal education and the legal profession for the Institute for the Advancement of the American Legal System. “It’s not as much of an uphill climb as it was once was for other states.”

The new state efforts would mark milestones in the drive to make civil legal services more affordable for middle class and poor litigants. Change campaigns that once existed in a small group of Western states, including Arizona, Utah, and California, are now edging closer to the national movement reform advocates seek.

Arizona in August became the first state to formally allow nonlawyers to co-own law firms and other legal service operations, effective Jan. 1. Also in August, Utah approved a pilot program that lets providers such as Rocket Lawyer offer state residents access to the company’s independent attorney network. California, like Utah, is considering a test regime though is several steps behind that state in gaining approval.

Now state court officials in New York and Illinois have formed working groups to study regulatory innovation, the first steps in what could be multi-year rules reform efforts. Several other states, including Florida, North Carolina, and Connecticut now have similar task forces up and running.

Loosening law firm ownership rules in more states would further open an historically closed-off profession to new types of business models, including apps like Legal Zoom. Easing restrictions also may encourage “WalMart Legal"-type walk-up or online stores that offer discounted rates for basic legal services like writing a will or filing for a divorce.

Changes, especially if they occur in enough important legal markets like New York, California, Illinois, Florida, and Washington, D.C., may renew pushes by the Big Four accounting firms—KPMG, PwC, Deloitte, and EY—to practice law in the U.S., a long-held goal.

If enough large states change their rules, “the Big Four could participate in the legal market in ways they have not been able to in the past,” DeMeola said.

The companies have so far been reluctant to comment publicly on changes in Arizona and other states. A KPMG spokeswoman declined to comment, while representatives of the other Big Four companies could not be reached for comment.

Fundamental Principles

New York Chief Judge Janet DiFiore in June announced the creation of the Commission to Reimagine the Future of New York’s Courts. The panel is examining new technology, online platforms and other possible changes, including new regulations, to expand access to justice and improve delivery of services.

A commision working group has interviewed reform experts, including Utah Supreme Court Justice Deno Himonas and former Arizona Supreme Court Chief Justice Scott Bales, said Hank Greenberg, a shareholder with Greenberg Traurig and the panel’s chair.

Greenberg declined to gauge the likelihood that New York will follow Arizona’s path of scrapping the state’s version of Rule 5.4, which prohibits nonlawyers from co-owning legal operations. He also wouldn’t speculate as to whether New York might create a “regulatory sandbox” as Utah did, allowing the state to test new and expanded legal service models, including those with nonlawyer investment or ownership.

The commission “is carefully considering whether such innovations are appropriate for New York and has not reached any final conclusions,” Greenberg said. The panel will likely issue its report within the next few months, he said.

One reform skeptic, Patterson Belknap partner Stephen Younger, a previous president of the New York State Bar Association, said New York has been “steadfastly” opposed to such reforms in the past.

“I would be surprised if they move in the direction of Utah or Arizona,” he said.

New York historically has resisted major rule changes because of deeply held concerns over upholding lawyer independence and legal ethics standards, several attorneys said in February at the American Bar Association’s midyear conference in Austin, Texas.

The state’s prohibition against nonlawyer ownership of law firms, fee-splitting, and the unauthorized practice of law, “is something akin to theology,” Greenberg said at the conference.

A New York City Bar committee last month issued an opinion that lawyers should be able to enter business relationships with law firms that have nonlawyer owners when they’re located in jurisdictions that permit such ownership and other conditions are met.

Nonlawyer Owners

In Illinois, a task force sponsored by the Chicago Bar Association and the Chicago Bar Foundation recommended that lawyers be able to partner with nonattorneys to provide legal tech solutions, among other recommendations, according to a 199-page report issued in late September.

The Chicago task force submitted its report and recommendations to the Illinois Supreme Court in early October, according to Bob Glaves, executive director of the Chicago Bar Foundation.

The court has formed a “special working group” made up of representatives from two of the court’s standing committees, Glaves said. The working group will conduct a detailed review of the Chicago report and make recommendations by early February, he said.

“The Court’s approach to reviewing it on an expedited basis with the help of this internal working group makes good sense,” Glaves said.

There’s also been a push in states around the country for programs that fund and train limited license legal technicians. Such programs are designed to lower family law court costs by letting people seek help from limited licensees instead of fully accredited attorneys.

Though Washington state earlier this year dismantled its limited-license program, four states, Colorado, Minnesota, New Mexico, and Oregon, are at different stages in developing pilot programs, DeMeola said.

Big Four Blues

The moves in New York and Illinois come as Big Four accountancies have been bolstering their legal services arms elsewhere around the globe. At least one, Deloitte, has also launched a partnership with New York-based law firm Epstein Becker Green.

The companies pose a potential threat to law firms not just because accountancies boast annual revenues in the tens of billions of dollars, which dwarf those of the largest U.S. firms, or because they’re tech-forward in ways most law firms aren’t.

“The Big Four possess versatile, adaptive business models that have been very effective,” DeMeola said. “Law firms, not so much.”

Boosting Momentum

Reform opponents have expressed concerns about potential harm to legal consumers, in part because of ethical hazards that nonlawyer profit motives may pose.

Yet some legal ethics experts believe reform is needed—especially in the wake of Covid-19 and resulting economic dislocation—and that there are ways to boost access to justice while protecting consumers.

Two national groups, the ABA and Conference of Chief Justices, earlier this year gave their respective backing to states looking to test innovative approaches. The ABA passed its resolution after a tough convention fight.

“All of this should be done carefully—and that’s the point of the Utah sandbox,” said Jan Jacobowitz, immediate past president of the Association of Professional Responsibility Lawyers.

Not all state efforts will allow for the formation of regulatory sandboxes like Utah’s, or grant other significant changes to the rules, Utah Supreme Court Justice Himonas said.

“But that’s okay,” he said. Even smaller reforms will help alleviate the access-to-justice crisis and add to a sense that momentum is building.

“I suspect that 10 years from now, allowing for outside ownership will be ubiquitous,” Himonas said.

The change will happen, he said, “once it’s been shown that the sky has not fallen, and that disciplinary rates haven’t gone through the roof” in states that opened up their systems.

To contact the reporter on this story: Sam Skolnik in Washington at sskolnik@bloomberglaw.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com;
John Hughes in Washington at jhughes@bloombergindustry.com

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