Re-regulating legal services in the US

A brief reminder that in the US legal regulation is broadly a state matter. At the federal level the Department for Justice and Federal Trade Commission advocate for reform and for a more pro-competition stance. They may even use their powers directly where self-regulation might be seen to harm the public interest (see for example North Carolina State Board Of Dental Examiners V. Federal Trade Commission). As the UK and US start to explore trade negotiations we know that legal services were, perhaps unexpectedly, on the table to some degree. But it is the individual States that really matter. And, having left the issue to State Bars for far too long, State Supreme Courts are recognising just how badly the legal market functions for ordinary people. Hence the activity that we saw (and I blogged about) in 2019.

However, a note of caution for regulators and geeks alike. The resistance from the deeply conservative branches of the legal market are loud and powerful. They remain small – the negative responses to California’s consultation numbered something like a few hundred respondents among a lawyer population of over 170,000, and a significant minority of respondents supported change. That really is not much opposition at all, but it matters when self-regulatory institutions are unused to the levels of resistance from market participants that is commonplace in telecoms, energy or financial services regulation for example. There is a real risk that regulators water down their proposals just to try and win over a tiny minority of market incumbents who have no significant evidence to support their resistance to reform, or to gain favour with democratic and judicial institutions that face lobbying.

What might happen if regulators do water down proposals, slow down reform or just deliver reforms in a way that undermines effective change. Let’s look at the legal market as it is now – not what might be, but what is.

Elevate, Axiom, United Lex are all finding ways to make regulation irrelevant for corporate clients. They have a roster of lawyers that they hire out to clients, where GCs can then supervise those lawyers as in-house. Call this the gig economy, agency working, recruitment bureau or whatever but the outcome is simple. Over regulation that prohibits non lawyer ownership leads non lawyer creators to find new products and services that mean corporate GCs do not need to buy legal advice from law firms. None of these three firms are breaching unauthorised practice of law – they simply do not practice law. But they curate the legal labour market and provide GCs with an alternative to legal advice from traditional law firms. These businesses are not waiting for regulators to reform – and importantly nor are their clients, as GC’s increasingly insist that traditional law firms partner with these expert legal businesses.

Elevate has taken this a step further with ElevateNext Law. This new model law firm sits alongside Elevate – offering the practice of law with the technology and client focus that comes from the parent brand. If anyone doubts that the new entrants of the last 20 years are marching up the value chain, stop and look at this firm. Major clients love it.

Let’s also consider the Big Four. I do not know how many lawyers they employ in the US but it will be significant. They will be working to help their clients solve business problems that might alternatively be solved by legal advice from traditional law firms. When a management consultant, accountant, process designer or outsourcing expert works with a Corporate GC or FD to manage their sales process or contract management the Big Four might get legal advice from their internal lawyers. They solve the client’s problem and avoid the need for legal advice from a traditional law firm. KPMG legal has recently opened in its 79th jurisdiction. Its ability to focus on products, processes and platforms as well as traditional legal advisory work sets its apart from all but the most forward-thinking traditional law firms. Clients approve of that and this will continue regardless of regulatory reform.

It is not just corporate clients that are benefiting from ‘enterprise’ (I so dislike the ‘alternative’ moniker) legal service businesses. Legal Zoom and Rocket Lawyer are delivering solutions to the everyday problems of individuals and small businesses. A mix of self-service, curated and intelligent support allows people to solve their legal problems without turning to traditional law firms that charge by the hour and seize control of their problem. 25 million US adults have an account with Rocket Lawyer. These two businesses have grown substantially despite the illiberal regulatory environment. Clients will keep choosing these services irrespective of regulatory reform.

We could go on. We could for example consider litigation financing in the US, or funding of debt in law firms. What is clear is that wherever you look in the US legal market change has already happened. New ideas have broken through guild like walls and new law companies are meeting the needs of clients of traditional law firms in ways that simply bypass regulators. If you still don’t think this is significant look at what investors think. In 2018 investment into legal tech (many of the companies mentioned above) broke through $1 billion. And it rose further last year. Permira’s major investments into Legal Zoom and Axiom; Kayne Anderson Capital’s investments into Elevate and the money flowing into start-ups should be evidence enough of the potential for the enterprise legal market to grow over the next five years.

Law firms in the UK have responded to regulatory reform and increased competition. Major firms like Pinsent Masons ‘professional services with law at the core’, Bryan Cave Leighton Paisner’s new Cubed and others are developing and delivering imaginative solutions to compete in this changing legal market. Some even see the opportunity that comes from external capital and floating – see Ince Gordan Dadds as just one great example.

So back to the US and attempts to re-regulate. The danger for regulators is that they are too timid. The market has already changed and despite the protestations of some incumbents the question is not about ‘if’ non lawyer ownership, fee sharing, roll back of UPL should happen. The reality is that that question has been voided by customer pressure driving competitive responses outside of the traditional legal market. That is how our economies work.

The only remaining question for the US legal regulators is should they seek to regulate these new entrants or not? If they want a level playing field, if they want to use regulation to assure standards, or they want to allow traditional law firms to respond to the competition that they already face, then they need to move quickly with reform. Lawyers and law firms that resist re-regulation are cutting their own throats – they are not stopping new entrants but are giving them a free pass outside the scope of regulation.

It matters how regulators reform too. Experience from England & Wales tells us that if non lawyer ownership is allowed but the process for approval is too bureaucratic, or the regime too inflexible, or other controls incompatible with meeting client needs, then these enterprise businesses will continue to bypass regulators.

To tackle these and other issues regulators need to engage with the new entrants as they design reform rather than just talk to themselves, judges and lawyers. The absurdity of lawyers complaining that the California Task Force has representatives from tech and new law seems lost on many in the profession. The danger for those that wield influence is that while they look inward and debate narrow issues around how rules might be modified step by step, the existential question is being answered in the market place by new law companies and clients who used to exclusively turn to traditional law firms.

My call for to the US in 2020 is simply to be bold. Anything else is too little; too late. Luckily some States get it.