Sandboxes for legal innovation

An often-ignored fact is how much law firms pay the price for inefficiency.

According to Gillian Hadfield, a leading scholar on legal regulatory reform, law practices with under $250,000 in revenue struggle to bring home $40 for every $200 charged to the client. Shockingly, she also estimates, based on U.S. billing data pulled from legal tech company CLIO, that small and solo lawyers working an eight-hour day are, on average, only getting paid for 1.6 hours of billable work.

Though Canadian data on the subject is scarce, it's hard to escape the obvious conclusion. "That's a lot of hours not practising law," said Hadfield during an online panel discussion organized by the Legal Innovation Zone. Eighty per cent of what factors into those lawyers' hourly rates is due to inefficiencies, she says. 

Where does the time fly? Much of it gets spent on unbillable work, professional development, and managing clients and staff. But the real problem is that lawyers are not especially good at matching what they can provide with what clients need, says Hadfield. Unlike other industries, the legal profession has failed to deploy technology to drive efficiency and meet those needs. 

For that, she blames the legal regulatory framework, which is getting in the way of innovation in the legal marketplace. As one of her co-panellists, Crispin Passmore, put it, "if there's not high adoption of technology, it's not a competitive market." So Hadfield is calling on the Ontario government to revisit rules about who can provide legal services and who can invest in legal businesses and fee-sharing. All of this would significantly impact incentives for funding legal tech.

In truth, there have been attempts across Canada to loosen restrictions on who can do legal work, primarily by allowing paralegals in some provinces to take on extra responsibilities. But Hadfield is proposing more radical measures – reminiscent of the recommendations contained in the 2014 CBA Futures Report, which argued in favour of non-lawyer ownership of law firms.

Tech companies can't partner with legal service providers because of restrictive rules around the unauthorized practice of law and fee-splitting. And because of restrictions on ownership, legal innovators can't access much-needed venture capital. "All of these are the basic tools in all other markets to promote cost reduction, quality improvements and innovation," she says.

Most importantly, the measures Hadfield and her co-panellists (including Ontario's former attorney general, Chris Bentley) were advocating would go a long way to address an intractable access-to-justice crisis.

Hadfield estimates that, if everyone in Ontario could access an hour of legal consultation to solve a legal problem, it would cost somewhere around $4.4 billion. "This is not a problem that we can solve simply by subsidizing access to legal services," she concludes. Or by requiring lawyers to contribute more pro bono hours. According to her back-of-the-envelope calculation, every one of the province's 55,000 licensed lawyers would have to contribute, on average, 265 hours of pro bono work to address the shortfall. "We can't volunteer our way across this gap."

Hadfield acknowledges the ongoing need to regulate conduct, but argues that legal regulation has transformed over the years into economic regulation. "We are stuck in an economic model that is stopping a vast majority of people from getting access to legal help. That's what we're gasping for in law."

Utah leads the way

Hadfield's ideas are quickly gaining traction. She's the author of Rules for a Flat World, which explores how legal systems are failing to respond to the complexities of the global economy. In it, she advocates for a more market-based approach to building legal infrastructure. She also served on the Utah Work Group on Regulatory Reform that made ground-breaking recommendations approved last summer by the Utah Supreme Court to create a regulatory legal sandbox.

The sandbox is being billed as a way to test new ideas in a controlled environment — part of a two-year pilot program, heavily influenced by the adoption of alternative business structures (ABS) in England and Wales. Over this period, professionals other than lawyers will be able to invest in law firms and take ownership.

There are similar efforts under way in other states. Arizona is bypassing the sandbox model altogether, becoming the first state to change its rules to allow for ABS. It also allows "legal paraprofessionals" to provide limited legal services to the public, including representing clients in court. Meanwhile, California is studying the sandbox model, and a dozen other states, including Illinois and Florida, are exploring various reforms.

Closer to home, BC Law Society benchers approved in September a plan to set up a regulatory sandbox where individuals, businesses and organizations who are not lawyers or law firms  can submit proposals to develop legal services.

"It's catching on like wildfire," says Utah Supreme Court Justice Deno Himonas, who co-chaired the Utah Work Group and participated on the LIZ panel. "There's a huge market for unmet legal needs, and the idea is to figure out how to help lawyers and non-lawyers to tap into that market."

Participants can include traditional law firms, legal tech start-ups, established companies like Walmart and even community organizations that offer front-line services.

The digital legal services company, Rocket Lawyer, is one of the first entities approved to participate. Still, the Utah sandbox has been conceived with a wide range of participants in mind. "Think of the possibility of having librarians, church workers and social workers that can offer legal advice," says Himonas. He hopes that by involving community first responders in the program, the regulator can track the public's needs regarding legal information. That data can in turn be used to design courses to train the responders.

In addition to creating a sandbox, Utah has also built an entirely new regulatory body, the Office of Legal Services Innovation, under the auspices of the Utah Supreme Court. Its mandate is to take a risk-based approach to regulation and collect data from participants while focusing on outcomes that support improvements to access to justice.

Building a new regulatory body is critical to successfully reforming the legal services market, says Hadfield. Instead of dictating business structure and practices, she says, regulators need to turn their attention to the real objective of regulation, which is protecting consumers in a way that is tailored to the real risk of harm.

Ultimately that means figuring out whether consumers are better off under the new model than they are now, at a time when they can't access legal services. Says Hadfield, "we are a society built on the rule of law and the rule of law requires access to legal help."