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Legal barriers to innovation: the bar's control over corporate legal markets is growing more costly.

Article Excerpt
Few commentators, outside of the practicing bar and the judiciary, find much to recommend the modern system of professional regulation of lawyers. Legal scholars concerned about access to justice have often been scathing about what they perceive as self-serving claims by the American Bar Association that legal regulation is in the public interest.

To date, the critiques have had little impact. In recent years, the ABA has renewed its commitment to the 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. Indeed, as recently as 2003, over objections from antitrust officials at the Federal Trade Commission and the Department of Justice, and from its own ABA Sections of Antitrust Law and Delivery of Legal Services, the ABA urged states to invigorate enforcement of unauthorized practice laws against non-lawyers on the basis of a definition of "the practice of law" that effectively covers everything lawyers now do. This is compelling evidence that the organized bar's regulatory agenda is still set by a continued use of the rubric of consumer protection to justify rigorous protection of the legal-services monopoly held by lawyers.

In this article, I focus on a cost of the current regulatory model that has been largely overlooked, given the emphasis on the impact of regulation on pricing and availability--particularly in the personal services sector. This is the cost of stagnation in the underlying design and content of legal inputs--what it means to "do law." For the clients that make up the core of the legal market--corporate and other business entities--self-regulation stands as a tremendous barrier to innovation in legal markets and thus as a severe obstacle to the effort to develop legal mechanisms that meet the needs of a rapidly transforming, globally competitive economy.

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THE POLITICAL AND ECONOMIC FUNCTIONS OF LAW

Beginning with the ABA's founding in 1878, the American legal profession has claimed fundamental authority over the regulation of the entire legal system. 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 for 1880-1881 and Kent Professor at Yale Law School from 1881 to his death in 1900), articulated in powerful terms the "special" status of the lawyer in American society, above politics and the state: "If the Constitution ... belongs to the judicial department to determine and to administer, then it is placed in the safe-keeping of the American bar.... Let us stand fast by the ark of our covenant."

Phelps' ringing rhetoric no doubt still stirs the soul of many an attorney some 130 years later. It is a short distance from this overt appeal to the role of lawyers in the protection of American constitutional ideals to the preamble one often finds in modern bar association codes of conduct--the set of regulations governing the profession--such as this one from the New York Bar Association:

The continued existence of a free and democratic society depends upon recognition of the concept that justice is based upon the rule of law grounded in respect for the dignity of the individual and his capacity through reason for enlightened self-government. Law so grounded makes justice possible, for only through such law does the dignity of the individual attain respect and protection. Without it, individual rights become subject to unrestrained power, respect for law is destroyed, and rational self-government is impossible. Lawyers, as guardians of the Law, play a vital role in the preservation of society.

But we should distinguish two very different functions of the law. One is the democratic/political function to which Phelps and the New York bar appeal: protecting the architecture of democratic institutions, protecting individual rights, and regulating the balance of power to promote the goals of self-governance such as human dignity, autonomy, fairness, and well-being. The other is the role of law in supporting efficient market transactions: establishing real and intellectual property rights and facilitating contractual and organizational economic relationships in finance, innovation, production, and trade. In this latter function, law is more appropriately judged not by how well it promotes the normative democratic goals of equality, autonomy, dignity, and so on, but rather by how well it promotes economic activity and efficiency.

It is no longer tenable for the functions of a legal system to be all knotted into a common core of fundamental rights of a political, democratic, or constitutional character. In the remainder of this article, I describe how the regulatory structure of legal markets presents a major obstacle to those markets' efficient adaptation to a rapidly changing, globally competitive market economy.

HEAVILY REGULATED MARKET

The market for corporate legal products and services is one of the most heavily regulated in the economy. What follows is a catalogue of the attributes regulated by the bar and the judiciary (what I jointly refer to as "the legal profession") with respect to the innovation, production, pricing, and delivery of goods and services in this market.

PRODUCT The legal profession first defines the scope of its regulatory authority: what counts as a legal product and hence is subject to control by the profession. This is done overtly through the definition of "the practice of law." Although most states have codified the definition, most statutes are relatively vague and determining what counts as "the practice of law" has largely been left to judges. Many courts resist the idea that there can be a clear definition.

The most common definitions go only a short distance from the explicitly circular by defining "the practice of law" as the provision of services that require legal knowledge, skill, judgment, or ability--i.e., what lawyers do. In the law-thick world in which modern corporations exist, the practice of law covers just about all structural features of how the corporation goes about its business.

PRODUCER The reason for defining "the practice of law" is to determine who can...

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