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The fierce debate over Alternative Business Structures

April 19, 2021

The following contains purely informational, educational, or technical material. The views expressed herein represent the opinions of the author and have not been approved by the ABA House of Delegates or the Board of Governors and, accordingly, should not be construed as representing the position of the association or any of its entities.

Ready or not, they are here. Alternative Business Structures (ABS) have long been a highly charged point of contention between lawyers who embrace the strictures of Model Rule of Professional Conduct 5.4, Professional Independence of a Lawyer, and Rule 5.5, Unauthorized Practice of Law. The former prohibits the sharing of legal fees with a nonlawyer, and the latter prohibits the practice of law in a jurisdiction, in violation of the regulation of the legal profession in that jurisdiction, or to assist another in doing so. Both Rules 5.4 and 5.5 are subject to limited exceptions, none of which contemplate the acceptability of an ABS, in which lawyers and nonlawyers form a for-profit business so that both may provide legal services.

Most lawyers have considered deviation from Rules 5.4 and 5.5 to be ethically repugnant, as that would suggest the increase of profitability to both lawyers and nonlawyers at the expense of public protection. Until recently, all U.S. jurisdictions based their rules on the American Bar Association’s Model Rules of Professional Conduct, including Rules 5.4 and 5.5, and prohibited ABS. Suddenly, within the last year two states, Utah and Arizona, have changed regulatory conditions to allow acceptance of ABS. But in the profession at large, the polarity has deepened, not softened. To many lawyers, this movement represents Armageddon, where core values and professional singularity have been swept away in favor of profit and incompetence. To others, ABS are an essential innovation without which the legal profession blocks access to justice and economically languishes for lack of capitalization opportunities.

What exactly are ABS? The National Organization of Bar Counsel (NOBC) created a webpage, Alternative Business Structures, Frequently Asked Questions, that provides a useful overview. It defines ABS as a “generic reference to any form of business model through which legal services are delivered that is different from the standard sole proprietorship or partnership model.” The webpage goes on to describe four types of ABS identified as of that writing (2014-15) and lists foreign jurisdictions that have already adopted it. The NOBC study provides a deep dive into the issues raised by ABS and many resources for the continued examination of its evolution and future. There have been many advancements in the field since NOBC’s ABS analysis. One of the best resources for tracking the status of ABS is the University of Denver’s Institute for the Advancement of the American Legal System (IAALS). Its Unlocking Legal Regulation Knowledge Center is a comprehensive list of resources for current information on many regulatory issues, including ABS. Below is a discussion of the two U.S. jurisdictions that have adopted the business model.

Utah: The Sandbox

Effective Aug. 14, 2020, the Utah Supreme Court issued Standing Order No. 15, which established a pilot legal regulatory Sandbox and an Office of Legal Services Innovation. Their purpose was to act under the direction of the Supreme Court to test and regulate the practice of law by nontraditional legal service providers or by traditional providers offering nontraditional legal services. The order will expire on the second anniversary of its effective date. In effect, it creates a regulatory environment for ABS. In a press release issued on Sept. 8, 2020, the Utah Supreme Court, announced that as of Sept. 1, 2020, it authorized the sharing of reasonable fees with nonlawyers within the oversight of the regulatory reform Sandbox. By early Sept. 8, 2020, the Office of Legal Services Innovation had approved five companies to offer legal services within the Sandbox: RocketLawyer, LawHQ, 1Law, LawPal and Blue Bee Bankruptcy Law. An example of a fully operational Utah ABS is Law on Call, regulated by Utah’s Office of Legal Services Innovation. This legal services business is nonlawyer owned. Its features include unlimited direct access to lawyers for a monthly subscription fee of $9; full legal services at low hourly rates; and a 100% satisfaction guarantee.

Arizona: No Sandbox – Rule Changes

On Aug. 27, 2020, the Arizona Supreme Court filed an order amending or abrogating a series of Arizona’s Rules of Professional Conduct. These changes, inter alia, create a regulatory safe harbor for ABS. They eliminated Ethics Rules 5.4, Professional Independence of a Lawyer; 5.7, Responsibilities Regarding Law-Related Services; and changed E.R. 5.3, Responsibilities Regarding Nonlawyers, effective Jan. 1, 2021. The order effectively provided a permanent platform for ABS.

Other jurisdictions pondering ABS include New York, which is considering licensing of social workers for some legal tasks; and California, Illinois and New Mexico, which are considering limited practice of law by nonlawyers.

In essence, there are two prevailing schools of thought concerning ABS:

  • The Armageddon response. ABS constitute the unauthorized practice of law; nonlawyers are incompetent to practice law; lawyer-client confidentiality does not extend to nonlawyers; ABS are contrary to the core values of Rules 5.4 and 5.6; ABS experiment with practices that threaten harm to the public; they do not advance access to justice, as ABS in other countries do not show increased access; and they compete with lawyers.
  • The Innovation response. ABS are not the unauthorized practice of law if they are permitted in the jurisdiction in which they practice; the United Kingdom, Australia and Canada have had ABS for many years without harm to public: the UK regulates ABS managers; Australia regulates the ABS entities; in the U.S., access to justice remains elusive under the existing regulatory structure; ABS do not compete with lawyers; they are new sources of business referrals; ABS provide opportunities to capitalize a wide range of new practice opportunities for lawyers; and ABS provide new employment opportunities for lawyers.

The American Bar Association did not create the notion of ABS. In fact, ABS trends were firmly established before the ABA adopted Resolution 115, Encouraging Regulatory Innovation, at its Midyear Meeting in February 2020. The report to the resolution discusses a number of ABS models under development in other states, including those of Utah and Arizona. The ABA’s role remains to convene, inform and provide a forum for discussion. What it has discovered, not for the first time, is that one person’s Armageddon is another person’s innovation.

Teresa J. Schmid is the director of the American Bar Association Center for Professional Responsibility. She is a past executive director for the Oregon State Bar and executive director for the State Bar of Arizona. She is also a past chair of the Los Angeles County Bar Association’s Professional Responsibility and Ethics Committee and a past member of the State Bar of California’s Standing Committee on Professional Responsibility and Conduct. She is licensed and active in Illinois, California and Oregon.

The Center for Professional Responsibility provides national leadership in developing and interpreting standards and scholarly resources in legal and judicial ethics, professional regulation, professionalism, and client protection.

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