Well, Maybe More Than a Foot
Unlike Utah, which has created a regulatory “sandbox” during which nonlawyer investment in and ownership of law firms will be permitted as an experiment, the Arizona Supreme Court has taken it one step further. Based on recommendations of a task force chaired by Vice Chief Justice Ann Scott Timmer, the Arizona Supreme Court went “all in” on changes to the regulation of the profession and adopted sweeping changes that became effective on Jan. 1, 2021.
Bridging the Justice Gap
Is this just a way to expand law firms into big businesses? No. Concerns over access to justice started the conversation underlying these changes.
During a recent interview on Sharon Nelson and Jim Calloway’s The Digital Edge podcast, Timmer discussed the court’s rationale for making these dramatic sea changes.
In addition to access to justice, the task force focused on other potential benefits of an infusion of capital into law firms. One of the anticipated benefits is technological innovation that will result in more efficient and economical delivery of legal services. Law firms, and law firm partners, don’t always look to the future, being more concerned about a firm’s current profitability. This is not an atmosphere that is conducive to investing in the creation or implementation of cutting-edge technology.
Allowing nonlawyer investment, the task force hoped, would permit firms to attract the best possible talent incentivized by the ability to have an equity interest in the firm and its future success. Permitting law firms to become one-stop shops providing a wide array of services the client needs is certainly an innovation not previously possible, at least not in Arizona.
As Timmer explained, this kind of investment may also allow smaller firms to offer the same level of one-stop service to consumers. In addition to allowing nonlawyer investment in law firms, the Arizona Supreme Court created a new class of legal service provider, the legal paraprofessional (LP).
With LPs offering legal assistance in areas where many if not most litigants are self-represented, there is a significant likelihood that the justice gap will finally start to shrink. In addition, lawyers will be able to expand their services by offering what will likely be lower-cost services rendered by LPs.
Arizona Deep Dive
So, in this brave new world, what is permitted and what is not? Is it now no-holds-barred pandemonium, with nonlawyers swooping in by way of their monetary investment and ownership interest to dictate how and when lawyers take clients? As you might have anticipated, the answer is no. There are definite rules governing this new environment.
Alternative Business Structures
The changes in Arizona created a new entity, an alternative business structure (ABS) defined by administrative code as “a business entity that includes nonlawyers who have an economic interest or decision-making authority in the firm and provides legal services.” Decision-making authority refers to big-picture kinds of decisions—including authority to legally bind the ABS and control or participate in the management and policies and operation of the ABS—not whether to use one messenger service over another or when to pay an invoice for services.
Licensing of an ABS begins with filing an application and consideration of that application by a court-created committee. The committee must take into consideration the regulatory objectives that underlie the creation of this new entity: promoting and protecting the public interest; promoting access to legal services; advancing the administration of justice and the rule of law; encouraging an independent, strong, diverse and effective legal profession; and promoting and maintaining adherence to professional principles.
Applicants are required to demonstrate adequate governance structures and policies to ensure: the professional independence of lawyers providing legal services, proper standards of work, the freedom for lawyers to make decisions in the best interest of clients, the confidentiality required by the Rules of Professional Conduct and that any business policies or procedures do not interfere with lawyers’ duties and responsibilities to clients. Once licensed, the entity submits itself to regulation by the Arizona Supreme Court.
Disbarred or suspended lawyers or persons denied admission to the practice of law may not own more than 10 percent of an ABS, nor may those censured, on probation or under any other disciplinary action relating to their professional or occupational license if the underlying conduct is relevant to the goals set out for ABSs. There is a long list of additional disqualifying events that may result in an application being denied.
Compliance Lawyer
An ABS must follow the typical requirements when forming a new business entity, such as disclosure of relationships to any parent company and any related businesses. However, an ABS is also required to designate a compliance lawyer—a lawyer who is a manager or employee of the ABS and who is responsible for ensuring the ABS, any authorized persons and specifically its lawyers comply with the ethical and professional responsibilities required when providing legal services. The responsibilities of the compliance lawyer are significant and potentially daunting as they are on the hook for the conduct of the ABS and its staff and must report breaches of the regulatory requirements of the code or the ethical or professional responsibilities of the lawyers.
Other Changes to Bridge the Justice Gap
Arizona had previously attempted to bridge the access to justice gap by authorizing certified legal document preparers who could assist unrepresented individuals in completing documents but could not provide legal advice. In Arizona, entrepreneurial lawyers leveraged the opportunities that change presented and created law-related businesses offering document preparation. This, sadly, did not significantly bridge the gap. The LP, able to offer legal advice and appear in court in certain cases, is a more significant step in addressing access to justice.
How will this help individuals in need of but unable to afford legal services, while not harming lawyers and their practices? It’s time to embrace the change and reimagine what law practice looks like. While LPs are permitted to set up shop on their own, they may also become part of the firms of the future. LPs may handle lower-level or more routine matters in the permissible practice areas, leaving the lawyers to handle more complex matters. Think, if you will, about how medical offices now employ nurse practitioners, and you begin to see the possibilities.
Are the barbarians at the gates? Well, lawyers must certainly start to rethink the practice of law and their business models. But barbarians? Not likely.
