Arizona and Utah lead the way on legal industry change

A boardroom is seen in New York City, New York, U.S., June 3, 2021. REUTERS/Andrew Kelly

(Reuters) - When it comes to embracing change, the legal profession is about on par with my 93-year-old grandmother, who believes boats are not intended to be rocked.

That’s what makes Utah and Arizona’s ongoing experiments with loosening attorney regulations in a bid to spur innovation so noteworthy.

No need for pearl clutching though. As my colleague Karen Sloan reports, a new study by Stanford Law School shows that the programs are offering lawyers “a host of new opportunities to extend their reach” without triggering an increase in consumer complaints.

Per the report, 58 legal service providers have taken advantage of the new programs - Utah’s regulatory “sandbox” which launched in August 2020 and is authorized through 2027 and Arizona’s narrower “alternative business structure” option, which went into effect in 2021 and is permanent.

Bar ethics rules have traditionally prohibited non-lawyers from holding an ownership stake in law firms. As the report notes, such restrictions are meant to protect clients from profit-focused outside owners who might "undercut lawyers’ independence and loyalty to clients, thereby driving a 'race to the bottom.'"

But the report also flags the yawning "justice gap" in the delivery of legal services, with many people unable to afford legal help. The hope is that relaxing bar regulations could increase competition, allowing a wider of range of providers to offer lower-cost help.

I reached out to half a dozen firms that have adopted new ownership structures to include non-lawyer shareholders, curious why they made the switch and how it’s working out.

For some, it’s been a major shift.

“This is going to revolutionize the way we practice,” plaintiffs lawyer Steve German, who heads the newly formed Scout Law Group in Phoenix, told me.

Focusing on complex insurance, disability and personal injury litigation, Scout is majority-owned by Miami-based investment firm 777 Partners. According to a Sept. 21 news release announcing the deal, the partnership “will instantly create one of the country’s most well-funded” plaintiffs’ law firms.”

With a portfolio that includes professional soccer teams and budget airlines, 777 has also been active as a litigation funder. Here, rather than loaning capital secured by the promise of contingent fees, 777 co-owns Scout itself, bankrolling its expenses and sharing its profits.

German currently represents plaintiffs in the Camp Lejeune water contamination litigation, as well as in mass tort cases involving the drug Elmiron and infant formula-related necrotizing enterocolitis.

“All case decisions are my decisions,” he said.

For other practitioners, the structural changes have been less dramatic but still offer advantages to running their businesses.

Michael Payne, who is both a lawyer and a C.P.A., had been operating a law firm and a separate accounting firm in Arizona since 2017.

He combined the two to form BOSS Advisors. “We no longer have two calendars, two emails, two websites,” he said. “We are one unified front.”

The work tends to be complementary. For example, Payne said that in every merger or acquisition he’s handled as a lawyer, there “has been some significant tax element.” Likewise, tax work often triggers legal questions, such as whether someone is properly classified as a contractor.

Now, the two firms' experts are “all under one roof,” he said.

Of course, Big Law has long fretted about potential competition from the Big Four accounting firms for this very reason.

That's not an issue in Arizona or Utah, at least not yet. While the accounting firms are “seemingly well-positioned to utilize rule reforms in the U.S. legal markets, none have sought authorization in either Utah or Arizona,” the Stanford report notes, adding that the accounting giants “might not see Utah and Arizona as sufficiently large legal markets” to justify a foray.

Wealth management and estate planning are another obvious area of overlap.

Attorney Kent Phelps told me he spent more than 25 years working as trusts and estates attorney, establishing a referral relationship with financial advisor Jeff Junior, the owner of Trajan Wealth.

Together they formed the law firm Trajan Estate, which they said was first alternative legal services provider to operate in both Arizona and Utah. (Trajan Wealth continues to be separately held.)

Phelps said clients “love the idea that if something happens, it’s one stop.”

For Singular Law Group in Arizona, the new regulatory scheme meant that non-lawyer Allen Rodriguez, who previously founded law firm marketing, design and website development agency ONE400, could be a co-owner, not an employee.

At Utah-based workers comp law firm Davis & Sanchez, former owner Halston Davis said the sandbox program made it possible for him to retire by selling the business to his non-lawyer son-in-law, who had been managing the five-lawyer firm for years.

The firm continues to operate “exactly as it always has,” Davis told me, adding that selling to a family member gave him confidence that the business was in good hands going forward.

Still, the programs are not without problems. One Utah applicant, Blue Bee Bankruptcy Law owner Chip Parker, wanted to give a 10% ownership stake in his firm to a paralegal in recognition of her contributions and as a retention aid.

The firm's application to do so was “in limbo for many months,” awaiting approval from the Utah Supreme Court, he told me. In the meantime, he said, “they wanted us to continue reporting client data, and it’s just too cumbersome."

As a result, the firm gave up its quest. Parker called the process “a disappointment and a waste of our resources.”

A sandbox representative did not respond to a request for comment.

Hiccups aside, most firms’ experiences strike me as modest wins. Not the kind to fundamentally reshape access to justice, but at least demonstrating that states might safely loosen their grip slightly on how law firms are organized.

As grandma would attest, change is easier to accept if it comes in small steps.

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Jenna Greene writes about legal business and culture, taking a broad look at trends in the profession, faces behind the cases, and quirky courtroom dramas. A longtime chronicler of the legal industry and high-profile litigation, she lives in Northern California. Reach Greene at jenna.greene@thomsonreuters.com