Could Re-Regulation Benefit Lawyers?

Modifying the Model Rules of Professional Conduct that prescribe the business of lawyers could help lawyers as well as consumers.

That’s a premise of work being done by task forces across the U.S. As I’ve written before, task forces in several states including Illinois, California, Arizona, and Utah are developing recommendations to change legal regulations to spur innovation and the effective delivery of legal services to consumers. In addition, a resolution from the ABA’s Center for Innovation urges state supreme courts to consider attorney regulations that may increase access to affordable and quality legal services.

Some lawyers oppose changes to the Rules, arguing that it would allow new players into the field potentially reducing income and/or taking jobs. However, others posit that changing some of the regulations prescribing the business of legal services may make it possible for lawyers to scale their practices and enlarge the legal services pie for all.

The purpose of attorney regulation

The purpose of attorney regulation is to protect the public, not lawyers’ livelihoods. Therefore, it’s not valid to oppose regulatory change on the grounds of increased competition and potential income reduction. In fact, arguing that lawyers should maintain a monopoly based on the Rules isn’t tenable under various legal and ethical principles, including antitrust considerations.

The following appears in the Preamble to the Rules:

[12] The legal profession’s relative autonomy carries with it special responsibilities of self-government. The profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar.

To this end, several state task forces and national organizations — such as the Association for Professional Responsibility Lawyers Future of Lawyering Committee and the Institute for the Advancement of the American Legal System Unlocking Legal Regulation project — are evaluating whether the Rules accomplish the goal of protecting the public from fraudulent or incompetent legal services. And, if they do, at what cost?

Three categories of rules are in the spotlight: 1) rules against the unauthorized practice of law; 2) rules against lawyers providing anything of value in exchange for referrals or recommendations; and 3) the rule against fee-sharing with those who aren’t licensed lawyers. This latter rule, ensconced in Model Rule 5.4, prohibits lawyers from partnering with nonlawyers as well as nonlawyer investment in law firms.

Ethics regulation vs. economic regulation 

Arguably, the provisions in Model Rule 5.4 aren’t ethics rules governing lawyers’ behavior vis-à-vis their clients. Instead, they’re economic rules prescribing how lawyers structure their business with other lawyers and allied professionals.

Currently, lawyers can only organize themselves to deliver legal services in three ways: sole proprietorships, legal partnerships or LLCs. In these structures, money is received as fees and profits are distributed to partners/owners at the end of the fiscal year. There’s little incentive to forego distributions and invest in technology or other long-term solutions to better serve clients.

It can be assumed that the goal of this attorney regulation is to protect the public. However, there’s little reason to continue to cling to the prescribed structure if enforcement results in unintended negative consequences for consumers or lawyers.

Competition has already arrived

Technology is ubiquitous. It’s providing opportunities for professionals who aren’t lawyers to enter the legal landscape. The profession must recognize that lawyers are already competing with non-J.D.s operating in the legal space.

A 2019 Altman Weil Law Firms in Transition survey asked attorneys if their firm was losing business to other providers of legal services. Sixty-three percent reported losing business to in-sourcing by corporate law departments, 14% reported losing business to alternative legal providers and 9% reported losing business to the Big Four accounting firms.

On the consumer side, internet-based law companies have emerged as major competition for solo and small firm practices, which include over half of the attorney population. The success of providers like LegalZoom indicates a significant untapped market – and unregulated businesses are making serious inroads into that market.

The success of LegalZoom and similar companies is predicated on the ability to scale. And the ability to scale is predicated on the availability of capital. Although under Model Rule 5.4 lawyers cannot accept outside capital investment in their firms, legal companies (which aren’t governed by the Rules) can.

In fact, legal companies are the recipients of unprecedented outside capital investment. Last year saw an eye-popping 713% increase in legal tech investment, reaching $1 billion for the first time. Moreover, in the first three quarters of 2019, capital investment in legal tech surpassed full-year 2018’s total.

Rules hamstringing lawyers

Our world is becoming more legally and technologically complex by the day. In recognition of the need for technological competence, Comment 8 was added to Model Rule 1.1, stating that lawyers have a duty to “keep abreast of changes in the law and its practice, including the benefits and risks associated with relevant technology, engage in continuing study and education and comply with all continuing legal education requirements to which the lawyer is subject.” Thirty-seven states have adopted some form of this tech competency requirement.

But for those who started practicing before computers were on their desks let alone in their pockets, it may be overwhelming to keep up with what’s relevant as well as to assess the benefits and risks. What if such lawyers could co-venture with technologists, engineers, or other experts to seamlessly provide such expertise in service to clients? Would clients rather enlist the expertise of a computer scientist or pay their attorney to learn how to configure technology through CLE programs?

The Rule against paying for referrals also hampers lawyers, making it necessary to spend non-billable time on business development. Data from lawyers across the country who use Clio’s cloud-based practice management technologies paint a sobering picture of how solo and small firm attorneys spend their time. The 2016 data show that, on average, lawyers log only 2.2 hours of billable time per 8-hour day and collect payment on the equivalent of 1.5 hours per day.

In 2017, Clio surveyed users on what was happening to the missing 6 hours. The subsequent data confirmed that the non-billable tasks that are consuming lawyers’ time and constraining their income have nothing to do with the exercise of their legal acumen. In fact, 33% of attorney time was spent on business development and another 48% on administrative tasks.

I wonder what lawyers could accomplish if they didn’t have to spend so much time looking for clients. What would happen if attorney regulations permitted lawyers to ethically use services to match them with clients at scale?

Conclusion

Re-regulation could help unlock more rewarding and impactful careers for lawyers. However, there should be no knee-jerk response to new attorney regulation efforts. Rather, there should be careful consideration of the complexity of the current legal ecosystem. If it’s determined that the Rules affecting the business of law are part of the problem, it’s the province and responsibility of the state supreme courts to change them.

A version of this blog was first published on the IAALS blog.

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