The Disruption of Alternative Business Structures

Alternative Business Structures Hidden FiguresIt used to be that any services provided by a lawyer were legal services and only a lawyer could provide those services.  Not anymore.  Alternative legal service providers are everywhere. And in some jurisdictions of the world, professionals in addition to lawyers practice together in alternative business structures.

Alternative business structures (ABS) are only allowed in two limited jurisdictions in the U.S. Would this be helpful to address the current disruption of the legal profession?  Perhaps it is time to disrupt the status quo.

Disrupt. Everywhere you read about the legal profession these days, that pesky word “disrupt” seems to pop up.  What does it mean?  The definition of the verb disrupt is “to interrupt (an event, activity or process) by causing a disturbance or problem.” Second definition: “drastically alter or destroy the structure of something.”  Both apply to the legal industry.

I thought about this in new way when I watched the movie Hidden Figures about women who worked in the NASA space program in the early 1960s.  The movie made me appreciate (many things, including) that the math supporting our first space trips was done by super-smart people using pencils and paper, aided only by simple clunky adding machines. The people who performed these calculations were called “computers.” Eventually machines able to perform calculations much faster than the human mind replaced those human computer jobs.

The analogy to the legal profession is striking.  Much of the work that was performed by lawyers in the past has been broken down into bytes of information and processes.  The Internet is the delivery vehicle.  Those who are not lawyers—and machines–can perform many of the processes more efficiently than traditionally-trained lawyers.  This disruption is causing a problem for lawyers.

Nontraditional legal providers and technology companies are not subject to the registration process or ethical rules that govern the legal profession.  These companies have the freedom to issue products and services unencumbered by regulations about who they go into business with. Not so lawyers.

And the public is availing themselves of these resources widely available via the internet.  As the ISBA Task Force on the Future of Legal Services Report recently noted, members of the public like to be able to access information online, on their timetable, and control the costs they incur.  Perhaps one of the best known of the nontraditional legal providers, LegalZoom, published figures with the SEC stating that as of 2011, it had served over 2 million customers.

Alternative Business Structures are Generally Not Allowed Under Lawyer Ethical Rules

Since the time of the candle, lawyers have practiced in solo practices or affiliated with other lawyers in firms. Lawyers are regulated so.

Except for limited exceptions in Washington State (which recently allowed a new limited license professional) and Washington D.C., every United States jurisdiction has adopted Model Rule of Professional Conduct 5.4 which prohibits lawyers from going into business with or sharing fees with nonlawyers.   In other words, lawyers and those who are not licensed lawyers cannot co-own or co-manage a business venture to deliver legal services.  The stated rationale of this no fee-sharing rule is to preserve the independent judgment of attorneys.

Whatever the rationale, the lawyer ethical rules effectively have created a structure—let’s call it a silo or a castle—that excludes co-ownership with folks who may have complementary skill sets.  Skill sets that lawyers don’t necessarily have. Such as financial planners, project managers, or technologists.

Up until a few decades ago, potential clients willingly rode the drawbridge across the moat to consult with lawyers in their castles.  Now, not as many are making the trip.  The structure of the industry is being disrupted by those taking advantage of technology and the internet.  After all, why would anyone pay a lawyer for what they can get for free on the Internet?

Perhaps lawyer independence can be preserved, and the public protected, through different regulation. The ISBA Futures report, like other reports issued by bar associations and other legal organizations across the country, recommends that attorney regulations be re-considered.

Regulations in Other Countries Allow Alternative Business Structures

Other countries have disrupted their attorney rules to bring nontraditional legal providers into the regulatory scheme and to allow lawyers the flexibility to join in a business structure with professionals in another field, such as technology or business.

In Australia, modifications of lawyer regulations began in New South Wales in the 1990s.  Lawyers were permitted to form multidisciplinary practices with other professionals, and eventually were allowed to incorporate. The rationale for the legislation included: to facilitate a national services market and regulatory framework; provide greater flexibility in choice of business structures for law practices; enhance choice and protection for consumers; and provide improved access to justice.

Under this regulatory scheme, the incorporated law practices, as well as the individual lawyers, are subject to regulation.  All the principals of the entity, which generally means all partners of the firm or directors of the corporation, are responsible for making sure that the legal services provided by the practice are provided in accordance with the law and with professional obligations.  The number of incorporated legal practices has steadily grown, as of 2015, comprising almost 40% of the Australian firms.

In England and Wales, the Legal Services Act of 2007 radically disrupted the regulatory scheme for lawyers. The Act created a new regulatory scheme, licensing entities as well as individual lawyers.  Lawyers are allowed to go into business with non-lawyers as owners or managers of the entity, provided that non-lawyer owners or managers are approved by the Solicitors Regulation Authority as fit and proper to assume the role.

Since 2007, the number of incorporated companies, or alternative business structures, in the United Kingdom has continued to rise. As of November 2016, 41% of the legal practices were registered as incorporated companies. The number of solo practices and traditional partnerships has dropped consistently over the years.

Models of alternative business structures in the United Kingdom take many forms. Two examples of American companies that have become registered as alternative business structures in England are LegalZoom and Crawford & Company.

In 2015, LegalZoom became the first U.S. firm to be granted an alternative business structure license in the U.K. It later bought a law firm and LegalZoomUK lawyers deliver legal services directly to consumers.

In mid-2016, Atlanta, Georgia-based Crawford & Company, a company handling insurance claims and risk management services announced that it was setting up an alternative business structure in the U.K.  A spokesperson for CrawfordUK said, “it is imperative that loss adjusting companies evolve to meet the changing dynamics of the claims sector. Creating an ABS will allow us to support our clients with a genuine need for seamless, high quality claims and legal service.”

Some provinces of Canada have allowed non-lawyer ownership and/or multidisciplinary practices for a long time. In the province of Quebec, lawyers can practice and share profits with other professionals.  In Ontario, lawyers may practice and share profits with paralegals—who are also regulated. In August 2014, the Canadian Bar Association issued a sweeping report: Futures: Transforming the Legal Delivery Services in Canada.

The Futures report (which is advisory to the law societies which have the regulatory power in each province and territory) recommends that lawyers be allowed to practice in ABS that permit fee-sharing, multidisciplinary practice and non-lawyer ownership.  Aspects of the report condition the non-lawyer ownership, management and investment with fiduciary and ethical requirements applied to the entity, not just the individual lawyer, including protecting client confidentiality and guarding against conflicts of interest.

Moving to a Better Structure?

The business structures in these other countries allow lawyers to provide legal services alongside professionals who are trained in complementary fields, such as technology or risk management.  These countries have proactively created disruption in the regulatory schemes.  Preliminary results indicate better service to the consumers of legal services.  We also may find that the result also is that the jobs of lawyers could be saved.

As is very evident, machines now have the capability of learning and are replacing some of the tasks that formerly were handled by lawyers.  In the movie Hidden Figures, human computers were able to keep their jobs by adapting and learning to program machines.  In other words, when faced with disruption, they adapted and learned new skills.  What is the lesson for lawyers?

Jayne Reardon

Jayne Reardon

As a prior trial lawyer, Jayne leads lawyers to embrace the transformative possibilities of future law practice. As a prior disciplinary counsel, Jayne is passionate about promoting the core values of the legal profession. She is a graduate of the University of Michigan Law School and the University of Notre Dame. Jayne lives in Park Ridge, Illinois with her husband and those of her four children who are not otherwise living in college towns and beyond.
Jayne Reardon

2 thoughts on “The Disruption of Alternative Business Structures

  1. Why are we lawyers so quick to forget what the practice of law is all about? Being a lawyer is more then activating your document search and assembly resources, but being able, by learning, training and most important, EXPERIENCE to talk to people in need of legal services.

    That “need” by people with problems, such as a tenant being evicted by a landlord whose residential apartments are violating significant provisions of applicable building codes,is not just having a “lawyer”, but having someone who they can have confidence in and trust and know that anyone can create a “legal document”, but they also have someone who cares and is brave and can do what no form book or document assembly system can do.

    LegalZOOM is a law firm is it not? At least a number of state bar associations, but not Illinois, thought so when they sued LegalZOOM for the Unauthorized practice of law. And, in the filings with the SEC, before millions more dollars got pumped into LegalZOOM by venture capital firms, LegalZOOM made it clear that down the road if they lost this issue, one’s investment in their company could be lost…. one of the risks of investing in their company.

    The author asks a question: “After all, why would anyone pay a lawyer for what they can get for free on the Internet?” Do we so quickly accept such an approach and forget the better saying: “You get what you pay for!” Would we choose a doctor on the same theory?

    The fact is that not enough lawyers took an interest when technology for use in the legal profession came to pass, and many, many bar associations ignored the ability to pretty well predict the future.

    I do not understand references to outside services not being permitted! Of course, they are….. you can hire third parties who do not engage in UPL, to scan your documents and create your databases and help with video presentations in court, but here and there, the talent of the lawyer, who not only masterminds what is taking place, but that mind of the lawyer is using the training, knowledge and wisdom achieved from years of practice, to get better results then ever before for clients (who, due to technology in use by the law firm) will “Get more bang for the buck”, but the bang is louder and the bucks are less and produce more, when we lawyers quit anguishing and moaning and making excuses and finally realize that we will never at least most of us, will never have the talents of a computer programmer and the talents of a lawyer! THAT we can and are living with.

    A lot of the blame belongs to the Courts, but that is another topic.

    Paul Bernstein,
    Licensed in Illinois since 1959

  2. A few issues here. First, the rapid decline in demand for legal services, in and of itself, is going to rapidly change the profession. There will be far less work for attorneys to do. Second, the fact that applications, which replace attorneys, may violate ethical rules is irrelevant. The bottom line is that these apps ARE going to be built. After some intense lobbying there will be a state which allows such applications to be used. Once the benefits of that app are shown then additional states will allow it and, at that point, the snowball begins to roll. It’s not a question of whether the legal profession is going to be “disrupted.” It’s already underway in my opinion.

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