An assessement of the impact of the lawyers' establishment directive.

The second major law that regulates the multi-jurisdictional practice by European lawyers is now commonly known as the "Diplomas Directive".  Unlike the Lawyers’ Services Directive, the Diplomas Directive was intended to cover permanent establishment. Furthermore, the Diplomas Directive is not limited to the legal profession. The Diplomas Directive requires mutual recognition by Member States of higher education diplomas and regulated professional licenses for those professions which are not subject to a separate directive.

Under the Diplomas Directive, the Host State can require that the transient professional either take an aptitude test or complete an adaptation period of not more than three years. For the legal profession, it is the Host State, and not the individual, which has the right to determine whether to require an adaptation period or an aptitude examination. All EC jurisdictions except Denmark have opted to require an aptitude test rather than an adaptation period.

The third important EC law governing lawyers addresses the topic of permanent establishment, and is commonly referred to as the “Lawyers’ Establishment Directive” or "Directive"; it is this Directive which forms the thematic centrepiece of this essay.

Prior to the Directive's adoption, there was much debate as to how the question of home country title establishment for lawyers would be construed by the Court of Justice, which had not yet adjudicated the issue.  As indicated above, the freedom of establishment includes "the right to take up and pursue activities as self-employed persons .... under the conditions laid down for its own nationals by the law of the country where such establishment is effected ...".  On one view this means that those exercising the freedom of establishment can only do so within the constraints of the host country law.  Thus a restrictive host country law reserving the right to give legal advice to members of a particular profession would prohibit lawyers from other Member States from the right to practice within the host country under their home title.  They would need to join the host country legal profession first.  This view seemingly had the support of the Commission at the time.  However, another view argued that national rules are subject to Community law principles that prohibit them from completely nullifying the achievement of a Community goal.  

The uncertainty of the Court's eventual interpretation of home country title establishment for lawyers led the CCBE to discuss, negotiate and ultimately design a draft proposal resolving this issue, a process it was engaged in since the late 1970's!  In 1992 the CCBE finally reached agreement on its proposal which, with two dissenting votes, was submitted to the Commission.  The Commission tendered its own proposal in late 1994, which contained a number of altered provisions in comparison with the original CCBE proposal (for instance, a 5-year limit on permanent establishment).  On 15 December 1997, the Lawyers' Establishment Directive was adopted by the European Union Council of Ministers, following adoption of the Directive by the European Parliament at its November plenary session, in the form described below.

 3.         Requirements and Scope of Directive 98/5/EC

The Lawyers' Establishment Directive requires the transient lawyer to register with the Host State.  The Directive specifies the rules of conduct which apply in different situations and makes the transient lawyer subject to discipline in the Host State (as well as in the Home State).  Initially, the lawyer practices under the lawyer's Home State title.

Similar to the Lawyers' Services Directive, Directive 98/5/EC places some limits on the transient lawyer's scope of practice.  For example, the Host State may elect to exclude the transient lawyer from preparing formal documents to administer estates of deceased persons or instruments creating or transferring interests in land.  The Member State may also require a lawyer involved in litigation to work in conjunction with a lawyer who practices before the judicial authority in question.  These "scope of practice" limitations are relatively narrow, however.  Except for the specified limitations, the transient lawyer may practice Home State law, EC law, international law and, remarkably, also Host State law.

Interestingly, the Lawyers' Establishment Directive provides two different methods by which the transient lawyer may become integrated into the Host State profession, with the ability to thereafter use the Host State's title of lawyer.  First, the transient lawyer may become integrated under the methods heretofore specified in the Diplomas Directive.  Alternatively, the transient lawyer may become integrated into the Host State's profession if the transient lawyer has "effectively and regularly pursued for a period of at least three years an activity in the host Member State in the law of that State including Community law....".  Thus, a French lawyer, for instance, is permitted to move to Germany, practice EC law for three years, and thereafter become a full-fledged German Rechtsanwalt, with the right to use the title of Rechtsanwalt.  The French lawyer can do this without an examination or special requirements, other than registration with the proper German authorities.

Further requirements of the Directive include the provision that the transient lawyer must be a national of an EU Member State, and further must be a fully-qualified lawyer and not merely a trainee.  Only lawyers who have acquired one of the titles listed under Article 1 fall within the ambit of the Directive.  The transient lawyer must carry adequate indemnity insurance to satisfy the legal requirements of the Host State, though proper coverage within the Home State will be considered sufficient under the terms of the Directive.

Pursuant to Article 16 of the Directive, Member States were given until 14 March 2000 to bring the Lawyers' Establishment Directive into force.  Many, if not most of the Member States, failed to meet this deadline.  Since then, the Commission has, at various times, referred several cases to the European Court of Justice for the failure of Member States to transpose the Directive into law.  To-date, judgments have been rendered against France and Ireland for failure to implement, whilst the Court is presently adjudicating action against Luxembourg and the Netherlands for their transgressions.  Nevertheless, the vast majority of Community states have fully implemented the Directive.

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4.          Impact of the Directive on the Market for Legal Services

A.        Statistics and Trends

In principle, the Lawyers' Establishment Directive has laid down a structural framework to enable the highest level of integration for lawyers in the European Community.  This steady development, which had begun under the Lawyers' Services Directive and Diplomas Directive, and culminated in the Lawyers' Establishment Directive, ensured that the legal profession had enough time to prepare for a more thorough integration.  Nevertheless, it is interesting to note that mobility still works on an extraordinarily small scale and, to this point, there has been no indicative wave of trans-border establishment.  To demonstrate the point, the CCBE has compiled statistics of so-called "Community lawyers" per host Member State.  As of August 2002, 915 lawyers of this nature had been documented, ranging from 2 in Sweden to 157 in the United Kingdom to 378 in Belgium.   According to figures given by the CCBE delegations, effective January 2003, there are over 500,000 fully-qualified lawyers within the EU Member States.  Thus, cross-border lawyers account for less than 0.2 per cent of all lawyers within the Community!  The reasons behind this are manifold, though a few of the more salient are included here.

According to Dr. Rupert Wolff, past president  of the CCBE, one reason lies in the fact that training, both university and post-university, is still very much focused on national law, sometimes leaving Community law completely aside.   Moreover, the difference in Member State legal systems renders the transition exceedingly difficult; some States have a civil law system and others have a common law system.  There are even significant differences among Member States that have a civil law system in place.

Another reason may be that lawyers recruit their clientele from their own social environment. Leaving this environment is thus counterproductive and still connected with many lateral problems which plague expatriates in all walks of life, such as the high costs of market entry, business risk, housing, schooling for their children, language problems, and so forth.  Chief amongst the problems would be the language barriers, insofar as the legal profession is fundamentally and absolutely underpinned by its concise interpretation of language.  Also of consequence is the overriding need for face-to-face, lawyer-client contact.

There are other considerations which may account for the limited migration of lawyers to-date.  New fields of substantive law have arisen in the recent past, such as E-commerce law.  The E-commerce Directive calls on Member States to establish on-line dispute resolution schemes. This process continues to advance.  Court proceedings will no longer, by necessity, be conducted in courtrooms.  Even today many court proceedings in civil cases can already easily be handled on-line.  Alternative Dispute Resolution (ADR) and mediation are expected to drastically reduce the number of claims brought to court, and hence would tend to markedly diminish trans-border mobility of lawyers.

Nevertheless, trends towards cross-border migration have been statistically noted in certain sectors of the Community.  Most prominent would be the growing tendency of English firms to enter markets of other Member States.  The Legal 500 for the year 1999 lists the twenty largest law firms for each European jurisdiction.  The tables for Germany, France, Spain and Italy each show at least three or more English law firms (though it should be recognized that the penetration of these markets at least partially pre-dates the Lawyers' Establishment Directive). This may, in large part, be due to the preference of parties in many international transactions to subscribe to English law.  

It is also noteworthy that the perceived obstacles to lawyer migration are not necessarily universal, in that where regional similarities exist in language, culture, or law, statistical trends indicate a greater propensity toward cross-border movement.  That is why Belgian and Luxembourg qualified lawyers have been the largest cross-border movers into France, and Irish qualified solicitors have constituted the majority of Community entrants to the English and Welsh Law Society. However, an empirical survey of what prompts lawyers to migrate, or the composition of the migrating groups, or the most enticing legal markets, has yet to be undertaken.

B.        Economic Approach

Despite the statistical negligibility of, and the pragmatic justifications for, the limited propensity for cross-border migration of lawyers, economists would argue that such movement remains an advantageous and economically feasible vehicle within the European single market.  Frank H. Stephen, in a paper presented at the 17th European Association of Law and Economics Conference in Ghent, in September 2000, argued this point.

Historically, the market for legal services has been regulated in most European economies, either by national governments or self-regulated through professional bodies organized at national or sub-national level.  There are many typical instruments used by self-regulators of the legal profession, including (I) restrictions on entry; (II) restrictions on advertising and other means of promoting a competitive process within the profession; (III) restrictions on fee competition; and (IV) restrictions on organizational form.  Furthermore, almost all self-regulatory bodies covering the legal professions in the EU have deontological rules - codes of ethics and conduct - a breach of which can lead to removal of the right to practice.

In most EU jurisdictions, licensing and registration rules regulate entry to the legal professions, protect professional titles associated with the legal professions and representation before the courts.  The breadth of such restriction varies amongst jurisdictions, though in most Member States the right to represent others before the courts is restricted to members of the designated professions.  Designated titles are restricted to members of professional bodies in all EU Member States.  Successful completion of a specified period of study of the law at university together with the passing of one or more professional examinations and a period of training under an experienced member of the profession is usually required to obtain the right to practice under such titles in most Member States.

The traditional restriction on advertising by members of the legal profession has been relaxed in a number of jurisdictions in recent years; for instance, in Germany, advertising has historically been prohibited, but current regulation permits informative advertising.  With respect to fee regulations, different jurisdictions handle the matter in different ways.  Fees for both main branches of the legal profession in Scotland, England and Wales are determined by the market as are those for advocates and barristers.  In Spain the local bar produces scale fees based on the value of the transaction, but it appears that the actual method of determining the fee is a matter of negotiation between the parties.  The State lays down the minimum fees to be charged by German Rechtsanwaelte on the basis of the value of the transaction.  Speculative fees, also known as contingency fees – the foregoing of fee if the action is lost - are prohibited in Germany and Belgium, and for barristers in Northern Ireland.

Stephens' research indicated that the jurisdictions where legal services markets are aligned most closely to the competitive ideal are likely to be Finland and Sweden, possibly followed by Scotland and England and Wales ("efficient" markets).  At the other extreme, Germany still has regulated fees, and Spain has only recently permitted advertising ("inefficient" markets).  However, Directive 98/5/EC has tended to liberalize the market by clearly establishing the right of law firms to set up branches in any other Member State, and such firms can be staffed by both Host State and migrant lawyers.  A monopolistic profession which seeks to restrict entry in order to increase its members' incomes would make it attractive for other professionals to enter its market.  From an economic perspective, the more efficient the arrangements of the profession in one state are, the greater the incentive for law firms from other states to move into the inefficient state (see Figure 1).

Figure 1: Lawyer migration according to Frank H. Stephen

The Lawyers' Establishment Directive considerably diminishes the barriers to entry into legal markets in the EU.  Arguably, then, the existence of one relatively efficient jurisdiction in the EU--e.g., Sweden--combined with the freedom of establishment created by Directive 98/5/EC, can result in demonstrable movement of professionals over the long-term from efficient jurisdictions.  This movement, in turn, would force the inefficient state to revisit and liberalize its policies in order to stimulate competition within its own boundaries, a trend portended by the recent Commission's Report on Regulation of the Liberal Professions.

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C.         Competition vs. Regulation

Over the last decade, a groundswell of opinion has begun to argue that the level of regulation for professionals in general, and for lawyers in particular, was out of step with economic developments and technical progress. It should be borne in mind that the goal of the Lisbon European Council was to make the EU the most competitive and dynamic knowledge-based economy in the world by 2010.  Professional services account for 70% of EU GDP but only 20% in terms of cross-border trade.  In order to counteract this anomaly, the Commission aims to fully apply competition rules to the liberal professions, a task which was clarified in two recent judgments of the European Court of Justice, in the Arduino and Wouters cases.

The Arduino judgment made clear that Member States have the right to regulate a profession. It further stated that Member States can associate professional bodies in this task as long as they retain the decision-making powers and establish sufficient control mechanisms.  They must not abdicate their powers to professional bodies without clear instruction and control.  However, in Wouters, the Court recognized that some type of rules and regulations can be considered as inherent to a particular profession and therefore cannot in principle be caught by the prohibition of anti-competitive agreements, decisions and practices.  Without such genuine deontological rules the profession could not function as such.  

The Commission, in attempting to strike a balance between regulatory schemes which are inherent in the profession, and those which are not, commissioned a study to compare the regulations affecting lawyers, notaries, accountants, and other liberal professions.  The results indicated unequivocally that the extent of regulation varies greatly across the EU, both with regard to market entry and to the regulation of conduct.  In the legal profession, the index established by the researchers shows that Greece is the most highly regulated Member State, whilst Finland, Sweden, Denmark and The Netherlands are the least restrictive. This tends to comport with the Stephens research indicated above.  Another observation of the study is that in countries with low degrees of regulation, there are relatively lower revenues per professional, but a proportionally higher number of practicing professionals generating a relatively higher overall turnover.  This would suggest that low regulation is not a hindrance but rather a spur to overall wealth creation.  Conversely, a high level of regulation tends to discourage efficiencies and thereby lower wealth.  For instance, in Italy or Spain, there appear to be an enormous number of firms with very few employees; conceivably, efficiencies could be improved if a modicum of concentration was permitted.

The overall conclusion of the study was that the lower regulation strategies which are successfully implemented in one Member State might be made to work in another, without decreasing the quality of professional services, and for the ultimate benefit of the consumer.

In the coming months, lawyers and other liberal professionals across Europe shall be responding to the "Commission Services Working Document, Regulation in Liberal Professions and its Effects, Invitation to comment".  This questionnaire, addressed both to users of services as well as professionals and professional bodies, seeks to understand and evaluate the present market situation, the degree of consumer satisfaction, the detection of artificial barriers to the optimal use of resources, and the potential for improvement in existing rules and regulations.  The results of this survey shall be taken into account as the Commission makes strides toward a more efficient market in the legal field.

5.          Conclusion

It appears altogether obvious that an aggressive EU competition policy will soon cause a relaxation of regulation within the legal profession.  The economic justification for cross-border movement argued by Stephen, then, would seemingly evaporate, as all Member States may tend to become more efficient.  On the other hand, levelling the playing field amongst Member States should serve to stimulate competition, which may in turn give rise to trans-national mergers and increased mobility of European lawyers over the long term.  Due to the fundamental and historic changes at the policy level at the moment, it is difficult to prognosticate the eventual outcome involved in the marriage of the new competition applications to the Lawyers' Establishment Directive.  Assuredly, though, there will be a major change in the market for legal services in the European Community in the years to come.

The EC overcame substantial practical barriers when it developed its multi-jurisdictional practice rules for European lawyers.  Whether the Lawyers' Establishment Directive, standing alone, will remarkably alter the market and the practice of law in the European Community is a matter of debate and speculation.  Yet perhaps its significance lies beyond numbers and theories.  Single Market Commissioner Mario Monti, upon adoption of the Directive, noted that it "marks an important step forward both for lawyers themselves, who will find it much easier to practice in other Member States, and for their clients, especially the many businesses and citizens who need a lawyer in another Member State.  The Directive is proof that we can make progress in the field of recognition of qualifications on the basis of mutual trust between Member States ....".  This progress and accord amongst the Member States might underscore the true and veritable impact of the Lawyers' Establishment Directive on the market for legal services in the European Union, and indeed, may have proven a compelling catalyst in the policy of regulatory reform in the legal profession.

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7. Endnotes

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