Along with my three wonderful co-authors—Eric Biber of UC-Berkeley Law, Sarah Light of Penn’s Wharton School Legal Studies Department, and Jim Salzman of UCLA Law—I was pleased recently to have published Regulating Business Innovation as Policy Disruption in the Vanderbilt Law Review. As its title suggests, the article explores instances of “disruptive business innovation” to sort out why some (e.g., Uber and Airbnb) explode into policy disruptions and others (e.g., Netflix and Swiffer) do not. After all, both Uber and Netflix upended incumbent industries, so why is Uber facing legal snarls all over the globe and Netflix destroyed Blockbuster with nary a legal scratch?
Reading about the lawsuit Legal Force recently filed against Legal Zoom (and the California, Arizona, and Texas bars) in California, claiming it is engaged in unauthorized practice of law in its online trademark documents service, I was stuck by an irony about our article: with four law professors as co-authors, we included not a single example from the legal industry! Legal Zoom is the obvious example we could have used, but the problem runs deeper and threatens the access to justice movement.
But first, some background on what we mean by policy disruption. Over in the business school world, there is a raging debate over the merits of Clayton Christensen’s theory of disruptive business innovation. The basic idea is that by using a technological or business model innovation (or both), an innovator can quietly eat away at the “low end” of an incumbent industry’s customer base—the customers who would pay less to get less but don’t have that option under the incumbent industry’s model. Over time, though, the innovator improves its product quality and penetrates deeper into the market before the incumbents wake up, by which time it is too late. Legal Zoom is a great example: it started out doing limited, routine legal tasks and now does a lot more, including feeding work to a network of lawyers, with annual revenue upward of $200 million.
In the article, we do not try to resolve the debate over whether the business theory of innovative business disruption is useful or not—that’s for the business profs to decide. Our point is that, as far as we can tell, the impact of regulation response never plays a role in that debate, but regulation may have everything to do with whether a business innovation succeeds or not. So we developed a theory for thinking about when business disruption raises a policy disruption under the existing regulatory regime applied to the incumbents–a disconnect that could attract regulators’ attention. There are four types of business innovation policy disruptions:
- End Runs – the innovator argues it is sufficiently different from the incumbents to avoid being subject to the incumbent regulatory regime
- Exemptions – the innovator argues it fits an exemption in the incumbent regulatory regime
- Gaps – the innovator is engaging in an activity that fits no existing regulatory regime but presents policy concerns like those that led to the incumbent regulatory regime
- Solutions – the innovator is subject to the existing regime, but if left alone would help solve the problem that led to the regulation of the incumbents in the first place
Legal Zoom is a clear example of an End Run—the company argues it is not engaging in unauthorized practice of law but comes about as close to the line as one can imagine, which has ruffled the feathers of lawyers and state bars around the nation since the company started in 2001. The Legal Force lawsuit claims Legal Zoom has crossed the line and is unfairly cutting into Legal Force’s business as a law firm specializing in trademark practice. We would identify this as a clear policy disruption problem—the incumbent (Legal Force) argues that the innovator (Legal Zoom) presents the same policy concerns that led to the regulation of the incumbent and thus should be subject to the same regulatory regime in order to avoid giving it an unfair market advantage, but Legal Zoom argues it is not practicing law so is not subject to the regulations.
We argue in the article that in such situations regulators have four choices:
- Block – prohibit the innovator model altogether
- OldReg – apply the incumbent regulatory regime as is and see how it fares
- NewReg – invent new regulations for the innovator model (and possibly the incumbents)
- Free Pass – leave the innovator alone and let the market chips fall where they may
As the ABA Journal has covered extensively, so far the Legal Zoom battle in the US has for the most part been between advocates of OldReg versus advocates of Free Pass, although some states, such as North Carolina, have adopted NewReg approaches. By contrast, in the UK, their embrace of a NewReg approach to legal practice has allowed Legal Zoom far more latitude.
As I argue in a forthcoming installment of my Post Normal Times column in ABA’s The Young Lawyer magazine, I don’t see much future for the limiting this ongoing debate to the OldReg vs. Free Pass options. Neither do the DOJ and FTC, which argued in support of the North Carolina reform. There is mounting pressure to harness advanced technologies through innovative business models as a way to improve access to legal solutions for low- and middle-income individuals and small businesses, who simply cannot afford traditional legal services delivery. Other legal innovation upstarts, like the ticket resolution app TIKD, are getting stymied by the relentless battle with OldReg forces. As the DOJ and FTC argued:
“the practice of law” should mean activities for which specialized legal knowledge and training is demonstrably necessary to protect consumers and an attorney-client relationship is present. Overbroad scope-of-practice and unauthorized-practice-of-law policies can restrict competition between licensed attorneys and non-attorney providers of legal services, increasing the prices consumers must pay for legal services, and reducing consumers’ choices. … Such products may also help increase access to legal services by providing consumers additional options for addressing their legal situations. The Agencies also recognize that such interactive software products may raise legitimate consumer protection issues. The Agencies recommend that any consumer protections, such as requiring disclosures, be narrowly tailored to avoid unnecessarily inhibiting competition and new ways of delivering legal services that may benefit consumers.
Put bluntly, if the legal profession is serious about improving access to justice, we are going to have to get serious about designing a NewReg model that both allows legal industry innovations to thrive and protects consumers and the public.