A Different Take on ABS

A Different Take on ABS – Proponents and Opponents Both Miss the Point

The Lawyers Weekly recently included an article by Cristin Schmitz entitled Study sounds note of caution in ABS debate. Ms. Schmitz discusses a thoughtful paper by Nick Robinson who is a research fellow with the Harvard Program on the Legal Profession.

In an interview with Ms. Schmitz, Mr. Robinson said:

“I’ve been amazed in this debate how much each side kind of talks past each other, dismisses the concerns of the other side, or the point of the other side. I am a bit cautious about non-lawyer ownership in the paper, but I can also see in certain situations how it could be beneficial.”

Dueling Arguments

The Robinson paper starts its discussion with what is described as the often “polarizing” claims made by ABS proponents and opponents. Proponents claim that non-lawyer ownership will increase access to legal services while opponents claim that it will undercut professionalism.

The arguments for the proponents are said to be that (i) access to outside capital permits economies of scale, infrastructure and specialization, (ii) non-lawyer ownership is an avenue not just to economic capital but also to “high-value employee with different skills sets”, (iii) outside investment allows consumers better information and quality of service by the development of brands which provide consumer information and an incentive to ensure quality and (iv) a business offering multiple types of services can provide services with greater convenience and efficiency.

The arguments for the opponents are said to be that (i) owners who are not themselves providing legal services are not personally invested in the labour of the enterprise and will accordingly be interested only in profits and not professional ideals and norms, (ii) non-lawyer ownership creates the potential for conflicts between the duties owed to investors and the duties owed to clients and the justice system, (iii) providing non-legal services together with legal services creates greater risk of misuse of confidential client information and unauthorized practice of law.

The paper suggests that, while these dueling perspectives both bring important insights, “the actual impact of non-lawyer ownership is likely to be quite different that either of these traditional accounts suggests” in material ways.

Country Studies

With a view to examining what actually has happened as opposed to the theoretical claims of proponents and opponents, the paper next considers the impact of ABS in Australia, England and the United States.

England

The paper examines two aspects of the English experience namely the effect of ABS on the personal injury and the insurance industry and the relatively limited impact of ABS on family law as opposed to the significant impact of cuts in legal aid.

As for personal injury, the paper notes ABS licensees are disproportionately concentrated in some sectors, particularly personal injury, where ABS firms account for one-third of the personal injury market share by last report. The paper suggests two reasons for this concentration. The first is recent unintended regulatory incentives which have encouraged claims management and insurance firms to invest in law firms. The second is that:

The personal injury market is both historically large and, at least in recent years, disproportionately profitable, making it a clear target for outside investors. Personal injury firms also require capital-intensive upfront costs, particularly in advertising and in creating an organizational infrastructure to screen and process claims.

The paper notes the risk for systemic conflict of interest between insurers and injured persons and the likelihood that economic efficiencies are not likely to much affect access where injured persons generally do not pay for legal services whether because of contingent fees, insurance or other arrangements.

As for family law, the paper notes that the Cooperative, an ABS with a social mission, has not been able to halt the massive increase in unrepresented litigants arising from the legal aid cuts of 2013 despite being one of the largest providers of family law services. The paper does not suggest that the adverse impact of these legal aid cuts has not been mitigated and will not be further mitigated but that the legal aid cuts had the more significant impact at least in the short term.

Australia

As for Australia, the focus of the paper is on the consolidation of the personal injury market with three firms now making up nearly one-half of the plaintiffs side of the market. The largest of the three has been publicly traded since 2007. The second largest is not an ABS. The third became a publicly traded ABS in 2013. The paper suggests that this consolidation is likely the result of regulatory factors such as prohibition of contingency fees and restrictions to the type of advertising allowed. The paper notes that the two firms that are now publicly traded were consolidating prior to their access to non-lawyer investment and that the other large firm does not have non-lawyer investment. Nevertheless, the paper suggests that publicly owned firms may have an advantage in acquiring other firms.

The paper draws limited conclusions from the Australian experience about non-lawyer ownership per se. The paper doubts that non-lawyer ownership is necessary for consolidation and closes with the observation that “Non-lawyer ownership may impact the cases these firms select and how they manage them, but, despite some aspersions otherwise, so far in Australia there is no clear evidence that it has led to significant new conflicts of interest”.

The United States

Despite non-lawyer ownership of legal practices being prohibited in the United States, the paper examines Legal Zoom and social security disability representation as close parallels.

The paper suggests that the effect of Legal Zoom is not well documented although access has likely been increased by pressure on prices. However, the paper notes that “a company like Legal Zoom is aimed primarily at small business and the upper middle class. In other words, people with the capacity to know that they have a legal problem and the resources and savviness to be able to seek out its answer and pay for it”. The paper also suggests that Legal Zoom has not increased access by “significantly decreasing the overall number of people without wills”[i].

The paper also considers the provision of social security representation which is permitted to be delivered by non-lawyers. The main point made by the paper seems to be that relationships between these firms and insurers and the social security agency has allowed for new potential conflicts to arise.

Observation

While the paper fairly describes this examination as being the “most extensive empirical investigation to date on the impact of non-lawyer ownership by focusing on its effects on civil legal needs for poor and moderate-income populations”, the actual empirical examination is nevertheless very limited. Recognizing the need of improved collection of data, the paper recommends that:

regulators should attempt to better track the cost of commonly used legal services, the demand for legal services, how these legal services are used, different pathways to resolving a legal issue, and how litigants use the courts. Sector specific studies should also periodically study the functioning of markets for specific legal services such as personal injury, immigration, probate, conveyancing, or family law.

Implications of the Empirical Review

The paper starts its consideration of its empirical review with the following observation:

Those who advocate for more integration by allowing non-lawyer ownership frequently argue this will lower prices and increase access and quality. Those who oppose greater integration worry it will undercut ethical and professional distinctiveness and create new conflicts. The country studies in this article show that while both sets of claims have some merit, they also miss critical components of nonlawyer ownership’s actual impact.

The paper suggests that the following contextual variables are important in the determination of “the actual scale and form that non-lawyer ownership will take”:

  • The nature of the capital and legal services market in the jurisdiction. A smaller market like Australia has seen less non-lawyer ownership than in England where the population is almost three times larger and there is a broader and deeper range of capital investors. The size of the U.S. legal and capital markets has allowed the rise of online legal services despite significant regulatory impediments.
  • The nature of legal services regulation in the jurisdiction. The recent referral fee ban in the UK has led to insurance companies[ii] investing in affiliated personal injury law firms. The Australian contingency fee ban appears to favour larger personal injury firms. The approach to ABS regulation may tend to encourage or discourage ABS formation.
  • The nature of the legal services. Non-lawyer investment appears to be more likely “in lucrative areas of the law that are amenable to economies of scale, where the work can be more easily standardized, and where other costs may be high (such as advertising, administration, or technology)”. Personal injury firms have seen disproportionate investment in Australia and England which may be because “personal injury has historically had large profits, high advertising costs, and a relatively routine and high volume workload of cases that are often handled by nonlawyers and mostly settle”.
  • The nature of the non-lawyer ownership. Ownership can be for-profit or not-for profit. Ownership may be by public listing, private outside investors, worker or consumer ownership, government owned or by a company that provides other goods or services. The nature of the ownership is likely to have an impact on the types of conflicts that develop the stability of the legal services market, professionalism and beneficial effects on access.

The paper observes that the empirical evidence does support the claim that “non-lawyer ownership can, in some circumstances, lead to new innovation in legal services, greater competition, larger economies of scale, and new compensation structures”. However, the paper also suggests that there are reasons to believe that non-lawyer ownership will not lead to significant access gains because (i) those in need of civil legal services often have few resources and, for them, legal aid is the answer, (ii) non-lawyer ownership is likely to be attracted to profitable sectors of the market, (iii) some legal services require the individualized attention of an experienced practitioner who charges high rates and the traditional worker owned partnership model may be the better approach in this context and (iv) there may be reasons other than price causing people not to address civil legal needs.

The paper also observes that, while the opponents of non-lawyer ownership often make claims that are too sweeping, there are genuine professionalism concerns raised by non-lawyer ownership such as (i) the potential for conflicting commercial interests such as insurers investing in personal injury firms, (ii) the potential for regulation to be by-passed such as the avoidance of the UK personal injury referral fee ban by insurer acquisition of legal practices, (iii) the potential for systematization of dubious practices, (iv) the potential for reputational concerns to limit the services provided to unpopular clients or riskier claims.

The paper observes with respect to professionalism challenges that:

… many of the most concerning new professionalism challenges identified in this article did not arise from non-lawyer ownership per se, but rather non-lawyer ownership that involves enterprises that also offer other services, and then only a sub-set of these enterprises. This suggests that jurisdictions adopting non-lawyer ownership should consider banning, or at least more heavily regulating, this type of ownership where the potential for conflict of interest is high, such as insurance companies owning personal injury law firms. When there is merely the potential for conflict or other professionalism concerns regulators should exercise their choice on when and how to intervene in the market. …

The paper notes that there are a number of regulatory policy choices to be made with respect to non-lawyer ownership. The paper encourages the development of more and better data to allow for more plausible claims to be made about the impact of non-lawyer ownership. Significantly, given the difficult judgment calls that are required, the paper calls for decisions to be made by regulators:

drawn from and drawing on a diverse set of opinions, including these two groups, but also consumer organizations, access advocates, other professional groups that deal directly with the public’s legal challenges (like doctors, educators, and accountants), and the academy.

Finally, the paper concludes that:

For policymakers the goal should not be deregulation for its own sake, but rather increasing access to legal services that the public can trust delivered by legal service providers who are part of a larger legal community that sees furthering the public good as a fundamental commitment. Carefully regulated non-lawyer ownership may be a part of achieving this larger goal, but only a part.

Some observations about the paper

In my view, this paper provides important insights for the ABS debate. As I have previously written, there is an unfortunate tendency to see ABS as utopian or dystopian while both the benefits and risks of ABS appear to be less than claimed by the duelists on both sides of the issue. The Robinson paper provides nuanced and thoughtful insight into non-lawyer ownership. It is right to conclude, as Mr, Robinson does, that ABS is no replacement for legal aid. Clearly, there are some legal services for which non-lawyer investment bears little advantage and there are consumers of legal services for whom market-based innovations will be of little import. As the ABS Working Group reported in February 2014, “it would be wrong to suggest that ABSs are a panacea”[iii]. But is wrong to dismiss any proposal on the basis that it is not a silver bullet.

I think that Mr. Robinson rightly observes that, at least at the outset, non-lawyer investment is most likely to focus on particular areas of practice particularly those which are lucrative and where capital can be put to use. Personal injury appears to be one such area. While it is likely right to be sceptical about efforts by existing practitioners to protect lucrative turf, it is also at least questionable whether it would be worth permitting ABS if the practical effect was primarily to partly consolidate the existing personal injury market rather to than expand the legal services that are provided in other areas. We should think hard about the likely impact of ABS in Canada taking into account Mr. Robinson’s insight that different geographic markets and different market sectors likely respond differently to non-lawyer investment.

Finally, Mr. Robinson’s focus on the interests of different investors is important. Mr. Robinson has written cogently about the professionalism concern that insurer-owned personal injury firms create systemic conflicts risks. The same concern can be raised about title insurer, mortgage lender or real estate brokerage ownership of real estate practices. While allowing access to economic and social capital is attractive, it is important to be careful about potentially conflicting interests of the capital providers.

As the title of this article is intended to convey, this “Harvard study” clearly advances this discussion. But it does not end it.

_______________________

[i] John Suh, CEO of Legal Zoom, suggested otherwise on March 6, 2014 at the Harvard Program on the Legal Profession conference entitled Disruptive Innovation in the Market for Legal Services.

[ii] and claims management companies

[iii] Para. 119 of the February 2014 LSUC ABS Working Group Report

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