Legal fees and the free market

I have been in Serbia, advising the Ministry of Justice on harmonisation of the country’s laws relating to lawyers, as part of an EU-funded project to help Serbia prepare for its accession to the EU. (Yes, some people want to join the club; we might bump into them on the way out.)

I am going to Belgrade for five one-weekly blocks, and I have just finished my second period. Each time, I learn more. My experience over the past week ties in directly to recent developments here and elsewhere.

It is obvious that Serbia will have to adopt the lawyers’ directives (77/249/EC and 98/5/EC), and so permit free movement of EU lawyers into Serbia, and similarly allow their own lawyers to go freely to practise in other member states.

But that is not the only part of the ‘acquis’, the body of EU law, that will apply to them. There are the horizontal rules that apply to players in the single market, including lawyers. For instance, there is the general services directive (2006/123/EC). Again, I have no problem in accepting that legal services are like any other service in the single market, and must be subject to its rules – even though Serbian lawyers are accustomed to considering legal services as a constitutionally protected activity exempt from similar measures.

Where I begin to have my doubts is when it comes to the consequences of the application of competition law. There is no doubt that competition law applies not only to legal services, but also to the professional bodies which regulate legal services. The seminal case of Wouters (Case 309/99) settled that for once and all.

Much of the debate centres around the question of a lawyer’s tariff. In Serbia, the bar decides the fees that the lawyer must charge, and it is a disciplinary offence for the lawyer not to apply the tariff. I have explained repeatedly that this is contrary to EU competition law. There are some Italian cases - Arduino (Case C-35/99), and then the joined cases of Meloni and Cipolla (C-94/04 and C-202/04) - which make this clear beyond any doubt.

We can all see why it should be so: the bar (made up of lawyers) decides who can join the group of lawyers, who is expelled from it, and the bar is indistinguishable from a cartel if it is able to set the prices charged by the group.

The difficulty arises when trying to describe what happens to fees in a market economy. I hope that the Serbian legal profession does not read the overseas legal press too closely, because their questions could become rather uncomfortable. They are worried, for instance, that lawyers will over-charge for their services in a market economy. I hide under the table the recent report from the Centre for Policy Studies describing how City firms are now charging over £1,000 per hour.

They are worried, too, about the opposite – under-cutting of rates. I similarly hide the Bar Council’s recent warning in a note on fees against: ‘pressure to “cut corners” due to unreasonably low fees, and pressure to accept too great a workload to compensate for this.’

We know that the topic of legal costs in our market economy absorbs a huge amount of time and emotion. Just reviewing developments over the last few weeks, we see how much we struggle with adapting a purely market view of fees to controls which others (principally, the government) want to impose on them – at random, I mention Jackson fixed fees, criminal legal aid rates, small claims limits.

That is without addressing the topic of access to justice. It is a commonplace to say that a large proportion of the public are priced out of the legal services market, which has given rise to recent developments in the unregulated sector. This is not just a UK problem. In the American Bar Association’s recent adoption of regulatory objectives for all legal services in their own market economy, including for unregulated providers, there was specific and repeated reference to the ‘burgeoning access to justice crisis’.

So, we know that the bar fixing tariffs is a no-no. Our alternative, based on the religion of successive governments, is the market economy. But why does our government have to keep interfering in the market then to control costs? Why is there an access to justice crisis? Why is the unregulated sector on the rise?

Of course, the fanatical believers - I am looking at you, Legal Services Board - believe against all the evidence that more and more competition is the answer, blinding themselves to the increasing interventions by government and others (such as legal expenses insurance companies) to control costs as more competition is introduced.

More reflective people might wonder whether there is not another and better solution.

Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs