By Mike Finstad
In 2014, the American Bar Association (ABA) formed a Commission to study the future of legal services in the United States, and a report released in 2016 (the “2016 Report”) cited the legal profession’s resistance to change as an impediment to providing greater access to basic civil legal services for millions of low- and middle-income Americans.1 These individuals and families are increasingly finding themselves priced out of the market for legal services, unable to afford the hourly rates charged by private law firms and attorneys. Even those who can afford a lawyer choose not to, either because they do not recognize their need for legal expertise or because they opt for less expensive alternatives.2 This has led to a growing number of cases where one or both parties go unrepresented in matters that involve eviction, foreclosure, restraining orders, marital dissolution, child custody disputes, child support, debt collection and bankruptcy.
Despite the overwhelming need for affordable legal services, however, many new lawyers remain un- or underemployed. According to data from the U.S. Bureau of Labor Statistics, unemployment for new lawyers is significantly higher than the national average across other labor categories, leaving too many new lawyers unable to gain the practical experience they need to enter practice effectively.3
Solving these problems requires the profession to address the inefficiencies of the traditional law practice business model, and develop new methods that provide greater access to legal services. For many low-income individuals and families with civil legal needs, the only option is obtaining representation through a legal aid organization. Many of these organizations are publicly funded by the Legal Services Corporation (LSC). To qualify, an applicant’s income must fall below 125 percent of the federal poverty guideline. In 2016, more than 63 million Americans were eligible to receive legal aid, but because of funding made available to the LSC by Congress, only a small fraction received assistance. In some jurisdictions, more than 80 percent of litigants in poverty went unrepresented.4
Pro bono legal services are also available to those with low incomes, and the legal profession has remained steadfast in its commitment to providing pro bono services. Pro bono service alone, however, cannot fulfill the vast unmet needs of low-income Americans, that is, unless every lawyer in the United States is willing to increase their pro bono hours by more than 900 hours per year.5
Middle-income Americans face a different challenge. Because their incomes are too high to qualify for free legal assistance, their only option is hiring a private attorney, and many cannot afford the hourly rates charged by private law firms and lawyers. Thus, a growing number of people are caught, well, in the middle: Their incomes are too high to qualify for legal aid or pro bono services, and too low to hire a market-rate attorney.
The affordability of legal services is also problematic for courts as well. Those who cannot afford a lawyer are choosing to litigate matters on their own behalf, perhaps solely relying on knowledge acquired through internet searches in lieu of law school, and this has been especially problematic for state courts. Large numbers of pro se litigants unnecessarily clog court calendars, consume court time and personnel, increase the number of cases that advance to litigation, and achieve legal results decided on technical errors rather than the merits.6
The Legal Profession’s Resistance to Change
The unmet need for legal services is what economists refer to as a “latent” legal market, as there is a potential market for legal services that is largely untapped, which has resulted from inefficiencies of the traditional law practice business model. “The billable hour model … arguably provides less of an incentive to develop more efficient delivery methods … and does not easily allow for innovations in scalability, branding, marketing and technology that are found in most industries.”7
One study conducted by the Georgetown Law Center pointed out that law firm clients increasingly demand more efficiency in the legal services they purchase. Yet the response from firms has been slow and reactionary, rather than adopting a proactive approach to technology and process improvements.
In the face of this deeply-rooted institutional inertia, which has no doubt served an essential function in the rule of law, a new model for delivering legal services is starting to quietly disrupt one of the world’s oldest professions. Based on the charitable principles of Internal Revenue Code §501(c)(3), nonprofit law firms are meeting the demand for affordable legal services, especially for middle-income Americans. Using technology and social entrepreneurship, a group of new lawyers in Utah are lighting a path forward for the legal profession and, in the process, revitalizing the American ideal of justice for all.
A New Model for Nonprofit Law Firms
Open Legal Services (OLS) is a small law firm with one office located in the basement of an old building in downtown Salt Lake City. The firm’s main practice areas include family and criminal law, but they also have a small estate planning practice. Founded in 2013, OLS has experienced steady growth. Their success is somewhat remarkable, considering that many competitors have experienced a downturn in recent years. Founding attorneys Shantelle Argyle and Daniel Spencer attribute OLS’ success to their status as a charitable law firm.
Argyle and Spencer recognized the underserved legal needs of the middle-class, and submitted an application to be recognized as a §501(c)(3) shortly after opening their practice. Their application advanced a three part mission to provide: 1) greater access to affordable legal services for low- and moderate-income people, 2) employment and mentorship to new attorneys, and 3) educational resources to the public.
“We wanted to provide affordable representation to those who can’t afford to pay market rates,” says Argyle. “Our clients can’t afford to pay $300 an hour for an attorney. Even I can’t afford to pay an attorney $300 an hour, and most of my attorney friends wouldn’t either.”
OLS’ application for tax exempt status was granted in 2014. In many ways, OLS operates like any other law firm — providing legal services in exchange for a fee. Charging fees for charitable services is increasingly common in the nonprofit world. Organizations have historically depended on external sources to finance their activities, such as grants from government agencies and foundations. But these funds often require heavy upfront investment in research and grantwriting. Even if funds are awarded, significant resources are spent on complying with restrictive grant terms. Charging for services provides organizations with a sustainable source of unrestricted funds, helping to pay for operational expenses that may not covered by restricted funds.
All of OLS’ clients are either indigent or otherwise unable afford legal services, and legal fees are determined by a client’s ability to pay.8 OLS charges fees according to a sliding scale determined by a client’s income and family size. Sliding scale fees are a type of “low-bono”, which broadly refers to the idea of providing legal services at discounted rates. But unlike for-profit firms that offer alternatives to achieve reduced fees, such as flat fee agreements and the unbundling of legal services, OLS is required to ensure the affordability of their fees.
Sliding scale fees are less profitable and carry risk that for-profit firms may not be willing to tolerate. Nonprofit law firms, however, can sustain lower profit margins because of benefits associated with their tax exempt status. For example, nonprofits do not pay corporate income tax, and can accept tax deductible donations. Thus, tax exempt status affords OLS a built-in flexibility to offset lower profit margins or losses that for profit firms cannot tolerate.
The Business Realities of Charity
Despite their nonprofit status, OLS faces the same financial realities that exist in other businesses. “A lot of people think that because we’re a §501(c)(3), we don’t need to make a profit. That’s not the case,” said Spencer. “Earning more than we spend is how we are able to continue serving our mission.”
Because their fees are typically lower than most, OLS has been able to capture a share of the underserved population with legal service needs. It also forces them to keep costs low. For example, attorney compensation is significantly lower than other law jobs, although OLS attorneys are eligible for Public Service Loan Forgiveness, which can be a valuable incentive to new lawyers with six-figure student loan debt. OLS also makes use of volunteers and receives second hand supplies like computers and office furniture. They also give clients the opportunity to do work for themselves, which saves the client money and allows OLS to help more clients.
“We don’t offer lower rates to undercut other firms, or because we’re anti-compete; we think competition makes for better lawyers. It’s just that we’ve been able to provide legal services at a lower cost, and we pass our savings onto clients.”
In other words, OLS chooses not to maximize profits, which may seem like an odd business decision. But unlike for-profit businesses that answer to shareholders, §501(c)(3) corporations do not have a fiduciary duty to maximize profits. Instead, the fiduciary duty of a nonprofit board is to the organization’s mission, which means business decisions are driven by a charitable purpose.
Technology and Social Entrepreneurship
Although Argyle and Spencer have remained competitive by staying lean, their ability to cut costs has also been driven by hidden talent.
“We spent a lot of time early on learning how to build our own software,” said Argyle, who spent eight years in the tech industry before attending law school. “The tools we developed allowed us to cut out recurring expenses on software.”
Spencer, who describes his familiarity of relational databases as a “hobby,” spent months developing a database that OLS uses to track billable hours, client contact information and produce automated reports. “It’s also customized to our practice, unlike most of the practice management software we tried,” said Spencer. Not to be outdone, Argyle developed an export utility that integrates Spencer’s database with Quickbooks, which syncs the firm’s accounting records with their practice management tool.
Argyle and Spencer make their database available to the public free of charge. According to Spencer, “This stuff really isn’t too hard; anyone can do it, but it takes time and dedication to learn.” OLS is currently preparing their infrastructure for migration to the cloud using Salesforce, which offers many services to §501(c)(3) charities for free.
Developing software is not typical of nonprofit startups, much less nonprofit law firms. But Argyle and Spencer saw the value in developing innovative solutions that serve clients efficiently. Argyle says embracing technology has helped OLS in other ways. “We use technology to be efficient, but it also helps us comply with the IRS’ rigorous reporting requirements for nonprofits.”
The Future of the Legal Profession
“Without significant change, the profession cannot ensure that the justice system serves everyone and that the rule of law is preserved. Innovation, and even unconventional thinking, is required.”9
Too many Americans who need legal help are unable to afford an attorney. The problem doesn’t just affect the underserved, but also the justice system itself, and solving it requires a willingness to transform. For those who need help, providing affordable legal services could inspire renewed confidence in the integrity and fairness of the legal system. Perhaps more importantly, however, it could revitalize our profession’s commitment to providing justice for all. A nonprofit model for private legal services could be the innovative solution our profession needs to answer the call.
Mike Finstad is a solo practitioner and 2018 Chair of the SDCBA’s New Lawyer Forum.
1 Am. Bar Ass’n Comm’n on the Future of Legal Services, Report on the Future of Legal Services in the United States 16-17 (2016).
2 Am. Bar Ass’n Comm’n on the Future of Legal Services, Issues Paper Concerning New Categories of Legal Services Providers 2 (2015).
3 Databases, Tables & Calculators by Subject, Bureau of Labor Statistics (May 10, 2016), available at http://data.bls.gov/timeseries/LNS14000000.
4 See 2016 Report at 12, supra note 1.
5 Id. at 13.
6 Id. at 15.
7 Id. at 16.