Danger ahead!

Non-lawyers owning, operating and advertising their “law” firms with devastating consequences for both lawyers and their clients

2021 November

The State Bar of California continues to squeeze attorneys with more restrictive marketing and advertising requirements. At the same time and for the first time in California history, the Bar is pressuring the California legislature to allow “licensed” non-lawyers to advertise their ability to practice law and to have ownerships of law firms. This deregulation of the legal market is not theoretical – all California attorneys need to be informed so that we can stand up and defend consumers and the practice of law before it is too late!

The Bar’s progress in adopting non-lawyer marketing regulations is astonishing and real. On September 24, 2021, the State Bar Trustees approved public comment on the final report of the State Bar of California Paraprofessional Working Group (CPPWG). This report, despite strong opposition from CAALA and CAOC, intends to create a new type of “licensed” non-lawyer who will literally engage in the practice of law in certain areas.

This “licensed paraprofessional” will be able to advertise and market just as a lawyer does, own up to 49% of a law firm and share law-firm earnings. Following right behind the CPPWG is yet another committee called the State Bar of California Closing the Justice Gap Working Group (CJGWG or the “Sandbox”). This committee will propose even further law practice deregulation. Under the pretense of so-called “Access to Justice,” this deregulation will only benefit “Big Tech,” large accounting firms and even insurance companies, who will be allowed to use the internet and artificial intelligence technologies to mislead and confuse the public.

Truly unfair competition

What does this mean? In practice, it means that instead of my firm competing with a few other large-firm competitors, all of which are owned by individuals or small partnerships like myself, we will all be competing with the likes of Google, Facebook, Amazon, Uber, and other market-share-seeking mega corporations. This is all under the guise of access to justice. The reality is they want access to shareholder profit.

So, what’s the problem? Currently, we lawyers can all reasonably and fairly compete against each other when it comes to consumer advertising. But we cannot expect to outrank GoogleLaw on Google! Furthermore, the lead-generation companies that currently sell leads will no longer simply sell us leads. Rather, once the law allows them to share fees with lawyers, they will want to get paid 50% or more of the fees on the leads they send to lawyers. Even worse, these mega corporations do not need to make a profit, because they are funded by shareholders, investors, and are publicly traded.

The way these large companies are valued is not necessarily based on profit. Rather, they are valued based on market share acquisition. Did you know, for example, that Uber and Amazon and many other large tech companies intentionally operated at a loss for the first decade or more of their business? They did this by design to squeeze out competitors, gain market share, and then jack up prices, etc. once they dominate the market.

With their model, we will all soon become like the cab drivers who lost their businesses or the private practice doctors who got pushed out of business by the hospitals and HMOs and are now employees of hospitals. It’s terrible for lawyers that advertise to consumer clients because the advertising lawyer will no longer be able to compete to acquire cases.

It’s equally terrible for the heavy-duty trial lawyers because most of these trial lawyers get their cases referred to them from advertising firms. When there are only a handful of advertising firms left in business, rather than the thousands we see today, the big firms will control the industry. They will command how much the trial lawyer gets paid. Rather than doing a fee split on a case with a 40% contingency fee, the client will probably be paying only a 20% contingency fee since the mega corporation can afford to not make a profit while they work to gain market share by putting all of us out of business. Even if the big firms pay a percentage of the fees to the trial lawyer, that percentage will be based on a lower recovery for the client, plus I doubt the big firms will go 50/50. They will probably only offer a few percent to the lawyers since we will have become so deeply commoditized; treated and paid as poorly as Amazon treats and pays its current warehouse employees and drivers.

The consumer is victimized, too

More importantly, the mega-sized corporate non-lawyer-owned law firms will drastically harm accident victims as well. Why? Because these mega corporations don’t care about the results they get for their clients; they are just looking for market share. Full and complete justice means nothing to them. They’re also not interested in working hard to squeeze out more money on a settlement or proving their trial skills to the world by hitting a huge verdict because they aren’t in the business of looking for trial referrals. Simply put, their motivations and reward systems are not aligned with that of the consumer. If I were an injured client, I’d much rather pay 40% of a one-million-dollar settlement/verdict than 20% of a $55K settlement.

How can the state bar even regulate attorney marketing at all?

It is shocking that the State Bar is spending significant amounts of money in their attempts to deregulate advertising and marketing rules for nonlawyers. Since 2018, the State Bar continues to be more restrictive on lawyer advertising and marketing. At the same time, the Bar’s efforts to deregulate legal marketing is no longer theoretical – in Utah, over 29 non-lawyer entities have been approved in its “sandbox,” including several in the area of personal injury, such as Rocketlawyer. In Arizona, LegalZoom has applied for an “Alternative Business Legal Structure” in order to allow non-lawyer employees to own law firms and practice law.

Under the new Paraprofessional program, non-lawyers will be allowed to advertise in nearly identical ways as lawyers for the first time in California history. First of all, how can legal marketing be restricted under the First Amendment? At the turn of the century, country attorneys – including Abraham Lincoln – freely advertised their services in local newspapers and markets. This freedom changed when large corporate law firms sought to control the legal landscape. Soon the American Bar Association’s original canons of ethics banned all attorney advertising with the almost ridiculous exception of business cards. (ABA Canon 27 (1908).)

It was not until 1977 that two small-firm lawyers challenged these oppressive rules. In Bates v. State Bar of Arizona, the U.S. Supreme Court ruled that legal advertising was free speech, striking down dozens of state bar ethics restrictions. (Bates v. State Bar of Arizona (1977) 433 U.S. 350.) But Bates carved out a massive exception: false, deceptive or misleading advertising was not protected free speech. While total bans were no longer allowed, state bar associations could prevent advertisements that they deemed misleading to consumers.

Existing California rules and statutes on advertising and marketing

On May 10, 2018, the California Supreme Court adopted the first overhaul of the Rules of Professional Conduct (“Rules”) in nearly 30 years. (California Supreme Court Administrative Order 2018-05-09, effective November 1, 2018; see also California Business and Professions Code Section 6157-6158.3; Former Rule of Professional Conduct Rule 1-400(D)(1-3) (Former Rules”).)

In California, Rules and Statutes restrict “communications” and “advertising” in slightly different and somewhat circular ways. The definition of a communication is found in the Rules and includes “any message or offer made by or on behalf of a lawyer concerning the availability for professional employment of a lawyer or a lawyer’s law firm directed to any person.” (Comment [1] to Rule 7.1.) The term “advertising” is defined by the Business and Professions Code as follows:

(c) any communication, disseminated by television or radio, by any print medium, including but not limited to newspapers and billboards, or by means of a mailing directed generally to members of the public and not to a specific person that solicits employment of legal services provided by a licensee and is directed to the general public and is paid for [sic] by, or the behalf of an attorney.

(Bus. & Prof. Code, § 6151.1, subd. (c).)

Importantly for modern marketing, California’s Rules and Statutes have long been vague when it comes to modern technology, referring to “electronic medium,” “electronic means” and “computer networks.” (See e.g., Bus. & Prof. Code, § 6157, subds. (c, d) and Former Rule 1-400.) It was not until 2001 that the State Bar of California’s Standing Committee on Professional Responsibility and Conduct (“COPREC”) Formal Opinion No. 2001-155 finally applied ethics rules to law firm websites. In 2019, COPREC opined that under the new Rules, lawyers may also owe a duty to regularly search for attorney reviews and references to them and their firms on third-party websites. (Formal Opinion 2019-1991; note that COPREC opinions are not binding Rules but provide guidance to the State Bar’s disciplinary functions.)

This patchwork of statutes, rules and opinions is intended to broadly prevent “false or misleading communication about the lawyer’s services.” (Rule 7.1(a); see also Former Rule 1-400(D)(1-3).) A “communication is false or misleading if it contains a material misrepresentation of fact or law or omits a fact necessary to make the communication considered as a whole not materially misleading.” (Ibid.) While new Rule 7.2 seems more generic, it is actually stricter.

Comments to new Rule 7.2 go further than ever, suggesting that even “truthful statements that are misleading” could be subject to discipline if they are taken out of context. (Comment 3 to Rule 7.1 (italics added).) The Comments further describe the necessity at times of “disclaimers” in order to “avoid…unjustified expectation[s]” by consumers. These Comments are inconspicuously disseminated by COPREC for public comment. They receive no or very little attention in the lawyer community. Yet they may have significant impact in the future. These new potential restrictions demonstrate the State Bar’s growing efforts to restrict lawyers’ advertising speech since the 2018 rule amendments.

Deregulation of non-lawyer advertising

The deregulation of non-lawyer advertising is even more remarkable when the restrictions of currently unlicensed individuals are examined. People who are not lawyers may not advertise that they practice law under Business and Professions Code section 6125. Those who do – such as predatory “Notorios” – may be punished by a fine of up to $1,000. In addition, unlicensed- person advertising is a crime under Business and Professions Code section 6126:

Unauthorized practice [of law] or attempted practice; advertising or holding out; penalties. (a) Any person advertising or holding himself or herself out as practicing or entitled to practice law or otherwise practicing law who is not an active member of the State Bar, or otherwise authorized pursuant to statute or court rule to practice law in this state at the time of doing so, is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment.

(Bus. & Prof. Code, § 6126.)

A second conviction under this statute requires jail time of not less than 90 days. (Ibid.) Current law is also extremely restrictive when it refers to California paralegals who are banned from advertising unless the services performed are all under lawyer supervision. (Bus. & Prof. Code, § 6452, subd. (a).)

Under the new “licensed paraprofessional” recommendations, the way in which these restrictions are avoided is a deceptive sleight of hand. The proposed rules state that the paraprofessional merely needs to be licensed to practice law in the areas in which they have been licensed. That’s it. Decades of law is to be simply wiped away with a Supreme Court Rule.

Because the paraprofessional is legitimately “practicing law,” then the proposed rules “seem” to be fair. Like other draft rules, the Proposed Rules in the area of advertising and marketing have been essentially lifted straight from the new attorney Rules 7.1-7.4, with the word “lawyer” being replaced by “licensed paraprofessional.” (Note that the State Bar staff have decided to change the name of the licensee from paraprofessional to something else. Despite hiring three consultants to develop a name, they have yet to pick one. This highlights both (a) the amount of money spent without State Bar disclosure and (b) the confusion created by State Bar staff in developing this new entity.)

But given the reduced regulations, training and licensing of the paraprofessional, merely adopting lawyer rules is patently misleading to the public.

To give the State Bar credit, the Rules do contain a few minute restrictions on the future licensed paraprofessional that do not exist for lawyers. The paraprofessional must disclose to any potential client that they are not a lawyer (Paraprofessional Proposed Rule 1.4.2). They must disclose that there may be other ways to resolve their issue, such as through a free consultation with a lawyer or a self-help clinic. (Ibid.) The paraprofessional must state that they are “not a lawyer” in a “clear and conspicuous statement.” (Proposed Rule 7.2(d)(2).)

Even the most casual reading of the new licensee program demonstrates that these “restrictions” are very thinly hidden deregulation. While attorneys must disclose a physical office address, a paraprofessional must only include a “means of contact.” (Proposed Rule 7.2(d)(1).) Likewise, how will the “conspicuous” statement that someone is a non-lawyer be policed? If a paraprofessional, who can own up to 49% of the firm, pairs up with a lawyer, they can hang out their shingle while evading these rules altogether.

As mentioned above, using comments and COPREC Formal Opinions, the State Bar’s interpretations of its own rules as to lawyer advertising are becoming potentially more stringent in quiet and subtle ways. Perhaps the most egregious example of the proposed deregulation is that none of these Comments and Formal Opinions will apply to paraprofessionals. Simply putting forward the bare rule and stating that it is essentially the same for lawyers does not tell the whole story. As lawyer rules become harsher, especially as to internet advertising, the State Bar’s efforts to eliminate the rules for other entities is even more remarkable.

The impact of the “sandbox” on legal marketing

Businesses have long sought to own law firms. However, the importance of an attorney’s independent judgment has kept regulations forbidding non-lawyer ownership intact. (See e.g., Rule 5.4.) In the most recent effort to change this decades-old measure of consumer protection, the State Bar also created the Closing the Justice Gap Working Group (“Sandbox”). This group (which was created at the same time as the Paraprofessional Working Group), will use the “Sandbox” deregulatory approach to develop even more sweeping changes in the guise of “access to justice.” The “Sandbox” approach will allow corporations to take the Paraprofessional rules and overlay even more lax ways in which Big Tech will be able to “disrupt” the legal marketplace. Within days of its IPO, LegalZoom applied for such an “Alternative Business Legal Structure” in Arizona. Large corporate entities and more than a few personal-injury firms have already been approved for the provision of non-attorney legal services in Utah (see Utah Office of Legal Services Innovation, http://www.utahinnovationoffice.org).

What does this mean for traditional attorney advertisements? If allowed, then massive Big Tech entities such as Google, Amazon and LegalZoom may start to create their own “landing pages” with paraprofessionals – or even non-lawyers if allowed – to advertise low-cost legal services. The areas of services being considered by the CPPWG and CJGWG have been far-reaching. The only “criteria” is the ability of an entity to create “one to many” reductions in legal prices and the willingness to be subject to a regulatory “license.”

Conclusion

While Big Tech and insurance Goliaths are salivating at the prospect of paraprofessional “sandboxes” in which they may start to practice law and advertise as law firms, the fight is still not over. The State Bar will not finalize its decision on the Paraprofessional program until January and February of 2022. The Sandbox group may not be able to finalize its procedures until mid-2022. As lawyers, however, we are familiar with fighting Goliaths and beheading them. It is time to lay them low and preserve the right to real justice for our clients and consumers.