Legal Affairs
space


Current Issue

 
 
 
 


printer friendly
email this article
letter to the editor


space space space
space


March|April 2006
Money! Power! Ambition Gone Awry! By Robert W. Gordon
One Stop Law Shop By Richard A. Epstein
Vartkes's List By Michael Bobelian
Young Guns By Bernard E. Harcourt
Crusaders in Wingtips By Rachel Morris
Children of the Church By Bernice Yeung

One Stop Law Shop

The land of solicitors and barristers teaches America how a freer market could deliver better legal services.

By Richard A. Epstein

FOR TOO LONG, THE PRACTICE OF LAW IN THE UNITED STATES and Britain has been treated with kid gloves, as a learned profession that must be insulated from the more vulgar mores of the marketplace by rules of legal ethics. One manifestation of this attitude is especially visible in England and Wales. For centuries barristers were the only lawyers allowed to argue before Britain's High Court of Justice. At the same time, however, they could speak to clients only through solicitors, who had a monopoly over negotiating commercial deals and other transactional work. Though solicitors and barristers now share some of each other's formerly exclusive privileges, this artificial division in the legal profession still makes it hard for clients to do one-stop shopping for legal services, and it limits the kind of competition that might lower legal fees. Beholden as we are to the English common law on which our legal system is based, this form of mandatory market specialization has always been incomprehensible in the United States, where law firms frequently house lawyers of all sorts under a single roof.

Happily, recent events suggest that the English and Welsh may soon view America's legal profession as the one curiously shielded from market forces. A groundbreaking report prepared by Sir David Clementi in 2004 and approved by British Prime Minister Tony Blair's government in October 2005 recommended eliminating many of the hoary distinctions between solicitors and barristers, but it also did more. Of greater relevance to Americans is the daring proposal that law firms no longer be the exclusive province of lawyers. Clementi wants law firms to become more competitive in the increasingly global legal market by gaining greater access to management expertise and capital markets. His solution is to allow nonlawyers to own, manage, and finance law firms. These and similar reforms will be included in a bill that is expected to go before Parliament later this year. If the reforms take root in England and Wales, global market pressures are likely to bring similar proposals to our shores.

CLEMENTI'S PROPOSALS MARK THE CULMINATION of a decades-long movement toward opening the legal profession to competition in England and Wales. Although the division between barristers and solicitors largely remains, in other ways the English and Welsh market for legal services has been more open to competition than ours. Precisely because solicitors were denied access to the High Courts they have been looked upon traditionally as expert providers of services rather than as officers of the court who need independence to discharge their professional duties. In addition, nonlawyers like accountants and management consultants can offer most forms of legal advice in competition with solicitors, even if they may not conduct litigation. In the United States, each state generally prohibits nonlawyers from practicing law.

The barrister-solicitor distinction dates from the 13th century, when English courts held that only advocates who had regularly come before them could argue a litigant's case. Oddly enough, an advocate was allowed to enter the picture only at the final argument stage, so that the litigant had to make the initial pleadings himself. Advocates were precursors to barristers. By the 15th century, litigants were allowed to hire out-of-court attorneys to submit pleadings in writing, and these attorneys were precursors to solicitors. As the demand for legal services increased with economic development, so did the need for courtroom advocates. Inns of Court arose to train and regulate the advocates—drawn exclusively from the upper classes—as the only people authorized to appear before high-court judges. In the 16th century, the division between barristers and solicitors became fixed. Clients dealt only with solicitors, and solicitors arranged for barristers. In the 17th century, solicitors gained limited rights to appear in the lower equity courts, but that exception reinforced the rule's vigor.

This historical tale provides scant reason for the market division, other than class distinctions and the protection of economic turf. But once the division was in place, its defenders advanced ingenious justifications to preserve the status quo. One defense of the split is that barristers can form more balanced judgments about a case if they are a step removed from the client and not financially beholden to him. But that doesn't explain why the law should mandate a form of doing business to assure an outcome that an efficient market could be expected to provide. In time, the cracks in the old structure became more apparent: Soli-citors nursed lingering resentments of barristers' social and legal privileges, clients chafed at having to hire two layers of legal specialists, and companies sought in-house lawyers who could litigate disputes as well as negotiate contracts. In 1990, after considerable drama, solicitors were allowed to appear in the higher courts if they earned an additional qualification.

As the distinctions between solicitors and barristers eroded, so too did the barriers between lawyers and nonlawyers. England and Wales already allowed accountants and management consultants to give most types of legal advice and lawyers to provide nonlegal services like tax planning and preparation, so it wasn't a big step in the late 1980s for the deregulation-minded Thatcher government to allow solicitors and nonlawyers to forge informal alliances that offered legal, accounting, consulting, and other services or, more ambitiously, to offer those services through ancillary businesses (a strategy that U.S. firms were later allowed to copy). The Thatcher government was responding to pressure from lawyers who believed that they were competing at a disadvantage with nonlawyers at home as well as with foreign lawyers and accounting firms located abroad and not subject to the same restrictions. But the changes did not mark a complete break from the past. As in the United States, efforts to preserve the independence of lawyers from the temptations of business prevented lawyers in England and Wales from forming partnerships and sharing fees with nonlawyers.

THESE PARTIAL PALLIATIVES DID NOT STOP THE SURGE OF PRESSURE from lawyers and law firms still dissatisfied with their competitive position. In July 2003, Lord Falconer, the British constitutional affairs secretary, appointed Clementi to study whether those holdover rules, along with a host of other regulations controlling the practice of law in England and Wales, made sense in an increasingly competitive world. Clementi brought a business perspective to the job. An accountant who graduated from Oxford University and Harvard Business School, he ran the British bank Kleinwort Benson before becoming deputy governor of the Bank of England in 1997 and then chairman of Britain's Prudential financial-services firm in 2002. In 2004, Clementi issued a 165-page report that recommends sweeping changes. He wants the government rather than the legal profession to have the final say in disciplining lawyers, and he wants law firms to have the right to make nonlawyers full partners. He urges a simpler regulatory system to make lawyers more accessible and accountable to consumers. He hopes to make law firms more competitive by supplying them with new sources of capital and by bringing nonlawyers with valuable expertise into the legal profession.

More concretely, the Clementi report sees two ways for outsiders to enter the legal marketplace. The first would allow banks, insurance companies, retailers, and other commercial entities to bring existing law firms under their corporate umbrellas or, if so inclined, to create law firms as wholly owned subsidiaries. The second method sounds more radical, for it would allow an existing law firm to sell shares in itself to the public. Either way, the traditional law partnership would no longer be the dominant game in town. Partners could sell stakes in their firms for hefty sums of cash by agreeing to become the (highly compensated) employees of those firms.

Like most proposals for deregulation, the Clementi report shows signs of having evolved in two steps. In the first, Clementi and his team seem to have recognized that restrictions on entry into the market to provide legal services do little to protect the general public from shysters and con men, while doing a great deal to protect members of the legal profession from competitive upstarts. Clementi found the current disciplinary system for lawyers riddled with delay and inconsistent outcomes and the divided bar in England and Wales an obstacle to effective legal assistance. (The American system of generally requiring lawyers to be licensed in a state before practicing there also can "protect" local people from hiring the lawyer they want if he is licensed only in another state.)

In the second step, though, Clementi took back half the potential good from step one by proposing restrictions that would operate as partial barriers to entry into the legal profession. Although the report issued a clarion call for opening the legal markets and deregulating law firms, it foolishly wondered aloud about how to prevent firms from falling into the clutches of "inappropriate owners," people who might try to make a killing by providing shoddy services to unwitting clients. Next, the report nervously warned that some nonlawyer owner of a firm might adopt, sin of sins, the sensible strategy of "cherry-picking" clients that the owner wanted the law firm to serve. Was Clementi actually bothered by these issues? It's doubtful. He had to deal with the polite, underground opposition of the various legal societies, the organizations that oversee solicitors and barristers, whose real fear probably was, and is, new and stiff competition for their entrenched businesses. Still, Clementi proposed that a government regulator administer a "fit to own" test for prospective investors in law firms, an inquiry into the "honesty, integrity and reputation; competence and capability; and financial soundness" of the investors. Whew!

IF A REFORM PROPOSAL SIMILAR TO THE CLEMENTI REPORT makes it to the United States, the last thing we'd want is to place our faith in some unidentified federal or state regulator with the power to determine who is fit to own or run a law firm. Aren't aggressive but highly successful retailers like Wal-Mart considered by some people to be unfit because of the minimal health plans they offer to store clerks? Of course it matters whether new and substantial investors are fit to participate in businesses. But other shareholders, employees, customers, and suppliers are the ones to judge the fitness of owners and managers. For a law firm, that task should not fall to some regulator who, like the Securities and Exchange Commission, would be forever tempted to find new reasons to extend the scope of its authority and interfere with the competent and efficient operation of the firm.

The larger question, however, is whether allowing nonlawyers to own law firms makes sense from a business perspective. The right answer, I suspect, is that in some market niches it will prove a dud and in others a bonanza.

On the dud side of the ledger are probably firms owned by public shareholders. We can count three strikes against them: The financial interests of the equity shares would reduce lawyers' income, the numerous shareholders would make firms too unwieldy to operate efficiently, and public ownership would force unwanted disclosure of finances and other sensitive matters. Those who might dispute this conclusion could point to the successful transformation of large investment houses like Goldman Sachs from private partnerships to publicly traded corporations. But Goldman chose to go public notwithstanding a real concern that it could not adequately compensate its key people if the firm had to divide its profits with outside owners who would understandably demand their share. It overcame that reluctance for one simple reason: In order to play an active role in large financial transactions, it had to be willing to take an equity stake, if only for the short-term, in companies with which it did business. That requires more capital than can be raised by deferring distributions of past earnings to well-heeled equity partners. It takes real dough, which means access to big-league capital markets through the sale of shares to the public. The practice of law does not, however, require huge amounts of capital. It's the legal talent that matters. Law firms are like McKinsey & Company and similar business-consulting firms, which stay private to maximize payments to their partners and employees.

Sure, law firms are already getting much larger. In 1995, there were 150 firms in the United States with more than 200 lawyers. Today, there are at least 196—17 of which have more than 1,000 lawyers. Many American firms have merged with foreign firms, and some have joined with other firms to form distinct but complementary practices: Old-line Ropes & Gray now includes in its ranks the intellectual property group that used to be with Fish & Neave. Yet all market forces do not push toward amalgamation. Boutique firms constantly spring up to handle specialized forms of litigation. Many large class-actions involving antitrust and consumer-fraud issues, for example, are handled by ad hoc alliances among multiple firms that split their labor and share the rewards of the litigation. In many markets, it is more efficient for smaller groups to work together on some specified project than for one large entity to handle the project while being saddled with idle capacity. In addition, these smaller, nimbler firms don't face the tricky ethical conflicts that crop up when squadrons of lawyers, with clients of varied and sometimes clashing interests, work under a single firm name. Just as there is a place for minnows in the ocean, small law firms serve a useful function, and they are not likely to disappear or go public.

I also suspect that large businesses won't cotton to the opportunity for acquiring a law firm. Major corporations already have internal legal departments that employ hundreds, sometimes thousands, of lawyers. These lawyers serve only one master, which allows them to sidestep conflicts of interest, the need to be licensed to practice in different states, and other issues that bedevil sprawling independent law firms. None of these corporations, of course, keeps all its legal work in-house. Extraordinary matters often require cooperation between in-house counsel and outside lawyers. But few major corporations would want to acquire or have a financial interest in a large law firm just to keep extraordinary expertise close at hand, because corporate general counsels are already adept at assembling their own teams of lawyers and outside experts. Just a prediction, of course, but the betting here is that we won't see JPMorgan Chase taking over White & Case any time soon.

The consumer market is another story, and large, diversified companies that offered legal services might make sense, as the Clementi report suggests. Most people need advice on buying homes and making wills. Unlike the legal staff at large corporations, they don't have the cash or skills to assemble a team to deal with their legal, business, and financial problems. They'd be well advised to go to a one-stop operation that could provide standardized services at low prices. If H&R Block can do tax returns, then Wal-Mart should be able to do wills. Most simple wills do not raise difficult issues like the tax consequences of transferring ownership of land, and drafting them requires no more, and perhaps less, specialized expertise than dealing with the IRS. Allowing businesses in these high-volume retail markets to offer legal services should slash costs through standardization, and matters in litigation could always be referred to more traditional lawyers.

Unfortunately, American jurisprudence is full of warnings about how horrible it would be to allow companies like Wal-Mart to perform these heady legal duties. We hear that the practice of law is a learned profession that requires formal training and state licensing. Ordinary people, we are told, need to be protected by licensed legal professionals against the risk of fraud and overreaching—as if the business reputation of a large firm is not a stronger assurance against systematic misbehavior. But there is plenty of evidence that licensing requirements for lawyers do not reliably protect clients from unscrupulous members of the bar. They are more effective at blocking entry to the profession and propping up prices for routine legal services of critical importance to people of limited sophistication and means. As the Clementi report suggests, we need market liberalization, but without regrets, and without ill-conceived regulations that could smother useful legal reform.

Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law at the University of Chicago and the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution.

printer friendly email this article letter to the editor reprint premissions
space space space












More By Richard A. Epstein
Pharma Furor
space
Contact Us