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Does the UK know something we don't about alternative business structures?

By Laura Snyder

January 1, 2015, 5:51 am CST

For two nations sharing a language and legal history, the contrast in the visions at play in the legal systems of the United States and United Kingdom is more than striking. It’s revolutionary.

The debates in the U.S. go on: Should ethics rules blocking nonlawyer ownership of law firms be lifted? Is the current definition of unlicensed law practice harming rather than protecting clients? What about the restrictions on multidisciplinary practices?

And those debates are by no means ending: Witness the newly created ABA Commission on the Future of Legal Services. Though ABA President William C. Hubbard does not mention ethics rule changes in the commission’s primary task of identifying the most innovative practices being used in the U.S. to deliver legal services, some of those practices have been questioned as possible ethical breaches. Meanwhile, the rules and restrictions stay in place. The situation in the United Kingdom couldn’t be more different: Such restrictions have largely been lifted, and under the Legal Services Act the creation of new ways of providing legal services—including through alternative business structures—is more than simply permitted; it is actively encouraged.

And what is happening on the other side of the ocean may have direct consequences for the United States. Below is a tale of two companies that brings the picture—and its significance for the U.S. legal services market—into sharp focus.

The two companies, LegalZoom and Jacoby & Meyers, figure among the most recognized legal brands in the U.S. They are different in many ways, yet have remarkable commonalities.

ZOOMING IN

Founded in 1999, LegalZoom launched in 2001 with $2 million in seed funding. Over the course of several years it raised upwards of $100 million of private equity funding to finance its operations nationally.

LegalZoom began by providing an online legal document creation service together with an education center for individuals and small businesses searching for help with their legal needs. It has encountered challenges from a few state bars around the country claiming that it engages in the unauthorized practice of law. While none of those challenges has permanently stopped its operations, the company nevertheless responded by building a network of local attorneys and adding to its offerings an attorney referral service under a fixed-fee subscription legal plan.

LegalZoom’s sales have grown to more than $150 million, and it claims to be the most recognized legal brand in the U.S. To obtain funds for further expansion, the company filed for an initial public offering in 2012. However, dogged by recurrent claims that it engages in UPL and by a lack of clarity regarding the legal nature of its products and services, LegalZoom withdrew the IPO filing, citing unfavorable market conditions. It also increased its focus on new product development.

But in February 2014, LegalZoom announced with Permira, a European private equity firm, “the acquisition of more than $200 million of the outstanding equity of LegalZoom by a company backed by the Permira funds.”

Now having proved its concept nationally—in a 2012 filing with the U.S. Securities and Exchange Commission, LegalZoom claimed service to 2 million customers over 10 years and 2011 revenue of $156 million—and still having access to private equity funding, LegalZoom is expanding overseas. The U.K. was an obvious place to start given the common language and similar legal systems.

J&M EVERYWHERE

Jacoby & Meyers was founded in 1972 by Leonard Jacoby and Stephen Meyers, two UCLA law school classmates. It began as a single storefront office and has grown to more than 310 attorneys and 600 staffers, providing legal services via its virtual office technology and more than 130 offices in all 50 states. Billing itself as “America’s largest full-service consumer law firm,” J&M seeks to provide an alternative source of legal support to lower- and middle-income clients who otherwise could not afford to hire a lawyer.

Since J&M was founded, it actively sought to develop and implement more cost-effective and efficient means to reach and serve clients. It opened branches in shopping malls, maintained Saturday evening office hours and was the first to accept credit card payments. To keep client costs low and predictable, J&M standardized its claims-handling process and charged flat fees.

In seeking to reach its target clientele, J&M did not shy away from controversy: It was a major instigator in the debate regarding attorney advertising, which culminated in the 1977 U.S. Supreme Court decision Bates v. the State Bar of Arizona, in which the court found lawyer advertising to be commercial speech and upheld lawyers’ right to advertise. The day after publication of that decision, J&M placed its first newspaper advertisement; within days it also aired its first television ads, making it the first U.S. law firm to advertise on TV.

In 2011, J&M brought litigation against bar authorities in New York, New Jersey and Connecticut requesting that the enforcement of the “antiquated” ethical rule that restricts nonlawyer ownership of law firms be enjoined. Among its multiple arguments, J&M asserted that the rule violates the state constitutions, violates the separation of powers, is void for vagueness, and is an excessive burden on the flow of interstate commerce.

J&M argued that the rule prevented it from raising the capital necessary to pay for improvements in technology and infrastructure, to expand its offices and to hire additional personnel. As a result of its restricted access to funding, suffered as well by other law firms, J&M argued that access to legal services for those otherwise unable to afford them was dramatically impeded.

Last July the firm voluntarily dismissed its New Jersey suit. The litigation, ongoing in New York and Connecticut, is taking its time wending its way through the courts—and as it does, that antiquated rule remains in effect.

So J&M didn’t wait for litigation to finish before rolling out a new model for associating other law firms with its brand. However, in a difference from previous campaigns, J&M sought to roll the model out both nationally and internationally, notably across Europe. Again, the U.K.’s common language and common-law legal system made it the obvious choice for establishing a European foothold.

MODEL RULE ROADBLOCKS

The restrictions that have curtailed the two companies in the U.S. have their origins in ABA Model Rules of Professional Conduct 5.4 and 5.5, versions of which have been enacted in most states. Under these rules:

• Nonlawyers are prohibited from creating, owning or managing law firms, either alone or in partnership with lawyers. (Only the District of Columbia allows minority-nonlawyer ownership of U.S. law firms.)

• Multidisciplinary practices combining legal services with nonlegal services are restricted.

• Lawyers admitted in one U.S. state but not in another may not actively seek clients in that other state, nor advise clients with respect to the laws of that other U.S. state. Each constitutes the unauthorized practice of law.

Because LegalZoom has nonlawyer ownership, under the ABA Model Rules it cannot purport to be a law firm or practice law in the U.S. So when it sought to offer clients access to lawyers, it could not do more than create a referral service, since its in-house attorneys were not allowed to provide legal services to anyone but LegalZoom itself. Even in creating the referral service, it had to avoid promoting another form of UPL by having any of its network attorneys advise clients in a state where he or she was not admitted to the bar.

As for J&M, its situation is more straightforward: It wants external investment to fund its expansion plans, but says it was unable to obtain this because of the Model Rules.

Between 2009 and 2012, the ABA Commission on Ethics 20/20 considered making changes to Rule 5.4 to permit nonlawyer ownership of law firms and to permit multidisciplinary practices. According to Andrew Perlman, chief reporter for the commission, the panel sought “empirical evidence” from the U.K. (and programs in Australia and D.C.), but ABS was so new, “there was very little evidence … that could really demonstrate a benefit” to clients.

Still, a draft proposal to modify the nonlawyer ownership rule to be similar to the D.C. program was released for public comment.

“It suffices to say the response was overwhelmingly negative,” Perlman says.

At the end of its examination, the commission declined to recommend any changes, saying that “the case [for making changes] had not been made.”

Paul Paton, the dean of the University of Alberta’s law school who served as an Ethics 20/20 reporter from 2010 to 2012, thinks the wrong question was being asked: “Where is the evidence of demand from consumers?”

Invoking the image of Steve Jobs and other innovation giants, Paton notes that these entrepreneurs did not wait for demand before creating products that developed huge consumer markets.

“If you need to assess the demand, you only need to take a look at how many people are accessing LegalZoom,” Paton says. “Lawyers could be providing those services.”

Even in the absence of changes to the Model Rules, certain elements of the legal services market in the U.S. are being re-engineered. These service providers have identified imperfections and inefficiencies in the traditional law firm model, and have created new services and new business models to address them. In doing so, the need to negotiate their way around the Model Rules has forced them to take one of two paths.

The less risky path has been to craft and market services for law firms themselves or for other companies, and notably for large companies with their own in-house legal departments. This is the path that companies such as Axiom Law (legal placement and outsourcing), Lex Machina (legal data analytics), KCura (Web-based e-discovery) and Anaqua (intellectual property asset management) have followed.

Gillian Hadfield, a professor of law and economics at the University of Southern California, explains: “We have created a set of rules where there are more exceptions if it is just lawyers that want to play. As a result, the restrictions of the Model Rules apply only in a limited manner when the decision-maker for the client is a licensed lawyer.”

The other path, taken by companies that develop and market their services for individual consumers and small businesses, is significantly riskier. RocketLawyer and Shake are two examples of companies whose shareholders and senior management include nonlawyers. Because they sell directly to individuals and small businesses without the intermediary of a licensed lawyer as the purchaser, they must carefully restrict their offerings. For example, RocketLawyer can sell document templates, but it cannot offer the services of its lawyers in direct client support for using those templates. The most it can do is offer an attorney referral service with the option of a limited prepaid legal plan.

“U.S. companies have to tailor their models in order to fit the Model Rules,” says Hadfield, who sits on LegalZoom’s Legal Advisory Council. “There are many things that U.S. companies cannot do, and the fact that there is a little going on at the margins does not come close to what could be done if the restrictions were not there.”

In August, however, RocketLawyer and the ABA announced a pilot program to link potential small-business or self-employed clients to the ABA’s network of practicing lawyers through RocketLawyer’s cloud-based platform.

OPERATION U.K.

While facing these limits in the U.S., LegalZoom and J&M have set their sights overseas.

LegalZoom, fresh from an additional round of private equity funding and wanting first to dip its toes into the U.K. market before diving in, has entered into a partnership with QualitySolicitors, a national network of franchised firms. Via this partnership, LegalZoom can leverage its technology and automated document-creation capacities and again combine them with a prepaid legal plan. However, the regulatory environment in the U.K. affords greater flexibility, and LegalZoom is able to directly provide its customers the support of QualitySolicitors lawyers in a manner that is integrated with every customer purchase under a variety of prepaid legal plans. As a result, the experience of a LegalZoom customer in the U.K. is less segmented and more streamlined than that of a U.S. customer.

In establishing its U.K. foothold, LegalZoom’s most immediate objective is to learn to adjust its offerings and marketing to the culture and expectations of the U.K. customer. But LegalZoom’s longer-term priority is to use the U.K. as a “legal laboratory,” a place to experiment with different customer service and delivery models to determine what the best “consumer-facing” legal service looks like and then expand that model outside the U.K.

J&M’s initial step into the U.K. is in the form of a joint venture—Jacoby & Meyers Europe Limited—with an affiliate of MJ Hudson, a niche London-based private equity and corporate law firm that was set up in 2010. Working with this firm, J&M is finalizing its model for a complete consumer and small-business law franchise offering, provided through virtual and physical offices.

J&M’s offering provides to its law firm members a recognized brand together with technology, infrastructure, back-office capabilities and experienced legal practice management. J&M is also working with its U.K. joint venture partner to develop plans for European expansion using direct recruitment, associations and acquisitions.

Again, with many differences, LegalZoom and J&M have two important commonalities: Both are using the U.K. as a place to develop new models for legal services. And both intend, in time, to deploy those models outside the U.K.

OPENING THE LAW

The U.K. Legal Services Act—adopted in 2007, three years after the blockbuster Clementi report (see sidebar on the right)—radically overhauled the regulation of legal services in England and Wales. The 400-page act instigated hundreds if not thousands of changes, including allowing nonlawyers to hold ownership and management positions in law firms and allowing creation of multidisciplinary practices.

“Massive evidence shows that there is a huge unmet need for legal services,” says Alex Roy, then-head of development and research of the Legal Services Board of England and Wales. “The unmet need is by no means limited to individuals and small businesses, but for them the situation is particularly acute.

“The U.K. reforms are about putting the customer at the heart of the relationship, and about prioritizing the needs of the customer. The reforms allow for people who have different skills and expertise to be brought together—people who typically aren’t brought together—in order to meet customer needs, and in order to improve access to justice and to legal services.”

To distinguish firms that have nonlawyer owners or managers, or that engage in multidisciplinary practices, from traditional law firms and sole practitioners, the U.K. rules provide for a new kind of legal company, referred to as an alternative business structure.

From early 2012—when ABS firms were first authorized—until press time in early December 2014, 386 had been established, 339 by the Solicitors Regulation Authority and 47 by another regulatory authority, the Council for Licensed Conveyancers.

Not all ABS firms are remarkable. For example, one of the first was a firm with just one solicitor. The application was made to permit the solicitor’s spouse, who was not a solicitor, to become a shareholder.

However, this example belies the wide variety and creativity of many ABS firms. They include:

Corporate and commercial services: Knights Solicitors, a firm that dates back to 1759, combines commercial and corporate legal services for companies with wealth management services for individuals. Upon converting to ABS status in early 2013, it became a multidisciplinary practice by adding town planning to its real estate offering. In addition, it received a seven-figure investment from the private equity firm Hamilton Bradshaw, using the investment for a new IT system and employee training.

Reputation defense: Before acquiring ABS status in 2013, Schillings was a traditional law firm specializing in privacy and defamation. Upon acquiring ABS status, it integrated a cybersecurity business and recruited risk management professionals from the management consulting world, transforming itself into a multidisciplinary practice combining legal services with risk consulting and cybersecurity. Schillings’ current COO is now the firm’s first nonlawyer partner.

Strategy consultancy: Obtaining ABS status in early 2013, Omnia Strategy is a multidisciplinary practice that advises governments, multinational companies and high-profile individuals on a wide variety of matters such as international public law, international counsel, negotiation and dispute resolution, and strategic communications, including reputation management. Its management team includes lawyers, along with experts in economics, diplomacy and communications.

Insurance claims defense: Triton Global is a multidisciplinary practice that integrates insurance claims administration, legal defense and representation, and claim investigation and adjusting for professional indemnity insurers and policyholders. As an ABS, Triton Global was the first legal services provider to offer employee share ownership, and to become a member of the U.K. Employee Ownership Association.

Consumer services: MyHomeMove is a conveyancing service assisting consumers with real property transactions, notably the purchase and sale of their homes. Kings Court Trust is a probate service assisting families through the probate process upon the death of a loved one. Both operate on a volume model supported by online platforms. While both employ lawyers, including on their respective senior management teams, neither company’s CEO is a lawyer. They also have in common a shareholder, Smedvig Capital, a private equity firm that invests in fast-growing businesses.

But the adoption of the ABS structure is not always necessary. As Roy explains, “While the discussion of the U.K. regulations is often focused on nonlawyer ownership, MDPs and the creation of the ABS structure, the changes in our regulations are much more profound. Essentially, we’ve taken away the restrictions on competition in the legal services market, and in doing so we’ve fostered a general climate of innovation and creativity in the provision of legal services. As a result, whether they do it as an ABS or not, all lawyers need to re-engineer what they do and how they do it in order to compete in a very different environment.”

“The U.K. benefits economically from being more open,” Roy says. “Competition drives competitiveness drives performance of the firms. While the law itself across jurisdictions may be different, the model you use to deliver and the types of issues you have are the same. So you can take a platform and a way of dealing with law and apply it by modifying the underlying legal framework behind it. And while this might work more easily where you have similar jurisdictions, like common law, we increasingly see firms coming from Europe—from civil law jurisdictions—and competing in the U.K.”

GOING GLOBAL

But far beyond just competing in one (the U.S.) or two or three (the U.K.) countries, ABS structures can arguably open the world to legal services providers.

In offering multinational, if not worldwide, legal services from a U.K.-regulated ABS, LegalZoom and J&M expect to benefit from a tradition of export of law and legal services, together with a regulatory environment that promotes and supports such export, and the favorable reputation and high standing in which U.K. law and its legal service providers are generally held.

“The U.K. government senses in law and legal services a real opportunity for export,” Roy says. “The U.K. already has a strong financial center and a large number of large international law firms. Feeding on that already competitive environment, the U.K. government sees the possibility to drive higher legal exports from the country, and to develop law and legal services as an area for competitive advantage.

“The U.K. government sees that it can promote law firms that can operate both here and overseas,” Roy continues, “delivering high-quality [legal services] using the brand of England, where lawyers are seen as well-trained and highly skilled, and operating in flexible firms that can deliver advice to businesses and people on a global basis.”

Roy adds that “law has been globalized for large corporations for quite some time now, of course. What you see now is that law is also becoming globalized for small businesses and even individuals. And what is driving this change is IT. Firms now have the ability to harness IT in order to deliver legal services over the Internet to anyone in the world.”

Lisa Webley, a professor of empirical legal studies at the University of Westminster in London, agrees: “Even before the 2007 Legal Services Act, the U.K. was very open. Non-legally-qualified people have always been able to offer legal services, as long as they are not one of the six reserved activities. The Legal Services Act did not change that.”

In addition, Webley says, “the U.K. has for a long time been open to foreign lawyers. Our rules permit lawyers from nearly anywhere in the world to establish themselves in the U.K. and be regulated here as registered foreign lawyers. They can do that without attending law school or taking a bar exam here in the U.K. Their only restrictions are that they cannot claim to be solicitors or barristers, and they cannot engage in any of the six reserved activities, none of which include drafting contracts or providing legal advice. Because of this openness, from a U.K. base, it is not just possible but relatively easy to offer legal services in the law of pretty much any country in the world.”

And in Webley’s opinion, consumer legal needs in the U.S. are in sync with the new U.K. rules.

“The changes to the U.K. rules have been much discussed in relation to big, international practices, but where they will be a true game changer is for small, domestic U.S. legal practices,” she says. “It is easy to imagine a U.S. legal service provider that comes to the U.K., raises investment capital in the U.K., puts money into technology and develops a more efficient business model, employs U.S. attorneys as registered foreign lawyers, and offers the entire package back to clients in the U.S.”

And another nation’s legal professionals are considering moves similar to ABS. In August the Canadian Bar Association released a report, Futures: Transforming the Delivery of Legal Services in Canada, that calls for radical changes in rules governing lawyers.

Citing globalization, technology, market competition and a need for expanded access to justice, the report says lawyers must be able to work “through new structures and in conjunction with other professionals (including alternative business structures).”

The 22 recommendations include non-lawyer ownership, multidisciplinary practice, regulation of law firms as well as lawyers, and a commitment to diversity. For such changes to go into effect would require approval by Canada’s provincial bar associations and some legislative changes.

“It will take time—a few years at least—for it to all come together, but as things stand, it will happen and it will be a game changer,” Webley says. “In the U.S., it is the consumer and small-business market rather than the large-firm market that is more vulnerable to the U.K. rules, as consumers and small businesses are used to getting all sorts of services over the Internet, and they are not impressed by heavy-hitting law firm partners or fancy offices. They just want less-expensive, quality legal services.”

The ABA’s Commission on the Future of Legal Services may play a role in this game as it considers the new practices nonlawyers are using to deliver legal services—something the U.K. has through its list of reserved activities only licensed lawyers may do.

“Regulators in the U.S. may try to stop this from happening,” Webley adds, “but their room to maneuver will be limited. They may argue there is unauthorized practice of law, but U.S.-admitted attorneys would be doing the legal work. They may argue there is sharing of legal fees, but the U.S. lawyers will not receive fees; they will only receive a salary. They may argue that a nonlawyer cannot have the right to direct or control the professional judgment of the U.S. lawyer, but the other ABS structures that we have here in the U.K. demonstrate that mechanisms can be put in place to prevent that from occurring, albeit ones that are as yet relatively untested. In fact, a U.S. regulator would not have many options in a scenario like this one. It would be a ‘market muddle.’ “

John Flood, a professor of law and sociology at the University of Westminster, agrees. “Regulators in the U.S. may very well try to take action against a U.K.-based company providing legal services via the Internet to clients in the U.S., but there is little they can do to stop it,” he says. “The regulators would not get a lot of support, and the FTC would quite happily eliminate the lawyers’ monopoly.”

But Paton, whose responsibility on the ABA’s Ethics 20/20 Commission included its work on ABS, sees the roadblock coming not from lawyers and regulators, but from American clients. “I’m not as convinced of American consumers accessing legal services that way,” he says.

Still, he foresees change coming to the U.S. in the face of ABS opportunities. “I’d rather see the legal profession lead,” he says, “than have it come from government.”

“Lawyers are very slow, so the changes will take time,” Flood says, “but it will happen. The U.S. market, and especially the U.S. consumer market, is ripe for someone—anyone, from anywhere—who can provide quality products and services at a lower price. U.K.-based legal services providers have the ability to dominate not just the U.S., but the world, and they have the means to do it.”

But none of this is new for LegalZoom or for J&M. They’ve already put together the pieces of this puzzle. Why else have they gone to the U.K.?

This article originally appeared in the January 2015 issue of the ABA Journal with this headline: “Flexing ABS: Does the U.K. know something we don’t about alternative business structures? Two U.S. legal companies are hoping to see the light.”

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Laura Snyder has 20 years' experience in international corporate law. She is at work on a book-length look at the effect of alternative business structures on legal practice in the U.K., Australia and the U.S., to be released by ABA Publishing.