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Florida Business Insight: "Time to Break up the Lawyers Monopoly on Legal Services"

by Andrew Updegrove

It is increasingly true in Europe that the largest providers of legal services are not law firms, but accounting firms. In some countries, professional rules limit the cooperation between accountants and lawyers to forming affiliations between their respective firms. But in others, entire law firms have been acquired by the Big Five accounting firms, which now have many hundreds of attorneys on their payrolls. This integrating process has proceeded so far and fast that in France and Spain, the legal departments of some of the Big Five accounting firms have more lawyers, providing more services, than their largest independent law firm competitors. And for Europe as a whole, the largest single law department now no longer practice as a law firm, but as a service group within an accounting firm. 

With respect to some types of professional needs, it is arguable that clients will be able to receive more efficient, more inexpensive and better integrated legal and accounting services from these Multi Discipline Practices (MDP' s) than they could receive from separate firms; Yet in the United States, such integrated services are currently unobtainable, due to rules enforced by the state bar associations.

Why is this so? And are the rules which prohibit MDPs in the United-States defensible, or against the public interest? It is the thesis of this LEGAL BACKGROUNDER that the American professional rules today prohibit MDP's primarily to protect lawyers from competition, rather than to protect the best interests of modern clients. While reasonable objections do exist for unregulated MDPs, those concerns may be easily addressed by adopting appropriate professional rules which guard against abuse.

The History of Opposition to MDPs . Since 1928, the professional rules promulgated by the American Bar Association have prohibited non-lawyers from owning an interest in a firm providing legal services, and have prevented lawyers from practicing as such in any entity owned in whole or in part by non-lawyers. With minor variations, these rules have been adopted, and continue to be enforced, by the organized bar of every American state. Only the District of Columbia permits a degree of flexibility with respect to the conduct of MDP's. Ostensibly, these rules were originally intended to restrict the practice of law to those who are properly trained to competently represent clients, and who are bound by appropriate rules ensuring that the public is protected from inappropriate conduct. Significantly, various proposals and recommendations have been made over the years to loosen the grip of lawyers on the economic benefits of the practice of law. To date, however, each recommendation to reform the rules which has been tendered by a professional association committee or commission has been rejected.  At the same time that efforts to deregulate ownership of legal practices have failed, there has been a partial loosening of the rules which prohibit law firms from having an ownership interest in entities which provide "ancillary services" to their clients. Interestingly, virtually all of the hazards which are argued to threaten clients if non-lawyers (such as accountants) were permitted to have an economic interest in the provision of legal services could also arise where lawyers provide certain types of permitted ancillary services.

Why Should MDPs be Permitted? There are a number of reasons to allow the public to benefit from receiving reasonably related professional services from a single provider. For example, in public securities work, accounting and securities issues are inextricably combined, yet the accountants and the lawyers work on parallel, but separate tracks. While this separation is necessary and healthy with respect to the individuals involved ( e.g., those trained as accountants should still leave the legal issues to those trained as lawyers, and vice versa), enforcing the physical, billing and administrative separation of these providers is inefficient.

This is particularly true with respect to initial public offerings, where the charges of law firms and accounting firms may range from $200,000 to more than double that amount for each firm. Any significant percentage savings in amounts of that magnitude would be important, particularly where an offering is abandoned before shares are sold, but after most of the professional fees have been incurred. Moreover, the higher bills in such situations are very often attributable to the issuing company's having paid poor attention to keeping its legal and/or accounting houses in order in the years preceding the offering. Closer coordination between the legal and accounting advisors of a company can often bring such lapses to light before they become serious. As a result, the client may be saved from costly and distracting reconstructive efforts during the high stress of preparing to go public ( and while still trying to run its business ).

Similarly, in the area of intellectual property, even small companies must now address a global labyrinth of patent, trademark, and copyright laws. Even where separate countries have adopted common treaties, local filing requirements and practices vary, as do enforcement conventions. The larger individual companies grow, the more complex are the internal controls which they must institute to police the protection of their intellectual property. While many law firms now market "intellectual property audits" as a service product, the accounting firms, with their auditing expertise and their hundreds of offices around the world, are better equipped to effectively staff and efficiently provide such reviews than are United States-based law firms. In point of fact, few, if any, law firms can offer the combination of global offices, familiarity with local practices, and close attention to evaluating practices and compliance that any of the Big Five can provide.

Moreover, it has long been the case that numerically more companies look to Big Five accounting firms for international tax advice than look to their law firms. In fact, many law firms have been relieved by the fact that accounting firms offer this expertise, as few but the largest law firms find it cost effective to remain current on the tax laws of every nation on earth. In effect, a firm without international tax expertise may securely (for now, at least) refer its clients to the major accounting firms for international tax advice, without worrying that the new tax advisor will seek to persuade the client to send other legal work the accountant's way.

Notwithstanding the existing rules which apply in other situations, tax advice rendered by accounting firms is often provided by licensed lawyers. When accounting firm clients are called on the carpet by taxation authorities, even CPAs may represent these clients with respect to their alleged infringements. And yet, for some reason, all other types of legal services are presumed by the bar associations to present especially problematic quagmires from which clients must be protected from entering.

The Arguments Leveled Against MDPs do not Hold Up . Most of the issues which are raised against permitting MDPs are particularly disingenuous when applied to accounting firms. For example, concerns regarding the preservation of confidentiality are particularly groundless, given that accountants are bound by similar rules. Similarly, specific (although somewhat different) rules relating to conflicts of interest apply to accountants, and these rules are in many cases stricter than those which apply to lawyers. Accordingly, accountants already practice in a disciplined fashion where awareness of conflicts is high, and appropriate screening procedures are in place. Finally, arguments which assert that lawyers and accountants will feel constrained to recommend their partners rather than unaffiliated professionals are no more compelling than the potential for abuse in "cross selling" legal services within law firms. In point of fact, no law firm is equally strong in all departments. Assuming lawyers today feel morally strong enough to send a client elsewhere to secure a particular type of service from a superior provider when their own expertise in the area in question is weak, then presumably lawyers working for accounting firms will find the ethical courage to recommend a different accounting (or law) firm as well.

And, of course, it will also be true that the client will often have chosen the MDP because it wished to centralize more of its service purchases under one roof. This may be done to trade a small degree of skill in some areas in exchange for such demonstrable benefits as negotiating a fee agreement at a greater discount from an MDP in exchange for awarding a larger package of work to that provider.

Some have also claimed that permitting the Big Five and their smaller brethren to expand their services to the legal arena would be anticompetitive. But consider the following: while the accounting firms have brought broader knowledge, wider global coverage, a greater range of services, more integrated consulting packages, and intensively competitive rate bidding to their clients, law firms in the United States have continued to do almost exactly what they have done for the last hundred years. Although there has certainly been centralizing of more work in fewer firms with broader legal expertise, the number of firms which supply this range of services does not much exceed one hundred, and the global outreach of those firms is minimal. In a recent survey of the fifty largest international law firms conducted by The American Lawyer, the largest number of foreign countries in which any American law firm maintained offices was thirty-five (Baker & MacKenzie). However, the second highest number was only eleven, and the tenth largest number for any American firm was only five.

In short, while accounting firms have been innovating and expanding their services intensively, law firms have been largely stagnating, offering legal services (only) in ways that have changed marginally. At the same time, the hourly cost of legal services has exploded. It is difficult to argue, therefore, that opening the American legal market to competition from other types of service providers could restrict or stifle competition. In point of fact, American law firms, protected by restrictive professional rules, have been ineffective at providing the sort of competition that leads to the provision of more, better and cheaper legal services to the American business community.

Clients Want Business Advice, and not "Professional" Advice . To a much greater extent than is the case with other professionals, lawyers have retained a purist, ivory tower approach to their profession, and in many cases have rebuffed requests for business advice. Yet increasingly, clients will choose savvy business/legal advice over purely technical answers. Why? Because the law firm which prides itself only on technically superior legal analysis will leave its clients at a commercial disadvantage in a fast-changing, increasingly competitive international marketplace. Particularly in the case of rapidly growing businesses, clients preferentially choose attorneys who provide pragmatic, efficient solutions to real world problems. Permitting lawyers to draw on a wider range of expertise across a broader spectrum of disciplines within their own organizations will enable them to provide such advice more effectively to American business.

Professionalism Argues for Changing the Rules . The highest duty of any professional is to provide the greatest value, in an ethical fashion, to his or her clients. Where issues exist which stand between the status quo and providing higher value, and those issues can be resolved, then it is the duty of professionals to work towards such a resolution. The true conflict facing American lawyers today is the fact that defending the exclusivity of the practice of law at the rules barricades doesn't protect clients - it only protects American law firms from a threatened wave of formidable competition.

But in the long run, even lawyers would benefit from a change. It is quite arguable that the lack of creativity and entrepreneurship of lawyers, in comparison to accountants, has limited commercial prospects of law firms and lawyers. After all, any change of rules would logically operate in both directions, and the most entrepreneurial and strongest law firms could expand in new directions into which they are currently barred from venturing. And with respect to smaller law firms, as has proven to be the case with the smaller accounting firms, there will continue to be a vast amount of work, regardless of what turmoil is experienced by the largest law firms following a liberalization in the rules.

It's Time to Meet with the "Enemy." The way of the future, when seen from the client's point of view, would seem to be clear. Its time for the professional associations of the legal and accounting service industries to sit down and come up with a common set of model rules for adoption by their respective national and state representatives. These rules, if intelligently developed in a cooperative fashion, would permit each type of licensed professional to work with and for the other. Properly conceived, these rules can easily respect and protect the interests of all clients, and would permit a broader, more competitive service marketplace to evolve. Failing to do so, while the rest of the world moves towards permitting global companies to purchase comprehensive services from MDPs, will not only place American business at a competitive disadvantage, but ultimately American law firms as well.

Details

PUBLICATION: Florida Business Insight, Vol. 3, No. 5

DATE: 09/01/1999

AUTHOR: Andy Updegrove

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