US ABS reform is “spurring innovation”

Utah: UPL waivers make significant difference

The introduction of alternative business structures (ABSs) in two US states is “spurring innovation”, the first research into the initiatives has found.

Its publication came as one of the pioneering ABSs in Arizona took external investment.

ABSs have been licensed in Arizona since last year, while Utah has allowed them since autumn 2020 as part of a regulatory sandbox – but it is not yet a permanent regulatory change.

However, there has been strong pushback from the profession in other states, as shown at last month’s American Bar Association annual conference.

Stanford Law School’s Deborah L Rhode Center on the Legal Profession examined the experience of the two states to date in a bid to provide more evidence to support the debate.

It noted that “efforts to rethink the regulation of legal services are gaining momentum in the United States, fuelled by a yawning justice gap and growing evidence that regulatory barriers are at least partly to blame”.

It also looked at the evidence on the impact of ABSs in England and Wales, albeit that the legal market here is in some ways very different from that of the US.

The report said reform efforts so far “do not appear to pose a substantial risk of consumer harm”, with no evidence that they generated more consumer complaints.

It identified five main innovation types:

  • Traditional law firms making changes to their capital or business structure or service model (89% of the 57 entities authorised in the two states as of 30 June 2022 have taken on non-lawyer ownership, investment or partnership of some kind);
  • ‘Law companies’ like LegalZoom practising law, which they cannot elsewhere in the US;
  • ‘Non-law companies’ as new entrants adding legal services to their existing offerings;
  • ‘Intermediary platforms’ that connect lawyers and consumers and often provide practice support systems to lawyers such as case management and billing; and
  • Entities using non-lawyers and technology to practise law.

An example of the latter is Rasa, a B-corp using both artificial intelligence-enabled software and non-lawyers to help Utahns determine whether they are eligible to expunge their criminal records and then do it.

The report said that importantly, in both Utah and Arizona, “lawyers remain central to the development and delivery of services”, even when non-lawyers and software were being used.

“A majority of entities are using both technology and other innovations to deliver services in new ways, mostly to consumers and small businesses,” it went on.

“In total, 61% of entities across the two reform states identified a technological innovation as part of their ABS or sandbox authorisation.”

A major block in the US is the rule against the unauthorised practice of law (UPL). While the concept of UPL does not exist in the UK, the notion of unregulated legal services providers does not exist in the US – only licensed lawyers who are members of their state bar are permitted to deliver legal services.

The Stanford research found that UPL reform “appears to be critical to serving lower-income populations”. The Utah sandbox – which allows entities to seek waivers of UPL – contained the only entities, all of them non-profits, “that report that they primarily serve indigent and low-income people”.

Similarly, Utah’s reforms were prompting innovation in the use of non-lawyers and technology within the meaning of the UPL rule to deliver legal services.

By contrast, Arizona’s “ABS-only approach” has thus far yielded “important but limited changes to the conventional law firm model of legal services delivery that predominantly serves a middle-income and small business clientele”.

This indicated that “reform choices matter”, the research said.

The evidence showed, it concluded, that rule reforms “can spur significant innovation, both in the ownership structure of legal services providers and in the delivery models used to serve clients”.

The report continued: “While ironclad predictions about the future remain unwise, the evidence thus far suggests that lawyers, far from being displaced by newly configured entities and new service delivery models, will instead face a host of new opportunities to extend their reach via a mix of conventional service delivery, non-lawyer assistance, and software that were not possible previously.”

One of the ABSs licensed in Arizona is Scout Law Group, which last week announced a new partnership with Miami-based investment firm 777 Partners, which has litigation finance as one of the six areas it invests in.

This has created “one of the country’s most well-funded plaintiffs’ law firms dedicated to creating access to legal services”.

As well as capital, 777 will provide other resources to Scout Law Group, including “strategic insight, institutional relationships, and robust operational support to amplify growth and expand access to legal services”.

Scout founding partner Steve German said: “Joining forces with 777 Partners will allow Scout Law to help people who wouldn’t otherwise be able to demand accountability on an individual level. That increased access to legal services is exactly what the ABS model is designed to enable, and we’re so proud to be leading the charge.”

Steven Pasko, founder and managing partner at 777 Partners, said the partnership would “supercharge the firm’s mission to increase access to legal resources and services”.

He continued: “We look for opportunities with flexible and scalable growth that benefit both parties so our collaboration with Scout Law Group, and its commitment to creating a new kind of law firm committed to delivering justice for all, is a perfect fit.”

Meanwhile, we reported last month that the California State Legislature had passed the annual fees reauthorisation and legislative oversight bill for the State Bar of California, which this year specifically provides that plans to introduce a regulatory sandbox should “exclude corporate ownership of law firms and splitting legal fees with non-lawyers”.

This bill has now been signed into law by governor Gavin Newsome.

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