The legal sandbox tipping point

You’re familiar with regulatory sandboxes in law, right? If so, feel free to skip down a few paragraphs. If not, here’s how I described them in a recent podcast:

A regulatory sandbox is essentially a safe space for innovation. Think of it as a closely monitored laboratory where experiments can be carried out — except these experiments are new types of services that are prohibited by current regulations, but that look like they could be beneficial to the public.

The regulator wants to give these experimental services a try — but it doesn’t want to immediately authorize a service that doesn’t meet the established criteria for authorization, sight unseen. So it creates a “sandbox” where the service can be tried out under close supervision, to see whether the benefits it provides outweigh the risks or harms it creates.

I’ve written about legal regulation sandboxes recently, and I’m far from the only one. Read Margaret Hagan & Jorge Gabriel Jimenez, David Curle, Jayne ReardonMonica Goyal, Yves Faguy, Amy Salyzyn, and the Center on the Legal Profession at Harvard Law School. Regulatory sandboxes are an increasingly talked-about topic in the legal sector, but at the moment, only two North American jurisdictions have actually launched one: Utah, which is off to a flying start, and British Columbia, which has also received significant interest. (In this, as in other areas of legal innovation, England & Wales are already well ahead.)

But that could be about to change. On April 13, the Law Society of Ontario’s Technology Task Force released a report calling for the establishment of a Regulatory Sandbox for Innovative Technological Legal Services (ITLS) for a five-year pilot program. The report includes a motion for approval to be brought before the law society’s governors later this month. British Columbia’s regulatory sandbox deservedly gets the credit for leading the way in Canada; but a sandbox in Ontario — home to more than one-third of this country’s lawyers — would have an even more significant impact.

Image taken from “Earth’s metaverse powered by blockchain technology.” IDK.

Ontario’s sandbox would be open to “any person or entity that is prevented by current regulations from operating an innovative technological legal services tool or program.” In general, the trial period would be about two years (though I’d imagine entities that rapidly deliver clear benefits with little evidence of risk or harm could be approved more quickly). At the end of this trial period, the entity may be approved, with or without conditions, to continue operating freely in the open market, or the law society would amend its by-laws to allow for this exception to the rules, or it would be rejected.

Note that “innovative technology” is a required element — the sandbox is not for, say, a real estate law clerk who wants to provide legal advice over the phone about selling your house. But that’s not the barrier it might appear to be, since Ontario also licenses and regulates independent paralegals, so there’s already a framework in place for “a person, but not a lawyer” legal service options.

And Ontario is an ideal place to host a tech-based innovation sandbox, precisely because Toronto in particular is the headquarters for a large and rapidly accelerating Canadian legal technology industry. Legal tech folks have been saying for years that it’s immensely difficult to attract the kind of investment capital needed to build and scale accessible legal solutions without the confidence that’s created by regulatory authorization. A legal tech sandbox would be the first step towards making that happen in Ontario.

Above all, one key theme consistently surfaces throughout the Task Force’s report: Legal technology is accelerating fast and changing the legal market, and this is the regulator’s best (and maybe only) opportunity to play a role in its regulation.

“As with other sectors and industries, the proliferation of new market entrants and innovative technologies will continue to transform markets and gain users, with or without the regulator’s involvement. Inertia on the law society’s part risks allowing ITLS providers to proliferate in Ontario outside of an effective regulatory scheme. … The technologies will continue to develop, but the law society may lose the opportunity to have an influence if it does not act quickly.”

Now, what’s interesting and coincidental about this development is that, while Canada’s largest jurisdiction considers a legal technology sandbox, the United States’s largest jurisdiction is doing the same. Four days before Ontario released its report, the State Bar of California’s Closing the Justice Gap Working Group held its most recent meeting, with an agenda that considered recommendations on the structure, governance, scope, application process, and criteria for a regulatory sandbox in that state.

The California working group, as you probably know, has been assigned to study innovative ways in which the legal market could be reconfigured to expand access to justice for Californians. Chief among its mandates is to explore whether and how a regulatory sandbox would operate in the state. As I wrote back in the summer of 2018, significant regulatory change to the legal sector in California would be a seismic event, one that would almost certainly trigger rolling changes across the United States for years to come.

I’m not privy to the Task Force’s discussions, of course; but the supporting materials for the April 9 meeting make for interesting reading. The report of the Scope Subcommittee, for instance, reveals that there was some discussion about restricting the sandbox to “firms that offered services to the unserved and underserved,” which the subcommittee defines as including “members of the middle class and small businesses.” This raises more than one red flag for me.

Does California have enough sand?

Set aside for a moment the problem of trying to screen out sandbox applicants according to who will buy their products and services (which strikes me as highly impractical in a free market), as well as the flagrance of the effort to restrict scope so as not to threaten the interests of lawyers and to put up roadblocks against the Big 4. The real problem here is singling out only “the middle class and small businesses” as unserved and underserved, which hides from the reality that everyone is unserved or underserved by the current legal system, and everyone deserves a better choice of remedies than what’s now on offer.

Nevertheless, the inarguably good news is that the Closing the Justice Gap Working Group is making real progress. Observers of the process with whom I’ve spoken appear optimistic that although the wheels of this process are grinding slow, they are grinding in a good direction. I don’t pretend that decision-makers in California are remotely swayed by what happens in Canada, but the fact that their northern neighbours in BC have approved a sandbox, and that Ontario might follow suit, could have at least some normalizing impact.

But in addition to Utah’s trailblazing effort, California and Ontario should also seriously reflect on the fact that Arizona blew right past the “sandbox” concept and opened its legal sector to all types of providers. Arizona eliminated its ethics rules barring “non-lawyers” from having an economic interest in law firms or participating in fee-sharing, thereby demonstrating what real reform of legal services regulation looks like (again, following the lead of England & Wales). Thanks to Arizona, sandboxes can no longer be viewed as radical departures from the norm — they’re now the safe, slow, middle way, the unobjectionable road to reform.

And that brings me to my final point: a friendly warning to any lawyers in legal governance in Ontario and California who might be tempted to derail this process for their own purposes. Not only would that derailment remove from the regulator any practical means of influencing new legal services providers, it would also render obvious to everyone the starkly protectionist agenda of the profession’s lawyer governors. And that, inevitably, would accelerate calls for fundamental changes to lawyer self-regulation.

The tipping point of regulatory reform in the law is drawing near. The legal profession should be throwing its considerable weight behind reaching this point sooner, in order to truly and fully advance the public interest — and thereby prove itself worthy to continue governing not only the legal market, but also its own affairs.



3 Comments

  1. Santhi Latha

    Thank you for sharing and for summarizing the report.


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