Biglaw

Blowing Up The Legal Monopoly

Arizona announces a bold experiment in law firm ownership and fee-sharing by nonattorneys.

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Over the past few years, California, Utah, and other states have been quietly exploring allowing nonattorneys to provide limited legal services or share in attorneys’ fee arrangements. But while those states have been dipping their toes in the pool, Arizona just shouted “cannonball” from the high dive. Starting January 1, 2021, Arizona regulations on who can provide legal services will be fundamentally reformed and opened up to nonlawyers. You can read the Arizona Supreme Court’s complete 91-page order and attachments here.

As an Arizona-born and raised lawyer at a law firm founded back in our territory days, I’ve long believed that, if done right, these kind of changes could spur innovation and provide wider access to the legal system. So, how did my home state do? Let’s take a look at the coming changes and their potential ramifications.

Same Bar, Infinitely Bigger Tent

Three major changes are coming down the pike for the Arizona legal industry. First, the state bar will begin certifying a new class of legal service provider called the Legal Paraprofessional. Requirements haven’t been set forth yet, but LPs will be certified in specific areas of the law and authorized to represent clients in certain matters before courts. The bar is characterizing the certification as akin to a nurse practitioner for law. Any certified LPs must pass a character and fitness review, and they will be subject to the same ethical rules and disciplinary procedures as a JD-holding attorney.

Second, the bar will also be charged with licensing a new class of entity, the Alternative Business Structure. An ABS is an organization providing legal services that is owned, operated, and/or managed by nonattorneys. ABS’s will again have to go through the bar to be certified, but they serve as a way for non-law-firm organizations to start offering legal services as part of their model.

Finally, the ethical rules barring fee-sharing with nonattorneys have been nuked outright. Firms no longer will need to engage in convoluted compensation agreements with their nonattorney managers and staff to allow them to share in the firm’s success.

Lawyers have held a professional monopoly for decades, with some justification, but monopolies lead to stagnation, decay, and inefficiency. It’s given us a legal system where the vast majority of the public can’t afford a lawyer when they need one. The time has long been right to try to correct that deficiency in access to justice.

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A Peek Into The Crystal Ball

The potential ramifications from these changes are enormous, and if history is any guide, the biggest changes will likely come from an angle no one expects. Having laid out that caveat, here’s where I think the biggest changes will occur.

I initially thought these changes would lead to huge new competition on the more consumer-facing side of private law, but I’m not convinced many small or solo law firms will feel a huge increase in competition. Rather than compete for the customers who can already afford lawyers, I’d expect LPs and ABS’s to initially pursue the untapped hordes of people who’ve never been able to afford legal services. The companies that figure out how to service the clients the traditional legal profession has been missing out on for decades stand to make a mint, and their clients will be infinitely better off than they were before when they had no options on the table. If you want an example of what this could look like in practice, take a look at my interview with DoNotPay.com’s CEO Josh Browder, who has developed the “world’s first robot lawyer” for consumers who have never been able to afford legal representation. Imagine a model like that with actual lawyers or perhaps LPs assisting consumers. It’s not difficult to imagine ABS’s utilizing a combination of technology and traditional lawyers to serve clients.

Likewise, I also don’t see there being a huge new competitive crush at the upper echelons of Biglaw. The major nonfirm players such as the Big Four accounting firms and the alternative legal service providers like Axiom have already been making advances on Biglaw’s turf. While lawyers like to point to the Big Four as the reason to fear changes like those in Arizona, most fail to note or understand that Sarbanes-Oxley prohibits accounting firms from providing certain legal services to auditing clients. So while the Big Four may try to make a play for their nonauditing clients, they will not have the ability to take wholesale chunks out of the legal market without doing the same type of marketing and business development as law firms. Yes, traditional law firms will have more competition, but it will be more of a level playing field than many expect.

While the fear of the Big Four may be overblown, one area that may be directly impacted by the rules is executive-level compensation. While traditional businesses can offer equity as an incentive to management recruits, law firms have historically been barred from doing that under the anti-fee-sharing rules. Firms have therefore been disadvantaged in efforts to attract a deep pool of nonattorney talent to their management ranks. With those rules vanishing at the start of 2021, Arizona-only firms suddenly have a new suite of incentives to offer the MBAs and CEOs they need to run the business side of their practices. Firms that invest wisely in management talent may find themselves well positioned in the coming years. Less clear at this point is what, if anything, firms with multistate presence can do on this or any other issue impacted by the rules.

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While those may be the first areas to see major change in light of these reforms, they won’t be the last. While LPs and ABS’s may start out experimenting on the edges of the current legal industry, as they mature, I fully expect them to begin eating into traditional law’s market share. 2021’s scrappy newcomers may end up 2030’s 500-pound gorillas.

A Bang Or A Whimper?

That said, maybe the excitement and trepidation over these rule changes is overstated on both sides. The UK deregulated its rules on law firm ownership over a decade ago, and the UK lawyers I’ve spoken about it to have responded that the change had less of an impact on the market than many thought.

James Knight, CEO of Keystone Law, a publicly traded law firm in the UK, told me in an interview earlier this year that “most law firms don’t need money for growth or to develop … if equity is sold off to investors then there’s less money to be shared amongst the partners.”

Similarly, John Croft, President of the UK-based ALSP Elevate, was also dismissive of the sky-is-falling crowd when I spoke with him several months ago. “A few years ago, all the headlines started saying ‘Look out, technology and AI are going to take your jobs.’ And that’s not the case … If you’re running an efficient business, this shouldn’t scare you at all.”

“If you’re not,” Croft continued, “maybe it should.”

Even if these changes do lead to a sea change in legal services, all is not lost for traditional lawyers by any stretch. This new challenge may be just the jump-start our industry needs to catch up to the larger business world.

We’ve long been the only game in town for legal services, and we believed we were the best ones to do the job. Time to put our money where our mouths are.

James Goodnow is the CEO and managing partner of NLJ 250 firm Fennemore Craig. At age 36, he became the youngest known chief executive of a large law firm in the U.S. He holds his JD from Harvard Law School and dual business management certificates from MIT. He’s currently attending the Cambridge University Judge Business School (U.K.), where he’s working toward a master’s degree in entrepreneurship. James is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

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