Highly-Regulated U.S. Law Industry Reminds U.K. Firms To Keep Out: New York State Bar Rules On Ethics

Formal publications and informal publications, like this law blog, spend a predominant amount of time advocating for legal service innovation.

Clifford Winston, Robert W. Crandall, and Vikram Maheshri of the Brookings Institute suggest in their publication, First Thing We Do, Let’s Deregulate All the Lawyers. The authors claim entry barriers and restrictions combined with government-induced demand for lawyers drives up the prices for legal services, which then draws significant social costs, hampers innovation, misallocates the nation’s labor resources, and creates socially perverse incentives.

Winston and Crandall also contributed an op-ed to the Wall Street Journal calling for the immediate deregulation of the legal industry. They wrote:

“The reality is that many more people could offer various forms of legal services today at far lower prices if the American Bar Association (ABA) did not artificially restrict the number of lawyers through its accreditation of law schools—most states require individuals to graduate from such a school to take their bar exam—and by inducing states to bar legal services by non-lawyer-owned entities. It would be better to deregulate the provision of legal services. This would lower prices for clients and lead to more jobs.”

Amid countless lawsuits accusing law schools of misrepresenting employment statistics and a boom in online legal services, law school graduates are desperately seeking jobs, and clients seeking affordable counsel.

Both the Cato Institute and OpenMarket.org agree with the WSJ that deregulation is necessary.

“People can represent themselves in small-claims courts, which have simplified procedures, but in many states, such courts can hear only the tiniest legal claims, like those seeking less than $5,000,” states OpenMarket.org (via ATL).

“Every other U.S. industry that has been deregulated, from trucking to telephones, has lowered prices for consumers without sacrificing quality,” continue Winston and Crandall.

Foreign countries have also deregulated the law industry. Consider, for example, the U.K.

Law firms there can receive external investment—even through an IPO—and non-law firms can offer legal services without special legal accreditation.

The Legal Services Act, which passed in October, provides for new ownership structures in the U.S., but to date, no major U.K. law firm has taken advantage of it (via WSJ).

And, according to the Wall Street Journal and a recent ethics opinion by the New York State Bar, perhaps U.K. firms should continue to stay off U.S.-regulated soil. Here’s why.

The New York State Bar, which is the largest in the country with 77,000 members, recently ruled that New York lawyers can’t practice law in the state if they are part of U.K. law firm with non-lawyer owners.

“The committee considered this scenario: Lawyers licensed to practice in New York enter a business relationship with a U.K. firm that has non-lawyer owners and managers. The New York lawyers establish a New York office for the firm and represent New York clients. They don’t share confidential information with the non-lawyers and they abide by U.K. rules,” writes the WSJ Law Blog.

The New York State Bar ruled that the above scenario violates ethics rule that forbids a lawyer from practicing law for profit with an entity that includes a non-lawyer owner.

Although The American Bar Association is considering a tweak to its ethics rules, there is no end in sight. Despite the dire economic climate for lawyers, the U.S. is hesitant to propose any innovation that would deregulate the law industry.

FT has more on the ethics opinion here.

What’s the solution? To garner more business overseas and to exit this financial crisis, will U.S. states be forced to deregulate their law industry?

In today’s globalized world, a combination U.S.-U.K. law firm shows signs of potential success. But, for the moment, it looks like U.S. law firms will have to go it alone.

-WB

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