For the Bar, Competition is Always “Unethical”

Jonathan M. Barnett —  8 June 2020

This guest post is by Jonathan M. Barnett, Torrey H. Webb Professor of Law at the University of Southern California, Gould School of Law.

State bar associations, with the backing of state judiciaries and legislatures, are typically entrusted with a largely unqualified monopoly over licensing in legal services markets. This poses an unavoidable policy tradeoff. Designating the bar as gatekeeper might protect consumers by ensuring a minimum level of service quality. Yet the gatekeeper is inherently exposed to influence by interests with an economic stake in the existing market. Any licensing requirement that might shield uninformed consumers from unqualified or opportunistic lawyers also necessarily raises an entry barrier that protects existing lawyers against more competition. A proper concern for consumer welfare therefore requires that the gatekeeper impose licensing requirements only when they ensure that the efficiency gains attributable to a minimum quality threshold outweigh the efficiency losses attributable to constraints on entry.

There is increasing reason for concern that state bar associations are falling short of this standard. In particular, under the banner of “legal ethics,” some state bar associations and courts have blocked or impeded entry by innovative “legaltech” services without a compelling consumer protection rationale.

The LegalMatch Case: A misunderstood platform

This trend is illustrated by a recent California appellate court decision interpreting state regulations pertaining to legal referral services. In Jackson v. LegalMatch, decided in late 2019, the court held that LegalMatch, a national online platform that matches lawyers and potential clients, constitutes an illegal referral service, even though it is not a “referral service” under the American Bar Association’s definition of the term, and the California legislature had previously declined to include online services within the statutory definition.

The court’s reasoning: the “marketing” fee paid by subscribing attorneys to participate in the platform purportedly runs afoul of state regulations that proscribe attorneys from paying a fee to referral services that have not been certified by the bar. (The lower court had felt differently, finding that LegalMatch was not a referral service for this purpose, in part because it did not “exercise any judgment” on clients’ legal issues.)

The court’s formalist interpretation of applicable law overlooks compelling policy arguments that strongly favor facilitating, rather than obstructing, legal matching services. In particular, the LegalMatch decision illustrates the anticompetitive outcomes that can ensue when courts and regulators blindly rely on an unqualified view of platforms as an inherent source of competitive harm.

Contrary to this presumption, legal services referral platforms enhance competition by reducing transaction-cost barriers to efficient lawyer-client relationships. These matching services benefit consumers that otherwise lack access to the full range of potential lawyers and smaller or newer law firms that do not have the marketing resources or brand capital to attract the full range of potential clients. Consistent with the well-established economics of platform markets, these services operate under a two-sided model in which the unpriced delivery of attorney information to potential clients is financed by the positively priced delivery of interested clients to subscribing attorneys. Without this two-sided fee structure, the business model collapses and the transaction-cost barriers to matching the credentials of tens of thousands of lawyers with the preferences of millions of potential clients are inefficiently restored. Some legal matching platforms also offer fixed-fee service plans that can potentially reduce legal representation costs relative to the conventional billable hour model that can saddle clients with unexpectedly or inappropriately high legal fees given the difficulty in forecasting the required quantity of legal services ex ante and measuring the quality of legal services ex post.

Blocking entry by these new business models is likely to adversely impact competition and, as observed in a 2018 report by an Illinois bar committee, to injure lower-income consumers in particular. The result is inefficient, regressive, and apparently protectionist.

Indeed, subsequent developments in this litigation are regrettably consistent with the last possibility. After the California bar prevailed in its legal interpretation of “referral service” at the appellate court, and the Supreme Court of California declined to review the decision, LegalMatch then sought to register as a certified lawyer referral service with the bar. The bar responded by moving to secure a temporary restraining order against the continuing operation of the platform. In May 2020, a lower state court judge both denied the petition and expressed disappointment in the bar’s handling of the litigation.

Bar associations’ puzzling campaign against “LegalTech” innovation

This case of regulatory overdrive is hardly unique to the LegalMatch case. Bar associations have repeatedly acted to impede entry by innovators that deploy digital technologies to enhance legal services, which can drive down prices in a field that is known for meager innovation and rigid pricing. Puzzlingly from a consumer welfare perspective, the bar associations have taken actions that impede or preclude entry by online services that expand opportunities for lawyers, increase the information available to consumers, and, in certain cases, place a cap on maximum legal fees.

In 2017, New Jersey Supreme Court legal ethics committees, following an “inquiry” by the state bar association, prohibited lawyers from partnering with referral services and legal services plans offered by Avvo, LegalZoom, and RocketLawyer. In 2018, Avvo discontinued operations due in part to opposition from multiple state bar associations (often backed up by state courts).

In some cases, bar associations have issued advisory opinions that, given the risk of disciplinary action, can have an in terrorem effect equivalent to an outright prohibition. In 2018, the Indiana Supreme Court Disciplinary Commission issued a “nonbinding advisory” opinion stating that attorneys who pay “marketing fees” to online legal referral services or agree to fixed-fee arrangements with such services “risk violation of several Indiana [legal] ethics rules.”

State bar associations similarly sought to block the entry of LegalZoom, an online provider of standardized legal forms that can be more cost-efficient for “cookie-cutter” legal situations than the traditional legal services model based on bespoke document preparation. These disputes are protracted and costly: it took LegalZoom seven years to reach a settlement with the North Carolina State Bar that allowed it to continue operating in the state. In a case pending before the Florida Supreme Court, the Florida bar is seeking to shut down a smartphone application that enables drivers to contest traffic tickets at a fixed fee, a niche in which the traditional legal services model is likely to be cost-inefficient given the relatively modest amounts that are typically involved.

State bar associations, with supporting action or inaction by state courts and legislatures, have ventured well beyond the consumer protection rationale that is the only potentially publicly-interested justification for the bar’s licensing monopoly. The results sometimes border on absurdity. In 2006, the New Jersey bar issued an opinion precluding attorneys from stating in advertisements that they had appeared in an annual “Super Lawyers” ranking maintained by an independent third-party publication. In 2008, based on a 304-page report prepared by a “special master,” the bar’s ethics committee vacated the opinion but merely recommended further consideration taking into account “legitimate commercial speech activities.” In 2012, the New York legislature even changed the “unlicensed practice of law” from a misdemeanor to a felony, an enhancement proposed by . . . the New York bar (see here and here). 

In defending their actions against online referral services, the bar associations argue that these steps are necessary to defend the public’s interest in receiving legal advice free from any possible conflict of interest. This is a presumptively weak argument. The associations’ licensing and other requirements are inherently tainted throughout by a “meta” conflict of interest. Hence it is the bar that rightfully bears the burden in demonstrating that any such requirement imposes no more than a reasonably necessary impediment to competition. This is especially so given that each bar association often operates its own referral service.

The unrealized potential of North Carolina State Board of Dental Examiners v. FTC

Bar associations might nonetheless take the legal position that they have statutory or regulatory discretion to take these actions and therefore any antitrust scrutiny is inapposite. If that argument ever held water, that is clearly no longer the case.

In an undeservedly underapplied decision, North Carolina State Board of Dental Examiners v. FTC, the Supreme Court held definitively in 2015 that any action by a “non-sovereign” licensing entity is subject to antitrust scrutiny unless that action is “actively supervised” by, and represents a “clearly articulated” policy of, the state. The Court emphasized that the degree of scrutiny is highest for licensing bodies administered by constituencies in the licensed market—precisely the circumstances that characterize state bar associations.

The North Carolina decision is hardly an outlier. It followed a string of earlier cases in which the Court had extended antitrust scrutiny to a variety of “hard” rules and “soft” guidance that bar associations had issued and defended on putatively publicly-interested grounds of consumer protection or legal ethics.

At the Court, the bar’s arguments did not meet with success. The Court rejected any special antitrust exemption for a state bar association’s “advisory” minimum fee schedule (Goldfarb v. Virginia State Bar (1975)) and, in subsequent cases, similarly held that limitations by professional associations on advertising by members—another requirement to “protect” consumers—do not enjoy any special antitrust exemption. The latter set of cases addressed specifically both advertising restrictions on price and quality by a California dental association (California Dental Association v. FTC (1999) ) and blanket restrictions on advertising by a bar association (Bates v. State Bar of Arizona (1977 )). As suggested by the bar associations’ recent actions toward online lawyer referral services, the Court’s consistent antitrust decisions in this area appear to have had relatively limited impact in disciplining potentially protectionist actions by professional associations and licensing bodies, at least in the legal services market. 

A neglected question: Is the regulation of legal services anticompetitive?

The current economic situation poses a unique historical opportunity for bar associations to act proactively by enlisting independent legal and economic experts to review each component of the current licensing infrastructure and assess whether it passes the policy tradeoff between protecting consumers and enhancing competition. If not, any such component should be modified or eliminated to elicit competition that can leverage digital technologies and managerial innovations—often by exploiting the efficiencies of multi-sided platform models—that have been deployed in other industries to reduce prices and transaction costs. These modifications would expand access to legal services consistent with the bar’s mission and, unlike existing interventions to achieve this objective through government subsidies, would do so with a cost to the taxpayer of exactly zero dollars.

This reexamination exercise is arguably demanded by the line of precedent anchored in the Goldfarb and Bates decisions in 1975 and 1977, respectively, and culminating in the North Carolina Dental decision in 2015. This line of case law is firmly grounded in antitrust law’s underlying commitment to promote consumer welfare by deterring collective action that unjustifiably constrains the free operation of competitive forces. In May 2020, the California bar took a constructive if tentative step in this direction by reviving consideration of a “regulatory sandbox” to facilitate experimental partnerships between lawyers and non-lawyers in pioneering new legal services models. This follows somewhat more decisive action by the Utah Supreme Court, which in 2019 approved commencing a staged process that may modify regulation of the legal services market, including lifting or relaxing restrictions on referral fees and partnerships between lawyers and non-lawyers.

Neither the legal profession generally nor the antitrust bar in particular has allocated substantial attention to potentially anticompetitive elements in the manner in which the practice of law has long been regulated. Restrictions on legal referral services are only one of several practices that deserve a closer look under the policy principles and legal framework set forth most recently in North Carolina Dental and previously in California Dental. A few examples can illustrate this proposition. 

Currently limitations on partnerships between lawyers and non-lawyers constrain the ability to achieve economies of scale and scope in the delivery of legal services and preclude firms from offering efficient bundles of complementary legal and non-legal services. Under a more surgical regulatory regime, legal services could be efficiently bundled with related accounting and consulting services, subject to appropriately targeted precautions against conflicts of interest. Additionally, as other commentators have observed and as “legaltech” innovations demonstrate, software could be more widely deployed to provide “direct-to-consumer” products that deliver legal services at a far lower cost than the traditional one-on-one lawyer-client model, subject to appropriately targeted precautions that reflect informational asymmetries in individual and small-business legal markets.

In another example, the blanket requirement of seven years of undergraduate and legal education raises entry costs that are not clearly justified for all areas of legal practice, some of which could potentially be competently handled by practitioners with intermediate categories of legal training. These are just two out of many possibilities that could be constructively explored under a more antitrust-sensitive approach that takes seriously the lessons of North Carolina Dental and the competitive risks inherent to lawyer self-regulation of legal services markets. (An alternative and complementary policy approach would be to move certain areas of legal services regulation out of the hands of the legal profession entirely.)

Conclusion

The LegalMatch case is indicative of a largely unexploited frontier in the application of antitrust law and principles to the practice of law itself. While commentators have called attention to the antitrust concerns raised by the current regulatory regime in legal services markets, and the evolution of federal case law has increasingly reflected these concerns, there has been little practical action by state bar associations, the state judiciary or state legislatures. This might explain why the delivery of legal services has changed relatively little during the same period in which other industries have been transformed by digital technologies, often with favorable effects for consumers in the form of increased convenience and lower costs. There is strong reason to believe a rigorous and objective examination of current licensing and related limitations imposed by bar associations in legal services markets is likely to find that many purportedly “ethical” requirements, at least when applied broadly and without qualification, do much to inhibit competition and little to protect consumers.