Albert A. Foer
The American Antitrust Institute is an independent, non-profit organization dedicated to supporting the mission of the nation's antitrust laws.1 We are pleased to present our perspective on the issues before the Commission on Multidisciplinary Practice (MDP).
It is useful to put these issues into the framework of larger trends that have affected the antitrust community in recent years. These trends include: deregulation, the breakdown of traditional boundaries separating industries, and internationalization of business. We will also discuss the relationship between consumer protection, competition, and self-regulation, and will raise several larger questions about the role of competition in the evolution toward MDP.
The MDP and Deregulation
The movement toward deregulation in this country dates to the mid-1970's. It picked up speed in the 1980's and became a theme in many other nations as well, as the virtues of competitive markets became more widely accepted.2 At the same time, the learned professions, for many years thought of as separate from the general stream of commerce, became increasingly viewed as having a strong commercial element mixed in with the special service characteristics that were traditionally emphasized by the professions themselves.3 The codes of ethics that had been crafted by the various learned professions came to be seen as having a dual nature - a protection for vulnerable consumers, but also in many cases a protection for the economic well-being of the profession. One facet of the deregulation movement was a series of legal challenges to the anticompetitive aspects of ethical codes. In response, the U.S. Supreme Court made it clear that the learned professions were subject to the antitrust laws.4
The landmark case clarifying that the learned professions are "trades" subject to the antitrust laws is Goldfarb v. Virginia State Bar5 , holding that a minimum fee schedule for lawyers enforced by a state bar association was an illegal price fixing agreement in violation of Section 1 of the Sherman Act. Later cases often focused on whether actions of professional associations were per se illegal or subject to rule of reason analysis, but there has been no questioning of the relevancy of antitrust to the learned professions in general or to the legal profession in particular.6 If, therefore, the ABA or any state Bar association adopts an ethical standard or other pattern of conduct that lessens competition, it may be subject to antitrust penalties.7 In this light, it is important to determine whether it would be anticompetitive for the Bar to maintain a position that may constrain the emergence of new business mechanisms for delivering professional services.
While the learned professions have not been considered "regulated" in the same sense that transportation, energy, and banking were once regulated,8 neither have they been "unregulated" in the sense that is familiar to most industries in America. Rather, operating within legislative frameworks, the professions themselves have been delegated substantial authority for self-regulation.9 Today, in the context of the deregulation which has brought other important industries out from the shadow of government regulation and into the marketplace of open competition, we are considering the extent to which the learned professions of law and accountancy, in particular, should also be opened up to increased competition.
There are parallels to earlier efforts at deregulation. First, a common thread in the history of deregulation has been the emergence of similar, but unregulated services on the fringe of the regulated market, presenting regulators with the claim (both from the regulated and the unregulated sectors) that the playing field was not level. One solution has been to increase the sphere of regulation. This is what happened years ago when trucking began to compete with the regulated railroad industry. Trucking became subject to regulation by the Interstate Commerce Commission. Another approach has been to recognize that the world is changing, and that the regulated industry should be allowed to compete more evenly with the unregulated sector that has emerged. This is largely the case with the delivery of letters and packages and with long distance telecommunications.
With regard to legal services, it is clear that a wide range of services once thought of as provided only by lawyers in their role as practicing lawyers are now provided by non-lawyers or by lawyers in non-traditional settings. The Bar can try to treat these competitors as the Interstate Commerce Commission treated truckers - bring them under the regulatory umbrella. But this would probably be beyond the Bar's power, would certainly flow against the tide of deregulation and would not serve the public interest.11
Changes on the demand side have been described in many of the statements submitted to the Commission. They include the rapid growth of international business and corporations that operate on the global playing field. Such clients face complicated questions whose answers often require the integration (and possibly the rapid integration) of various types of expertise across traditional professional lines. In a global environment, professional service firms that can provide the integrated services may have a major competitive advantage over those which -as a result of professions' self-regulation-cannot. Self-regulation that falls too far out of step with market conditions will likely prove suicidal.
Deregulation does not occur when everyone is happy with the existing situation. Airline deregulation, for example, responded to consumer awareness that air transportation in unregulated markets (such as intra-state travel in California) was much less expensive than in regulated markets. Part of the demand for more competition in professional services is fed by recognition that additional competition will probably result in lower prices. In a world economy where competition plays an ever-increasing role, the price of professional services necessarily becomes more important to business clients.
Consumer Protection, Competition, and Self-Regulation
Finally, it is important to note that deregulation has generally been accompanied by some degree of continued regulation, albeit pared down to protect consumers and deal with foreseeable problems. In air transportation, the Civil Aeronautics Board was abolished, but the Department of Transportation continues to oversee safety and otherwise to protect consumers. Similarly, the self-regulation of law and accountancy should not be abolished, but rather changed. The protection of consumers from conflicts of interest, misrepresentation, inadequate representation, and abuse of confidentiality all remain important missions of self-regulation. In approaching the reformation that is required, the learned professions must continually remind themselves and the public that the only legitimate goal is protection of consumers. Protection against competition would be illegitimate and indeed illegal.
We believe that consumer protection and antitrust are both needed to assure that a market economy can continue to operate effectively:
The antitrust laws are intended to ensure that the marketplace remains competitive, so that a meaningful range of options is made available to consumers, unimpaired by practices such as price fixing or anticompetitive mergers. The consumer protection laws are then intended to ensure that consumers can choose effectively from among those options, with their critical faculties unimpaired by such violations as deceptions or the withholding of material information.11
We suggest that the Bar should move away from its focus on who owns what and who pays whom, and instead focus on assuring that consumers of legal services are provided with a wider range of options among which they can choose effectively. Self-regulation of the profession should focus on what the professional does vis a vis the client, rather than on the institutional setting.
This is not to say that all institutional settings are equally conducive to ethical behavior. However, in a market, it should be up to consumers to choose intelligently among options. Today a consumer makes trade-offs on everything from the quality of the automobile she drives to the quality of the medical plan she subscribes to. Government provides minimum thresholds of quality in many circumstances, but it is up to the consumer to decide how much to spend for above-threshold quality. The same paradigm should apply in law and accounting. For those clients who, with full disclosure of the relevant information, prefer to retain a multidisciplinary practice, that should be their choice to make. For those who feel that, despite the ethical requirements that apply to professionals within an MDP, they will get better service or more confidentiality from a lawyers-only group or an accountants-only group, that should be their choice.12
Additional Competition Concerns
As we view the emergence of the MDP, it is important to be sure that nothing is done to limit MDPs to the largest accounting firms. The fact that there is now a Big Five, to which most public corporations turn for auditing, is itself disturbing. An oligopoly structure of this nature located at the gateway to capital resources may not be conducive to an adequate level of competition. We believe the path should be open for the creation of MDPs that may eventually grow out of law firms, financial institutions, or even economic consulting firms. By affiliating with or even absorbing accounting firms, these powerful organizations could eventually enter into direct competition with the Big Five, thereby offering a wider range of professional service options to clients.
But there are other potential antitrust issues in addition to market entry. The existence of firewalls within the Big Five or MDPs may or may not be sufficient to protect clients from the unwanted sharing of confidential information within the accounting firm. Our understanding is that there have been only a few reported instances of firewalls being breached within accounting firms. Whether this is true is an empirical issue that could be determined by a survey of accounting firm clients and a review of complaints filed with accounting authorities. If firewalls in accounting firms have indeed proven effective, this will give us more confidence in our ability to minimize confidentiality problems within MDPs.
Another, perhaps more important question from a public perspective, is whether internal firewalls will be sufficient to protect the public against sharing competitively sensitive data within an MDP for purposes of collusion or coordination. This question can arise within a law firm today because conflict of interest standards would not ordinarily preclude situations in which competitors are represented by the same firm, unless their particular interests being represented are adverse. It would be even more of a problem, at least theoretically, in a Big Five accounting firm or in a MDP that more routinely takes on clients who compete with one another. Two professionals in a MDP who represent competing clients and thus have access to important proprietary financial and strategic information could -on behalf of their clients-share information that would facilitate coordinated activity. Although quite likely a violation of the antitrust laws, this form of collusion could be executed in ways that would be extremely difficult to discover, much less prove.
How might the Bar and society protect against this? Indeed, how might the Bar, lacking jurisdiction over MDPs, assure that attorneys uphold the best values and traditions of the profession? It may be possible to create new institutions for the self-regulation of MDPs. For example, there could be brought into existence a multidisciplinary body that establishes a code of ethics specifically applicable to MDPs, supplementing the codes that already apply to existing professions. Such a code could cover the issues of conflicts, misrepresentation, and confidentiality, and could also include standards that would help assure compliance with the antitrust laws within a MDP. The drawback to this approach is that because there are so many professions that could be involved, some of which have no self-regulation, it may prove too difficult to operationalize. An alternative would be to create this system by federal law.
A less encompassing but more appropriate first step would be for the Bar to establish that lawyers would operate within MDPs as a law department, and that the department itself would have to be licensed. Licensing would be dependent upon training in ethics, conflicts, and antitrust, and the department would be subject to periodic audits. A principal drawback to this approach would be that it could disadvantage small MDPs, which would find it impractical to comply. To deal with this criticism, the Bar could exempt small MDPs or have reduced requirements that are tailored to smaller organizations.
To summarize, we urge the Bar to look at the emergence of MDPs as an opportunity to serve segments of the consuming public through new competitive mechanisms that provide additional options for the delivery of professional services. A creative, pro-consumer approach toward solving the potential problems of conflicts, confidentiality, and misrepresentation can be consistent with the evolution toward new institutions.
1 Albert A. Foer is President of the American Antitrust Institute. The AAI was founded in 1998. It is described on the Internet at www.antitrustinstitute.org and in Albert A. Foer and Robert H. Lande, "A New Foundation for Antitrust Law," The Legal Times, Nov. 2, 1998. 2 Competition is expected to: (a) set prices at or near marginal costs, thereby benefiting consumers directly and furnishing the signals for society's efficient allocation and use of resources; (b) generate a variety of options for consumers, so that the consumer has a reasonable ability to make choices in the market place; (c) motivate entrepreneurs and investors to start and grow businesses and to undertake the risk of innovation; and finally, (d) contribute to a democratic polity, by reflecting a diversity of economic power bases. 3 See, e.g., the essays in Roger D. Blair and Stephen Rubin (ed.), Regulating the Professions (Lexington, MA: Lexington Books, 1980). 4 This history is recounted in the Statement of the Section of Antitrust Law presented to this Commission. 5 421 U.S. 773 (1975). 6 See National Society of Professional Engineers v. United States, 435 U.S. 679 (1978) (engineers' ethical ban on bidding practices held anticompetitive under rule of reason analysis); Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982) (doctors' maximum fee schedule on insurance reimbursement plans per se illegal); FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986) (concerted refusal by dentists to provide x-rays to insurance companies for reimbursement approval illegal under rule of reason analysis); FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990) (agreement of lawyers to withhold legal services in order to gain increased rate of payment, held per se illegal). 7 Whether the conduct would be deemed subject to per se or rule of reason treatment would be an important determination with respect to the bar's probabilities of defending itself successfully. Two other considerations of importance would be whether a defense is possible under the state action doctrine (see Bates v. State Bar of Arizona, 433 U.S. 350 (1977) ) or the Noerr-Pennington doctrine (see Eastern Railroad Presidents Conference v. Noerr Motor Freight Inc., 315 U.S. 127 (1961) and United Mine Workers of America v. Pennington, 381 U.S. 657 (1965) ). 8 Those industries were directly overseen by governmental agencies that typically controlled market entry and exit and the terms and conditions of trade. 9 Regulation of the learned professions has typically focused on restricting entry into the market by defining the profession's niche and establishing the qualifications for holding oneself out as a professional, and on preventing fraud and otherwise protecting consumers. 10 Another parallel: deregulation responded to changes in technology and communications which both redefined markets and made competition more feasible. The current effort to deregulate electricity, for example, derives in large part from a reduction in the economies of scale of electricity generation. One implication is that the generation level of the electricity industry no longer needs to be treated as if it were a natural monopoly. The learned professions are facing changes in technology and communications that make very large multidisciplinary professional service organizations much easier to manage at the same time that they become more in demand. 11 Neil W. Averitt and Robert H. Lande, "Consumer Sovereignty: A Unified Theory of Antitrust and Consumer Protection Law," 65 Antitrust Law Journal 713, 714 (1997). 12 The degree of disclosure necessary to assure ethical conduct may vary to some extent in accordance with the sophistication of the consumers involved. A large corporation is probably better able to decide whether it wants to risk some type of professional conflict than a small business or a consumer.