There is a slight difference in meaning, however, '2)' is not the way a native speaker would write out that statement, but
'1)' is correct.
I don't know where the law school is (located). An adverb clause of place.
Now the second example is structured in a way that is akin to making a statement and asking a question. For example,
Q: Do you know where the law school is?
A. Sorry, I don't know.
Q: Where is the law school?
A. Sorry, I don't know (where the law school is).