Legal barriers to innovation: the growing economic cost of professional control over corporate legal markets.

• Author: Hadfield, Gillian K.

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)...