A Tale of Two States: First-of-its-Kind Data-Driven Analysis of Legal Regulatory Reforms

Utah and Arizona are pioneers in the regulatory reform space. In Utah, the state supreme court and the Utah Bar Association worked together to launch the first legal regulatory sandbox, where authorized entities can offer products and services that would not have been permitted under the traditional rules of professional conduct. The Arizona Supreme Court took a different approach to reform and amended the state’s prohibitions on nonlawyer ownership. Legal services entities within the state that are seeking a co-ownership arrangement with individuals who are not lawyers can now apply for an Alternative Business Structure (ABS) license.

While the regulatory reform strategy differs between the two states, there are similar and interrelated motivations driving these efforts: fostering innovation and increasing access to justice. New research from Stanford Law School’s Deborah L. Rhode Center on the Legal Profession, led by David Freeman Engstrom and Lucy Ricca (Co-Director and Director of Policy and Programs, respectively), begins to shed light on what is happening in these ecosystems. In doing so, the Legal Innovation After Reform report provides early but key insights into the central premise of regulatory reform: “that the existing rules governing delivery of legal services create high and often insurmountable barriers around the supply of legal services, raising prices, stymieing innovation, and yielding a dysfunctional market that cannot optimally deliver legal services to those who need them.”

Methodology

The Stanford researchers conducted interviews with 37 entities that had authorization to operate in jurisdictions with liberalized regulatory rules. Half of these entities were in Utah and Arizona; the other half were in England and Wales, where certain regulatory reforms have been in place for a decade. (For the sake of brevity and focus, we do not include mention in this piece of the insights gleaned from England and Wales.) In order to understand the broader context of how much innovation may occur in these jurisdictions and, importantly, who that innovation serves, the researchers analyzed public-facing materials from 57 of the entities authorized in Utah and Arizona. 

Types of Innovation

The study identified five innovation types emerging in these liberalized regulatory environments.

1. Traditional law firms that have introduced a partner that is not a lawyer, new sources of capital to drive expansion of services, or a new service delivery model.
2. Law companies providing legal services as their primary business but that are not owned solely by lawyers and/or are structured as a for-profit corporate entity.
3. Non-law companies either combining law and non-law expertise under the same roof or offering legal services as an add-on to their primary line of business.
4. Marketplace platforms that connect lawyers and consumers, and that offer some sort of practice support to the practitioners.
5. Only available in the Utah sandbox, but which can overlap with any of the four business models described above, are entities using software or professionals who are not lawyers to practice law.

Incidence of Innovation

In addition to identifying the types of innovation occurring in these liberalized legal services markets, the Stanford study set out to determine how much of each type of innovation is likely to result from the different reform approaches. (See Endnote 1)

The study found that “rule reform in both states is spurring significant innovation in the ownership structure of legal services providers, and lawyers are playing a central role in that innovation.”

• With respect to innovation by traditional law firms, the Arizona reform approach is yielding a larger proportion than is the Utah sandbox (53% [10] and 26% [10] of authorized entities; respectively). 
• Most of the law companies in Arizona and Utah have sought authorization in order to incorporate lawyers into the services they offer. These comprise 26% (5) of authorized entities in Arizona and 38% (15) of authorized entities in Utah.  
•  A similar percentage of non-law companies have emerged in Arizona (21% [4]) and Utah (18% [7]).
• The marketplace platforms (3) have all been established in the Utah sandbox.
• Entities (13) using providers who are not licensed attorneys and/or technology to practice law are only active in the Utah sandbox, which allows UPL modifications as part of its reform approach. 

With respect to innovations designed to serve low-income populations, these entities are all located in the Utah sandbox. The study found that “nonprofit organizations and B corporations together make up 10 percent (4) of entities in the Utah Sandbox.” The study also found that most of the authorized entities in Utah and Arizona are serving consumers and small businesses: “Based on this evidence, rule reforms appear more likely to spur innovations that serve clients within the PeopleLaw sector, not the BigLaw sector.” 

The authorized entities in Utah are serving a larger diversity of legal service areas than are the entities in Arizona. Entities in both states are active in the following service areas: accident/injury, business, consumer finance, criminal, end of life planning, immigration, marriage and family, and real estates. Only entities in the Utah sandbox, however, are offering legal services in discrimination, healthcare, landlord-tenant, and public benefits matters.

An entity’s ability to take on ownership or investment by those not licensed to practice law is a hallmark of both states’ approach to reform. Under the Arizona ABS system, this is the only opportunity for reform. In Utah, 85% (33) of entities sought authorization for ownership/investment by those who are not lawyers. Of these entities, nearly three-fourths (24) took on 50% or more by professionals that are not lawyers. Nine entities entered into arrangements that involved less than 50% of such ownership/investment. Across the two states, the most common reasons given for entering into these new ownership/investment structures include access to capital, investment in technology, and hiring/retention of or partnership with providers who are not lawyers.

Technology features prominently in the entities authorized in Utah and Arizona, and perhaps more importantly, 54% (19) of these entities employ a technology tool that “is primarily public-facing and not practicing law within the conventional meaning of UPL.” Non-tech innovations are also important among entities in Utah and Arizona, particularly pricing innovations, which include subscription and flat-fee pricing. 

This study is an important next step in understanding the interplay between professional regulation and legal innovation. The findings also highlight how different approaches to rules reform may yield different outcomes with respect to access to justice.  

Endnotes

1. Earlier this year, Thomas Clarke and Lucy Ricca published a white paper outlining the key design choices for regulatory reform. While the Legal Innovation After Reform study acknowledged that the Utah and Arizona reforms are still in early stages, the findings provide preliminary evidence suggesting that these design choices matter.