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Article Excerpt
INTRODUCTION
I. THE REGULATORY STRUCTURE OF LEGAL MARKETS A. The Self-Governing Profession in the United States: Not We the Titmice of England B. Distinct Professions: The Political and Economic Functions of Law II. A HEAVILY REGULATED MARKET: WHAT THE BAR AND JUDICIARY CONTROL A. What Counts as a Legal Product B. Who Can Produce Legal Products C. What Law Schools Must Teach D. Which Markets the Producers of Legal Products Can Serve E. How Firms That Provide Legal Products Must Be Organized and Financed F. What Terms Must Be in a Legal Services Contract III. OBSTACLES TO INNOVATION IN CORPORATE LEGAL MARKETS A. Top-Down Standardization of the Product B. Homogeneity of the Idea Pool C. Restrictions on Scale and Scope Economies D. Restriction on Methods of Financing Legal Innovation CONCLUSION: THE ECONOMIC COST OF PROFESSIONAL REGULATION OF CORPORATE LEGAL SERVICES
INTRODUCTION
Few commentators, outside of the practicing bar and the judiciary, find much to recommend in the modern system of professional regulation of lawyers. While the topic (to date) has attracted only a small share of scholarly attention, justifications for the traditional exclusive control exercised by the bar and judiciary over the practice of law have drawn withering critiques from several directions for decades. Bill Simon called for the abandonment of legal professionalism thirty years ago and again in the wake of the savings and loan crisis of the late 1980s and the Enron debacle of 2001, emphasizing the failure of self-regulation and the absence of justification for corporate attorney-client privilege in particular. (1) Deborah Rhode has for almost three decades assailed the failure of the profession to put aside self-interest and live up to its obligation to promote access to the justice system and the interests of consumers of legal services, particularly personal (as opposed to business) legal services. (2) Both Rick Abel and Deborah Rhode made the argument twenty-five years ago that the American Bar Association (ABA) is inherently incapable of producing any regulations save those that promote the interests of lawyers. (3) Stephen Gillers offered a scathing critique in 1985 of the ABA's (then) new Model Rules of Professional Conduct, concluding that "[t]he lawyers who approved the Rules looked after their own." (4) Twenty years ago David Luban called for the deregulation of routine legal services (such as completion of forms, drafting and probating of wills, uncontested divorces) and argued that the attorney-client privilege and related duties of confidentiality (a lynchpin of the bar's justification for key elements of its regulatory regime) were not justified in the organizational (corporate) context. (5) In a careful history of regulation of the unauthorized practice of law (UPL) completed for the American Bar Foundation in 1980, Barlow Christensen reached the "shocking" conclusion that UPL restrictions were no longer defensible. (6) David Wilkins raised serious questions in 1992 about the validity of the bar's defense of self-regulation based on professional independence and unique bar expertise to judge lawyers' conduct. (7) Anthony Kronman saw no hope for the recovery of lawyerly ideals through self-regulation in the face of modern corporate legal practice in his plaint for the "lost lawyer" in 1993: any lawyer seeking those ideals has no alternative, he counseled, than to "stay clear of the ... large-firm practice." (8) Jonathan Macey called for the abandonment of self-regulation of the profession after Enron. (9) Benjamin Barton has recently argued that the judicial protection of lawyer self-governance is one among many examples of how the judiciary systematically favors the private interests of lawyers. (10) There is thus no shortage of scholarly critique. (11)
Most of these critiques focus on one of two costs of failed self-regulation. The first predominates (perhaps because corporate scandals are one of the few topics in the professionalism literature that can generate headlines) and concerns the loss that comes from failure of independent advice and ethical, public-spirited, conduct by lawyers. Here the concern is to find ways to restore lawyers to Kronman's golden age of lawyer-statesmen: above politics, above deception, above greed. This strand in the (admittedly small) literature principally concerns the role of elite lawyers advising corporations and organizations. The second category of critiques (an even smaller literature) emphasizes restrictions on the exercise of choice by consumers, particularly individual as opposed to organizational clients, and in particular the limited access to legal services that self-interested bar restrictions on supply impose. Because those who teach and study the legal profession often do so from the vantage point of legal ethics, the focus in the existing literature is thus substantially on the implications of self-regulation for ethical outcomes and the capacity for the legal profession to serve the public interest in terms of ensuring both compliance with law and access to the justice system.
As important and worthy as this focus is, however, it is also likely responsible for the infinitesimal effect that these wide-ranging and persistent critiques have had on the actual practice of lawyer self-regulation in the United States. If anything, the ABA has in recent years renewed its commitment to the very justifications for self-regulation--the need to protect client confidentiality, guard against conflicts of interest, protect the public from unauthorized practice, and maintain the independence of the legal profession--that have been so soundly rejected by legal scholars. In the face of a recommendation in 2000 from its own commission to relax restrictions on the capacity for lawyers and nonlawyers to join in the provision of legal and nonlegal services (the multidisciplinary practice, or MDP, debate), for example, the ABA retrenched, issuing a ringing statement that it remained committed to the profession's core values and would not budge on the requirement that lawyers, and lawyers alone, be authorized to provide legal services. Indeed, the ABA expanded its traditional list of core values (confidentiality, loyalty, avoidance of conflict of interest, professional independence, competence, access to justice) to include "the lawyer's duty to help maintain a single profession of law," (12) thus making overt the responsibility of lawyers to resist efforts (which are hinted at in much of the scholarly critique and which I will make explicit below) to establish different standards for different types of legal practice such as by distinguishing appearances in court from transactional advice, (13) and corporate practice from the provision of services to individuals in nonbusiness matters. The association also reiterated its stance that "[j]urisdictions should retain and enforce laws that generally bar the practice of law by entities other than law firms." (14) In 2003, over serious antitrust concerns raised by the Federal Trade Commission and the Department of Justice, (15) and by the ABA Section of Antitrust Law (which urged the ABA to "embrace competition among lawyers and nonlawyers in the provision of legal information and legal services"), (16) the ABA urged states to regulate in accordance with "the basic premise that the practice of law is the application of legal principles and judgment to the circumstances or objectives of another person or entity." (17) The occasion for the effort devoted to producing a model definition of the practice of law was articulated as follows by the ABA President:
The Association's interest in the parameters of the practice of law has been highlighted in recent years by the work of the Commission on Nonlawyer Practice and the Commission on Multidisciplinary Practice. The common thread in the work of these entities has been the revelation that there are an increasing number of situations where nonlawyers are providing services that are difficult to categorize under current statutes and case law as being, or not being, the delivery of legal services. This growing gray area may be partially responsible for the spotty enforcement of unauthorized practice of law statues across the nation and arguably an increasing number of attendant problems related to the delivery of services by nonlawyers. (18)
This is compelling evidence that the organized bar's regulatory agenda is still set not by calls among legal scholars for a revised approach to self-regulation to improve legal ethics and access to justice, but rather a continued use of the rubric of consumer protection (for which, as Deborah Rhode long ago pointed out, there is little evidence for the claim that there are risks generated by nonlawyer provision of services) (19) to justify rigorous protection of the legal-services monopoly held by lawyers.
In this paper, I shift the frame to focus not on the consequences of self-regulation for ethics and access to justice but rather on the significant and increasing costs of self-regulation for what has been for decades the core market in which legal services are provided: services to corporate and other business entities. The impact of supply control exercised by the bar has, of course, long been recognized as a potential cause of high prices for legal services, prices that we have seen spiral in the past decade. (20) Among the very few incursions into the bar's self-regulation have been Supreme Court decisions striking restrictions that explicitly hobble price competition such as minimum fee schedules, (21) advertising, (22) and residency restrictions, (23) and the Department of Justice's challenge (resulting in a consent decree) to ABA law school accreditation practices that imposed restrictions on faculty compensation. (24) These are undoubtedly important economic effects arising from supply control, but as I and others have previously noted, (25) particularly in the corporate-client market served by the largest and most elite law firms, artificial restrictions on the supply of lawyers and price competition among them cannot explain much of the explosion in legal costs of the past two-to-three decades. Moreover, while imperfections in the market for lawyers such as specialization, information asymmetries, and winner-take-all dynamics (26) account for distortions in pricing, the real culprit in the enormous increase in the cost of legal services is the more subtle dynamic of how the content of legal products is determined. The entropic growth in the complexity of law and legal procedures, rooted in the traditional practices of lawyerly reasoning and dispute resolution, (27) is the primary driver of increased costs. Put differently, the question is not (just) why does it cost so much per hour to conduct massive e-discovery in an antitrust case or draft the documents for an IPO or conduct patent litigation, but rather why has the legal system come to require such enormous complexity and quantity of legal effort to achieve the transactional and dispute-resolution goals of business entities? This, I believe, is the much more significant and much deeper consequence of the bar's continued self-regulation and the extensive limitations it places not only on who may deliver but, perhaps more importantly, who may invent legal products and services. The current regulatory model stands as a tremendous barrier to innovation in legal markets and thus as a severe obstacle to the effort to meet the needs of a rapidly transforming globally competitive economy.
The Article proceeds as follows. Part I gives a brief overview of the emergence of the modern professional regulatory regime in the late nineteenth century and advances the claim that the regulatory regime has failed to distinguish between the fundamentally different issues at stake in the economic sector as opposed to what I call the political/democratic sector of the legal world. I argue here that by conflating these two sectors in the analysis of the appropriate level and locus of professional regulation, lawyers use their legitimately unique roles in political and democratic fields to illegitimately protect the production and distribution of a fundamental, fundamentally economic, service. Part II then delineates the market conditions that are controlled by the judiciary and, primarily, the organized bar. Part III evaluates the economic implications of these regulatory controls, emphasizing the obstacles to innovation of lower cost and more effective inputs for economic transactions and dispute management. Finally, I offer conclusions about the need for lawyers, judges, antitrust authorities, legislatures, and, most importantly, the corporate clients whose interests professional regulation is ostensibly intended to serve, to take steps to make fundamental changes in the regulation of corporate legal markets.
I. THE REGULATORY STRUCTURE OF LEGAL MARKETS
A. The Self-Governing Profession in the United States: Not We the Titmice of England
"Your mere nisi prius lawyer," said Burke, when harassed with the technical objections of his adversaries on the impeachment of Hastings--"Your mere nisi prius lawyer knows no more of the principles that control the affairs of state, than a titmouse knows of the gestation of an elephant." The remark was as tree as it was pungent, when applied to the [English] bar to which he referred. But it has no just application to ours. If the fundamental proposition I have stated is sound, if the constitution that affords the basis of government as well as of forensic law, belongs to the judicial department to determine and to administer, then it is placed in the safe-keeping of the American bar. And we enjoy, as I have said, such a prerogative as never before was conferred upon a body of advocates. (28)
For most professions, self-governance is understood to be rooted in a delegation of the legislature's power to regulate. The state creates the profession's monopoly--and can take it away. The state grants the authority to self-regulate--and can take it away. Policy toward the regulatory regime is framed as a comparative exercise, evaluating the relative strengths and weaknesses of state-governance and self-governance. Self-governance is justified on a claim to relative expertise and hence enhanced capacity to achieve the public interest by those who are themselves members of the profession. (29)
Lawyers too claim expertise as a basis for self-governance. But the somewhat hazy structure of the regulatory regime governing lawyers in the United States at its core challenges the idea that the legislature is the ultimate regulator and the profession merely its delegate. Beginning with the creation of the American Bar Association in 1878, the American legal profession has woven a powerful, but perhaps untested, claim to a fundamental authority over the regulation of the entire legal system. It is a claim rooted in the constitutional structure of American democracy, an authority that, if credited, displaces the power of the legislature to regulate. (30)
The rhetoric even at the ABA's founding is stirring and startling in this regard. In his address to the Second Annual Meeting at Saratoga Springs in August of 1879, one ABA founder, Edward J. Phelps (later ABA President from 1880-81 and Kent Professor at Yale Law School from 1881 to his death in 1900), (31) articulated in powerful terms the "special" status of the lawyer in American society, as guardian of a constitutional structure that placed law above politics and lawyers above the state. He claimed that the American bar, unlike the "titmouse" of England, has a unique role in governance, administering the fundamental legal scheme on which American democracy is built:
Lawyers in other countries have nothing to do, as lawyers, with constitutional principles of government, or with the basis on which its administration stands. They deal exclusively with the administration of justice, civil and criminal, between man and man, under a government established and fixed, with the operations of which they have professionally no concern. We, on the other hand, are charged with the safekeeping of the constitution itself. (32)
At the time he made these statements, Phelps and the ABA were stepping into what they perceived as a postwar vacuum of considered legal authority (33) and seeking to re-elevate the bar to the status it had held and then lost since lawyers played such a significant role in the creation of the country and foundational constitutional interpretation. (34) Phelps appealed in particular to the chaos and "scenes of a desolation and sorrow ... over graves numberless to our arithmetic" (35) after the Civil War as the setting in which "[w]e come together ... [t]o renew again, in faith and hope, the work which Marshall and his associates began, of cementing and building up on firm and lasting foundations, the American constitution." (36)
From its inception, the ABA set out to execute what it perceived as its fundamental role in regulating the legal system across the full spectrum, with committees established not only for professional discourse in substantive areas of law and legal practice (Commercial Law; Patent, Trademark and Copyright Laws; Insurance Law; Taxation and International Law) but also on "Jurisprudence and Law Reform," "Judicial Administration and Remedial Procedure," "Legal Education and Admissions to the Bar," and "Grievances." (37) None of this attention to the structure of the legal system was organized under a delegation of an authority to regulate from state legislatures. Rather, the bar turned to the courts for assistance in implementing its proposed regulations. As early as the second annual meeting of the ABA in 1879, for example, the Committee on Legal Education and Admission to the Bar had recommended that bar admission be conditioned on three years of legal education; (38) by 1899 the constitutional authority of the state supreme court to require three years of legal education for bar admission, despite a contrary statute passed by the state legislature, was secured in Illinois. (39) By 1934 "[t]he determined effort on the part of the American Bar Association ... to place the regulation of federal trial court procedure in law actions under the control of the Supreme Court of the United States, [had] at last been successful." (40) Today, the ABA claims that "judicial regulation of all lawyers is a principle firmly established ... in every state." (41) For the most part, this means that regulation of lawyers is largely derived from the resolutions passed by majority voting in state bar associations on the basis of ABA recommendations. (42)
The basis for regulation of the practice of law by the judiciary, and hence effectively by the bar, however, still rests on a somewhat hazy and untested footing, elucidated only piecemeal through litigation in cases before state and sometimes federal courts. Many state legislatures appear to assert the power to regulate the legal profession through explicit statutory provisions establishing the requirement that the practice of law be restricted to those admitted to and in good standing with the state bar association. (43) But state supreme courts also frequently claim that the authority to regulate the profession lies inherently in the judicial branch and that, indeed, legislative interventions are unconstitutional under state constitutions explicitly or implicitly providing for a tripartite separation of powers. (44) As recently as 2004, for example, the New Hampshire Supreme Court held unconstitutional legislation that required the state bar association to hold a binding referendum on whether or not to require all practitioners in the state to be members of the association. (45) The Court had previously, at the request of the bar association, imposed this requirement, "unifying the bar." (46) State courts also assert the right to define and prohibit the unauthorized practice of law, regardless of whether there is any UPL statute on the books.
Congress has largely remained out of the field of lawyer regulation, deferring to state courts and legislatures. Only in a few select fields have Congress or federal agencies (notably the Securities and Exchange Commission and the Internal Revenue Service) taken clear steps to regulate lawyer conduct. (47) Even here, however, the regulatory structure is murky. Congress could assert authority over the regulation of legal markets under the Commerce Clause; the U.S. Supreme Court has held that the Sherman Act does extend to at least some of the practices of local bar associations, (48) finding sufficient interstate commerce to authorize federal legislation. Federal courts, however, have appealed to the traditional role of the state, particularly state courts, in regulating the profession when construing federal statutes narrowly so as to limit the applicability of federal law to the practice of law. (49) Just two years after holding that the Sherman Act does prohibit state bar associations from enforcing minimum fee schedules for lawyers, for example, the U.S. Supreme Court held that rules of attorney conduct (specifically advertising regulations) written by the ABA and state bar associations...
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