Disruption in Action: How the “Arizona Experiment” is Stoking the Flames of Transformation in the Legal Industry
As the legal community readies itself to move boldly into an uncertain future, there’s really no better way to settle into a disruptive mindset than to look around and acknowledge the very real—and very significant—acts of disruption taking place within our industry at this very moment.
Take the 2020 court order eliminating Rule 5.4 in Arizona, which not only eliminated Rule 5.4 on fee sharing with non-attorneys but also effectively removed the long-standing ban on non-lawyer ownership of law firms operating in the state. More specifically, the amendment introduces a new licensing requirement for so-called “Alternative Business Structures” (ABS), allowing non-legal entities to acquire a partial stake in AZ-based firms, provided that at least one authorized attorney is appointed compliance counsel.
It’s now been less than three years since the start of the “Arizona Experiment,” and we’re already seeing a number of impactful responses among law firms and would-be investors. Massive litigation finance companies like Burford Capital and Longford Capital Management have since expressed interest in acquiring firms in the state. Almost 50 legal entities have been licensed by the Arizona Supreme Court to participate in the ABS program.
Notably, while Arizona’s actions may be the most dramatic regarding Rule 5.4, they aren’t the only state interested in opening the door to new investment opportunities. Utah, for example, approved a pilot program ahead of the Arizona ruling, allowing non-legal entities to offer innovative new legal services in the state. Similarly, in 2021 the California Supreme Court approved its own amendment to Rule 5.4, increasing fee-sharing permissions between law firms and qualified non-profit organizations.
For some, the above amendments represent critical first steps toward reimagining legal work for the modern age, expanding access to affordable representation, and addressing the legal sector’s overall failure to keep pace with the digital transformation of other industries. However, this does not appear to be the mindset of the American Bar Association (ABA) and a myriad of partner firms, whose responses, while decidedly mixed, have largely defended maintaining the status quo.
ABA Defends Exisiting Ownership Rules
In August 2022, the ABA’s House of Delegates issued its long-anticipated response to the Arizona amendment in the form of a non-binding resolution, ultimately advising states to uphold Rule 5.4 as it currently stands. Calling the move a “huge victory for all lawyers,” Stephen Younger, former president of the New York Bar Association, went on to describe the resolution as a nationwide agreement between lawyers that the industry “ought not to allow investment firms and tech companies buy our law firms and thereby influence our independent legal judgment.”
Interestingly enough, while the ABA maintained its decades-old position that non-lawyer ownership of law firms is “inconsistent with the core values of the legal profession,” the group stopped short of discouraging innovation and even expressed some hesitant support for the emergence of new business models in addition to ongoing regulatory reform.
In my estimation, this sort of mixed messaging is an entirely understandable yet overly safe response to the potential disruption posed by Arizona’s elimination of Rule 5.4, including the growing possibility of other jurisdictions following suit. After all, the legal industry’s poor track record when it comes to technological innovation isn’t really a matter of debate, but expressing support for outside investment into the space is still viewed by many as a dangerous repudiation of legal tradition and one that very few practicing attorneys are willing to make.
Join our community and be part of the future of law.
This is an example CTA within a Blog.
Disrupt, or be Disrupted
To be fair, the ABA is far from alone in its resistance to change. A recent report from Law.com suggests that a fair amount of hesitation and skepticism remains strong among partner firms throughout the country. In addition to regulatory uncertainty, opposition to non-lawyer ownership seems to stem from a fear of the unknown or an overall inability to fully evaluate the risks involved with ceding control of operations to non-attorney stakeholders.
In the words of Marcie Borgal Shunk, founder of The Tilt Institute, “Lawyers are more risk-averse than your average person, and some of that is due to the nature of the business of law.”
Marcie has a point here; taking significant risks is typically a last resort strategy for a law firm looking to secure justice for its corporate clients, and the unusually high-risk appetite of Wall Street investors is one of the primary reasons that regulators have been so careful to prevent their influence over the space.
But at the same time, it seems incredibly unwise to sit back, play it safe, and passively observe the disruption occurring right before our eyes. As we speak, litigation funders and private equity firms are actively preparing to invest heavily in the U.S. market as soon as the opportunity presents itself. They are, meanwhile, becoming adept at running legal businesses in foreign jurisdictions as well. Moreover, the Big Four accounting firms have already spent years readying modernized legal services solutions in outside markets, many of which could pose a significant threat to legal professionals in the U.S. if the regulatory climate shifts even slightly in their favor.
In other words, while understanding and respecting the risks of non-lawyer ownership is essential, we also can’t ignore the risks of not tapping into the disruptive mindset ourselves before the influence of outside capital becomes too powerful and one-sided, and the average law firm no longer has any input in the future shape of our changing industry.
Now, am I saying we should all roll over and auction off a sizable chunk of equity in our firms to the highest possible bidder? No, of course not. But I am saying that the last thing we should be doing is covering our heads and going into self-preservation mode, as opposed to restoring our confidence in the value that only we can bring to the table and ensuring that the future of law reflects our unique vision and expertise.
Because, at the end of the day, the disruption of our industry is inevitable and entirely necessary. And once we set aside all of the structural and regulatory complexities involved in what we do, it becomes clear that we only have two choices going forward: Disrupt or be disrupted.
