My first post discussed one primary impediment to deregulating all the lawyers – which is the current system of legal regulation of lawyers.   Even if one agrees that deregulating all the lawyers may be the ultimate goal, this still leaves the question of how best to achieve this result.  Deregulating all the lawyers may not be the first thing we do.  One plausible candidate is fixing intellectual property protection for law.

This view is based upon the assumption that the best way to achieve the goal of deregulating all the lawyers is to create incentives for entrepreneurs to produce new and innovative legal information products.  As noted in my earlier post, innovation and entry by entrepreneurs into the legal information market can be a powerful force that weakens of the economic and political power of those whose interests are aligned with maintaining the current regulatory regime.  One result of this process is that deregulation becomes more likely.   This dynamic is why I love Virginia wine, even though I never drink it.

Creating incentives for entrepreneurs to innovate and enter requires a mechanism that allows them to appropriate a return to their investments.  Intellectual property rights can be an essential mechanism through which this occurs. Indeed, intellectual property rights can effectively protect many innovative legal information products.  However, in several important cases, legal information is subject to what can be described as a form of legal exceptionalism that results in weakened intellectual property rights.  In general, the availability and scope of intellectual property rights are limited so that the costs of restricting the use of already produced information do not exceed the benefits associated with the marginal incentives to create the information.   Intellectual property rights for law and related works seem to be further limited because of heightened concerns regarding use costs that are specific to legal information.

Perhaps the best example of legal exceptionalism is the legal treatment of the privately produced model building codes in Veeck v. SBCCI, 293 F.3d 791 (5th Cir. 2002, en banc).  In this case, Veeck posted SBCCI’s copyrighted model building codes on a website in violation of a license agreement that prohibited copying or distributing the work. The court held that the copyrighted code text entered the public domain when adopted as law by several local jurisdictions.  Through SBCCI retained copyrights to its model codes, they could not enforce them against Veeck, who identified the posted SBCCI model codes as the building codes of two municipalities.

Current copyright law precludes copyright protection for any work “prepared by an officer or employee of the United States Government as part of that person’s official duties”.  Under this definition, court opinions written by federal judges, congressional bills and statutes, and federal regulations are ineligible for copyright protection.  Courts have applied similar rules to state legal materials, including state judicial opinions, statutes, and regulations.   These rules assume that the use costs of intellectual property protection outweigh gains from improved private incentives to produce model laws.   Copyright law does not explicitly preclude copyright for model codes and other privately produced laws.  However, the court’s holding, by elevating due process concerns with public access to the law over providing economic incentives to produce model codes, effectively extends this prohibition to privately produced model codes and laws that have been adopted as law.

Protecting due process concerns does not require precluding copyright protection for privately produced works adopted as law.  Broad fair use privileges for those bound by the laws or codes could address these concerns while simultaneously protecting model codes from appropriation by competing commercial interests and other jurisdictions.   Restrictive licenses can also serve to appropriately balance the use-creation tradeoff by clarifying parties’ expectations regarding permitted uses and pricing of the copyrighted model law.   As part of these licenses, jurisdictions that adopt privately produced and copyrighted model codes could alleviate due process concerns by authorizing use by citizens bound by the law while preventing reproduction for other purposes.  Courts could require similar licenses to be granted by those wishing to file briefs and other potentially copyrightable documents.

The court’s holding in Veeck unnecessarily limits the ability to use these mechanisms by effectively eliminating copyright protection rather than retaining the protection and using the mechanisms discussed above that would permit limited public use and mitigate any due process concerns.  In doing so, the courts holding, along with other similar forms of legal exceptionalism unnecessarily weakens incentives for legal innovation and can result in less pressure to deregulate all the lawyers.

As we approach the end of this Symposium, I am struck by how much consensus exists on this subject. Of course, we are not conducting this exercise under the auspices of the ABA. Nevertheless, there is sufficient intellectual backing for a major push to begin the deregulation of legal services. Despite warnings that this is a bad time to consider such action, I think that there are reasons why this is a very good time to proceed. Contrary to popular wisdom, the number of employed lawyers has expanded through the recession, if one is to believe the results of the CPS household survey. But the employment in legal services firms has declined according to the BLS establishment survey. This is consistent with Larry Ribstein’s view on the decline of Big Law. The number of lawyers is growing slowly, but they are not having as much fun as before and are therefore less likely to come to the defense of their guild.

Read the full piece here.

It’s been a great symposium.  Many thanks to all of our outstanding contributors!  This Symposium demonstrated blogging’s potential for productive intellectual discussion of an important current topic.  We expect to have more such virtual conferences.

Read the full piece here.

Yale’s George Priest authored an op-ed in the WSJ on September 6th in which he raised a few of the arguments discussed here at TOTM over the past several weeks regarding the proposed AT&T / T-Mobile merger.  For example, we’ve focused upon the tension between the DOJ complaint’s theories of competitive harm (coordinated and unilateral effects) and the reaction of Sprint’s stock price.  Along these lines, Priest writes:

If the acquisition would lead to increased prices and lower quality products as the Justice Department has claimed, Sprint would be better off after the acquisition. Sprint would be able to add subscribers, not lose them, because of AT&T’s higher prices and lower quality. Sprint would oppose the acquisition—as it has—only if it thought that the merger would put it in a worse position by increasing the competitive pressures that it already faces.

The market—though not the Obama administration—understands this point. On the day that the Justice Department announced its opposition to the acquisition, Sprint’s share price rose 5.9%, reflecting investors’ belief that Sprint will be in a better competitive position without the acquisition.

As we’ve pointed out, Sprint’s stock price reaction is simply not consistent with the DOJ theories.  To find a theory of harm more consistent with the market reaction, critics of the merger have abandoned the DOJ’s theories in favor for a new one — that the merger will facilitate future exclusion of rivals from access to critical inputs like backhaul or handsets.

The AAI’s Rick Brunell makes this point in our comments.  The basic point is that under an exclusion theory Sprint benefits from the challenge to the merger because it prevents its future exclusion.   Brunell also argued in that comment that Verizon’s stock price movement supported exclusion theories of the merger, pointing out that its stock price fell 1.2% (with a .7% drop in the S&P 500) upon announcement of the challenge.

We challenged the economic logic of Brunell’s claim that Verizon’s non-reaction was consistent with exclusionary theories in a follow up post.  Put simply, assuming the merger will result in successful exclusion of rivals in the future, Verizon would be a gigantic winner from its successful completion:

The relevant economics here are not limited to the possibility that post-merger AT&T would successfully exclude Verizon.  Think about it: both Verizon and the post-merger firm would benefit from the exclusionary efforts and reduced competition.  However, Verizon would stand to gain even more!  After all, it isn’t paying the $39 billion purchase price for the acquisition (or any of the other costs of implementing an expensive exclusion campaign).  Thus, an announcement to block the would-be exclusionary merger — the one that would allow Verizon to outsource the exclusion of its rivals to AT&T on the cheap — wouldn’t happen.  Verizon stock should fall relative to the market in response to this lost opportunity.  The unilateral and coordinated effects theories in the DOJ complaint are at significant tension with the stock market reactions of firms like Sprint (and its affiliated venture, Clearwire).  The exclusion theory predicts a large decrease in stock price for Verizon with the announcement.  None of these comfortably fit the facts.  Verizon more or less tracks the S&P with a slight drop.  What about the smaller carriers?  Take a look at the chart.  MetroPCS barely moved relative to the market (in fact, may have increased relative to the market over the relevant time period); Leap is down a bit more than the market.  Here, with the smaller carriers there is not a lot of movement in any direction.  But, contra NB’s comment (“Verizon, a larger and far more significant competitor, had its stock drop sharply in that same period you show Sprint “surging”. MetroPCS’s stock also dropped.”), Verizon’s small fall relative to the market is nowhere near the magnitude of the positive effect on Sprint and Clearwire.

In other words, contra Brunell and other proponents of the exclusion theory, its not just that Verizon has “nothing to fear” from exclusion but that it has much to gain from it.  If the merger is likely to exclude Verizon’s rivals at a price tag of at least $39 billion paid with its chief competitor’s dollars, the announcement of a challenge should have resulted in a substantial loss for Verizon not one barely detectable beyond market trends. Excluding rivals and gaining market power with other people’s money is good work if you can get it.  If proponents of the exclusionary theory believe exclusion is worth $39 billion for AT&T and is the purpose of the merger, surely they also believe it is worth something quite significant to Verizon who would reap the benefits of exclusion and get it for free.

Unfortunately, AAI (through Brunell) ignores this point in a Letter to the Editor to the WSJ filed in response to Priest’s op-ed:

Mr. Priest ignores the fact that Sprint would be harmed if the merger enhanced AT&T’s (and Verizon’s) ability to exclude Sprint from the market (or raise its costs) through increased control over the best handsets, roaming and backhaul services that Sprint needs to compete effectively in the market, as Sprint alleges in its own lawsuit challenging the merger. Sprint also benefits, from the merger’s demise, as a potential acquirer of T-Mobile.

Mr. Priest also ignores the stock-price movement of Verizon, AT&T’s chief rival, which has no reason to fear exclusion from the market, and would be harmed the most if the merger made AT&T a more efficient competitor. In the two days following the merger announcement in March, Verizon’s stock price jumped 3.1% (compared to the S&P 500’s increase of only 1.1%), while in the two days after the Justice Department’s suit was announced, Verizon’s stock fell by 1.2% (compared to a .7% drop in the S&P 500). Verizon has not opposed the merger.

Event studies of stock-price movements are notoriously inconclusive. However, the data here are entirely consistent with investors’ expectation that the merger will result in less price and quality competition in the industry and higher costs for AT&T’s smaller rivals, all to the detriment of consumers.

If you are keeping score at home: Priest 1  –  AAI 0.  Once again, the exclusion theories don’t seem to hold up to these data.  On the other hand, the DOJ theories are embarrassingly confronted by the response of the rival’ stock price surging upon the announcement of a challenge.  For what its worth, I agree with Brunell that event studies are not dispositive of a merger’s likely effects — though query what data available to predict merger outcomes are?  But event studies and stock-price movements produce valuable information.  In this case, financial market responses cut against the the exclusionary theory favored by AAI and Sprint and the conventional DOJ theories.

Filed under: antitrust, doj, economics, exclusionary conduct, merger guidelines, mergers & acquisitions, telecommunications, wireless

My previous post in this symposium argued that deregulation is upon us.  Here I’ll discuss what that could entail.

The legal information expert:  I summoned up the specter of computers practicing law.  There is in fact no doubt that computers can practice law as that term is defined by some courts and regulators: giving personalized legal advice.  Clearly computers already can process a lot of data and come to fairly accurate determinations of many types of legal questions.

This does not, however, mean that computers can replace lawyers.  It means that lawyers will have to learn to work with technology.  The “legal information experts” of the future will have to provide the human insights about the world of law that computers must have to do their jobs.  They must also make the choices that computers can’t. For example, what types of contractual structures work best with the new types of arrangements that arise in a constantly changing business world?  What choices should individual clients make among the alternatives that a computer provides?

This is good news for lawyers.  Lawyers can focus on the more sophisticated tasks that require human ingenuity as computers take over the routine.

The policy architect. Freed by technology from routine, lawyers can increase their involvement in designing laws and other legal structures.  Computers may be great historians but they are not yet equipped to make judgments about what the future should look like.  Lawyers need not leave lawmaking to legislators, but can participate in a private market for law. Kobayashi and I discuss in a recent paper the potential for such private lawmaking and the changes in the law that could make it happen.

The death of the law firm.  Although I’ve written the obituary for Big Law, regulation continues to sustain a semblance of the big law structure.  These firms are sustained by rules restricting referral fees and non-lawyer financing of firms engaged in the practice of law.  At a more basic level, law firms address clients’ costs of obtaining information about lawyer quality.  Law firms presumably can help by monitoring, mentoring and screening lawyers, so that the client just needs to choose a firm with a good reputation.  But as big law weakens, so does its ability to provide these services.  More importantly, the markets and technologies discussed in my previous post can step in and solve clients’ information asymmetry better than can today’s law firms.

The future of licensing.  It’s unlikely that lawyer licensing will completely die.  It will be hard to reconcile complete deregulation of law practice with continued licensing of doctors, tour guides and horse dentists.   But there’s an important difference between lawyers and these other professions:  the prodigiously powerful lawyer interest group has managed to restrict access to the extremely broad field of human activity called the “practice of law.”  This regulatory monolith is bound to fracture.

It’s not clear what will remain.  Certain types of services to consumers may require a license, on the theory that ordinary consumers can’t fully protect themselves from lemons. Also, courts may insist that licensed lawyers conserve public courts’ scarce resources.  Licensing may reflect something like the traditional British distinction between barristers and solicitors.

Another approach to licensing may be to change how it is done.  Lawyers now must be licensed in every state where they practice law.  This enables states to erect regulatory walls that impede national law practice.  It also forces professional rules to be uniform in order to accommodate our mobile and global society.

A better option, similar to a system I’ve suggested for law firm regulation, is a “driver’s license” approach, where lawyers get a license in the state of their principal residence which they can use to practice anywhere in the country. Unlike the internal affairs doctrine for corporations, states could issue licenses only to their residents.  Because lawyers are likely to practice mainly where they live, this helps ensure that the licensing jurisdictions will have a stake in good regulation and prevent a potential race to the bottom.  At the same time, the drivers’ license approach would enable more jurisdictional competition for lawyer regulation than we have today, and thus help pave the way for the developments discussed in my previous post.

Let me start with a couple of stories.

Story 1.  I’m an economist, but I got a chance to be like a real lawyer in filing an amicus brief recently (Barnes v. Indiana– here’s our brief).  We had only two weeks to organize, write, and file because of an oddity of the case (a petitition for the Indiana Supreme Case to rehear after an opinion that surprised everyone with its breadth). We had legal counsel, but pro bono, without paralegal help, and by email. It came down to the wire in writing and getting final approval from amici, so he suggested that I do the physical filing. I took the brief to Kinko’s around 9 p.m., but discovered they couldn’t do the binding by 11, and I needed to drive an hour get to the Indianapolis Statehouse and file by midnight. I went to my office instead, and did simple staple binding with green cardstock, which ran out so I used white cardstock for the back covers and made it to the Rotunda at 11:50. Alas, our counsel shortly got a notice that the back covers needed to be green too. But the Court Clerk was merciful, and allowed us to slip in replacement briefs without a formal motion.

Read the full piece here.

As a libertarian, I mostly concur in the critique of occupational licensure made famous by (among others) Milton Friedman. For the most part, licensure is a consumer-unfriendly affair that protects incumbent practitioners from competition, locks out promising new methods of service provision, and interferes with voluntary dealings between professional and client. It is dubious enough as applied to occupational groups such as doctors and plumbers, and downright ridiculous (as the Institute for Justice keeps reminding us) as applied to groups like cosmetologists, florists and interior designers.

Read the full piece here.

Fifteen years ago I published an article urging that non-lawyers be allowed to finance the cost of legal representation in return for a percentage of a judgment or settlement if the plaintiff is successful.    Common law prohibitions on champerty were widely believed at the time to prohibit third parties from buying an interest in litigation.  Few such litigation funding arrangements were available for plaintiffs, and lawyers perhaps predictably looked upon them with disfavor.   See Litigating on a Contingency:  A Monopoly of Champions or a Market for Champerty?, 70 Chicago-Kent Law Review 625-697 (1995) (Symposium on Fee Shifting).

Read the full piece here.

Last month the New York Times ran an editorial with the headline “Addressing the Justice Gap,” observing that “the poor need representation and thousands of law graduates need work.”  The piece proposed several solutions, but notably absent was the reform most likely to deliver legal services to those in need and to create jobs for unemployed lawyers:  corporations should be able to own law practices and provide legal representation.  It’s not only a matter of managing the justice gap in America in the face of an enduring economic recession and increased global competition; it’s also a matter of First Amendment concern.

Read the full piece here.