“Ethics” Rules Shape the Legal Services Market: To Protect Clients? Or to Protect Lawyers from Unwanted Competition? — Big 4 Legal Practices — Part 2 of 5

THE POINT

1. Unlike countries in Europe and Asia, Big 4 accounting firms are prohibited from offering corporate legal services in the U.S.

2. Through its rule-making state bar authorities (made up of lawyers), the U.S. legal profession is fighting tooth-and-nail to keep it this way.

DISCUSSION

U.S. law firms tout their prowess as legal powerhouses that a serious business cannot safely do without. In quiet conversations with in-house counsels and P&L executives alike, attorneys from these firms unsubtly invoke the fear-and-dependency that an earlier generation expressed this way:

“Nobody was ever fired for hiring IBM.”

For attorneys who sell their services this way, the last thing they want is competition from the likes of EY, PwC, Deloitte, and KPMG for substantial corporate legal work. 

That (along with other aspects of legal market structure) is what’s at stake in the following, arcane-sounding, legal “ethics” prohibition:

“A lawyer or law firm shall not share legal fees with a nonlawyer”.*

Big 4 accounting firms have been practicing law outside the United States for a couple of decades.

According to John Fitzgerald, audit partner, member of the Executive Committee, and Chair of Law Firm Services at the New York accounting firm Berdon LLP:   

“Increasingly, Big 4 accounting firms — Deloitte, PwC, KPMG, and EY — are competing with the legal services industry by offering a range of legal services, and traditional law firms, especially small- to medium-sized firms, are taking notice.

” … PwC Legal had already become the world’s sixth largest legal services provider, by headcount, in 2017. Indeed, between them, [each of] the Big 4 average well over 2,200 lawyers in 72 countries.”   

So the otherwise esoteric rule prohibiting a lawyer or a law firm from sharing legal fees with a nonlawyer — operative in all 50* U.S. states and territories — lies at the center of a white-hot debate:

Should legal “ethics” rules allow Big 4 accounting firms to hire lawyers, and then offer their services to business clients in the United States? 

New York accounting partner John Fitzgerald again:

“Industry observers note that what the Big 4 are attempting to do now in the legal services market is remarkably similar to what they did when they conquered the consulting industry. By utilizing their scale, resources and global reach, the Big 4 have broken into areas that their existing practices already touch on. Leveraging their established relationships with C-level executives, they are offering an attractive, single-provider model for a wide range of legal, accounting and consulting services.”

Given the high stakes for conventional law firms’ incomes, the legal profession pulls out all the stops when sharing-of-legal-fees-with-nonlawyers comes up.

Dan Packel and Dylan Jackson gave an example of the intensity in February 2020’s American Lawyer:

The Big Four’s shadow loomed over an open letter that was signed by 10 of California’s largest law firms and submitted to the California [Task Force on Access Through Innovation of Legal Services] in September 2019.

“‘Lawyers also argue that the global dominance of the accounting profession by a very small number of accounting firms is an anticompetitive model that should not be replicated in the legal profession’, the firms, including Morrison & Foerster, Pillsbury Winthrop Shaw Pittman and Baker McKenzie, wrote.  

Each of the 10 firms [who expressed opposition to accounting firms being allowed to practice law] declined to further discuss with The American Lawyer their opinions on the proposals.”

The fact that these 10 largest California law firms refused to speak about their own formal statement to the California Bar — with one of the legal profession’s most prominent journals — reflects an odd reluctance to substantiate their argument in a public debate that they willingly entered.

(It’s odd because when we lawyers think that we have a good argument, we love to substantiate it.)

Their diffidence on this point raises the question I pose in Part 1 of this series:

“Might some of these ‘ethics’ rules that regulate the market for legal services actually have more to do with protecting lawyers from unwanted competition than they do with protecting clients?”

 

 

* The lawyers “ethics” and disciplinary rules of every state and territory in the U.S. prescribe this rule, with exceptions that don’t apply to accounting firms. As Professor Bill Henderson of the University of Indiana Law School put it in a 2018 report (at Page 21) commissioned by the State Bar of California: “The only substantive exception in the U.S. is the District of Columbia, which permits a minority ownership of nonlawyers.”