Jan 5, 2023 Legal Service — Eric Giguere

California Bar 'Sandbox' May Rattle Legal Competition for Firms - Bloomberg Law

A California State Bar group is divided over whether to limit a test of new legal service delivery models to organizations that serve low-income residents or broaden the experiment to a wide range of businesses.

"There appeared to be support" for restricting participation to organizations that focus on access to justice for "the unserved and underserved," according to a memo last month summarizing discussions within the 20-person group.

But several members of the Closing the Justice Gap Working Group object to the narrow focus. They say allowing profit-driven companies to provide legal services could spur innovation throughout the system, even if the businesses focus directly on wealthy clients.

"To exclude corporate clients on the ill-informed view that they get enough, or get good enough, legal services shows the risks that come from a narrow or inwards looking view of the legal market," group member Crispin Passmore wrote.

The group's final decision may either limit or encourage disruptions in California's legal service market. That includes the possibility of allowing the Big Four accounting companies to more directly compete with large law firms.

Given its size, economic strength and legal-market importance, the group's direction could have a significant impact on the rest, according to Jordan Furlong, a Canadian legal sector analyst.

"Significant regulatory change to the legal sector in California would be a seismic event, one that would almost certainly trigger rolling changes across the United States for years to come," wrote Furlong in a recent blog post.

The Direct Path

The working group's divisions, evident for the last several months, have included how to define the scope of the experiment, which the group calls a "regulatory sandbox," and its main purpose.

Toby Rothschild, who is a volunteer counselor to OneJustice and a member of the panel, stated that if the sandbox can be used to support legal service companies that help middle class residents with their debt problems, then "that's going have a fairly straight path to the rest of low-tomoderate, middle income people."

Rothschild stated that if the project focuses instead on companies that assist corporate lawyers in filing Securities and Exchange Commission statements (or any other type of business), "I don’t think that that’s going to have as many chances at downward assistance, at minimum in my lifetime."

A 2020 report commissioned by the state bar found the legal services gap is "widespread, pervasive, and multifaceted." State residents receive "no or inadequate legal help" for 85% of their civil legal problems, it found.

But, there are those who disagree that the targeted approach is the best. They believe the whole market must change. The sandbox, therefore, should be open to all types of alternative legal service businesses.

There are alternatives to this, such as legal service operations that are not owned by lawyers. They could range from Big Law firms who bring on non-attorney technologists or accountants as equity partners, to "people law" operations like Legal Zoom or Rocket Lawyer that focus on consumer law applications.

Bridget Gramme from the University of San Diego School of Law wrote to the panel: "To limit sandbox to applicants who are serving individuals who lack the means to afford them seems to be setting it up for failure."

Gramme said that research into various legal Sandboxes in different countries including the U.K. had shown that in order to foster innovation, it makes sense to keep them as open and accessible as possible "especially at beginning."

Similar Fight, new venue

The California State Bar's effort to establish the working group began with the Commissioning of the Legal Market Landscape Report from William Henderson. Henderson is a professor at Indiana University Maurer School of Law. After Henderson's review, the bar's Board of Trustees created the Access Through Innovation of Legal Services taskforce (known as ATILS) in July 2018.

The task force was created to examine online legal service delivery models in order to find out if they could be improved while still protecting the public. Before any changes could take effect, they would need to be approved and confirmed by the Bar's Board of Trustees.

Several of the same players from the different sides have moved from ATILS and the sandbox work group to be involved in the arguments for possible system reform in the past few years.

More than 400 comments were received on the proposed changes. These included objections from small-sized attorneys in states that are opposed to any expansion of long-standing law firm ownership or fee-sharing rules.

Despite opposition from both sides and lobbying campaigns, the Board of Trustees approved the idea of a sandbox a full year ago by a 9-2 vote.

A sandbox could bring about "revolutionary” changes to the system according to Sean SeLegue. He was a partner at Arnold Porter Kaye Scholer in San Francisco and was vice chair of the board before the decision.

"A Seismic Event."

One consequence of rule change could see a shift in the ways the Big Four accounting firms, Deloitte EY PwC, PwC, PwC, KPMG, compete in the American legal markets. This is a concern for Big Law because of the large revenues and strong tech focus of Big Law.

An unrestricted California sandbox wouldn't be a trojan horse for the Big Four "to come in and start attacking" the legal profession, working group member Andrew Arruda said at the April 9 meeting.

California would not be the first state that tests a legal services sandbox. Utah's Supreme Court approved the state's pilot program for two years last August. Rocket Lawyer is now part of the program, along with about two-dozen legal service providers who are also mostly consumer-facing. In recognition of the innovations that the program has sparked, the court added five more years to the program earlier this month.

Arizona followed a different, and perhaps more radical, path when its Supreme Court repealed state ethics rule (5.4) last August. Nonlawyers were prohibited from owning an economic interest within a law firm.

Canada's British Columbia, Canada is also experimenting with a legal Sandbox. Ontario may follow suit.

The California working groups is set to meet again on June 18. Next up, the panel's scope subcommittee will meet on June 4. This committee is charged with recommending how broad-based the sandbox should become. In September 2022 the Bar's Board of Trustees must receive the recommendations of the working group.

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