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I’m very pleased to announce the George Mason Law & Economics Center is hosting a program focusing on our friend and colleague Larry Ribstein’s scholarship on the market for law.   Henry Butler and Bruce Kobayashi have put together a really wonderful program of folks coming together not to celebrate Larry’s work — but to use it as a platform for further discussion and for legal scholars to engage in these important issues.

Interested readers might want to check out the TOTM Unlocking the Law Symposium.

The announcement follows and I hope to see some of you there on Friday, November 9, 2012 at GMU Law.
The Henry G. Manne Program in Law and Regulatory Studies presents Unlocking the Law: Building on the Work of Professor Larry Ribstein to be held at George Mason University School of Law, Friday, November 9th, 2012. The conference will run from 8:00 A.M. to 4:00 P.M.

OVERVIEW: In a series of influential and provocative articles, Professor Larry Ribstein examined the forces behind the recent upheaval in the market for legal services. These forces included increased global competition, changes in the demand for legal services resulting from the expanded role of the in-house counsel, and the expanded use of technology. His analysis showed that changes in the market for legal services were not just the result of a cyclical downturn in the economy. Rather, the profound changes in the market reflected building competitive pressures that exposed the flaws in the business model used by large firms to provide legal services. His recent writings also examined the broader implications of this upheaval for legal education, the private production of law, and whether legal innovation will be hindered by or hasten the demise of the current system of professional regulation of lawyers.

Professor Ribstein passed away suddenly on December 24, 2011. In the wake of the terrible loss of their close friend and colleague, Professors Henry Butler and Bruce Kobayashi (along with several other colleagues at Mason Law) have decided to honor Larry through a conference designed to capture and expand on the spirit of Larry’s recent work. The Unlocking the Law Conference seeks to advance these goals by inviting legal scholars to present their views and engage in a vibrant discussion about the present and future of the market for legal services. The panels at this conference will showcase 14 papers written specifically for this occasion and presented to the public for the first time.

This conference is organized by Henry N. Butler, Executive Director of the Law & Economics Center and George Mason Foundation Professor of Law, and Bruce H. Kobayashi, Professor of Law, George Mason University School of Law through a new Project on Legal Services Reform – under the auspices of the Mason Law & Economics Center. The Project on Legal Services Reform seeks to continue and extend the important work on legal innovation, legal education, law firms, and legal regulation produced by Larry. We hope to encourage scholars who have not worked in these areas to read Larry’s work, critique it in the same manner in which Larry famously commented on papers, and expand (or even restrict or redirect) the thrust of Larry’s work. In essence, this project is about “Larry as Catalyst.”

For background information, you might want to visit TRUTH ON THE MARKET (http://www.truthonthemarket.com), which held an online symposium on this topic on September 19 and 20, 2011.

REGISTRATION: You must pre-register for this event. To register, please send a message with your name, affiliation, and full contact information to: Jeff Smith, Coordinator, Henry G. Manne Program in Law and Regulatory Studies, jsmithQ@gmu.edu

AGENDA:

Friday, November 9, 2012:

Panel I. The Future of Legal Services and Legal Education

How the Structure of Universities Determined the Fate of American Law Schools
- Henry G. Manne, Distinguished Visiting Professor, Ave Maria School of Law; Dean Emeritus, George Mason University School of Law

The Undergraduate Option for Legal Education
- John O. McGinnis, George C. Dix Professor in Constitutional Law, Northwestern University School of Law

Panel II. Deregulating Legal Services

The Deprofessionalization of Profession Services: What Law and Medicine Have in Common and How They Differ
- Richard A. Epstein, Laurence A. Tisch Professor of Law, New York University School of Law

The Future of Licensing Lawyers
- M. Todd Henderson, Professor of Law, University of Chicago Law School

Failing the Legal System: Why Lawyers and Judges Need to Act to Authorize the Organizational Practice of Law
- Gillian K. Hadfield, Richard L. and Antoinette Schamoi Kirtland Professor of Law and Professor of Economics, University of Southern California Gould School of Law

Globalization and Deregulation of Legal Services
- Nuno Garoupa, Professor and H. Ross and Helen Workman Research Scholar, University of Illinois College of Law; Co-Director, Illinois Program on Law, Behavior, and Social Science

Panel III. Law Firms and Competition Between Lawyers

From Big Law to Lean Law
- William D. Henderson, Professor of Law and Van Nolan Faculty Fellow, Indiana University Maurer School of Law; Director, Center on the Global Legal Profession

Glass Half Full: The Significant Upsides to the Changes in the American Legal Market
- Benjamin H. Barton, Professor of Law, University of Tennessee College of Law

An Exploration of Price Competition Among Lawyers
- Clifford Winston, Senior Fellow, Economics Studies, Brooking Institution

Panel IV. Reputation, Fiduciary Duties, and Agency Costs

Lawyers as Reputational Intermediaries: Sovereign Bond Issuances (1820-2012)
- Michael H. Bradley, F.M. Kirby Professor of Investment Banking Emeritus, Fuqua School of Business, Duke University; Professor of Law, Duke University School of Law
- Mitu Gulati, Professor of Law, Duke University School of Law
- Irving A. De Lira Salvatierra, Graduate Student, Department of Economics, Duke University

The Fiduciary Society
- Jason Scott Johnston, Henry L. and Grace Doherty Charitable Foundation Professor of Law and Nicholas E. Chimicles Research Professor in Business Law and Regulation, University of Virginia School of Law

Class Action Lawmakers and the Agency Problem
- Barry E. Adler, Bernard Petrie Professor of Law and Business and Associate Dean for Information Systems and Technology, New York University School of Law

Panel V. Private Lawmaking and Adjudication

Decentralizing the Lawmaking Function: Should There Be Intellectual Property Rights in Law?
- Robert G. Bone, G. Rollie White Teaching Excellence Chair in Law, University of Texas at Austin School of Law

Arbitration, the Law Market, and the Law of Lawyering
- Erin O’Hara O’Connor, Milton R. Underwood Chair in Law, Vanderbilt University Law School
- Peter B. Rutledge, Herman E. Talmadge Chair of Law, University of Georgia Law School

VENUE:
George Mason University School of Law
3301 Fairfax Drive
Arlington, VA 22201

FURTHER INFORMATION: For more information regarding this conference or other initiatives of the Law & Economics Center, please visit: http://www.MasonLEC.org

Call or send an email to: Tel: (703) 993-8040, Email: lec@gmu.edu

The Henry G. Manne Program in Law & Economics honors the legacy of Henry G. Manne, Dean Emeritus of George Mason Law School and founder of the Law & Economics Center. Manne was a trailblazer in the development of law and economics, not only as a prominent and influential scholar, but also as an academic entrepreneur. He spurred the development of law and economics into the most influential area of legal scholarship through his Economics Institutes for Law Professors and Law Institutes for Economics Professors. The Manne Program promotes law-and-economics scholarship by funding faculty research and hosting research roundtables and academic conferences.

http://www.MasonManne.org

Clifford Winston argues for this in the NYT.  For much more, see our symposium with Winston and many others.

It’s been a great symposium.  Many thanks to all of our outstanding contributors!  This Symposium demonstrated blogging’s potential for productive intellectual discussion of an important current topic.  We expect to have more such virtual conferences.

We’ll have a wrap-up tomorrow of all of the posts here.  I will offer some reactions after I’ve had time to absorb the volume of ideas presented.  In the meantime watch this space for more Truth on the Market.

As we approach the end of this Symposium, I am struck by how much consensus exists on this subject. Of course, we are not conducting this exercise under the auspices of the ABA. Nevertheless, there is sufficient intellectual backing for a major push to begin the deregulation of legal services. Despite warnings that this is a bad time to consider such action, I think that there are reasons why this is a very good time to proceed. Contrary to popular wisdom, the number of employed lawyers has expanded through the recession, if one is to believe the results of the CPS household survey. But the employment in legal services firms has declined according to the BLS establishment survey. This is consistent with Larry Ribstein’s view on the decline of Big Law. The number of lawyers is growing slowly, but they are not having as much fun as before and are therefore less likely to come to the defense of their guild.

Cliff Winston and I think that the best way to proceed is through a variety of different state experiments. Some states could allow bar exams for persons who have not attended law school or who have subscribed to on-line law school programs. Others could offer a variety of different exams for different prospective specialties. Still others could repeal their unauthorized practice of law prohibitions. Others could allow non-lawyers to own legal services operations. Still other variants could be tried, including total deregulation. Let’s see what works – and not only in the United Kingdom.

My first post discussed one primary impediment to deregulating all the lawyers – which is the current system of legal regulation of lawyers.   Even if one agrees that deregulating all the lawyers may be the ultimate goal, this still leaves the question of how best to achieve this result.  Deregulating all the lawyers may not be the first thing we do.  One plausible candidate is fixing intellectual property protection for law.

This view is based upon the assumption that the best way to achieve the goal of deregulating all the lawyers is to create incentives for entrepreneurs to produce new and innovative legal information products.  As noted in my earlier post, innovation and entry by entrepreneurs into the legal information market can be a powerful force that weakens of the economic and political power of those whose interests are aligned with maintaining the current regulatory regime.  One result of this process is that deregulation becomes more likely.   This dynamic is why I love Virginia wine, even though I never drink it.

Creating incentives for entrepreneurs to innovate and enter requires a mechanism that allows them to appropriate a return to their investments.  Intellectual property rights can be an essential mechanism through which this occurs. Indeed, intellectual property rights can effectively protect many innovative legal information products.  However, in several important cases, legal information is subject to what can be described as a form of legal exceptionalism that results in weakened intellectual property rights.  In general, the availability and scope of intellectual property rights are limited so that the costs of restricting the use of already produced information do not exceed the benefits associated with the marginal incentives to create the information.   Intellectual property rights for law and related works seem to be further limited because of heightened concerns regarding use costs that are specific to legal information.

Perhaps the best example of legal exceptionalism is the legal treatment of the privately produced model building codes in Veeck v. SBCCI, 293 F.3d 791 (5th Cir. 2002, en banc).  In this case, Veeck posted SBCCI’s copyrighted model building codes on a website in violation of a license agreement that prohibited copying or distributing the work. The court held that the copyrighted code text entered the public domain when adopted as law by several local jurisdictions.  Through SBCCI retained copyrights to its model codes, they could not enforce them against Veeck, who identified the posted SBCCI model codes as the building codes of two municipalities.

Current copyright law precludes copyright protection for any work “prepared by an officer or employee of the United States Government as part of that person’s official duties”.  Under this definition, court opinions written by federal judges, congressional bills and statutes, and federal regulations are ineligible for copyright protection.  Courts have applied similar rules to state legal materials, including state judicial opinions, statutes, and regulations.   These rules assume that the use costs of intellectual property protection outweigh gains from improved private incentives to produce model laws.   Copyright law does not explicitly preclude copyright for model codes and other privately produced laws.  However, the court’s holding, by elevating due process concerns with public access to the law over providing economic incentives to produce model codes, effectively extends this prohibition to privately produced model codes and laws that have been adopted as law.

Protecting due process concerns does not require precluding copyright protection for privately produced works adopted as law.  Broad fair use privileges for those bound by the laws or codes could address these concerns while simultaneously protecting model codes from appropriation by competing commercial interests and other jurisdictions.   Restrictive licenses can also serve to appropriately balance the use-creation tradeoff by clarifying parties’ expectations regarding permitted uses and pricing of the copyrighted model law.   As part of these licenses, jurisdictions that adopt privately produced and copyrighted model codes could alleviate due process concerns by authorizing use by citizens bound by the law while preventing reproduction for other purposes.  Courts could require similar licenses to be granted by those wishing to file briefs and other potentially copyrightable documents.

The court’s holding in Veeck unnecessarily limits the ability to use these mechanisms by effectively eliminating copyright protection rather than retaining the protection and using the mechanisms discussed above that would permit limited public use and mitigate any due process concerns.  In doing so, the courts holding, along with other similar forms of legal exceptionalism unnecessarily weakens incentives for legal innovation and can result in less pressure to deregulate all the lawyers.

Attorneys earn excess rents by maintaining barriers to entering the legal profession.  Legislation and regulation expanding the scope of work that only an attorney legally can perform is an obvious way in which attorneys attempt to expand or protect the market for their services.  The FTC has a long history of trying to convince state legislators and courts that expanding the scope of the practice of law is likely to have unjustified anticompetitive consequences.   A more subtle way attorneys limit competition for legal services is by interpreting existing legislation and rules in a manner that expands the universe of practices that are considered “unethical” or “unauthorized practice of law.”  In this symposium, I will address the application of antitrust law to this conduct.

The Legal practice no stranger to antitrust scrutiny.  Indeed, in several seminal antitrust cases the Supreme Court has grappled with the tension between a national policy in favor of competition and states’ abilities as sovereigns to regulate the practice of law.  See e.g., Bates v. State Bar of Arizona; Goldfarb v. Virginia; Hoover v. Ronwin.  Taken together, what these cases make clear that entry barriers erected directly by the state supreme court acting in its legislative capacity are ipso facto exempt from antitrust scrutiny as acts of the state sovereign.  Agreements among private attorneys (e.g., via a private state bar association as opposed to a mandatory state bar) to set competitively sensitive variables (like price and advertising), on the other hand, clearly are not unless both the “clear articulation” and “active supervision” tests from Midcal are met.  One area that has yet to be addressed, but which I think merits closer attention, is the use of ethics opinions or threats of enforcement for violations of ethical codes to limit competition in the market for legal services.

Let me provide a hypothetical to motivate this discussion:

  • Imagine a firm that uses a website to match attorneys with potential clients.  The site works like this:  you post on the website that you’re looking for someone to draft partnership agreements under Virginia law for your new business; attorneys who have paid to participate in the platform see your request, and, if interested, post a reply describing their qualifications and in some cases price.  The website make money from attorney subscriptions.  Recently, however, the state bar ethics committee issued an ethical opinion that participation in this platform would violate the state bars’ ethics rules by constituting and illegal payment to a non-attorney (the web site) for a referral.  Now, as an attorney in State X, you have a dilemma.  The website has been quite useful in helping you build your practice, but if you continue to participate, you risk being sued – either by an arm of the state bar, or a private attorney acting to protect the integrity of the legal practice – for violation of ethical rules.  The possible penalties (in addition to legal and opportunity costs to address any ethical challenge) could include fines, suspension, or even disbarment.

In this case, the state has not issued a new rule or regulation that explicitly expands the legal monopoly.  Instead, a group of attorneys (who most likely do not work full time for the state bar) have merely opined on what the state ethics rules require.  This opinion, however, has the practical effect of discouraging use of the online legal platform by threating legal sanctions.   In this manner, it has a clear anticompetitive effect of reducing consumer choice and retarding competition among attorneys.  Established attorneys with large client bases and existing referral systems operated by local bar associations, moreover, are likely to be the primary beneficiaries of this new opinion.

The interesting antitrust questions that arise in this scenario are (1) whether the state action doctrine protects this conduct; and (2) does this conduct constitute a restraint of trade.

Is This State Action?

Turning to the state action issue, the ethics committee of a state bar is not the sovereign, so its actions are not ipso facto immune from antitrust scrutiny.  Thus, a necessary condition for state action exemption is that the ethics committee was acting pursuant to a clearly articulated and affirmatively expressed state policy. Less clear, however, is whether this is also a sufficient condition for state action protection.  I argue that it is not, and that in addition the ethics committee must show that the state approved its decision to adopt an interpretation of the ethics rules that was likely to have anticompetitive effects.

Support for this position can be found in the FTC decision, In re North Carolina State Board of Dental Examiners (NCDE), (Feb. 8, 2011).  NCDE concerned a state dental regulatory board composed of private dentists that had sent cease and desist letters to non-dentists who performed teeth whitening procedures.  The Board acted on its interpretation that these non-dentists were engaging in the unauthorized practice of dentistry.  The Dental Board, however, lacked the authority to enjoin anyone from teeth whitening; its statute only allowed it to file a complaint in state court alleging unauthorized practice of dentistry.  The Board claimed state action exemption, arguing that as a state subdivision it needed only to show that it satisfied the clear articulation prong of the Midcal test.  The FTC disagreed, and held that to enjoy state action protection the Board also must show that the state actively supervised its decision to issue the cease and desist letters. (Id. at 9-11).

The important factor in the FTC analysis was its conclusion that the Dental Board’s interests were insufficiently independent from the interest of those it was regulating.  Turning to first principles, the Commission explained:

[I]f a state permits private conduct to go unchecked by market forces, the only assurance the electorate can have that the private parties will act in the public interest is if the state is politically accountable for any resulting anticompetitive conduct . . . .  Decisions that are made by private parties who participate in the market that they regulate are not subject to these political constraints unless these decisions are reviewed by disinterested state actors to assure fealty to state policy.

Id. at 10-11.  The Commission went on to find that the state of North Carolina had not supervised the Dental Board’s decision to classify teeth whitening as the practice of dentistry, thereby restraining competition in the market for teeth whitening, “was subject to any supervision, let along sufficient supervision to convert the Board’s conduct into that of the state of North Carolina. “ Id. at 17.

The reasoning in NCDE is equally applicable to expansive interpretation of rules or statutes to limit competition in legal services.  For example, in the above hypothetical, the ethics committee’s opinion should not enjoy state action protection unless the committee can show that the state reviewed and approved its decision to limit competition.  True, this rule will impose costs, but as I (along with Bill Kovacic) have argued elsewhere (see 90 B.U.L. Rev. 1555, 1597 (2010)) this is the price a state must pay if it wants to circumvent the national policy in favor of competition.  In deference to federalism, Parker and its progeny allow states to adopt policies that contravene the antitrust laws.  But regulatory bodies comprising unelected market participants are not sovereign, so deference to their anticompetitive policies does not vindicate the federalism principles that animate the state action doctrine.   What’s more, these bodies are likely to pose a greater risk to competition than elected officials, who at least are politically accountable for the anticompetitive policies that they pursue.

Finally, I argue that ex post review by a state court of decisions by ethics committees that expand the definition of the practice of law or that suggest some new practice is unethical should be insufficient to constitute active state supervision.   The active supervision prong of Midcal requires the state to approve prices set by a private cartel before they go into effect, so logically it should also require the state to approve ex ante an ethics committee’s decision to interpret ethical rules in a manner that is likely to restrain competition in the market for legal services.

Restraint of Trade?

Even if the ethical committee’s actions are not protected by the state action doctrine, we must also address a second question:  does the ethics committee’s opinion constitute a restraint of trade under the antitrust laws?  In Schachar v. Am. Academy  of Ophthalmology, 870 F.2d 397 (7th Cir. 1989), an ophthalmologist challenged the AAO under the antirust laws for opining that radial keratotomy was an experimental procedure.  Judge Easterbrook held that this could not be a restraint because although the AAO’s opinions carried weight due to its reputation, it had no power to prevent anybody from performing radial keratotomy.   Could the same issue exist for my hypothetical?  Is an opinion by the ethics committee no different from that of a trade association or an expert body?  I argue no, because unlike that AAO in Schachar, the ethics committee is acting under the color of law, which provides a reasonable basis for attorneys licensed in State X to believe that they risk state sanction if they fail to heed the warning.

Again, NCDE is illuminating.  Following the Commission’s state action decision, and after a full trial, the ALJ found that the Board’s conduct related to non-dentist teeth whiteners constituted an unreasonable restraint of trade. (see http://ftc.gov/os/adjpro/d9343/110719ncb-decision.pdf).   He based this finding on two grounds: the nature of the Board’s conduct coupled with its power to exclude competitors, which flowed from the fact that it was a state agency; and evidence that the Board’s actions actually caused some non-dentist teeth whiteners to exit the marketplace.   It would be hard to distinguish a state bar’s ethics committee’s expansive interpretation of an ethical requirement from the facts in NCDE; both regulatory bodies have the power to exclude competition because their opinions, unlike those of a private association, carry the possibility of legal sanction for non-compliance.

The traditional narrative is that Asian jurisdictions have fewer lawyers than in the West because they are much less litigious societies; they don’t need lawyers! Recent evidence has suggested the causation is probably reversed; there are not enough lawyers to provide services to all potential litigants.

Legal markets in East Asia were largely kept closed by excluding foreign law firms and imposing a significantly low passing rate for bar exams (usually less than 10%). In this context, Japan and Korea have enacted important legal reforms to modernize their legal practice and make it more competitive in the last ten years. Quite remarkably, they have been inspired by the U.S. model of legal education. The most immediate consequence has been the notable increase of passing rates in the Japanese and Korean bar exams, still low for U.S. standards (below 50%), but clearly above the traditional figures. The transformation of the law degree from undergraduate to postgraduate (similar to a J.D. program) has been less far-reaching than expected, since the undergraduate degrees were not fully eliminated.

Taiwan and Hong Kong have been changing at a slower pace. The political context (a process of democratization) has been fundamentally influenced by lawyers, but the changes in the market for legal services have been less remarkable than in Japan and Korea. Taiwan is the Asian jurisdiction with more law professors educated in the United States (still a minority though). The Hong Kongnese legal profession has been shaped by the British. Its vibrant market and the strategic location within the Greater China have attracted the attention of the big law firms.

Mainland China is a different story. For many political and historical reasons, the reform of the legal profession has not been a major priority. Passing rates in Chinese bar are extremely low (possibly below 5%) which, in my view, explains the big Chinese demand for U.S. LLMs degrees (even if low, the chances of passing the New York bar are higher than passing the Chinese bar). The big demand for legal services is concentrated in Beijing and Shanghai. Legal education has expanded significantly since the early 1990s, but most commentators agree that quality is a serious problem. The market is heavily regulated by the government (which does not exclude the possibility of less strict informal practices).

We cannot say we see a pattern of deregulation of legal services in East Asia. At best, most jurisdictions have been investing on improving the quality of their legal human capital. Entry controls traditionally were severe (they still are in mainland China), thus failing to create a competitive market (probably with the exception of Hong Kong). Recent reforms might change this pattern in the future but, at this stage, their impact is unclear. Local commentators are divided on the merits of these reforms.

In Part I of this post, I identified a jurisprudential thread of cases that suggest corporations have a First Amendment right to own and invest in law practices for the delivery legal services.  These decisions include NAACP v. Button, the union trilogy, and Bates v. State Bar of Arizona.  Two recent cases shed light on how the Supreme Court might view my collective reading of NAACP v. Button and its progeny: Citizens United v. Federal Election Commission and Sorrell v. IMS Health.

Citizens United accomplished at least two tasks related to understanding the free speech interests bound up in access to the law and the delivery of legal services via a corporation:  (1) the majority made clear that for-profit and nonprofit corporations alike enjoy the same protections as individuals under the First Amendment and (2) the holding broadened prior decisions related to the need for speech to further economic competition.  Writing for the majority, Justice Kennedy observed: “The identity of the speaker is not decisive in determining whether speech is protected.  Corporations and other associations, like individuals, contribute to the discussion, debate, and the dissemination of information and ideas that the First Amendment seeks to foster.”   If the majority’s opinion means what it says, Rule 5.4’s blanket ban against outside investment and ownership of law practices unconstitutionally interferes with the corporation’s ability to disseminate legal services.

In Sorrell, the Court struck down a Vermont statute restricting the sale and use of pharmacy records to so-called data miners.  Writing the 6-3 majority opinion, Justice Kennedy quoted from the Bates case, observing that the “consumer’s concern for the free flow of commercial speech often may be far keener than his concern for urgent political dialogue.”  The Sorrell decision recognizes that dissemination of information is essential to the First Amendment. The corporation is uniquely situated to engage in wide-scale distribution of legal services in a way that currently does not occur largely due to cost restraints associated with economies of scale.  It simply isn’t economically feasible for a traditional law firm to market and deliver en masse representation to the general public for routine wills, child custody, divorce, mortgage foreclosure, standard contracts, small business needs, immigration, bankruptcy, housing disputes, and other basic matters.

Let me return for a moment to the NYT editorial on America’s justice gap that I mentioned in Part I of this post.  The remedies proposed in that piece have not succeeded to date and are unlikely to come to fruition.  Funding for the Legal Services Corporation is on the decline, as it has been since established in 1974.  It is unclear how required pro bono reporting would make any meaningful difference in offering legal services to the untapped market of consumers that could be reached by corporations like Wal-Mart or Google.  As law schools struggle to control tuition and manage their budgets, expanding loan forgiveness programs seems unrealistic.  At best, permitting nonlawyers to engage in limited categories of simple legal representation might offer some relief but that, alone, is not enough.  Missing from this list of solutions, as I noted in my previous post, is the reform most likely to result in the dissemination of legal representation for those in need and to create jobs for unemployed lawyers:  corporate ownership of law practices.

We need a novel resource to facilitate competition, fuel innovation, and increase access to quality legal services.  Corporations have the potential to provide this resource.  Not only do economic realties and global competition demand this, but it is a matter of First Amendment concern as well.

First, thanks to TOTM for organizing this symposium on a most timely and important topic.  As computers and technology have revolutionized every aspect of human endeavor it is a particularly critical time to ask ourselves why 21st century law schools closely resemble the law schools of the late-19th century and why in court litigation would seem relatively familiar to Clarence Darrow.  One significant answer is the regulation of the legal profession, and one possible solution is significant deregulation.

My particular interest in the topic is the role that the American judiciary has played in generating the remarkably lawyer-friendly regulations that govern the practice of law.  (Self promotion alert!).  Cambridge University Press recently published my book entitled The Lawyer-Judge Bias in the American Courts.

The book starts with the relatively unremarkable observation that virtually all American judges are former lawyers. The book goes on to argue that these lawyer-judges instinctively favor the legal profession in their decisions and that this bias has far-reaching and deleterious effects on American law.  The book notes many reasons for this bias, some obvious and some subtle. Fundamentally, it occurs because – regardless of political affiliation, race, or gender – every American judge shares a single characteristic: a career as a lawyer. This shared background results in the lawyer-judge bias.

The regulation of lawyers is a prime example (in fact it’s chapters Five and Six in the book).  American lawyers have a unique regulatory structure.  Every other profession – from cosmetology to medicine – is regulated in the first instance by state or federal legislatures.  State legislatures generally set up regulatory agencies for each licensed profession and the efficacy of these agencies are a subject of some debate.  That said, at least every other American profession must push their policies and regulation through a legislature made up of members who generally practice another profession (ironically enough many state legislators are lawyers).  As such, state legislatures generally serve as some check on other professions.

The legal profession, by contrast, is governed in all fifty states by state supreme courts.  These Courts frequently delegate the actual nuts and bolts of governing lawyers to bar associations or other administrative bodies.  Predictably, this regulatory structure favors the interests of the legal profession over those of the public.

Interestingly, it was not always thus.  During most of the nineteenth century, lawyers were largely unregulated and what regulation existed came from legislatures not courts.  There was almost no formal regulation of lawyer behavior and barriers to entry like a bar exam or the law school requirement were unheard of.  Bar associations were weak or non-existent.  Admittedly this period was pre-industrialization, but note that it is not unthinkable or impossible to have a deregulated market for lawyers; to the contrary, we’ve done it before.

In the late-nineteenth century bar associations began to reform.  Priority number one was lobbying courts to step up the regulation of the profession.  Over time state supreme courts have taken control of lawyer regulation and have created the complex web of regulations that now govern the legal profession.

Priority one for the new bar associations was to encourage state supreme courts to take over lawyer regulation and then to raise barriers to entry.  For example, from its inception the ABA pilloried what it considered to be the undesirable element in the bar and proposed a tightening of bar admission standards because low admissions standards had contributed to “extraordinary numbers” of the “ignorant” and “unprincipled” becoming lawyers.  See 2 A.B.A. Rep. 212 (1878).  In 1891, the ABA Committee on Legal Education produced a 60-page report on entry to the profession that proved incredibly prophetic.  The report recommended virtually every major innovation to come: including state supreme court control over entry, written bar exams, a three year requirement for law schools, and specific law library and facility requirements.  The report’s very first resolution was to “strongly recommend that the power of admitting members to the Bar, and the supervision of their professional conduct, be in each state lodged in the highest courts of the State.”

State supreme courts obliged by claiming an “inherent authority” to regulate the legal profession as an outgrowth of the constitutional separation of powers between the legislative and judicial branches.  State supreme courts used this “inherent authority” to seize entry regulation from the legislature, conduct sua sponte investigations of the unauthorized practice of law, and even to make many bar associations unified or mandatory.  In states with unified bars, a lawyer must be a member of and pay dues to the state bar association to practice law in that state.  Obviously, a mandatory bar association has significant benefits for the legal profession in those states.  In many of these states, the Supreme Courts ceded control over the profession to the unified bars, making lawyers in those states the most self-regulated professionals in the world.   Further, like a closed union shop, the mandatory collection of dues and the associated political clout of having all lawyers be members of the bar association are significant advantages to the profession.

I raise this history and the close interplay between the interests of judges and lawyers to note how difficult any deregulation effort will prove.  State supreme courts govern lawyer regulation in all fifty states.  There have been federal incursions by the SEC and others, but judges control the nuts and bolts of both entry and conduct.  Any large-scale changes to regulation will likely have to go through state supreme courts and if history is any guide those courts will naturally (and frequently unconsciously) care more about the needs and desires of bar associations and the legal profession than the public at large.

The European Commission, in particular the Directorate-General for Competition, has shown interest in promoting competition in the market for legal services since the early 2000s.

Some countries such as the United Kingdom have taken this matter seriously. After a long review process, the British government has recently implemented a new regulatory set-up for legal services in order to foster competition, innovation, consumer protection as well as a so-called accountable regulatory enforcement (under the Legal Services Act 2007).  These reforms were prepared by the Clementi report (published by December 2004) which argued for alternative business structures (allowing nonlawyers to go into business with lawyers as well as nonlawyer’s ownership of law firms including the possibility of public trading of shares in law firms), an independent agency to deal with disciplinary complaints (rather than leaving it to self-regulation; currently the Legal Ombudsman and the Office for Legal Complaints), and greater freedom for legal service providers to compete (under the supervision of the Legal Services Board operational since 2010). The reform failed to suppress the distinction between solicitors and barristers, but the new alternative business structures could in the future further contribute to blur this distinction. It is probably too early for a full-fledged assessment of the impact of these legal reforms on the market for legal services in the United Kingdom, but the general sense seems to be that they have modernized the institutional framework in the right direction while making the market more competitive just in time for the 2008 recession. I do not know of any empirical study on the effect of these reforms on legal fees but it would be important to know whether or not more competition and plausibly a better regulatory setup have reduced average fees.

Not all countries have moved in the direction of deregulation. Until recently Spain had no bar exam. Law graduates simply needed to register with the local bar at the end of their degree (of five years in the past, now four years). The consequence is that Spain has currently one of the highest numbers of lawyers in per capita terms (slightly behind the United States). However, a large proportion of these “lawyers” are actually not practicing law, but merely registered with the local bar. With the excuse that Spain was different from the other EU Member States, the Spanish government has introduced a bar exam in 2007, effective from 2011. At this stage, we do not know what the passing rates will be, but we can easily see the new bar exam being used to reduce entry to the profession under the pretense of improving quality.

Another example is Portugal. Law graduates are accepted for a training period at the end of which there is a (national) bar exam with a significantly high passing rate. Due to an expansion of legal education in the mid 1990s, the number of lawyers has increased considerably in the last decade or so. As a consequence there has been a pressure for more competition in a market traditionally characterized by strong cartelization and considerable rent-seeking. The response from the national bar was simple: introduce a new (national) bar exam to enter the training period with a passing rate of less than 10%. There is no doubt that such change has satisfied the “incumbents.”!