Nick Robinson

One of the major debates in the legal profession in recent years has been to what extent regulators should regulate legal entities versus legal professionals. In 1991 Ted Schneyer famously argued in a Cornell Law Review article [Ted Schneyer, Professional Discipline for Law Firms? 77 Cornell L. Rev. 1 (1992)] that regulators should increasingly shift their disciplinary focus to law firms instead of relying almost solely on disciplining individual lawyers. Academics like David Wilkins and Elizabeth Chambliss have since argued [Elizabeth Chambliss and David Wilkins, A New Framework for Law Firm Discipline, 16 Geo. J. Legal Ethics 335 (2003)] that Schneyer’s proposal is most productively thought of as not suggesting to discipline law firms directly—something that has been possible in New York and New Jersey for some time, but rarely invoked—but rather demanding law firms have a plan to proactively participate in regulating (and disciplining) their own lawyers.

A variation of this cooperative strategy of regulation was adopted in Australia. In 2001 New South Wales (NSW) deregulated its legal profession. As part of this shift it required incorporated legal practices to implement and maintain “appropriate management systems.” Firms were required to self-asses and report on the implementation of these systems to an independent regulator. As Tahlia Ruth Gordon, Steve Mark, and Christine Parker found in an excellent 2010 article, this strategy seems to have led to a significant decline in complaints in NSW about lawyers at these firms. Interestingly, a drop in complaints was best correlated not with the grade the law firm gave its management system, but rather that it simply self-assessed at all. In other words, the process of self-assessment was seemingly more important for compliance than the grade that self-assessment generated.

In light of this seemingly successful experiment in New South Wales should other jurisdictions rush to regulate legal entities in a similar manner? As Joan Loughry documents in a recent article surveying the literature on law firm regulation—and describing a similar regulatory approach towards legal entities in the United Kingdom adopted under the 2007 Legal Services Act—the regulation of law firms continues to generate criticism.

One traditional critique is that an emphasis on law firm regulation will undercut professionalism. Lawyers will feel it is up to the firm to regulate unethical behavior and feel less of a need to self-regulate their personal behavior. Such a theory is plausible, but the New South Wales experience at least on its face does not seem to bare it out.

That said, given our current paucity of information about regulating law firms it is difficult to assess the impact of such regulation in any comprehensive way. The empirical evidence for the success of the regulation of legal entities is largely based on the New South Wales study. It’s unclear if adopting a similar regulatory strategy would lead to a parallel decline in complaints in other settings. Gordon, Mark, and Parker themselves note that the UK had an earlier less than successful experience with regulating law firms that provide legal aid. Critics of this UK scheme contended the regulation of these firms led to micro-management, box-ticking, and little improvement in lawyer performance. Gordon et al. argue that the difference between the two experiences had to do with the type of regulation being promoted: the UK regulation of law firms was focused on cost-saving and quality control for their participation in legal aid while the NSW regulation was focused on bringing down client complaints more generally through a more collaborative approach. They also noted the importance of the relationship between the regulator and those being regulated and the tools employed. The NSW regulatory framework requires high capacity regulators that can deploy their power in a nuanced way. We could imagine many situations though where this context does not exist and where an attempt at regulating law firms in a similar manner would lead to red-tape, increased costs, and the flouting of regulatory processes. There is still much research that needs to be done on how law firm regulation might interact with different regulatory cultures, politics, and economics (think Australia vs. the United States vs. China vs. India).

Even if we acknowledge that context matters and so must be taken into account in the regulation of legal entities elsewhere there are other reasons we might feel we need more information before we can be confident in embracing the NSW law firm regulation approach. Three such reasons are discussed below.

1. Capture and market manipulation. We might expect that the cooperative NSW regulatory approach would have early payoffs, but then the impact would later reduce as the energy behind this approach diminishes or as those that are being regulated capture the regulator. Those who capture a regulator might weaken regulation to make it ineffective, or, if the regulator was captured by large law firms, they might actually work to make regulation more onerous so as to drive out smaller firms less able to comply with burdensome regulatory demands. (Already in Australia a consulting industry for law firms has sprung up to help them through the required self-assessment process. Further legal entity regulation would likely lead to more consulting and more costs.) Although having an independent regulator certainly has many benefits compared to regulation by the bar, one drawback might very well be that it could be easier for it to be captured either by the more wealthy members of the profession or their perspective (which amounts to largely the same thing). This could lead to a bias towards more costly regulation which those with more resources are best able to comply with.

2. What Are We Disciplining? Law firms are already seen as producing fewer complaints from clients than solo practitioners. Sure, it would be great to reduce the number of complaints further, but is this even the type of misbehavior that we are most concerned about emanating from law firms, especially larger ones that tend to have more sophisticated clients? Maeve Hosier has written this paper on the role of lawyers in the Irish economic meltdown and the failures of the regulation of legal services involved. The NSW regulatory framework might very well have been better equipped to identify and mitigate these more systematic failures of the profession than the Irish system of regulation, but it’s not immediately clear that the NSW regulatory framework is particularly well designed to do this. Yet, such regulatory failures can have a far larger impact on the overall economy than most infractions by lawyers.

3. Why focus on law firms? (. . . Law firms are declining) Given that more complaints are received against solo practitioners than law firms, Richard Abel has argued that solo legal practitioners in the United States should be banned with all lawyers being required to have partners and insure themselves for malpractice. Much of the literature on the legal profession seems to have adopted either a similar normative stance in favor of law firms against solo practitioners or sees the continuing rise of law firms as inevitable and solo practitioners becoming marginal. Interestingly, and worthy of further study, the empirical evidence does not seem to back up this descriptive account (I won’t discuss the normative position here). Take New South Wales, which has probably been the most deregulated legal market for the longest (beginning in 2001). One might expect that large firms, using new ways of raising capital and combining their services with other industries, would be dominating this new legal landscape. Instead, we have seen a decline in the per cent of lawyers in law firms in New South Wales and an increase in the number of solo practitioners in private practice.

Lawyers in Private Practice in New South Wales

2001 statistics can be found here
2012 statistics can be found here

As the above chart shows, the only area where firms have grown as a per cent of lawyers in private practice is in the range of 11-20 lawyers. Large firms have not been immune. There were 24 firms over 21 lawyers in 2001. In 2012 there were still 24 such firms, but lawyers in them made up a significantly smaller per cent of lawyers overall. The United States legal market has also seen the persistence of solo practitioners—they have made up about half of legal professionals for decades now—and the economic recovery has seen jobs in the legal sector recover more quickly and robustly in portions of the legal sector outside of large firms. (Note: There is a categorization question these numbers raise. It’s unclear if in Australia and the U.S. the category of “solo practitioners” also includes lawyers who have pursued other opportunities—such as business—but retained an active law license. If so, this would conflate true solo practitioners with those engaged in other activities, but would not change the conclusion that there has been a relative decline in the number of lawyers working at law firms.) /p>

None of the arguments above are meant to discourage the regulation of law firms or the regulation of law firms through the NSW model. Instead, they point to the limits of our knowledge about this subject. Much further research needs to be done. In the meantime, policymakers will make decisions on the evidence and regulatory theories available. Changes in the regulation of law firms in the UK and other jurisdictions should give us more evidence to analyze in the coming years.

Nick Robinson is a research fellow at the Harvard Law School Program on the Legal Profession. Before coming to Harvard, he spent seven years in South Asia where he clerked for the Chief Justice of the Indian Supreme Court, taught at National Law School Bangalore, Jindal Global Law School, and Lahore University of Management Sciences, and was a senior fellow at the Centre for Policy Research. Read full profile