When the Rules Stagnate Innovation, Change the Rules

A lawyer, with a background as a title agent and a real estate broker’s license, wants to market himself as one-stop shopping for people looking to buy a new home.

Mintz Levin is a law firm with offices around the country and in London. It has a government relations subsidiary, ML Strategies, and an organization set up as a resource for entrepreneurs, Mintz Edge. Two lawyers have the ability and expertise, but lack the financial resources to set up distinct ancillary businesses with disclaimers.

A former lawyer who lost his license to practice decides to open a business consulting firm. He rents space, advertises, hires several non-lawyer associates, and assists his clients with business transactions, makes valuable connections among his clients for a fee, and advises clients on how to navigate various regulatory mazes.

Many universities offer master’s programs in regulatory affairs that produce graduates who are unlicensed but highly qualified to manage the regulatory process for companies innovating and developing cutting edge products in science and medicine.

Do these scenarios sound familiar to you? They highlight the blurring of boundaries between the licensed and regulated “practice of law” and other business services.

Would it be simpler, more effective and perhaps more equitable if lawyers could affiliate with other allied professionals to deliver legal and related services?

Many lawyers and those delivering legal services go through major machinations to comply with the Rules of Professional Conduct that dictate business structure or the economics of practicing law. The efforts are becoming more acute as technologists and others who aren’t licensed lawyers seize on inefficiencies and opportunities in the market.

However, enterprises entering the legal space must not run afoul of rules prohibiting the unauthorized practice of law (UPL). They also must consider rules prohibiting lawyers from giving anything of value in exchange for referrals or recommendations. A rule also forbids lawyers sharing fees with other professionals or creating a business structure that allows anyone without a law license to be a partner or, in the case of a professional corporation, be a director, an officer or have an ownership interest.

Many who’ve been studying the access-to-justice gap in our country point to these rules as contributing to the problems. Some say these rules inhibit innovation and the use of technology and unreasonably restrict lawyers from accessing capital and sharing profits with allied professionals.

Over the last year, several states have established task forces to re-think the rules around the UPL and restrictions around the business practices of lawyers.

Unauthorized Practice of Law

A law license from a state supreme court is the primary mechanism to ensure lawyers are qualified to deliver competent and ethical legal services. According to Model Rule of Professional Conduct 5.5, adopted in virtually every jurisdiction, only attorneys licensed by the state supreme court can “practice law” there, with certain exceptions.

The rule applies to cross-border practice, where lawyers work from a home or snow-bird office in a state in which they don’t hold a license. It also applies to those who aren’t licensed attorneys but hold themselves out as one, or to owners of tech companies that develop products or services that regulators may characterize as engaging in the practice of law. Further, it prohibits lawyers from “assisting another” in practicing law in a jurisdiction where they aren’t licensed to do so.

A problem with applying this rule in the 21st century is that the definition of “practice of law” is fluid. This can be vague when considering the activities of companies producing products or services in the internet era. For example, in Illinois, the practice of law consists of the “giving of any advice or rendering of any service requiring the use of legal knowledge or skill”. In re Howard, 188 Ill. 2d 423, 438, 721 N.E.2d 1126 (1999). It “encompasses not only court appearances, but also services rendered out of court.”

Marketing Restrictions

A lawyer would like to structure a new venture that provides valuable introductions to business clients in exchange for a finder’s fee if the introduction leads to a new, successful business venture.

Another lawyer wants to pay a fee to a corporation that offers a platform connecting lawyers to potential IP clients needing trademark searches and applications.

Do these scenarios raise any alarms? They should. Under Model Rule 7.2(b), titled “Advertising,” a lawyer may not “give anything of value” to a person for recommending the lawyer’s services unless it is to pay the “usual charges” of a legal service plan or nonprofit lawyer referral service.

This provision has been criticized as out of touch with the way customers expect to find goods and services in the internet age. It has also hampered lawyers from being able to scale their practices in a time when there are increasing geographical barriers to clients being able to access legal services in rural counties that are considered “lawyer deserts.”

Fee-Sharing/Professional Independence

A real estate lawyer wants to form a joint venture with a real estate broker and title agent to provide one-stop shopping for people looking to buy or sell a home.

Not allowed under Rule 5.4, which is ground zero for the reform movement. The rule’s title is “Professional Independence of a Lawyer” and some of the provisions (paragraphs (c) and (d)(3)) seem directed to this goal. It’s a foundational expectation that lawyers express their professional judgment independent of whoever recommends their services or pays their bills.

However, most of Rule 5.4’s provisions ((a), (b), (d)(1-2)) prescribe the economics or the business of a lawyer rather than the ethics of a lawyer’s behavior:

Rule 5.4 Professional Independence of a Lawyer

  • A lawyer or law firm shall not share legal fees with a nonlawyer… (with exceptions around death and retirement benefits and sharing court-awarded legal fees with a nonprofit)
  • A lawyer shall not form a partnership with a nonlawyer if any of the activities consist of the practice of law.
  • A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.
  • A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for profit, if:
  • A nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;
  • A nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation; or
  • A nonlawyer has the right to direct or control the professional judgment of a lawyer.

The comments to this rule provide little guidance, explaining merely that the provisions express “traditional limitations” on sharing fees and on permitting a third party to direct or regulate a lawyer’s professional judgment in rendering legal services. For example, the rule does not expressly forbid accepting stock in lieu of legal fees. However, as in the case of another fairly common scenario, it raises the potential for conflict:

A solo practitioner with a background in technology and an extensive network of contacts in technology start-ups is approached by the founder of a new technology company. The prospect wants to know whether the lawyer would be willing to accept stock in lieu of a flat fee or hourly rate for legal work.

Several model rules in addition to Rule 5.4 address the importance of a lawyer maintaining independent judgment. Rule 1.8(f) states that a lawyer may accept compensation from a third party if it doesn’t interfere with the lawyer’s independent professional judgment, and the client provides informed consent. Rule 1.7 (a) prohibits an attorney from representing a client if the representation will be “materially limited by a personal interest of the lawyer” (e.g., permitting someone who’s paying the bills to direct an attorney’s professional judgment).

The ethical requirement of independent judgment is also captured in Rule 2.1, which says: “In representing a client, a lawyer shall exercise independent professional judgment and render candid advice.”

Since the requirement of independent professional judgment is set forth in Rules 1.7, 1.8 and 2.1, why prohibit lawyers from sharing fees with others or practicing in a partnership or corporation with those who aren’t lawyers? Some argue that there’s no valid reason and that the provisions were borne of protectionism and are standing in the way of innovation.

Backstory on Lawyer Re-Regulation

In July 2018, William Henderson, professor and Stephen F. Burns Chair on the Legal Profession at Indiana University Maurer School of Law, issued a watershed report on the changing legal market. Henderson’s Legal Services Landscape Report, which was commissioned by the State Bar of California, has become a clarion call to action.

The report points to ethics rules as inhibiting access to justice and contributing to the flat demand for legal services. Henderson wrote,

“the legal profession is at an inflection point. Solving the problem of lagging legal productivity requires lawyers to work closely with professionals from other disciplines. Unfortunately, the ethics rules hinder this type of collaboration. To the extent these rules promote consumer protection, they do so only for the minority of citizens who can afford legal services. Modifying the ethics rules to facilitate greater collaboration across law and other disciplines will (1) drive down costs; (2) improve access; (3) increase predictability and transparency of legal services; (4) aid the growth of new businesses; and (5) elevate the reputation of the legal profession.”

Several state task forces have studied and cited Henderson’s report when considering the access-to-justice gap and flat demand for legal services. They’re proposing recommendations to modify the rules of professional conduct and/or the regulation of legal services being delivered by those who are not licensed lawyers.

California

Not long after the report was published, the California Bar’s Board of Trustees formed a Task Force on Access through Innovation of Legal Services (ATILS). In July 2019, the 23-member ATILS delivered sweeping recommendations to the State Bar and subsequently held a public comment period.

ATILS recommended several exceptions to restrictions on the UPL, including:

  1. To allow individuals who are not lawyers to offer certain types of legal services to consumers, with regulation.
  2. To allow state-certified/regulated/approved entities to use technology-driven legal services to engage in authorized law practice activities.

Another series of recommendations is aimed at modifying Rule 5.4 to remove the financial barriers impeding collaboration between lawyers and other professionals. Perhaps anticipating controversy, two versions were set forth: a narrow and broad approach to amending Rule 5.4.

ATILS’ recommendations are due to be submitted to the Board of Trustees by December 31, 2019.

Arizona

The Arizona Supreme Court formed a Legal Services Task Force early this year. Noting that court rules haven’t kept pace with changes impacting the delivery of legal services, the court charged the task force with focusing is “how rules and codes governing the practice of law in Arizona can be revised to improve the delivery of legal services to consumers by lawyers and others, such as document preparers.”

In October 2019, the task force issued its lengthy report with wide-ranging recommendations, including eliminating Rule 7.2(b)’s restrictions on lawyers paying referral fees; eliminating Rule 5.4 (and the ancillary business rule 5.7); and allowing multi-disciplinary practice and outside investment in law firms. It also recommends further exploration of appropriate regulation of entities that include professionals other than lawyers. The report states that “[a]ll proposed rule changes are designed to ensure that the ethical rules governing conflicts, obligations to the client, professional independence of lawyers, and maintain the overarching goal of protecting the public…” The task force report will be presented later this autumn to another Arizona Supreme Court oversight group, and if that body approves moving forward, the recommended rule changes would be published for public comment.

Utah

At the behest of the Utah Supreme Court, John Lund (past president of the Utah Bar) and Utah Supreme Court Justice Deno Himonas co-chaired a workgroup to study and make recommendations about “optimizing the regulatory structure for legal services in the Age of Disruption in a manner that fosters innovation and promotes other market forces increase the access to and affordability of legal services.”

The group’s report, which was unanimously approved by the Utah Supreme Court, lays out a new structure for regulating legal services by 1) loosening the ethical restrictions on lawyers in the Rules of Professional Conduct and 2) creating new regulations for companies and others providing some legal services.

The report recommends amendments to rules restricting lawyer advertising (Rule 7.2), as well as to the rules prohibiting fee-sharing with those who aren’t licensed lawyers and allowing those who aren’t licensed lawyers to have ownership or investment interest in law firms.

The report says: “We view the elimination or substantial relaxation of Rule 5.4 as key to allowing lawyers to fully and comfortably participate in the technological revolution. Without such change, lawyers will be at risk of not being able to engage with entrepreneurs across wide swaths of platforms.”

Recognizing that regulation of tech and other companies is a new endeavor, the working group recommends a “regulatory sandbox.” This would allow companies and regulators to experiment with new types of services and technologies to best determine how to regulate them. Himonas and Lund are leading an implementation workgroup to finalize the details of implementation.

Illinois

In 2018, Illinois issued a study of client-lawyer matching services and proposed a regulatory framework that allows for-profit client-lawyer matching services (as well as existing referral services) and excludes money generated by the match from being characterized as fee-splitting under Rule 5.4. This report is being submitted to the Illinois Supreme Court for its consideration.

In addition, the Chicago Bar Association and the Chicago Bar Foundation joined forces this autumn to create the CBA/CBF Task Force on the Sustainable Practice of Law and Innovation. The task force will address the failure in the market for consumer legal services. In the kickoff meeting, it was discussed that although the state has more lawyers than ever, a significant swath of the population isn’t seeking help from lawyers. Lawyers are challenged in running a sustainable practice. The task force charter is to build on work being done around the country, and notes that “because the legal market is shaped in large part by our Rules of Professional Conduct, we have an opportunity to take a fresh look at these Rules to spark innovation in the consumer legal market, promote the sustainable practice of law, and better serve people who need legal help.”

Interest at the National Level

Some pressure for ethical reform over the last several years (for example, with reference to the advertising rules) has been motivated by inconsistent lawyer regulation among the states. This inhibits efficacy in client representation across state lines. Therefore, it would be beneficial to see harmonization among reform recommendations. Two national organizations are active in addressing this goal.

APRL

The Association of Professional Responsibility Lawyers (APRL), a national bar association of legal ethics lawyers, created a Future of Lawyering Committee to explore the intersection of technology, the delivery of legal services and the access to justice gap with a:

“goal to make meaningful proposals for change in the area of lawyer regulation so that the profession may both embrace evolving technology and increase the delivery of competent legal services to the American public, with full accountability and without unreasonably restraining competition.”

The committee is undertaking a comprehensive review of the Rules of Professional Conduct that regulate referral services, the sharing of legal fees with those who aren’t lawyers and UPL in the context of technology’s impact on the delivery of legal services and access to justice.

Importantly, the committee includes diverse perspectives from liaisons including attorney regulators (National Organization of Bar Counsel), the Federal Trade Commission, the Legal Marketing Association and the ABA Center for Professional Responsibility. In addition, liaisons from the Conference of Chief Justices and the Chairs of APRL’s Future of Lawyering Committee regularly update the chief justices of the state supreme courts on their progress.

Given the developments around the country, and the desire to provide guidance for various state task forces considering reform, APRL expects to issue an interim report late this year.

IAALS

The Institute for the Advancement of the American Legal System (IAALS) is a think tank that collaborates with thought leaders to forge innovative solutions to problems in our legal system. One of IAALS’s latest projects tackles regulation of the legal profession. IAALS is involved in APRL’s Future of Lawyering Committee and will advise Utah in drafting an implementation plan for the working group’s recommendations. Expect the strong interest in regulatory reform to continue since Scott Bales stepped down as chief justice of the Arizona Supreme Court to become executive director of IAALS this fall.

Conclusion

The boundary between what is and is not the practice of law outside of the courtroom has always been unclear, and businesses like accounting firms seeking innovative strategies to grow have taken advantage of that fact. Lawyers, especially solos and those at small firms, have been most hampered by the barriers created by many of our ethics rules. If barriers come down, the opportunities for innovation can begin to flourish.

About the Authors


Jayne Reardon (left; on Twitter @JayneRReardon) is the executive director of the Illinois Supreme Court Commission on Professionalism. Susan Letterman White (right; on Twitter @susanletterman) is the managing partner of Letterman White Consulting and is a practice management advisor with Mass LOMAP.

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