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September 01, 2021 Vol. 47, No. 1

Making sense of a shifting landscape: Sandboxes, alternative business structures, and regulatory change

By Marilyn Cavicchia

“I think the problem we have when it comes to the way we regulate the delivery of legal services is that we have inherited a set of assumptions that may have been useful at the time they were created,” says Zack DeMeola, director of legal education and the legal profession at the Institute for the Advancement of the American Legal System (widely known as IAALS). “But that was before advanced techniques and advanced technological ability for collecting and analyzing data existed.”

DeMeola is not alone in this assessment. Among those who are tracking regulatory change affecting legal services, “data” is a word that comes up again and again—both in terms of more information being gathered and made available, and in terms of lawyers and others reviewing recent data before taking a position based on assumptions that the public will be ill served by certain changes or that lawyers will necessarily lose business.

Though this is certainly not an exclusive list, here are a few starting points for those interested in data regarding sandboxes, alternative business structures, and other developments in regulatory change:

  • IAALS maintains the Unlocking Legal Regulation Knowledge Center and also recently released  the report “Justice Needs and Satisfaction in the United States of America,” in collaboration with The Hague Institute for Innovation of Law (HiiL). DeMeola is excited about this report in part because it takes a much broader look at justice needs, rather than focusing exclusively on the needs of those with low or modest incomes. “The crisis is to such a great extent that it has engulfed most of the middle class and small businesses,” he believes. “The issue is no longer relegated to the poorest of us; it’s relegated to most of us.”
  • The ABA Center for Innovation published its Legal Innovation Regulatory Survey in 2019 and maintains a related online map that is continuously updated to reflect changes in each state. More recently, the center has undertaken an effort it simply calls the Data Project. “How will we know if we’re closing the justice gap?” says Don Bivens, chair of the center, about the purpose of this project. “We’ve been thinking about how to measure, who needs to be involved in measuring, and what’s impossible to measure.” The center has held national colloquies with judges, scholars, and other interested parties, Bivens says, and is very close to publishing results, in the form of metrics that can be used to evaluate various innovations, based on their aims.
  • The Utah Supreme Court’s Office of Legal Services Innovation, with assistance from IAALS, gathers and makes publicly available its monthly reports (which are cumulative) on participation in that state’s regulatory sandbox, including the number of applicants and how many were approved, and whether there were any consumer complaints against any of the participants. The office also offers a News You Can Use Series, which provides more general information.
  • As we were finalizing this issue of Bar Leader, IAALS published a blog post that highlights some key data points from Utah's July 2021 monthly report. Within nine months, the post says, more than 3,000 legal services have been sought by about 2,500 unduplicated clients. The services received have included (among others) end-of-life planning; marriage and family concerns; and business needs, such as intellectual property and entity incorporation. There's been one complaint per 1,000 services delivered, and one harm-based complaint per 1,500 services delivered. 

New webinar series offers guided tour of change

For those wanting more of a guided tour through a landscape that continues to change daily, the Redesigning Legal Speaker Series may be of interest. Hosted by IAALS, the ABA Center for Innovation, the ABA Center for Professional Responsibility, the ABA Standing Committee on the Delivery of Legal Services, and Legal Hackers, this quarterly webinar series—with a lively chat area on Zoom—looks at specific aspects of regulatory change from a variety of perspectives. The series kicked off in June 2021 with Leading from the Bench—Expanding Access Through Regulatory Innovation and continued in August 2021 with Legal Tech—Using Technology to Build Sustainable Practices & Expand Legal Services.

Justice Daniel J. Crothers, chair of the ABA Standing Committee on Professional Regulation (under the umbrella of the Center for Professional Responsibility), says cohosting this series complements some of the committee’s work, which includes interacting with the Conference of Chief Justices, engaging with state and local bars through a longstanding outreach program, speaking to the National Conference of Bar Presidents, and appointing liaisons from the National Organization of Bar Counsel and the Association of Professional Responsibility Lawyers.

“Our primary mission is the development and promotion of [ABA] policies and activities relating to professional regulation and discipline,” says Crothers, a justice of the North Dakota Supreme Court and a past president of the State Bar Association of North Dakota. The broader reach that can be achieved through collaboration with IAALS and other groups helps in that work, he believes.

Also, Crothers says, while the committee has not decided whether to propose any new or amended ABA professional regulatory policies, if this does happen—and he expects that it will—collaboration and early vetting with groups inside and outside the ABA will take place before anything is presented to the House of Delegates.

“We want the broadest range of views and data to inform our work. Buy-in by the profession is important,” Crothers says. “When our proposed regulatory policies are adopted by the House and implemented by regulators, they impact all lawyers and judges.”

The role of the ABA

The ABA’s participation in Redesigning Legal should not be taken as a sign of support for reform, necessarily. In terms of official policy, at its February 2020 Midyear Meeting, the ABA House of Delegates approved Resolution 115. Sponsored by the ABA Center for Innovation and cosponsored by the association’s Standing Committee on the Delivery of Legal Services, Standing Committee on Ethics and Professional Responsibility, Standing Committee on Professional Regulation, and Standing Committee on Public Protection in the Provision of Legal Services, the resolution encourages U.S. jurisdictions to consider regulatory innovations and approaches to help solve the access to justice crisis, and to collect and analyze data before and after any implementation, to ensure that any changes help increase access and are in the interest of clients and the public.

The resolution specifically says that it is not meant as a recommendation to change anything in the ABA Model Rules of Professional Conduct, including Model Rule 5.4, which addresses lawyers and nonlawyers sharing fees or business ownership. In September 2021, the ABA Standing Committee on Ethics and Professional Responsibility issued a formal ethics opinion clarifying under what circumstances and in what ways a lawyer in a jurisdiction where alternative business structures are not allowed may “passively invest” in ABS enterprises in jurisdictions where these are permitted.

Crothers also says that some aspects of this most recent round of regulatory change (which some date back to 2018 and the start of the work in Utah that led to the sandbox there) make it so that the ABA’s role may continue to be about education and best practices more than directly leading the way.

“What is unusual this time is the pace of change and from where it is happening. Regulators themselves and their state and local bars are driving it,” he explains. “Because of this source of action and innovation, the window for the ABA to act may be smaller than many anticipated.”

Where is change coming from?

“When [Resolution] 115 was passed, there were two jurisdictions in the hunt for regulatory innovation—Utah and Arizona,” Bivens says. “Now, there are 11 or 12.”

To express what’s driving many jurisdictions to consider changes in how legal services are delivered and regulated, Bivens uses an analogy that involves cars. In the current system, he says, consumers who need any form of transportation are shown Cadillacs (services delivered only by lawyers). If the consumer says they can’t afford a Cadillac, he adds, the current system’s response is to tell the consumer that there’s no option other than a Cadillac—and that it’s for their own good. So, the consumer walks away without any transportation at all.  

“In most markets, there’s differentiation between a Cadillac, a Prius, and a bike, and different people will have their needs met by different modes of transportation,” Bivens says. “The legal market will need to reflect the same thing.”

Speaking of the market, there’s no way around the fact that money is a factor in the discussion of regulatory change, certainly in terms of attracting nontraditional providers to offer legal services. (On that note, in August 2021, a few months after becoming a public company valued in the billions of dollars, LegalZoom applied to be an ABS in Arizona.) Bivens’ home state is Arizona, where—as part of creating the ABS framework—the state supreme court took a different approach from Utah’s sandbox, opting to scrap its version of Model Rule 5.4, as of January 2021. One purpose for this change, Bivens believes, “was to permit capital to come into the legal market such that more people could be better served, and cheaply.”

For those who look askance at talking about legal services and profit in the same breath, Bivens, DeMeola, and others indicate that commerce is already a significant part of the legal profession, whether in terms of lawyers in big firms being pressured to focus first and foremost on their billable hours, or both general counsel and outside counsel working toward the best interests of major corporations. In the ABS scenario, Bivens says, the lawyer in the venture is tasked with being an independent decision maker—and if a nonlawyer interferes with that, they have violated the rules for this arrangement.

It isn’t just regulations that prevent many lawyers from innovating in ways that may ultimately help them financially as well as providing more legal service to more people, Bivens says—it’s the lack of capital. In a solo or small firm, he explains, a lawyer often struggles to make money other than what goes toward their own salary and the bare minimum of equipment and resources needed to keep the firm going. A partnership of the type that is now permitted, with approval, in Arizona, could allow a solo or small firm lawyer to make a significant investment in technology and other needs, he adds.

“Lawyers who want to innovate ought to be looking at this,” Bivens says, “and going, ‘Hot dog! Finally.’"

IAALS has been actively involved with helping Utah establish and monitor its sandbox, and DeMeola agrees with Bivens that many consumers will walk away with their needs unmet if told that they must hire a lawyer. “The framework for the evaluator in Utah is to compare to the next best available service, not to a full-service lawyer,” he says. “For most people, the next best alternative is nothing. So, the question is, ‘Is this better than nothing?’”

Both the low number of consumer complaints and the often-disastrous outcomes when legal needs go unmet seem to indicate that these services are significantly better than nothing, DeMeola says. And judges, he adds, are keenly aware of what happens when people have nothing.

“When we say over 90 percent of defendants in debt collection cases don’t have attorneys, there are judges who see that daily and deal with what that means,” DeMeola says. “They’re becoming less and less patient with it.”

Regardless of how lawyers feel about regulatory changes that open up some legal services delivery to nonlawyers, he adds, “the courts may move on, too, and certainly the people have already started to move on.”

Agrees Bivens, “Chief justices are driving it. The truth is, there are 50 states, there are 50 chief justices—and they are going to make the decision, not the ABA.”

Judges speaking up

At press time, Bivens was preparing to attend the Western regional meeting of the Conference of Chief Justices, where he expected regulatory changes—especially those that have occurred in Utah and Arizona and that are being discussed in California—to be a main topic of discussion. Indeed, he said, this meeting would be attended by justices from other regions, and this is likely to be a major focus for other CCJ meetings as well, regardless of region.

In recent months, several judges have spoken on this subject at events geared toward bar leaders, lawyers, and other stakeholders. For example, Justice Deno Himonas of the Utah Supreme Court was a panelist at a workshop called “A State of Play for Mandatory Bars & Regulatory Sandboxes” at the August 2021 Annual Meeting of the National Conference of Bar Presidents. Along with John Lund, who was then president of the Utah State Bar, Himonas was an originator of what eventually became the regulatory sandbox; Lund and Himonas co-chaired the working group in 2018 that led to the sandbox proposal.

During that workshop, Himonas put the sandbox idea into a larger context of work that the Utah Supreme Court began in 2015 “to try to truly change the legal ecosystem,” not only on behalf of people with limited means, but in recognition that people of all income levels may have reasons not to seek services from lawyers.

The sandbox concept represents an important shift, Himonas said, from “prescriptive regulation” to “data-driven regulation.” This means that the regulator gathers information in real time on the services being offered and how they affect consumers, making any adjustments as needed, including whether a particular participant should be allowed to continue. Also, participants are categorized by high risk, medium risk, or low risk, based on the type of service and the type of provider, and thus the possible impact for consumers. Another important shift is that experts in fields other than law, such as economics and sociology, play a “sub-regulator” role by helping to evaluate the participants and their services.  

The reason outside organizations, including IAALS, are involved in evaluating whether the sandbox model is working, how it affects consumers, and how it affects lawyers is that “We wanted to take our own advice: Make this empirically based,” Himonas said. “Let’s not guess about whether this is helping or not.”

Speaking at the June 2021 Redesigning Legal webinar (from which the video, a transcript, and a recap are readily available), were: Vice Chief Justice Ann Timmer of Arizona, Chief Justice Bridget McCormack of Michigan, Chief Justice Nathan Hecht of Texas, and Chief Justice Matthew Durrant of Utah. The conversation was moderated by IAALS’ founding executive director, retired Justice Rebecca Love Kourlis of Colorado. Here are a few of their talking points:

  • Vice Chief Justice Timmer noted that the Arizona Supreme Court made sure to keep lawyers involved and informed through the process of establishing the regulatory framework for alternative business structures, “so there would be no surprises dumped on their doorstep.” ABS enterprises are regulated by the court, are subject to their own code of ethics and disciplinary system, and have protections in place for the public, she said. “The hope is that it’s a win-win for the public and for lawyers—lawyers are no longer shackled by some of the constraints they have,” she added, similar to Bivens. “They can bring in legal paraprofessionals to actually practice law in a limited sense, and expand their practice.”
  • The Michigan Supreme Court recently established a commission that will work toward 100 percent access to the state’s civil justice system, starting with landlord-tenant and debt collection, Chief Justice Bridget McCormack said. In general, she would like to see bold steps toward access to justice, including via the kinds of innovation that can be encouraged by regulatory changes and by lawyers letting go of “parochial interests” that cause them to assume they are always the best or only choice for legal services. While some say it’s risky to develop models that involve nonlawyers for some services, McCormack sees a bigger risk in not exploring any big changes. “We are running the risk of losing the consent of the governed if we don’t figure out a bigger play, a bigger move, to address the problems of the many people who have to navigate courts without lawyers,” she said.
  • Chief Justice Hecht noted that courts and judges across the country are taking a more proactive role than they used to in expanding access to justice. “As time has passed, and particularly in the last several decades, it’s been incumbent on the courts to take leadership roles—with the bar, with the judiciary itself, with the other two branches, and with the public—in trying to improve the delivery of justice that’s so precious to every one of us,” he said. One way judges are leading, he noted, is through the Conference of Chief Justices, which in 2020 passed a resolution urging its members to consider regulatory innovations to increase accessibility, affordability, and quality of civil legal services while also ensuring protections for the public.
  • Chief Justice Durrant made a connection between civil rights and access to justice and said regulatory change can be a way to help ensure both. “Legal rights aren’t worth much unless you have the means to assert and protect them,” he noted.

Other jurisdictions to watch

Much of the more noticeable action when it comes to regulatory change has been in Utah (via the sandbox), Arizona (in terms of both ABS enterprises and also a legal paraprofessional program that was authorized by the court in January 2021), and California, where the State Bar of California Closing the Justice Gap Working Group is currently weighing several possibilities.

But that doesn’t mean change isn’t brewing—or being discussed—elsewhere. For example, in July 2021, The Florida Bar Special Committee to Improve the Delivery of Legal Services, chaired by past bar President John Stewart, released its final report. The report makes several recommendations for further study, including considering a sandbox-like mechanism for testing certain innovations in legal services regulation to see whether access to justice increases without a decrease in quality.

In August 2021, notes Crothers, it was announced that the North Carolina State Bar Subcommittee Studying Regulatory Change voted to move a sandbox and licensed paraprofessional proposal beyond the study phase. (Video of the committee’s August meeting is available here.)

“I’d watch New York,” Bivens advises; though there are some factors that would prevent changes of the type that were made in Arizona, he says, Hank Greenberg, chair of the Commission to Reimagine the Future of New York’s Courts and a past president of the New York State Bar Association, has shown that he is open to discussion and study of regulatory innovation—and to changing his own views. Greenberg began as an opponent of ABA HOD Resolution 115 and ended up being a lead speaker in favor of it, Bivens notes.

North Dakota might bear watching, too. “My court is actively considering whether and when it is time to actively study regulatory reform,” Crothers says. “As we speak, I am preparing a memorandum to my court’s chief justice that summarizes the work being done in our sister states.”

DeMeola anticipates that if any jurisdictions model their efforts after one state or another, it will be Utah because the controlled, limited testing nature of its sandbox—whose pilot period was recently extended from two years to seven to allow further study—will be a more comfortable fit for most. But that could change, Bivens believes, as more capital flows into the legal sector in Arizona and the benefits to the public and to lawyers themselves become more widely known.

What can bars do?

What can state, local, and other bars do to help their members understand and prepare for possible regulatory change?  

That’s actually the first step, DeMeola says—to realize that change may be coming regardless of whether lawyers ever fully embrace it.

“Your opposition to these things is not going to stop them; it’s just going to prevent you from having a seat at the table,” he believes. “And that could be tragic for the profession.”

Bringing this article full circle, DeMeola, Crothers, and Bivens all say that while the data that is currently available does not hold definitive information to allay every possible concern, the amount of data is growing by the day and both IAALS and the ABA—as well as courts and offices where regulatory change is already occurring—are eager to help bars, lawyers, judges, and others understand and discuss it.

“Are all the answers out there? No. Can we tell which way the wind is blowing? Definitely. Is it too early to judge what’s going to happen? Probably,” Bivens says. “But from my standpoint, we’re poised to do some real good for a lot of people.”