States’ professional rules of conduct for the legal industry have effectively frustrated the creation of tech-enabled legal services. States restrict the practice of law to licensed attorneys and largely prevent those without a license from owning or investing in law firms. By doing so, state policymakers have prevented the tech industry from innovating within the legal industry by building digital legal services to meet the needs of businesses and individuals. Policymakers should amend these rules to allow businesses to create tech-enabled legal services.
All states require lawyers to obtain a license before offering legal assistance to clients. The prerequisites necessary to obtain a license vary by state, though most require aspiring lawyers to pass the state bar exam on legal subject matters and ethics and undergo extensive background checks before receiving a license. While the intent of these licensing requirements are ostensibly to properly vet those providing legal services to protect the public, they also effectively discourage competition from tech-enabled legal services. While some companies like LegalZoom and Upsolve offer automated tools to help their customers with legal issues, these are mostly restricted to completing legal forms, such as to file for divorce or bankruptcy. State licensing requirements prevent these companies from providing tailored legal services to clients.
So why don’t businesses interested in providing tech-enabled legal services just partner with existing law firms? There are state restrictions on that too. Most states have enacted rules against nonlawyers owning any interest in legal practices. The American Bar Association’s Model Rule 5.4 prohibits lawyers from sharing legal fees with non-employee nonlawyers and entering into business partnerships with nonlawyers if their activities will consist of the practice of law. The purported intent of these restrictions is to protect clients—the reasoning being that non-lawyer investors might prioritize profits over clients (as if lawyers are never driven by profits)—but these rules effectively prevent non-lawyers from working jointly with law firms to offer tech-enabled legal services.
This leaves only law firms to create tech-enabled legal services, but few are equipped to do so or even want to do so. Most law firms are structured to compensate partners based on a percentage of the firm’s profits, thus creating an incentive to increase billable hours and client fees rather than reinvest large amounts of funds into developing new technology. Moreover, state restrictions limit outside investors in law firms. This means that law firms cannot rely on venture capital. In contrast, technology start-ups often rely on outside funding, especially during early years when they are developing new technology, building a customer base, and are not yet profitable. Effectively barring venture capital firms from investing in law firms the same way they invest in start-ups further stymies the development of tech-enabled legal services by making it harder to finance these efforts.
States’ rules restrict nonlawyers from operating tech-enabled legal services, prevent tech companies from partnering with law firms to develop them, and prohibit outside investment that could encourage law firms to build these services themselves. These rules limit competition from potentially more efficient tech-enabled legal services that could offer better, cheaper, and more accessible representation to individuals and businesses. States should amend their rules to allow businesses to own and operate tech-enabled legal services that meet or exceed the standards of existing licensed attorneys as well as allow non-lawyers to own and invest in law firms to support the development of tech-enabled legal services.
Unfortunately, many states may be reluctant to take these steps, in part, because state bars and courts—the organizations responsible for setting licensing rules for practicing law in each state—are typically run by lawyers and these lawyers have a financial stake in avoiding competition with potentially more efficient, tech-enabled legal services. If states fail to act, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) should intervene (as they have in the past), and open proceedings to investigate the impact of these potentially anticompetitve restrictions on consumer welfare. As an initial step, the FTC and DOJ should host a joint workshop to explore this topic to better understand the issues at stake and how changes could benefit consumers.