Independence is often referred to as one of the core values of the legal profession. This value is reflected in American Bar Association Model Rule 5.4, entitled “Professional Independence of A Lawyer.” Model Rule 5.4(a) provides that a “lawyer or law firm shall not share legal fees with a non-lawyer…” with some narrow exceptions. Model Rule 5.4(b) forbids a lawyer from forming a partnership with a non-lawyer “if any of the activities of the partnership consist of the practice of law.” Subsection (c) of the Model Rule states that a “lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Finally, Model Rule 5.4(d) says that a lawyer may not practice in the form of a professional corporation or other association if a non-lawyer holds any interest in the entity, is a director or similar member of the control group, or otherwise has the right to control the professional judgment of the lawyer. The rationale is that non-lawyers, unbound by the lawyer’s professional obligations, may make decisions that are not in the clients’ best interest in the name of more profit for the business entity.
California has adopted its version of Rule 5.4 with a few differences, including some recently enacted. The California Rule allows sharing of legal fees with non-profit organizations, either fees awarded by a court or fees obtained by settlement, with the client’s informed written consent. The most recent changes were adopted after a State Bar task force on Access Through Innovation of Legal Services (ATILS) issued a report in May 2020 recommending some dramatic changes in the professional rules with the stated goal of increasing access to legal services. Independence always comes at a price, and, in the view of many ATILS participants, the price of lawyer independence includes the pricing of legal services beyond the reach of many consumers of legal services. ATILS advocated that a “sandbox” be created to explore other models for delivery of legal services that would remove or modify the traditional prohibition on non-lawyer involvement:
As a longer term objective, the Task Force recommends ongoing study of further revisions to rule 5.4. If, following study, a regulatory sandbox is developed, it is anticipated that applications for participation would be encouraged from law firms and from alternative legal services providers (ALSP) such as non-lawyer owned and operated technology firms, and business collaborations of lawyers and non-lawyers. On the one hand, the Task Force is well aware from public comments received and other input that the longstanding restrictions on fee sharing and non-lawyer ownership serve to protect an attorney’s exercise of independent professional judgment in providing legal advice and services. On the other hand, the Task Force regards rule 5.4 as central to advancing innovation in the delivery of legal services and has heard from technologists and others that this rule is a significant inhibitor of new delivery systems that might otherwise be brought to market by non-lawyer entities or co-owned collaborations of lawyers and non-lawyers. Once deployed, the data from sandbox trials, which would be conducted pursuant to Task Force recommendation #5 could inform whether, and to what extent compliance enforcement standards and risk based proactive auditing by a regulatory oversight body could balance consumer protection and access goals in the absence of a prophylactic ban on fee sharing and non-lawyer ownership.
Emphasis added. If anything, the ATILS final report understates the tsunami of criticism that greeted its tentative proposal in July 2019 to remove barriers to non-lawyer participation in the delivery of legal services, although it notes that 73% of the 2,865 public comments were opposed to one or more of its tentative proposals. Most of those negative comments were, as can expect, from attorneys.
Moreover, its final report advocating the experimental “sandbox” admits that there is no empirical evidence that removing the traditional prophylactic prohibitions embodied in Rule 5.4 would actually increase access to justice. “Sandbox” is computer programing jargon for a security protocol for testing unproven or untrusted software code. The use of the word emphasizes the tech-heavy orientation of ATILS. It also emphasizes the lack of empirical data showing that non-lawyer ownership would significantly impact the “justice gap.” It confirmed the fears of ATILS critics that the tech entrepreneurs were more interested in applying their disruptive business models to the legal services marketplace to make a lot of money, not to advance the cause of increasing access to justice.
The May 2020 ATILS report appeared when other states were conducting their own studies of access to justice and moving much faster than California. Arizona became the first state to completely repeal Rule 5.4, effective January 1, 2021. Utah jumped into the “sandbox” with its own more limited version of reform in August 2020. Following the final ATILS report, the State Bar of California moved ahead with its “sandbox” program through its Closing the Justice Gap Working Group (CTJG).
But a funny thing happened on the way to the sandbox. The Girardi scandal exploded in March 2021in a series of incendiary articles in the Los Angeles Times and the unprecedented admission by the State Bar of California in August 2021 that “mistakes” were made in handling the many complaints against the recently disbarred lion of the plaintiff’s personal injury bar. At about the same time, the California State Auditor published a report criticizing the State Bar for its growing backlog of cases. Matters came to a head in December 2021 when the Chairs of Judiciary Committees in both houses of the California legislature, Mark Stone and Tom Umberg wrote to State Bar Board Chair Ruben Duran, making their point in no uncertain terms:
The CTJG has been exploring a proposed regulatory sandbox and proposals that would recommend allowing a participant in the sandbox who is not a licensed attorney to be exempt from existing statutory laws regarding the practice of law and rules of professional conduct. Our Committees have prioritized protecting consumers from unscrupulous actors, including those seeking to do business in the legal field. Corporate ownership of law firms and splitting legal fees with non-lawyers have been banned by common law and statute due to grave concerns that it would undermine consumer protection by creating conflicts of interest that are difficult to overcome and fundamentally infringe on the basic and paramount obligations of attorneys to their clients. Corporations are driven by profits and demands for returns to shareholders, and do not have the same ethical duties and not subject to the same regulatory oversight as lawyers. The regulatory sandbox could become an open invitation for profit-driven corporations, hedge funds, and others to offer legal services without appropriate legal training, regulatory oversight, protections inherent in the attorney-client relationship, or adequate discipline to detriment of Californians in need of legal assistance. Any proposal that would materially change current consumer protections for clients receiving legal services and fundamentally alter the sacrosanct principles of the attorney-client relationship would be heavily scrutinized by our Committees.
One of the ways the California Legislature exercises the regulatory oversight of the State Bar that is shared with the Supreme Court is the fee bill that allows the State Bar to collect license fees from attorneys, the organization’s lifeblood. AB 2958, this year’s fee bill, was amended on June 15, 2022, to add the following language:
SEC. 3. Section 6034.1 is added to the Business and Professions Code, to read:
6034.1. (a) A committee or subcommittee of the California State Bar exploring a regulatory sandbox or the licensing of nonattorneys as paraprofessionals shall do all of the following:
(1) Prioritize protecting individuals, especially those in need of legal assistance, from unscrupulous actors, including those actors seeking to do business in the legal field, above all else.
(2) Prioritize increasing access to justice for indigent persons.
(3) Exclude corporate ownership of law firms and splitting legal fees with non-lawyers, which has historically been banned by common law and statute due to grave concerns that it could undermine consumer protection by creating conflicts of interests that are difficult to overcome and fundamentally infringe on the basic and paramount obligations of attorneys to their clients.
(4) Adhere to, and not propose any abrogation of, the restrictions on the unauthorized practice of law, including, but not limited to, Sections 13405 and 16951 of the Corporations Code.
(b) This section does not limit the State Bar’s ability to provide limited practice licenses to law students and law graduates under certain conditions, and with the supervision of an active State Bar-licensed attorney.
(c) This section does not limit the examination of the use of technology to increase access to justice for lower income and indigent persons so long as proposals adhere to, and do not propose any abrogation of, the restrictions on the unauthorized practice of law, including, but not limited to, Sections 13405 and 16951 of the Corporations Code.
(d) The State Bar shall not expend any funds, regardless of the source, on activities that do not meet the requirements of this section.
While the sandbox remains alive, it seems doubtful that the sweeping reforms sought by “technologists and others” allowing non-lawyers to own and direct the provision of legal services will see the light of day for the foreseeable future.