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Nova Scotia’s Stealth Revolution

If you’re not paying attention, you’ll miss it for sure:

On November 17, 2017 the Nova Scotia Barristers’ Society (NSBS) made a series of decisions that move the Canadian province considerably closer to the adoption of alternative business structures.

The decisions implement in part the NSBS’s 19-point Policy Framework, which the NSBS Council approved in November, 2015. More specifically, the decisions implement these elements of the Policy:

  • The regulation of the delivery of legal services by lawyers as well as by legal entities, “which include lawyers, law firms, law corporations, law departments and other similar entities,” and
  • Each such law firm and other legal entity will be required: (i) to designate an individual who will be responsible for the entity’s compliance with its regulatory requirements, (ii) to establish and maintain a management system that promotes competent and ethical legal practice, and (iii) to undertake self-assessment and report to the NSBS on its management system.

The first decision requires that, as of January 1, 2018, newly established law firms must register with the NSBS before beginning to deliver legal services to the public. The NSBS explains this decision as allowing “us to work with new practices to ensure they have an effective management system for ethical legal practice in place and appreciate the complexities of running a law firm and their regulatory obligations.”

As regards existing firms—and this is the second decision—they are now required to file with the NSBS an expanded Annual Report that includes the names of “support staff” (that is, persons who are not lawyers) who “assist or on their own” deliver legal services to clients. The NSBS explains that this requirement comes in preparation for amendments to the Legal Profession Act that will “allow more staff in law firms to deliver supervised legal services.”

The third decision requires that individual lawyers as well as law firms obtain the permission of the Executive Director of the NSBS before operating a client trust account. This permission will not be granted automatically; instead, the applicant must first successfully complete an assessment and demonstrate that the lawyer or the firm “has the infrastructure in place to safely and appropriately operate a trust account.”

The fourth decision requires all firms, over the course of a three year period, to undergo a self-assessment process and submit to the NSBS a completed self-assessment form. The process and the form itself are reminiscent of the self-assessment process and form pioneered in New South Wales, Australia and in place today in Queensland.

Finally, the fifth decision expands the role of a law firm’s “designated lawyer.” In the past, this role was merely administrative—it was the lawyer identified to receive correspondence from the NSBS. The fifth decision adds to the designated lawyer’s responsibility by making he/she responsible both for the submission of the firm’s Annual Report as well as for the performance of the firm’s self-assessment. In this manner, Nova Scotia’s designated lawyer can be compared to the role of Legal Practitioner Director, also pioneered in New South Wales and in place today in Queensland.

With these decisions, Nova Scotia has gone beyond the theory of its Policy Framework in order to implement both entity regulation and compliance-based regulation in a concrete manner. While Nova Scotia’s regulations in this regard will continue to evolve, and in all likelihood evolve considerably, that does not detract from the significance of these initial, ground breaking decisions. Admittedly, from the perspective of England & Wales and Australia, there is nothing ground breaking about them, given that those countries adopted entity regulation as well as “outcomes focused regulation” (England & Wales) and “proactive, management based regulation” (or “PMBR,” a term Ted Schneyer coined for Australia) quite some time ago. However, from the perspective of Canada and the United States, the NSBS decisions are ground breaking indeed. No other Canadian province or US state has even come close to adopting entity regulation or compliance-based regulation to this extent. Not yet, anyway. (Illinois and Colorado have taken tentative first steps).

What does all this have to do with alternative structures? At first glance, the response may appear to be nothing at all. Further, if you peruse the NSBS website and its supporting documentation, such as the Council meeting minutes, you would be very hard pressed to find references to alternative structures, “alternative business structures” or “ABS.” For the NSBS, it’s as if alternative structures were beside the point.

Don’t be fooled by appearances, though. The NSBS’s silence with respect to alternative structures is deafening. Entity regulation and compliance-based regulation have everything to do with alternative structures. This is because these two kinds of regulation are necessary before the NSBS—or any other legal regulator—can be in a position to adopt alternative structures. The successes of England & Wales and of Australia in adopting alternative structures demonstrate this. The failures of Ontario as well as the United States in adopting them equally demonstrate this. These two kinds of regulation (entity regulation and compliance-based regulation) are the response to the very common objection to alternative structures that is raised in Canada and the United States, which is: “but there is no way to regulate them.” There definitely are ways to regulate them. England & Wales and Australia have proven this, and Nova Scotia is well along the path of doing the same. With so few paying attention—at least outside Nova Scotia—it is a stealth revolution. And it is well underway.

Related posts on this site:

Chapter 9: And in This Corner: New South Wales and Victoria

Chapter 12: Nova Scotia: The Road is Made by Walking

Chapter 15: Ontario: A False Start But On Its Way

Chapter 21: The Two Commissions: Different or the Same?

Chapter 25: Final Assessment

Darrel Pink, Executive Director, Nova Scotia Barristers’ Society

James Coyle, Attorney Regulation Counsel, Colorado Supreme Court

James J. Grogan, Illinois Attorney Registration & Disciplinary Commission

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Voices of Modern Regulation

Gene Shipp and Lawrence Bloom, DC Office of Bar Counsel

DC could be an incubator to see how [alternative structures] could work in the United States. But it can’t be.

The Office of Bar Counsel serves as the chief prosecutor for attorney disciplinary matters involving attorneys who are members of the District of Columbia Bar. Wallace E. “Gene” Shipp, Jr. serves as Bar Counsel and Lawrence Bloom serves as Senior Staff Attorney.

It is difficult for a firm to know how to work under DC’s Rule 5.4. Here is an example:

Imagine a small law firm in North-East DC with two partners. Imagine that the firm has a family law practice, and it sees that its clients are experiencing certain problems and questions regarding their fitness as parents, for example, and decides to bring a social worker on board. The firm wants to help its clients improve their skills as they go through a child custody or child support proceeding. It’s a great idea — this two-person firm providing access to justice.

So they approach a social worker, but the social worker will only come on board if they are made partner and get a cut of the action.

So, there they are — a three person firm — two lawyers and one social worker.

But the social worker is bound by its own ethical rules to report any abuse or other illegal activity. Therefore, they cannot be bound under the rules of confidentiality that apply to the firm. But the heart and core of a law firm is confidentiality.

On the other hand, if that social worker had been hired as a consultant, it would have been bound by the same obligation to report.

This presents a dilemma for the firm. Rule 5.4 presents an opportunity for new kinds of legal services to be delivered, but it requires the firm to tread carefully.

In addition, a firm like this could work only if the lawyers were admitted just in DC and not in any other state. Because if they were admitted in another state, an arrangement of this kind would violate that other state’s rules. But there are very few DC lawyers who are not also admitted in another state.

You could make a case that the principle purpose of Rule 5.4 is to permit retiring Congress people to remain in DC and work as lobbyists.

But regardless of the reasons why Rule 5.4 was adopted and regardless of its potential uses, the reality is that very few people are taking advantage of it because no one is quite sure how to make it work. Instead, they set up work-arounds, such as an ancillary firm down the hall, or taking on the person as an employee and offer them a salary, a cut of the profits and a retirement program.

In this context, it is not a surprise that DC’s Office of Bar Counsel has never been presented with any complaint, and the Office has never investigated any firm, in connection with nonlawyer ownership of a law firm.

It appears that multidisciplinary practices and nonlawyer ownership of law firms is the future. It is not the end of the natural world as we know it. Places like England and Australia have figured out how to make it work. DC could be an incubator to see how this could work in the United States. But it can’t be because it’s just too tricky for a firm to make things work under the Rule.

This story is supplemental material for Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? To learn more about the book, please click here.

To download a pdf of this and the other stories, please click below.

Voices of Modern Regulation

Saul Singer, District of Columbia Bar

D.C. Rule 5.4(b) is a client-centric rule — it is all about the client.

The D.C. Bar serves both a representative and a regulatory function for the District of Columbia. Its core functions are the registration of lawyers, operation of a lawyer disciplinary system, maintenance of a Clients’ Security Fund, and other administrative operations. The D.C. Bar’s Legal Ethics Program provides informal guidance to lawyers on questions that arise under the D.C. Rules of Professional Conduct. Saul Singer serves as Senior Legal Ethics Counsel.

My job with the D.C. Bar is to provide informal guidance to D.C. lawyers regarding their ethical duties and responsibilities under the rules of the professional conduct for the District of Columbia.

The District is an outlier jurisdiction. We are not a wholesale ABA Model Rule jurisdiction — our rules are very different from the ABA Model Rules in many areas. In some instances we are stricter than the ABA (as regards confidentiality, for example). But in other areas the D.C. Rules are more lenient.

Save for one exception, the District of Columbia is the only jurisdiction in the U.S. that under very limited circumstances actually permits ownership or management of a law firm by nonlawyers. (The exception is Washington State, which allows lawyers to share fees with Limited License Legal Technicians).

Because we are the only jurisdiction that allows this (again, save for Washington State), this is something that must be done very carefully. Anyone seeking to do this must be sure to dot their i’s and cross their t’s.

The Rule is 5.4(b). It has four elements, all of which must be strictly met.

Where the rubber meets the road is with respect to the first element, which requires that the firm have as its sole purpose providing legal services to clients.

Here is a situation contemplated by this: let’s say I am a personal injury lawyer. A case comes in the door, and I gather all the pertinent information, including the medical records. I send the medical records to “Doc,” who is my consultant. Doc reviews the file, telling me if this is a good or a bad case, and where the holes might be. If I decide to take the case, Doc continues to act as my consultation, helps me to prepare expert witnesses, etc.

One day we get the great idea that instead of simply acting as my consultant, Doc should come in-house and be my partner. He’ll continue to do what he’s always been doing, but with an ownership interest in the firm. We’ll be a team — I will be the law guy and he will be the medicine guy.

This is ok, as long as these very strict conditions are met:

1)         Doc cannot be involved in any way in making any legal decision. He cannot have any say in whether the firm should take on a case or not. He can make a recommendation, but he cannot decide.

2)         The firm must be managed by lawyers. Doc’s decision making authority  may not be greater than 50%. The Rule does not actually contain this cap, but this limit must reasonably apply in order to assure that the nonlawyer does not have control of the firm and cannot vote down the lawyers.

3)         Doc must actively participate in the operation of the law firm. That is, he must actually help the firm to represent its clients. Passive investment by a nonlawyer is not permitted.

4)         I, as the firm’s supervisory lawyer, will bear responsibility for Doc’s conduct. So, if Doc violates an ethics rule, I can be on the line for it and it could cost me my law license.

There is no requirement that D.C. firms that have nonlawyer partners declare this fact to the D.C. Bar, and the D.C. Bar does not keep a registry or record of any kind of the firms that do have nonlawyer partners. For that reason, we do not know how many D.C. firms have nonlawyer partners.

That being said, a firm cannot keep secret the fact that it has a nonlawyer partner. For example, if a firm lists its partners on its letterhead or on its website, then the nonlawyer’s name must be included, or that would be considered a misrepresentation or omission in violation of Rules 7.1 and 7.5. Of course, in listing the nonlawyer’s name, there must also be a clear indication that the person is not a lawyer, much in the same way you would indicate that a lawyer is not admitted in the District of Columbia  but in a different state.

D.C. Rule 5.4(b) is a client-centric rule — it is all about the client. The Rule was adopted to help lawyers better serve their clients. We recognize that in a complex environment, a nonlawyer can provide significant help and assistance to a lawyer, especially if they are in-house. This is why passive investment is not allowed — because a passive investor will not do anything the help the client. But someone like a doctor definitely will.

At the same time, lawyers cannot abdicate their responsibility to make legal decisions, all the way through. Nonlawyers can provide input, but they cannot call the shots.

I can understand that in some states, simply hiring Doc as a contractor or simply paying him a salary would be considered sufficient compensation, and that may be one reason why those states do not permit nonlawyer ownership. My personal opinion — it is not the official position of the D.C. Bar — is that there is an advantage to bringing a nonlawyer in as a partner rather than an employee. There is a big difference between the motivation of a contractor or an employee and the motivation of an owner. An ownership interest, as opposed to just a salary, is a great motivator for anyone. Again, that is not the D.C. Bar’s official position, it’s my personal opinion.

This story is supplemental material for Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? To learn more about the book, please click here.

To download a pdf of this and the other stories, please click below.

Voices of Modern Regulation

Hope C. Todd, District of Columbia Bar

The District’s experience with Rule 5.4 has been disappointing.

The D.C. Bar serves both a representative and a regulatory function for the District of Columbia. Its core functions are the registration of lawyers, operation of a lawyer disciplinary system, maintenance of a Clients’ Security Fund, and other administrative operations. The D.C. Bar’s Legal Ethics Program provides informal guidance to lawyers on questions that arise under the D.C. Rules of Professional Conduct. Hope Todd serves as Assistant Director for Legal Ethics, Regulation Counsel of the District of Columbia Bar.

I cannot speak officially for the D.C. Bar, but I will give my personal opinion.

In my personal opinion, the District’s experience with Rule 5.4 has been disappointing in its ability to serve as a “model” or “pilot” because it appears very few law firms have nonlawyers partners or managers. There has been little movement on the Rule although the ability to partner with a nonlawyer has existed in the District of Columbia since 1991.

I think that the movement towards allowing nonlawyer ownership and management and investment in law firms is one that at least holds a promise for more affordable legal services for the general population, and for that reason I believe that the changes in Australia and in England and Wales may well result in better and less costly provision of legal services to the average legal consumer.

In the District we do not have empirical data on this subject. I know that there are firms that have nonlawyer owners, but I know that primarily based upon the telephone calls we get on the Legal Ethics Helpline. Of the approximately 2400 annual Helpline calls, a handful will be from someone wanting to set up a law firm with a nonlawyer partner and one or two from someone purporting to already be in such a firm, and asking some sort of ethical question in relation to that.

I can’t provide any names or specific information about those firms because all Ethics Helpline calls are strictly confidential. The most I can say is that we do field a few of these calls each year, so we know that there are some lawyers out there who have nonlawyer partners or individuals in supervisory positions.

The rule in the District allowing nonlawyer partners has been in effect since 1991. This raises the question — why haven’t more firms taken advantage of it? I think there is more than one reason for that.

The most obvious and the most mentioned reason is that the majority of lawyers who are licensed in the District are also licensed by and many practice in one or more other jurisdictions. As a practical matter this means that D.C. lawyers with multi-jurisdictional practices are subject to the rules of more than one state bar. Under the rules of all other U.S. bars, lawyers are not allowed to spilt legal fees with non-lawyers. For this reason, many are hesitant to take advantage of D.C. Rule 5.4, when they may be disciplined under the rules of other jurisdictions when providing legal services in those states.

The second reason is that the Rule is so limiting. It allows for a nonlawyer professional to provide services, but the entity itself can only provide legal services. So, you can have an economist, or an accountant or a social worker as a partner in a law firm, but they cannot offer their economic, accounting or social work services separately or maintain their own client base within the firm. Their services must be tied to the provision of legal services. That is, D.C. Rule 5.4(b) does not truly permit multidisciplinary practice. But that is the structure that would most likely benefit both clients and nonlawyer professionals, as clients often have both legal and non-legal professional needs. For that reason D.C. Rule 5.4 is not a very good deal for many nonlawyer professionals. They would probably do better in a different kind of structure, and notably simply as a contractor to the law firm. On the other hand, if the nonlawyer is happy to provide services to the firm only, such as in the role of a Technology Officer or Executive Director, it is easier to see how Rule 5.4 can work.

Again, this is my personal opinion. There are no surveys or statistics available in the District on this information.

The calls that we receive in relation to Rule 5.4 come from all over the country. The caller is usually quite excited — they’ve just heard that the District of Columbia permits nonlawyer ownership. Sometimes the caller is a lawyer who is in contact with potential nonlawyer investors in their firm, and sometimes the caller is a potential nonlawyer investor, excited at the idea that they could own and run a law firm. But that is not what Rule 5.4 is about. The Rule does not permit a nonlawyer to start a law firm by hiring a couple of associates. That is still the unauthorized practice of law.

What we often have to clarify for those callers is that the Rule also does not allow for passive investment. That is off the table and always has been. D.C. Rule 5.4 is not a way for a law firm to raise capital. The nonlawyer owner must be an individual professional who is providing services within the firm.

Nothing in the Rule specifically says that the nonlawyer owner must own less than 50%. On the other hand, Rule 5.4(c) requires lawyers to be free to exercise their professional judgment. Practically, this means that lawyers must have more than a 50% say in the legal decisions. The lawyers still have to call all the shots on the legal representation in consultation with their clients. This is something that could trip you up if you are not careful.

One of the protections built into the D.C. Rule, and why the Rule may be attractive to other U.S. jurisdictions, is first that the nonlawyers must agree to respect and adhere to the ethical rules, and second that the managing lawyers are “vicariously liable” for the ethical actions of the nonlawyers. This helps to address the problem that, at least as of today, the D.C. Bar does not have the power to regulate nonlawyers.

You can contrast this to Australia, which also makes the managing lawyer vicariously liable. But Australia adds another layer — Australia additionally regulates the entity itself, which means that if there is a problem, the regulator can shut the whole thing down. The D.C. Bar does not have the power to do that.

I am not aware of any complaints made, and there are no reported disciplinary actions that were connected to the activities of a nonlawyer owner or to the fact that a firm had a nonlawyer owner. But since the number of firms concerned may be so small (again, we have no idea just how many of these firms exit), this absence of complaints and disciplinary actions may or may not be significant, Nevertheless, it is a fact.

There are jurisdictions that are interested in the District of Columbia’s ’s experiences with Rule 5.4. Several have working groups in place at the moment that are considering the permissibility of alternative business structures, and those groups contact us from time to time. Our response to them is fairly consistent:

– Yes, D.C. Rule 5.4(b) has been in place in the District since 1991,

– We know there are a few law firms in the District that take advantage of it,

– We have not seen any problems with those law firms who are taking advantage of it, but that may just be because there are not that many of them, and

– That is unfortunately all the information that we have to share.

This story is supplemental material for Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? To learn more about the book, please click here.

To download a pdf of this and the other stories, please click below.

Voices of Modern Regulation

Fred Headon, Chair, CBA Legal Futures Initiative

Our message to lawyers is this: Look at the opportunity.

The Canadian Bar Association is a national, voluntary and representative organization for members of the Canadian bar. Approximately 37, 000 practicing lawyers, law students, notaries, and judges in Canada belong to the CBA. The CBA Legal Futures Initiative is a commission appointed by the CBA to study how and why the Canadian legal marketplace is changing — and what the Canadian legal profession can do to successfully adapt to those changes. Headon, who served as Chair of the CBA Legal Futures Initiative, is a Past President of the Canadian Bar Association and is Assistant General Counsel – Labor and Employment Law, Air Canada.The CBA Futures Report (issued in August 2014) is an attempt to help our members understand why client expectations are changing and how they can get ahead of them.

Lawyers are losing their relevance to the people they are supposed to serve. Lawyers have not embraced technology the way other industries have. Lawyers have not updated their processes the way that other industries have.

We are concerned that we will find ourselves becoming less and less relevant, and we see many ramifications of this:

–           That the people we are here to serve are not getting the service that they need,

–           That if those people are getting services from someone not trained in the law, they might be getting a sub-optimal outcome,

–           That lawyers are missing opportunities in the marketplace.

But most importantly, the legal profession has an essential role to play: in democracy, in the economy, in civil society. If we are not present in people’s lives and not connecting with them, are we really playing that role? And if we are not playing that role, then should we continue to benefit from the privileges that we have, such as self-regulation?

We realized that many of our members are not very well equipped to deal with this kind of change. When we were in law school, no one taught us the things we need to know to handle these issues today.

So we embarked on an inquiry into what is going on in the lives of clients to change their expectations, specifically with a focus on the Canadian market. We had had the idea of the study for several years, but it was only in 2012 that we were able to get both the people and the funding together to make it happen.

Now we are going out on the road in order to speak about the research. We explain the results, we help lawyers understand better how and why client expectations are changing, and we show lawyers in concrete ways how to flourish in the new environment. We explain why the regulatory changes we propose are helpful, and what safeguards can be put in place as the changes are made. We hope that if we can help lawyers to understand all of that, then concerns about the regulatory changes will lessen over time. Ultimately, we hope that the Report will help ease the way to the broader regulatory change that we advocate for Canada.

For many lawyers, the business model still “works.”  It is hard to tell people who are making a decent living that their business model is broken. When I get that kind of reaction from people, I remind them that the most profitable year for the buggy industry was the year before the car was invented. Are we perhaps living in that time right now?

Surveys show that in Canada, a very small number of legal problems — as little as 1 in 7 — are addressed by a lawyer. That is a very small slice of the market that lawyers are serving. There is so much opportunity out there for lawyers to gain a greater share of that market and to better play our role as a profession.

Clients want us to use processes, they want lawyers to work with them in a more transparent manner, they want to be more engaged in the process, they want a lower price, and, especially, a more predictable price.

Law firms can benefit from the expertise of different types of people to help us to change how we work in order to meet those expectations. When we spoke to these different types of people — people with business or engineering backgrounds, for example — they told us that while they might be willing to act as consultants, what they would strongly prefer is to become a real part of the business, and enjoy the upside that comes with that.

It could be very interesting for a law firm to have that kind of permanent presence in the law firm, with a continuing engagement for process improvement. A lawyer could go back to school to learn what these experts have learned, but bringing these experts in as full partners is an alternative that many lawyers might understandably prefer.

Another client expectation is that we provide them with a solution to their problem — not just the legal aspect but the problem as a whole. This is the value of a multidisciplinary practice — a business that can provide a holistic service to the client.

In sum, our message to lawyers is this: Look at the opportunity. Your clients are asking more from you, but they don’t need it to be delivered the way you’ve always delivered to them. You are tired of answering emails day and night and on weekends and holidays. What if you had systems and technology in place that simplified your day rather than burdening you? There is a whole world of opportunity out there for lawyers to do more. But it has to be done differently. What we do is important, but there is little sacred about how we do it. So let’s get closer to those who can help us change our practices and seize these opportunities.

We also address the ethical objections that are raised — the objections that nonlawyer ownership will undermine the relationship between the professional and the client, that undue pressure will be brought to bear on the lawyer, causing them to act unethically, etc.

We have a few responses to those objections. To begin, lawyers are not the only ethical people out there. In addition, a reasonable investor hoping for a return will not want a business to act in a way that would bring down the value of the business.

I like to draw upon my own experience as in-house counsel at Air Canada. Safety is as important to the aviation industry as ethics is to the legal industry. I’ve never heard an Air Canada shareholder suggest that we skimp on maintenance to drive a better return. They know that if the airline is not safe, then neither is their investment.

I also like to point out that, in anticipation of a worst-case scenario, we can put in place safety nets. This raises the importance of entity-based regulation and establishing direct reporting lines to authorities, in a manner similar to the way pilots have a direct relationship with aviation regulators to report anomalies that they observe. There is no reason why we can’t learn from that for the legal profession.

In sum, while we are calling for certain rules to be loosened, we are also calling for a certain number of new rules to keep it all in balance. We believe that our message is beginning to resonate.

The changes in the UK and Australia have obviously had a strong influence on us —they have formed a background for all of our work. We’ve looked at the regulatory frameworks in both countries, to see what we think could be used in Canada, and also to see where there were problems that we could learn from and avoid.

We saw in the UK and Australia that it was politicians who took the initiative to make changes. In Canada we hope to get ahead of the curve — it will take some time to get there, but we hope to make the changes ourselves. We want to invent our future rather than have it thrust upon us.

This story is supplemental material for Modernizing Legal Services in Common Law Countries: Will the US Be Left Behind? To learn more about the book, please click here.

To download a pdf of this and the other stories, please click below.