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California Law Firm Ownership Debate Ignites Lobbying

April 8, 2020, 8:55 AM

The State Bar of California Board of Trustees is facing mounting pressure over whether to create a regulatory “sandbox,” through which potentially game-changing legal industry reforms promoting access to justice could be tested.

This could be California’s last chance for a long while to enact changes that enable nonlawyer ownership of law firms and revised fee-sharing arrangements. These types of changes are in the works in Arizona, being tested in Utah through that state’s sandbox, and studied in other states.

Reform proponents criticized the board’s recent decision to delay its vote on the sandbox concept, a temporary regulatory structure designed to gauge the effectiveness of programs that promote access to justice. They’ve also expressed concern about remarks made by the board’s leaders, who said during a March meeting that a pause was needed so they could meet with various “stakeholders,” including members of the California legislature and Supreme Court.

A “no” vote in the nation’s most populous state could slow the national momentum that’s been building for change.

Advocates of liberalizing law practice rules say reforms are needed to reduce barriers for middle class and poorer citizens unable to afford the services of a traditional law firm—rules that result in an access to justice gap. Critics say this would remove crucial safeguards meant to ensure that those who provide those services—traditionally licensed and law school educated attorneys—remain subject to ethical oversight and discipline.

Another consequence of rule reform could be a more complete introduction of the Big Four accounting firms—KPMG, Deloitte, PwC, and EY—into the American legal market. That’s a scenario that makes many in Big Law anxious, given the accounting companies’ massive revenues and strong tech focus.

Reform advocates and opponents—which include at least two powerful state attorney groups—have lobbied board members and other state bar officials, in advance of the board’s meeting scheduled for next month, when the issue is set to be raised again.

The May 14 vote “will either put a bullet in efforts permanently or not,” Andrew Arruda, a member of the Access Through Innovation of Legal Services—or ATILS—task force, tweeted as the board’s March 12 meeting ended. “Going to need everyone behind #ATILS on that vote!” Arruda is a lawyer and entrepreneur in San Francisco.

Justice Gap

After debating different possible fixes for 14 months, the ATILS task force ultimately decided a sandbox would be the best approach for reform.

The sandbox—described in the ATILS report as “a multi-year program (e.g., 2–3 years) through which evidence and data can be gathered"—would include a process for evaluating different types of legal services delivery systems. These include consumer-facing apps that provide legal research, advice and services to clients at different income levels. Products like these aren’t currently being designed because of restrictive regulations.

At the March 12 meeting in California, John Lund, co-chair of the Utah Implementation Task Force on Regulatory Reform put forth an example of one type of product a sandbox could foster: an app designed to allow consumers considering renting an apartment to have access to a service that could help explain the lease to them in a “legally responsible, plain-English” way, so that they understand the document before signing.

Data would be collected to gauge benefits to consumers—as well as harms that could result if prohibitions on nonlawyer ownership, fee sharing, or unauthorized practice of law are loosened or scrapped.

Reform proponents angered by the delayed board vote say the proposal wouldn’t directly authorize a regulatory sandbox—it would only establish a new working group to explore the viability of developing such a structure.

Several advocates responded to Arruda’s March 12 tweet by promising to reach out to some or all of the 13-member board, including Board Chair Alan Steinbrecher, a partner with the Los Angeles-based business litigation firm Steinbrecher & Span, and Vice Chair Sean SeLegue, a partner with Arnold & Porter Kaye Scholer in San Francisco.

They’re not the only ones in touch with Steinbrecher and SeLegue.

“ATILS’ work has led to an unprecedented public response expressing divergent and strong views on its proposals and recommendations,” Steinbrecher said in a statement. “We have heard from the tech industry, from lawyers, from ethicists, from access advocates and others. Some comments strongly support the task force’s recommendations and others do not.”

Soon after the task force submitted its initial recommendations last year, access to justice advocates from around the country spoke out in favor of change at an August public hearing in San Francisco. Yet by that point, a much larger number of California attorneys had written into the bar to express alarm about the proposal’s possible effects.

Big Four Benefits

Two California lawyers’ groups are skeptical. A contingent that included members of Consumer Attorneys of California, a plaintiffs lawyers group, and California Defense Counsel, which represents civil defense practitioners, have met with bar officials in Sacramento twice since January to express their concerns about the proposal and related topics, officials with both groups confirmed.

Corporations co-owning law firms “goes against how we have been trained, and what we know as lawyers,” said Micha Star Liberty, president of Consumer Attorneys of California. She added that the notion of a sandbox is outside the charge of the state bar.

Mike Belote, a lobbyist for the defense counsel group, said that if reformers are successful in loosening law firm ownership rules through a sandbox or any other route, the main beneficiaries could be the Big Four accounting companies, which in recent years have exploded their legal operations in most corners of the globe except for the U.S., because of the regulatory roadblocks here.

That said, Belote said defense counsel might be open to participating in a working group to develop a sandbox, if they can get questions answered first about the proposal’s parameters.

The notion that the movement for access to justice could open a lane for the Big Four to pursue corporate clients in the U.S. has gained the attention of prominent observers. Others, like Mary Shen O’Carroll, Google’s director of legal operations and president of the Corporate Legal Operations Consortium, have also recently noted that the accountancies already are part of a wave of new competitors competing toe-to-toe with leading law firms for tech services and product clients.

Access to justice reform proponents including ATILS member Bridget Gramme, supervising attorney with the University of San Diego’s Center for Public Interest Law, and Jason Solomon, executive director of the Stanford Center on the Legal Profession, say the sandbox could develop solutions that address an access to justice gap that has persisted in California and around the country for decades.

“I really hope and believe the bar can move forward now,” said Gramme.

There’s reason to believe Steinbrecher and SeLegue are sympathetic. The justice gap “is creating a crisis of confidence in the legal system and a situation that cries out for solutions,” they wrote last October. “We need fresh thinking around delivery systems, regulatory reform that could stimulate the creation of new service models, experimentation and innovation.”

The board’s next meeting, set for May 14, will take place as planned either in-person or electronically—despite disruptions caused by the coronavirus, Steinbrecher said in his statement. He added, however, that the ongoing health crisis has delayed meetings with the board’s oversight bodies. It’s unclear whether those delays might result in another stalled vote on the sandbox.

To contact the reporter on this story: Sam Skolnik in Washington at sskolnik@bloomberglaw.com

To contact the editors responsible for this story: Jessie Kokrda Kamens at jkamens@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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