Are some of the Rules of Professional Conduct contributing to the access to justice gap and to hampering lawyers’ ability to sustain a law practice? This question is being answered in the affirmative by various legal organizations and state supreme courts. In fact, the Arizona and Utah State Supreme Courts appear to be leading the regulation reform movement. So, what should lawyers know about these reform efforts?
The Professional Responsibility Rules in Question
Three categories of prohibitions found in the Rules are being reconsidered on the basis that they no longer serve the public interest. The prohibitions in the rules include those: 1) against the unauthorized practice of law (UPL); 2) that prohibit lawyers from providing anything of value in exchange for referrals or recommendations; 3) that bar fee-sharing with individuals who are not licensed lawyers as well as prohibit lawyers from partnering with nonlawyers or accepting nonlawyer investment in law firms.
Arizona and Utah have amended or deleted these prohibitions in their professional conduct rules. The scenarios below demonstrate how the regulation of legal services will likely differ under each state’s model. Many other rules and ethical issues are implicated by the reform efforts now underway across the country. Please note that this article addresses only the most sweeping reforms being implemented by just two jurisdictions: Arizona and Utah. This overview of rule changes is provided for information purposes only, and readers should obtain their own advice before undertaking any action implicating these new rules and regulations, as well as in sorting out other issues such as potentially conflicting legal and ethical confidentiality and reporting duties.
The current state of regulation in most U.S. jurisdictions:
- Nonlawyer investment in law firms, partnering with nonlawyers, fee-sharing with nonlawyers, and payments for referrals are all generally prohibited.
- Workarounds are sometimes available, e.g., Model Rule 5.7 for law-related businesses.
- UPL rules and statutes generally prohibit the practice of law by nonlawyers; in many states, violating such restrictions is a crime.
Arizona Rule Changes (effective 1/1/2021):
- Removes restrictions on nonlawyer investment in law firms, partnering with nonlawyers, fee-sharing with nonlawyers, and referral fee restrictions.
- Creates and regulates “alternative business structures” (ABS) that include lawyers and nonlawyers; practice of law is permitted only by lawyers or legal paraprofessionals, and lawyers working in ABSs remain subject to ethics rules and professional discipline.
- ABS entities are subject to separate licensing and renewal requirements by a new committee operating under Arizona Supreme Court authority; discipline of ABSs and ABS members will be prosecuted by the State Bar of Arizona.
- ABS entities must have an Arizona lawyer designated as a “compliance lawyer” who is responsible for assuring that everyone in the ABS complies with the lawyer’s ethical obligations.
- Leaves the court rule definition of UPL substantively unchanged, i.e., with specified exceptions, including for licensed and regulated “certified legal document preparers” and “legal paraprofessionals,” nonlawyers cannot practice law.
- Removes restrictions on lawyers paying for referrals.
- With notice to clients, removes restrictions on nonlawyer ownership/investment in law firms, fee-sharing with nonlawyers for persons and entities in the newly formed “regulatory sandbox.”
- The regulatory sandbox operates under the authority of the Utah Supreme Court’s Office of Legal Services Innovation, which will regulate the practice of law using a risk- and outcome-based approach to regulation, including gathering data needed to assess consumer risks; regulation of entities and persons in the sandbox is separate from the state bar.
- Multidisciplinary practice regulations of lawyers operating in traditional law firms (i.e., firms owned entirely by licensed lawyers) remains substantially the same.
- Under revised Utah Rule 5.4, lawyers are permitted to provide legal services in any context only if “there is at all times no interference with the lawyer’s 1) independence of professional judgment; 2) duty of loyalty to the client; 3) protection of client confidences.” The extent to which licensed lawyers working in sandbox entities are subject to lawyer ethics rules and professional discipline by the state bar on issues such as conflicts of interest (including imputation of conflicts) and confidentiality may require clarification.
Scenario 1) Holistic Elder Law Practice
A licensed lawyer, an accountant, and a social worker desire to form a partnership to provide holistic elder law and consulting practice services to clients. Their advice would focus on estate and tax planning, medical care and housing assistance, and litigation and administrative proceedings relating to those matters. Do the rules governing the regulation of legal services permit this arrangement?
- Currently, such a partnership is prohibited almost everywhere under state versions of Model Rule 5.4. Workarounds may be possible, but they are complex and risky. These workarounds implicate Model Rule 5.7 on ancillary/law-related businesses, a rule that is challenging to apply in practice, and which imposes duties on lawyers to comply with all legal ethics rules in providing a so-called holistic practice unless special precautions are taken. This situation can also present significant ethical challenges under the current rules if confidentiality obligations of lawyers conflict with reporting duties of abuse by other professionals under applicable state law.
- In Arizona, with the deletion of AZ Rule 5.4, the lawyer, accountant, and social worker could partner and share fees, and the persons who are not licensed lawyers may invest in the firm. However, UPL rules are not being substantively changed, meaning that only lawyers in this proposed entity would be permitted to provide legal services (subject potentially to the federal exception to UPL for the accountant when providing federal tax advice). The entity formed will be considered an ABS and it will be subject to a separate set of regulatory rules. Lawyers must comply with all ethics rules, and at least one lawyer must be designated as responsible for ensuring ethical compliance by the entity, under threat of discipline.
- Arizona is also deleting Rule 5.7 regarding ancillary/law-related services, but all participants in the ABS will essentially be subject to rules on conflicts of interest (including imputation of conflicts within the firm, with one limited exception), as well as confidentiality and other rules. Potentially conflicting duties of lawyers and other professionals regarding obligations to report abuse will implicate substantial and difficult ethics issues under this approach, as they do today. See State Bar Ethics Op. 01-02 (stating that a lawyer’s statutory mandatory reporting of elder abuse is permissive under AZ Rule 1.6(b), but noting that “[t]he extent to which [an]attorney is required to make such a report, and whether other provisions of law, such as the attorney-client privilege, preclude her from doing so, are questions of law beyond the scope of this Committee’s jurisdiction.”); Order, In re EO-19-0003 (Ariz. Sept. 29, 2020) (addressing “the ethical duties of a lawyer supervising a social worker who may have a statutory obligation to report offenses against minors”).
- In Utah, the entity formed by the lawyer, accountant, and social worker would need to enter the newly created sandbox to operate together and will be regulated under a risk-based approach. The Office of Legal Services Innovation, the sandbox regulator, will have authority to define how issues such as conflicts of interest and confidentiality are dealt with by this entity. However, under revised UT Rule 5.4, licensed lawyers must at all times comply with their ethical duties of professional independence, client loyalty, and protection of client confidences. See also UT Supreme Court Standing Order 15 (eff. Aug. 31, 2020), at ¶4.9 (“As stated in Rule 5.4B, lawyers engaging with the nontraditional provision of legal services, as owners, employees, contractors, or business partners with Sandbox participants or licensed providers are required to uphold their duties as required by the Rules of Professional Conduct.”). Based on a comment in revised UT Rule 5.4, the obligations under the ethics rules may foreclose the lawyer’s participation in such entities in the regulatory sandbox. See, UT Rule 5.4  (“It may be impossible for a lawyer to work in a firm where a nonlawyer owner or manager has a duty to disclose client information to third parties, as the lawyer’s duty to maintain client confidences would be compromised.”). The use of the word “may” in this comment injects some level of ambiguity on this issue, and the comment does not mention how other legal ethics issues, including for example imputation of conflicts of interest, impact lawyers participating in sandbox entities. These issues may require clarification in the future. The interplay between lawyers’ confidentiality duties and mandatory statutory reporting duties is unclear. See Utah State Bar Ethics Op. 95-06 (stating that a lawyer’s statutory mandatory reporting of child abuse is permissive under UT Rule 1.6(b), but expressly not resolving potentially conflicting ethical and legal duties in this context).
Scenario 2) Online Document Preparation Services with Lawyer/Nonlawyer Ownership
A lawyer licensed only in one jurisdiction and a technology expert would like to form a corporate entity to provide low-cost drafting of living wills, physician directives, and powers of attorney based on information submitted by clients online for people in all U.S. jurisdictions. Both shareholders will be actively involved in the management of the entity, with the lawyer responsible for initially approving all forms used. The entity plans to use artificial intelligence principles to improve and adapt forms on an ongoing basis. Do the rules governing the regulation of legal services permit this arrangement?
- This arrangement currently is not permitted under Model Rule 5.4 in almost all jurisdictions. A nonlawyer can’t be an investor in an entity providing legal services under Model Rule 5.4. Such an arrangement also at least arguably violates UPL statutes and/or rules in most jurisdictions (whether or not such UPL restrictions are actually enforced).
- In Arizona, AZ Supreme Court Rule 31 did not change what is considered the “practice of law”–which includes preparing legal documents. Only lawyers and “Certified Legal Document Preparers” may prepare these types of legal documents for clients. Rule 5.4 will be deleted, so this arrangement may no longer be prohibited. There would, however, be potentially three layers of regulation of the entity and its personnel in this context: 1) the entity would be subject to ABS licensing and regulatory requirements (as described generally in scenario 1) and must have a lawyer supervising the practice of law; 2) lawyers participating in this entity would generally remain subject to ethics rules, as described in scenario 1.
- In Utah, this entity would be permitted if licensed and regulated in the sandbox, subject to risk-based regulation. Issues regarding the regulation of lawyer participation in this entity are the same as those discussed in scenario 1.
Scenario 3) Nonlawyer Entity Providing Legal Services, With Referrals When Needed
An entrepreneur who is not a licensed lawyer would like to form a business to assist people nationwide in negotiating and obtaining social security disability benefits. She offers a money-back guarantee for her services, and when she determines it is necessary, refers people out to licensed lawyers in the particular jurisdiction with whom she has a contractual relationship. She pays the lawyer pursuant to her contract with the lawyer, with no additional charge to the consumer. The lawyer complies with ethics rules for creating a lawyer-client relationship, including obtaining informed consent for the third-party fee payment under Model Rule 1.8(f). Do the rules governing the regulation of legal services permit this arrangement?
- Nonlawyer businesses of this sort exist now, but they present substantial issues regarding whether such an entity is engaged in UPL, and whether fees paid to participating lawyers violate restrictions on receiving compensation for referrals under Model Rule 7.2(b) and fee-sharing with nonlawyers under Model Rule 5.4(a).
- In Arizona, restrictions on lawyers paying for referral fees in AZ Rule 7.2(b) are being eliminated. Arizona also will remove completely the AZ Rule 5.4(a) prohibition on fee-sharing with nonlawyers. Under the scenario, the lawyer may properly obtain written informed consent from the client acknowledging that the referring company is paying the lawyer’s fees. However, Arizona is not making substantive changes to UPL regulation, so if this entity is engaged in the practice of law and none of the exceptions in Arizona’s rule applies, it remains UPL.
- In Utah, restrictions on lawyers paying for referral fees in UT Rule 7.2(b) are eliminated. If this entity is engaged in the practice of law in Utah, it will be required to be authorized and regulated in the regulatory sandbox, in which case fee sharing is permitted as long as the other requirements in new UT Rule 5.4(c) are met (generally, that any fee to be shared is reasonable and notice to the client is provided).
Beyond the Horizon of Arizona and Utah
Like a Gordian knot, the reforms underway in Arizona and Utah are first steps but seem to lead to other complex regulatory issues that need to be solved. An obvious example is whether other jurisdictions will allow licensed attorneys to participate in the novel entities being created in Utah and Arizona. A possible solution is for such states to expressly permit their lawyers to participate in entities authorized in other states via an ethics rule, as Georgia has done in GA Rule 5.4(e) and (f), or in an ethics opinion, along the lines of ABA Formal Op. 13-464 and NYC Bar Formal Ethics Op. 2020-1.
Other issues for consideration include: impact on the attorney-client privilege; impact on other legal ethics rules, such as fee and trust account rules; necessary revisions to advertising and solicitation rules; reconsideration of cross-border UPL rules consistent with a virtual legal profession; and the creation of a limited license for certain professionals other than licensed lawyers to deliver specific legal services. Several other jurisdictions have formed task forces and work groups in an attempt to tackle some of these issues and to consider changing the regulations affecting the delivery of legal services, including California, Illinois, Connecticut, Florida, New Mexico, New York, and D.C.
Borrowing the phrase of the late Supreme Court Justice Louis Brandeis, states are becoming laboratories of democracy when it comes to legal services regulatory reform. Reformers in Arizona and Utah are to be commended for their willingness to get out ahead on these issues and make bold rule changes that are designed to encourage innovation in legal services delivery, regulate these services based on actual risks and benefits to consumers, remove the fear traditionally justifying strict prohibitions against multidisciplinary practice, and improve access to legal help for everyone.
But the legal profession needs to avoid creating a patchwork of reforms that ultimately replicate the complexity and roadblocks that hamper legal services delivery today. To that end, the Association of Professional Responsibility Lawyers, the foremost national organization devoted exclusively to legal ethics and the law of lawyering, has formed a Future of Lawyering Committee which is working to develop a comprehensive set of recommendations that can serve as a template for all states to consider in their reform efforts. Hopefully, working together with the task forces established across the nation, with organizations such as the Institute for the Advancement of the American Legal System (IAALS), and the access to legal services statistics and data that are generated from Utah’s regulatory sandbox and resulting from Arizona’s rules changes, we will be able to collaborate to permanently embrace innovation and increase access to legal services for all.
About the Authors
Arthur J. Lachman practices in Seattle, focusing on legal ethics, professional liability, and law firm risk management issues. He has served as president of the Association of Professional Responsibility Lawyers (APRL) and chair of the ABA Center for Professional Responsibility’s National Conference Planning Committee. He is co-chair of APRL’s Future of Lawyering Committee, which proposes reforms to update lawyer ethics rules.
Jan L. Jacobowitz (JanLJacobowitz@ethicsadvisor) is the director of the Professional Responsibility & Ethics Program at the University of Miami School of Law, the immediate past president of the Association of Professional Responsibility Lawyers, and co-chair of its Future of Lawyering Committee. Jan also maintains a legal ethics consulting practice.