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Business Restrictions in the Legal Professions: Do We Need More Market Integration?

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Market Integration: The EU Experience and Implications for Regulatory Reform in China

Part of the book series: China-EU Law Series ((CELS,volume 2))

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Abstract

This chapter addresses business restrictions (defined as restrictions to alternative business structures and multi-disciplinary practices) in the legal professions. These restrictions are evaluated both from an economic perspective and in relation to the EU legal framework on free movement of legal professions. A central question in this chapter is whether there is a case for further EU intervention. In the context of this book, this chapter therefore deals with questions of regulation (do we need business restrictions from an economic perspective?) and market integration (is harmonization of different national laws necessary?). Finally, this chapter provides some implications for China.

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Notes

  1. 1.

    According to Mullerat (2000, p. 481), MDPs are characterized by the following: they provide more than one professional service; they include lawyers as partners, directors or share owners; and there is profit sharing between members of more than one profession.

  2. 2.

    See with respect to Europe, e.g. Paterson et al. (2003), pp. 49 and 56.

  3. 3.

    European Commission (2003a), pp. 12–13.

  4. 4.

    Examples are the OFT in the UK and the Canadian Competition Bureau. See Philipsen and Olaerts (2010), Chapter 3.

  5. 5.

    Case C-309/99, J.C.J. Wouters, J.W. Savelbergh and Price Waterhouse Belastingadviseurs BV v Algemene Raad van de Nederlandse Orde van Advocaten, 19 February 2002, paras 86–90. Eventually the ECJ decided that the regulation concerned did not infringe European competition rules, since the ban on MDPs could have reasonably been considered necessary for the proper practice of the legal profession as organized in the Netherlands (para. 110).

  6. 6.

    See Panteia and Maastricht University (2012).

  7. 7.

    This is in line with the terminology used e.g., in Panteia and Maastricht University (2012).

  8. 8.

    Panteia and Maastricht University (2012), pp. 196–198. The report includes a table with the rules on ABSs and MDPs per jurisdiction.

  9. 9.

    The term ‘market failure’ refers to perceived shortcomings of the market system itself to deal with certain problems that prevent an economically efficient outcome in a market.

  10. 10.

    Economists would say that regulation is directed towards an improvement in social welfare. For details, see Philipsen (2003), pp. 10–18.

  11. 11.

    Some professional services can be considered as ‘trust goods’, which are characterized by the fact that consumers cannot judge their qualities even after consumption. See on this also the contribution to this book by Shen and Philipsen, Sect. 4.1.

  12. 12.

    See Akerlof (1970).

  13. 13.

    These are the well-known problems of adverse selection and moral hazard. For further details and a discussion of the practical relevance of adverse selection and moral hazard in the market for legal services, see Van den Bergh (2007), pp. 20–22; Garoupa (2008), pp. 467–468; and Philipsen (2010), pp. 205–206.

  14. 14.

    Van den Bergh (2007), p. 22; Philipsen (2003), pp. 17–19.

  15. 15.

    Van den Bergh (2007), p. 24; Philipsen (2010), pp. 206–207.

  16. 16.

    This approach has developed from different theories, such as public choice, capture theory and the ‘Chicago’ theory of regulation. For descriptions and references, see Philipsen (2003), pp. 23–27.

  17. 17.

    Economists would say that the transaction costs of professional associations are low, while the information costs of the public at large of finding out about the detrimental effects of (too) restrictive regulation are high. Olson (1965). See also Van den Bergh (2007), pp. 25–26; and Garoupa (2008), p. 470.

  18. 18.

    Philipsen (2010), pp. 207–208. Attempts at an empirical analysis of regulation in the legal services markets include Faure (2003), Paterson et al. (2003), Pagliero (2005), and the studies mentioned in Stephen and Love (2000).

  19. 19.

    This subsection draws heavily from Philipsen (2014b), Section 6.4.1.

  20. 20.

    OECD (2000), p. 26; Van den Bergh (2007), p. 50.

  21. 21.

    For more details, see Philipsen (2009).

  22. 22.

    Van den Bergh (2007), p. 50.

  23. 23.

    Van den Bergh (2007), p. 50. See also Grout (2005), who finds it difficult to understand the assumption that there is a distinction between the incentives of lawyers working together and their incentives when they are owned or majority managed by non-lawyers.

  24. 24.

    See also Copenhagen Economics (2006, p. 15), where it is mentioned that outside owners might have better access to capital, are better at reducing costs or better at developing new business ideas.

  25. 25.

    OECD (2000), pp. 26–27.

  26. 26.

    Garoupa (2008), p. 483, referring to Hansmann (1990).

  27. 27.

    See also Garoupa (2008), p. 484. A related issue put forward by Garoupa is that of in-house lawyers, as found in large companies and banks. Because in-house counsel improves business compliance and reduces information asymmetry between corporations and external lawyers, there is no obvious public interest argument to restrict the legal activity of in-house lawyers.

  28. 28.

    Copenhagen Economics (2006), p. 49.

  29. 29.

    Copenhagen Economics (2006), p. 15. However, this particular statement is not backed by any arguments based on economic theory or empirical evidence.

  30. 30.

    Copenhagen Economics (2006), p. 15.

  31. 31.

    Grout (2005), p. 2.

  32. 32.

    Grout (2005), p. 2.

  33. 33.

    Grout (2005), pp. 2–3. In the paper some empirical evidence is presented to back the distinction between small and large firms. This evidence according to the author shows that ‘misconduct and poor quality is heavily focused on small businesses’ (see pp. 31–32).

  34. 34.

    Van den Bergh (2007), pp. 49–50.

  35. 35.

    See also Mullerat (2000), p. 482.

  36. 36.

    Mullerat (2000), pp. 482–483. The author (p. 492) furthermore argues that MDPs represent ‘a new step in the deprofessionalization’ and commercialization of the legal profession.

  37. 37.

    For an extensive analysis of LDPs, see Clementi (2004), pp. 108–128.

  38. 38.

    See for example the analysis of the Wouters case in Sect. 3 below, where it is pointed out the accountancy market is much more concentrated than the legal services market. See also Mullerat (2000).

  39. 39.

    Fox (2000), p. 1097.

  40. 40.

    Fox (2000), pp. 1100–1101.

  41. 41.

    Garoupa (2008), p. 483. Furthermore, Carr and Matthewson (1990, p. 328) found that partnerships dominate sole practitioners when client cases are large and the detection of chiselling is low.

  42. 42.

    Van den Bergh (2007), p. 49.

  43. 43.

    Stephen and Love (2000), p. 1005.

  44. 44.

    Garoupa (2008), p. 483. Fox (2000, pp. 1105–1106) is not optimistic about the concept of one-stop shopping, claiming that it (and lawyers working for nonlawyers) reduces the legal profession to yet ‘another profit center at a department store for consulting services’.

  45. 45.

    Van den Bergh (2007), p. 49.

  46. 46.

    Van den Bergh (2007), p. 49.

  47. 47.

    It should be noted with respect to MDPs consisting of lawyers and accountants, that there have been many changes in the (now stricter) regulation of the latter profession, in particular with regard to audit services. This includes rules on auditors’ independence, auditor rotation and quality of accounting services. See Philipsen (2009, 2012).

  48. 48.

    Van den Bergh (2007), pp. 49–50.

  49. 49.

    Mullerat (2000). See also Scott and Konsta (1999).

  50. 50.

    See also Deards (2002).

  51. 51.

    This subsection draws heavily from Philipsen (2014b), Section 6.4.2.

  52. 52.

    See also Fox (2000), pp. 1104–1108, who mentions a lack of empirical evidence, but also (implicitly) suggests that the information asymmetry between business clients and professionals is too large to generate reliable results.

  53. 53.

    Studies on the effects of ownership rules, mergers and accountancy scandals on concentration in the audit market have been performed by GAO (2003) for the U.S., and Oxera (2006, 2007) for the U.K. See also Philipsen (2009) in a report for the OECD.

  54. 54.

    Clementi (2004, pp. 133–134). Clementi also suggests, without quoting specific research, that e.g. in the context of claims arising out of motor accidents, MDPs could offer an integrated service, dealing with property damage, health, rehabilitation and compensation. Another example are affinity groups such as trade unions, which provide a range of legal services to their members, including legal advice.

  55. 55.

    Stephen and Love (2000), p. 1009; Van den Bergh (2007), p. 50.

  56. 56.

    See also Indecon and London Economics (2003), p. 48.

  57. 57.

    Indecon and London Economics (2003), p. 47. See also Van den Bergh (2007), p. 51.

  58. 58.

    Liang and Ogur (1987), p. 3.

  59. 59.

    The author mentions the Establishment Directive (98/5/EC) and (to a lesser extent) the Mutual Recognition Directive (89/48/EEC). Citizens of a Member State refused entry to the legal profession could qualify in another Member State and thereafter practice in the restrictive state, as long as the costs of this procedure are compensated by the gains from practicing in the restrictive state. Any practice rules designed to restrict competition between lawyers in one jurisdiction, thereby raising fee levels, will attract lawyers from other jurisdictions where fees are lower, according to Stephen (2002), p. 118.

  60. 60.

    Stephen (2002), p. 115.

  61. 61.

    Stephen (2002), p. 124.

  62. 62.

    Cases C-35/99 (Arduino) and C-309/99 (Wouters), both decided on 19 February 2002 and dealing with competition issues in the legal services market.

  63. 63.

    For details, see Terry (2009) and Philipsen (2010).

  64. 64.

    Paterson et al. (2003).

  65. 65.

    European Commission (2003b), p. 9.

  66. 66.

    European Commission (2004).

  67. 67.

    European Commission (2004).

  68. 68.

    European Commission (2003a), p. 7.

  69. 69.

    European Commission (2003a), pp. 12–13.

  70. 70.

    This case study was part of a wider study on free movement of lawyers: see Panteia and Maastricht University (2012). The idea of this case study was to involve professionals who are not lawyers. In other parts of the research, interviews were held with lawyers themselves.

  71. 71.

    Attempts were made also to contact professional organizations in Luxemburg, but these attempts were unsuccessful.

  72. 72.

    The interview with two anonymous respondents from the CFE (held 12 July 2012) made clear that German MDPs face similar problems.

  73. 73.

    Interview with anonymous respondent working as a notary in a big Dutch law firm, 23 August 2012. It was noted furthermore that lawyers in Luxemburg (and to a lesser extent in Belgium) operate almost like a cartel. They are not interested in co-operation with notaries.

  74. 74.

    Interview with anonymous respondent from the Royal Netherlands Notarial Organisation KNB, 16 July 2012.

  75. 75.

    Interview with two anonymous respondents from the CFE (held 12 July 2012).

  76. 76.

    Interview with two anonymous respondents from the CFE (held 12 July 2012).

  77. 77.

    Panteia and Maastricht University (2012), pp. 199–200. The authors, however, do not consider the ‘free movement’ argument very convincing, as it is for the country of origin to supervise whether the structural requirements are met which are imposed upon the ABS under home country law; bars in other Member States, where the ABS is active temporarily or in established form, are faced with the supervision of such activities only from the point of view of host country regulation, which is not different from the supervision of host country law firms.

  78. 78.

    And it is well-known that the goals of efficiency and market integration may conflict. See e.g. Bishop and Walker (2010).

  79. 79.

    E.g. OFT (2001), Competition Authority (2006), NMa (2006) and Competition Bureau (2007).

  80. 80.

    See on the market integration rationale also other contributions to this book, including the chapter ‘Introduction’.

  81. 81.

    The study consisted of country studies in all (then) 27 EU Member States (including legal desk research and interviews with national organizations), interviews with representative organizations at the EU level, interviews with law firms, 21 qualitative case studies, and a web survey among lawyers. The focus of the study was on implementation of the Lawyers’ Directives, evaluating these directives (also in relation to the Services Directive and the Qualifications Directive), and on identifying any remaining barriers to free movement of lawyers across the EU.

  82. 82.

    Panteia and Maastricht University (2012), p. 5. Besides these two Lawyers’ Directives, lawyers can also make use of the general system of Directive 2005/36 (on the recognition of professional qualifications), which leads to full integration in the profession of the receiving Member State, if the lawyer concerned successfully completes an aptitude test. The Lawyers’ Establishment Directive also offers a possibility to integrate fully in the legal profession, without the need to do an aptitude test, but only after the lawyer concerned has practiced for 3 years in the receiving country under the system of the Establishment Directive.

  83. 83.

    The rather difficult drafting of Article 11 has led to considerable problems of implementation in the Member States. A violation observed in many Member States is the need to objectively justify application of the host Member State’s professional rules with regard to branch offices and agencies. Member States either completely ignore the requirement or explicitly state that their own professional rules shall apply. A possible reason for this is the unclear wording of Article 11 (5) and its complex relationship with Article 11 (1). See Claessens (2008), p. 238.

  84. 84.

    Maastricht University and Panteia (2014), p. 96.

  85. 85.

    Twenty-one of such qualitative case studies were conducted on specific topics (including those on MDPs and ABSs: see Sect. 3.2 above). In the context of these case studies, 76 interviews were held.

  86. 86.

    Panteia and Maastricht University (2012).

  87. 87.

    See also Maastricht University and Panteia (2014), Chapter 3.

  88. 88.

    Maastricht University and Panteia (2014), p. 136.

  89. 89.

    For more information on the competition law perspective, see e.g. Philipsen (2012).

  90. 90.

    In Maastricht University and Panteia (2014), we again held interviews with various professional associations (including those for legal professions), asking them for justifications with regard to legal form requirements and shareholding requirements, respectively. The justifications mentioned are very similar to those found in previous reports, as far as the legal professions are concerned. See Maastricht University and Panteia (2014), pp. 113–114.

  91. 91.

    Panteia and Maastricht University (2012).

  92. 92.

    See also Articles 15 and 16 of the Services Directive (2006/123/EC).

  93. 93.

    And more generally with the subsidiarity principle.

  94. 94.

    See also Sect. 2.3 above.

  95. 95.

    UM and Panteia (2014), Chapter 8. The report is still under embargo; more details cannot be provided here.

  96. 96.

    It should be stressed that in the EU the ‘internal market goal’ exists alongside the goal of economic efficiency and other goals such as non-discrimination and consumer protection, which provides the EU with another theoretical argument to intervene in the legal services market. This ‘internal market goal’, however, may conflict with economic efficiency.

  97. 97.

    See generally Van den Bergh (2000), Faure (2003), and Van Boom (2011). See also the work by Bruno Frey on functionally overlapping and competing jurisdictions—FOCJ: e.g. Frey (2009).

  98. 98.

    Moreover, people have the options of voice or exit to influence decision making. See Tiebout (1956) and Faure (2003). Furthermore, having different laws rather than one allows for regulatory competition.

  99. 99.

    Which, as stated earlier, is the topic of our current study for DG MARKT.

  100. 100.

    See Philipsen (2014a).

  101. 101.

    Article 7 of The Regulatory Method of Law Firms (2008) Si Fa Bu Lv Shi Shi Wu Shuo Guan Li Ban Fa.

  102. 102.

    Article 9.

  103. 103.

    Article 10.

  104. 104.

    Article 8.

  105. 105.

    Report on Social Responsibilities of Chinese Legal Practitioners (中国律师行业社会责任报告), at http://www.acla.org.cn/html/xinwen/20130827/11102.html. Accessed 10 Mar 2015.

  106. 106.

    Ibid.

  107. 107.

    See also Panteia and Maastricht University (2012) for an explanation of why lawyers want to provide services abroad or establish in another Member State.

  108. 108.

    Liu (2012), Chapter 1.

  109. 109.

    For a detailed analysis of developments in the UK legal services market, see Stephen (2013).

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Authors and Affiliations

  1. Faculty of Law, Maastricht University, Maastricht, The Netherlands

    Niels Philipsen

  2. School of Law, University of Leeds, Leeds, UK

    Qi Zhou

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  1. Niels Philipsen
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Editors and Affiliations

  1. Faculty of Law, Maastricht University, Maastricht, The Netherlands

    Niels Philipsen

  2. Faculty of Law, University of Groningen, Groningen, The Netherlands

    Stefan E. Weishaar

  3. Centre for Law and Economics, China University of Political Science and Law, Beijing, China

    Guangdong Xu

Additional information

An early version of this paper was presented at the workshop ‘The Professions between Competition and Regulation: Interdisciplinary Perspectives’, Paris, 27–28 September 2013, University Paris Ouest Nanterre La Défense. Disclaimer: parts of this the paper are based on contract research that Niels Philipsen (with colleagues) has conducted for the European Commission/DG MARKT and for the International Bar Association. In the framework of these studies, interviews were held with professional associations and professionals, legal inventories were made, and economic analyses were carried out. One of the studies is under embargo and not all of its results can be published here.

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Philipsen, N., Zhou, Q. (2016). Business Restrictions in the Legal Professions: Do We Need More Market Integration?. In: Philipsen, N., Weishaar, S., Xu, G. (eds) Market Integration: The EU Experience and Implications for Regulatory Reform in China. China-EU Law Series, vol 2. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-48273-5_9

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