New Frontier of Legal Innovation – Regulatory Legal Innovation Sandboxes

2020 saw unprecedented adoption of legal technology and legal innovation, however, one of the more surprising developments are legal regulatory sandboxes, introduced first in the state of Utah in the United States and now in Canada, by the Law Society of British Columbia. The regulatory sandbox model allows for the experimentation of new alternative business models, including non-lawyer ownership and fee sharing, in a controlled environment under the regulator’s supervision.

The Utah Supreme Court two-year pilot of a regulatory sandbox (a regulatory body under the oversight of the Supreme Court to be called the Office of Legal Services Innovation, whose charge would be to license and oversee new forms of legal providers and services (see Utah Supreme Court Approves Sweeping Changes in Legal Services Regulation). These changes are meant to enable individuals and entities to explore creative ways to safely allow lawyers and non-lawyers to practice law, and to reduce constraints on how lawyers market and promote their services. The new forms of legal services providers could include partnerships, corporations, and companies entirely owned and controlled by lawyers; individual lawyers with an active Utah bar license; and legal services nonprofits partnering with a non-lawyer owned entity to offer legal services. They could also include non-lawyer owned entities, or legal entities in which non-lawyers are partial owners (for profit or nonprofit) that do either of the following:

1. Offer legal practice options whether directly or by partnership, joint venture, subsidiary, franchise, or other corporate structure or business arrangement, not authorized under the Rules of Professional Conduct or other Supreme Court rules.
2. Practice law through technology platforms, or lawyer or non-lawyer staff, or through an acquired law firm.

In early November 2020, the Law Society of British Columbia announced the launch of an Innovation Sandbox. The reason for the initiative, according to their website, is to address the fact that “85% of British Columbians who experience a serious, difficult legal problem either get no legal help or get legal assistance from someone other than a lawyer” (Law Society of BC Innovation Sandbox). The sandbox will “enable individuals, businesses or organizations that are currently not authorized to practise law to provide services that address the unmet need for legal advice and assistance within a structured environment that maximizes the benefits of the services while minimizing the risks associated with providing those services” They are inviting anyone to put forward a proposal, even people who are not lawyers. In their model, if your proposal is accepted you will get a “No Action” letter, which means that the participant will not be acted upon by the Law Society for engaging in UPL.

Interestingly, the Law Society of Ontario is also “exploring the development of a regulatory sandbox that would be focused on innovative technologically delivered legal services,” according to Will Morrison, the Ontario society’s strategic policy counsel (ABA Journal – Law Society of British Columbia launches ‘innovation sandbox’ to address access-to-justice gap). Per Morrison, the Law Society of Ontario is still considering whether to allow for non-lawyer owners or investors in the Ontario sandbox.

Regulatory sandboxes have worked well in the fintech space. For example, a UK study found that entry into a sandbox was associated with an increase in the average amount of funding raised (BIS: Inside the regulatory sandbox: effects on fintech funding). It is unclear if this would be the case for legal regulatory sandboxes, but it points to some of the benefits that can arise from such initiatives. Further, it remains to be seen what the actual participation in these programs will be. There may be cause for concern over what happens after the pilot period expires. For example, if you do invest your time and energy in a pilot project, and your project is successful, what assurances will there be that would say you are allowed to continue and essentially protect your investment in time and money? The Law Society of BC website says “Individuals, businesses and organizations that do not effectively deliver on their proposals may be removed from the innovation sandbox”, which may give pause to potential participants. Anyone who has had a technology business knows that where your starting point was, may not be your ending place. How flexible will the regulators be? Or will participants be limited to the four corners of your proposal?

Eventually if these initiatives do prove successful, they may lead to more permanent changes to the rules against non-lawyer ownership of firms in those states. Interestingly, Arizona state has decided to bypass the regulatory sandbox model and instead has moved directly to allowing for non-lawyer interests in law firms. On August 27, 2020, the Arizona Supreme Court voted to modify the rules regulating the practice of law (see Arizona Supreme Court Makes Generational Advance in Access to Justice). One of the changes was to eliminate the rule prohibiting fee sharing and prohibiting non-lawyers from having economic interests in law firms. A business structure that would include non-lawyer ownership would have to be licensed as an ABS. Arizona Supreme Court Chief Justice Brutinel said the court’s goal is to improve access to justice and encourage innovation in the delivery of legal services (see Arizona approves non-lawyer ownership, non-lawyer licensees in access-to-justice reforms). Arizona, unlike Utah or BC, will not have a sandbox, but says there will be a rigorous application process, and each applicant will be required to have an internal compliance officer. With these modifications, Arizona is set to be the first in the North America to allow for non-lawyer ownership in delivery of legal services. Unlike the sandboxes, the certainty of the rule change will make it more attractive for legal tech entrepreneurs and it might be that Arizona is the future place to look at for legal tech innovation and legal tech capital.