referral fees – the business of access to justice

Referral fees – the business of accessto justicelest_214 109..131

Andrew Higgins*Career Development Fellow in Civil Procedure, University of Oxford

The paper examines the controversial issue of referral fees for personal injury claims.It looks at the function of referral fees in the civil justice system, their relationship to theguarantees of access to court and the right to seek legal assistance in ECHR Art 6, andthe debate about promoting access to justice or a litigious society. It examines theexperience of the referral fees market in England and Wales, where the costs of referralshave risen dramatically and there is concern that referrers are auctioning their custom-ers to the highest bidder rather than helping them find competent lawyers. Sir RupertJackson recommended banning referral fees in his report on the costs of civil litigation,and the Government has announced it will implement this recommendation. The paperconsiders the potential effects of a ban on competition in the legal services market andits compatibility with UK and EU competition law. The paper argues that a combinationof better regulation of the industry and proper regulation of costs rules is a better andmore proportionate way of controlling legal costs and the quality of legal services thanan outright ban. While referral fees have not delivered all the benefits one would expectfrom a for-profit independent referrals service, they can help people obtain informationabout their legal rights, and competent lawyers to enforce them. This service is par-ticularly valuable given that the state has substantially cut public funding of the civiljustice system in recent years.

INTRODUCTION

In his report on the costs of civil litigation in England and Wales Sir Rupert Jacksonidentified referral fees as a cause of high and disproportionate costs. ‘Referral fees’ arepayments made by solicitors to third parties for client referrals or introductions inthe hope of securing legal work from the prospective client. The third parties can beinsurers, unions or, as is increasingly common, dedicated claims management com-panies.1 Jackson concluded that referral fees have ‘not proved to be of benefit eitherto claimants or to the providers of legal services’ in personal injury claims, andrecommended a total ban.2 The Government announced in September 2011 that itwould adopt this recommendation, although it is yet to provide details as to what theban would cover, or how it would be enforced.3

* Email: [email protected]. The author would like to thank Adrian Zuckerman,Samuel Issacharaoff and Timo Idema for comments on this paper and this subject. The usualdisclaimers apply.1. Hereafter referred to as claims management providers (‘CMPs’).2. R Jackson ‘Review of civil litigation costs: final report’ (December 2009) ch 20 [4.16],[5.1].3. Ministry of Justice, Curbing Compensation Culture: Government to Ban Referral Fees,Press Release, 9 September 2011.

Legal Studies, Vol. 32 No. 1, March 2012, pp. 109–131DOI: 10.1111/j.1748-121X.2011.00214.x

© 2011 The Author. Legal Studies © 2011 The Society of Legal Scholars. Published by Blackwell Publishing, 9600Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA

While referral fees might appear to be a specialised subject at first blush, it alsoraises important questions about the purpose and funding of the civil justice system.One cannot decide whether people should be able to charge lawyers a fee for referringprospective clients without first considering how the law enforcement process works:how people acquire information about their legal rights and enforce them. In turn thisrequires consideration of the guarantees of legal assistance, and the right of access tocourt, under ECHR Art 6. Similarly, any restrictions on the payment of referral feesraise issues about competition for legal services and could potentially breachcompetition law.

The purpose of this paper is to assess the function of referral fees and their effecton the civil justice system. It then examines whether a ban on referral fees would becompatible with European and UK competition law.

Part I outlines the legal, economic and political context in which referral feesoperate, and how that context has shaped the debate on the value of referral fees. Itlooks at Jackson’s review of the costs and funding of civil litigation and the Govern-ment’s response. It also provides a brief history of the claims management industry inthe UK.

Part II looks at the function of referral fees in the civil justice system. In theory, areferral fees market provides clients with information about legal services so that aperson may obtain competent legal assistance and enforce their rights. Referrers areessentially arbitrageurs who smooth the problem of how to match lawyers capable ofhandling the matter well with clients who do not know how to search the legal marketon their own. Permitting referral fees is one way of helping people get access to legalassistance and to court, as guaranteed by ECHR Art 6.

Part III looks at the track record of CMPs in England. There is a general belief, andsome research, indicating that CMPs have helped prospective claimants access thejustice system. One would also expect that a private referral fees market would be anefficient means of providing information about legal services and connecting prospec-tive claimants with suitable counsel. However, efficiency gains have been relativelylimited, and there are concerns that CMPs are often auctioning off prospective claim-ants to the highest bidder. This paper investigates the reasons why CMPs may not beproviding a cost effective and quality referral service, including the conduct of CMPs,costs rules and the nature of the legal services market.

Part IV examines whether a ban on referral fees would be compatible with UKand EU competition law, specifically s 2 of the Competition Act 1998 and Treaty onthe Functioning of the European Union (TFEU) Art 101. The European Court ofJustice’s (ECJ’s) decisions on restrictions on competition in the legal profession inWouters (concerning a Dutch law prohibiting multi-disciplinary partnerships) andCipolla (concerning an Italian law setting maximum and minimum fees for a law-yer’s services) give some guidance as to how the court might deal with a ban. A banthat restricts competition will be justified only to the extent that it is necessary toachieve a legitimate public interest. The key question is whether a total ban isnecessary and proportionate to the public interest in controlling the cost and qualityof legal services.

The paper argues that a combination of better regulation of the industry, especiallyin the information given to prospective claimants about referral fees, and capping theamount that can be recovered for referral fees from an opponent, would be moreproportionate, and just as effective as a total ban. Such a change would also maintainthe benefits of referral fees and make them work better in practice. These reformspartly mirror the Legal Services Board’s recommendations on referral fees in May

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2011, when it stated that while better regulation was needed, they would not askapproved regulators to consider an outright ban.4

PART I – THE BROADER PICTURE

Referral fees are just one element in the system of funding and delivery of civil justice.Jackson’s review of the costs of civil litigation in 2009 was the biggest and mostimportant since Lord Woolf’s review of the civil justice system in the mid 1990swhich heralded in ‘a new procedural code’ in 1999.5 Jackson’s review was promptedby concerns that litigation costs were continuing to rise, were sometimes dispropor-tionate to the interests involved in a dispute, and were impeding access to justice.6 Thecost rules relating to conditional fee agreements, especially the capacity for lawyers tocharge their clients a success fee of up to 100% on their base costs and recover this feefrom the losing party, had also been heavily criticised as unfair to defendants, and inturn taxpayers and insurance policy holders. These problems can be traced back to amajor shift in the funding of the system in the last 15 years.

From the 1950s most civil claims were funded by the state through legal aid.However, by the 1990s it was becoming increasingly clear that the legal aid systemwas unsustainable. While it was the most comprehensive legal aid system in the worldit was also the most expensive. The volume of cases that were funded increasedsteadily as did the average costs of each claim, leading to an exponential increase inthe costs of the scheme.7 In the late 1990s the Government concluded that thereneeded to be a major shift from public funding to private funding of civil claims. Thefinancial eligibility criteria to receive legal aid were progressively tightened. Only36% of the population is currently eligible for legal aid compared to 80% of thepopulation when the scheme was first established.8 The Access to Justice Act 1999also substantially reduced the types of claims for which legal aid funding was nor-mally available. Personal injury claims (apart from clinical negligence) wereexcluded, although individual claims could still be funded on an exceptional basis.9

The consequence of reducing the availability of legal aid was that unless therewere sufficient incentives for lawyers to take on cases for persons of moderatemeans, many such persons would be denied access to justice even if they had a strongclaim. Such incentives were available to lawyers through conditional fee agreements,which allowed solicitors to forego their fees in the event their client loses and chargea premium or ‘success fee’ of up to 100% of their base costs if the client wins.10

While such a system provided substantial incentives for lawyers to take on meritoriouscases, it also meant that successful claimants would end up with substantially lesscompensation after they paid their lawyer’s fees.

The prospect that successful personal injury claimants would not have sufficientcompensation to fund the care and treatment they may require for their injuries was

4. Legal Studies Board (LSB) Referral Fees, Referral Arrangements and Fee Sharing:Decision Document (May 2011) p 6.5. CPR 1.1.6. R Jackson ‘Review of civil litigation costs: interim report’ (May 2009) [1.2]–[1.3].7. Ibid, ch 12 [1.5].8. Jackson, above n 2, ch 7 [3.1].9. Sch 2, para 1; s 6.8(b).10. Courts and Legal Services Act 1990, s 58, which came into force in 1995.

Referral fees – the business of access to justice 111


politically unpalatable. So instead of shifting the burden of funding access to justicefrom taxpayers to successful claimants, the Government opted to shift the fundingburden to unsuccessful defendants.11 This was achieved by making the success fee ina conditional fee agreement (CFA) recoverable from the losing party. The claimantcould also recover the premium for litigation costs insurance, which claimants typi-cally obtained ‘after the event’ to protect themselves against an adverse costs order iftheir claim was unsuccessful.12 Equally importantly, CFAs were available to any partyregardless of their means,13 and available in any proceedings for resolving disputesexcluding criminal and family law matters.14

The combined effect of these reforms was a ‘scandalous’ increase in claimantlawyers’ costs, which were usually passed on to defendants.15 Because clients underCFAs were not liable for their own legal costs, win or lose, they had no interest inkeeping their lawyer’s costs down. Furthermore, because the overwhelming majorityof personal injury cases are successful, it was the defendant who ultimately paid theclaimant lawyer’s legal costs. Yet defendants have limited capacity to control theclaimant’s costs.16

The perverse incentives created by CFAs and the unfairness it causes to defendants(who could have their costs liability doubled at the stroke of someone else’s pen), ledthe ECtHR to rule that the system breached the right to freedom of expression in MGNv UK.17 In that case the super claimant, Naomi Campbell, sued the Daily Mirror forbreach of privacy after the paper published a photograph of her leaving a drugrehabilitation centre. Although Campbell was a woman of substantial means, sheentered into an agreement with her lawyers to conduct the case on a CFA with a 95%success fee for her solicitors and 100% for her counsel. The ECtHR upheld the Houseof Lords ruling that the paper had breached Naomi Campbell’s right to privacy.18

However the ECtHR went on to hold that the CFA system clearly interfered with thenewspaper’s right to free expression under ECHR Art 10. Relying heavily on Jack-son’s critique of the system, it went on to find that the depth and nature of the flawsof the system – including the chilling effect on defendants – were such that themeasures were not proportionate to the goal of increasing access to justice, andtherefore exceeded the broad margin of appreciation to be accorded to the State inrespect of measures pursuing social and economic interests.19

In his final report Jackson recommended abolishing the recoverability of successfees and ‘after the event’ insurance premiums for legal costs. Lawyers would still be

11. Lord Chancellor ‘Access to justice with conditional fees’ Consultation Paper (March1998).12. Access to Justice Act 1999, ss 27 and 29.13. Campbell v MGN Limited [2004] UKHL 22, [2004] 2 AC 457.14. Courts and Legal Services Act 1990, s 58A(1).15. According to the Lord Chancellor in a speech on 21 September 2008, quoted in Jackson,above n 6, ch 1 [1.3].16. There are some means of controlling liability for costs incurred by an opponent, includingmaking a part 36 offer to settle (with cost consequences for the party who rejects but fails to beatthe offer at trial), and applying for a costs capping order limiting the amount of futurerecoverable costs a party must pay in the event they lose: CPR 44.18. There is also scope forjudicial assessment of whether costs were reasonably incurred, reasonable in amount, andproportionate. However, judicial assessment has not proved effective in controlling high costs:A Zuckerman On Civil Procedure (London: Sweet & Maxwell 2006) at [26.88].17. MGN v UK App no 39401/04 ECJ (18 January 2011) [2011] All ER (D) 143 (Jan).18. Ibid, at [155]–[156].19. Ibid, at [192], [217].



able to charge the client a success fee of up to 100% of base costs; however, inpersonal injury claims the success fee would be capped at 25% of damages other thanfor damages for future care and future losses.20 Other major recommendations ofJackson include permitting clients and lawyers to enter into contingency fee arrange-ments (where the client takes a percentage of the damages if the claim is successful),21

and the introduction of qualified one way cost shifting for certain types of disputes,22

and, of course, abolition of referral fees.23

Jackson did not claim there was a particular philosophy underpinning his proposals.In his words he recommended a ‘coherent package of interlocking reforms’.24 None-theless, what can be discerned from his report is a recognition that to control costseffectively and promote access to justice, parties need some freedom to decide how tofund their claims (or defences), and that the parties who make these decisions must bearat least some of the cost of their funding arrangements, even if their claims aresuccessful. This is the only way of achieving the twin goals of controlling costs andpromoting access to justice in a way that is fair to all stakeholders, in the absence ofadequate state funding. The result, however, is to erode the basic principle underlyingthe English costs rules: that she who successfully enforces or defends her legal rightsshould not be left out of pocket for doing so. In other words, Jackson implicitlyrecognises that the system needs to shift, at least partly, from a loser pays to a user payssystem.

In March 2011 the Lord Chancellor announced the Government’s response to theJackson report.25 The Government indicated it will implement Jackson’s major rec-ommendations, including abolishing the recoverability of success fees and after theevent insurance premiums and introducing qualified one way cost shifting for personalinjury claims. The result, the Government claims, will be greater fairness and propor-tionality in the system as demanded by the ECtHR in MGN v UK.26

The Government’s response did not address Jackson’s recommendation on referralfees, but it subsequently announced in September 2011 that it would ban such fees inpersonal injury claims.27

Jackson’s proposal to ban referral fees is something of an exception to his otherproposals to move to a partial user pays system. For such a system to work effectively,users must have some freedom to choose their service providers, what services theyuse and how to pay for them. Yet Jackson wants to deny prospective claimants (andlawyers) access to the lawyer-client matching service offered by CMPs. This appearsto be an arbitrary limit on the ability of clients to enter into arrangements with theirlawyers that best suit their interests. There is a risk that such limits will restrictcompetition and choice for people who need legal assistance, at a time when the legalprofession and the civil justice system is undergoing major reform designed to

20. Jackson, above n 2, Executive Summary [2.2].21. Ibid, at [3.3].22. Ibid, at [2.6].23. Ibid, at [2.5].24. Ibid, at foreword i.25. Ministry of Justice Reforming Civil Litigation Funding and Costs in England andWales – Implementation of Lord Justice Jackson’s Recommendations (March 2011), availableat http://www.justice.gov.uk/consultations/docs/jackson-report-government-response.pdf.26. Ibid, Ministerial Foreword pp 3–4.27. Ministry of Justice, above n 3.



promote greater competition in the legal services market. From 6 October 2011,lawyers will be allowed to go into business with other firms, and businesses such assupermarkets will be able to offer legal services to the public.28

However, one of the perceived ills of competition and commercialisation of legalservices, which goes hand in hand with private funding of civil claims, is that itcontributes to a litigious society and a ‘compensation culture’. CMPs have beencriticised for contributing to this phenomenon. In 2010 Lord Young conducted areview of heath and safety laws for the Prime Minister, in which he argued a com-pensation culture, driven by litigation and the activities of CMPs, was a major causeof the problems that beset health and safety practices.29 The Prime Minister agreed,indicating the Government intended ‘to curtail the promotional activities of claimsmanagement companies and the compensation culture they help perpetuate’.30 Therehas been no further detail from the Government about what its plans are on referralfees.

The growth of CMPs is not entirely coincidental with the shrinking of publicfunding of civil claims. If promoting access to justice for persons of limited means isleft to law firms, at least in the first instance, law firms need sufficient capital andregular cash flow to fund claims on a speculative basis. This requires firms to build upa large client base, and enough expertise to guarantee a reasonable level of positiveoutcomes in litigation. One way law firms can guarantee a regular flow of work is topay CMPs fees for client introductions. The increasing specialisation of law firms alsomeans prospective claimants may need some assistance in finding and choosing alawyer capable of handling their matter well.31

Because referral fees are said to promote access to justice and a compensationculture, it is not surprising that the issue is controversial. This paper tries to take someof the heat out of this ‘divisive’32 debate, by identifying the values at stake and theextent to which referral fees promote or undermine those values.

But first we need to give a brief history of the infant but rapidly growing claimsmanagement industry in England and Wales.

BACKGROUND TO THE CLAIMS MANAGEMENT INDUSTRY

Solicitors were prohibited from advertising for business, or from having arrange-ments with third parties for the referral of business, until these bans were lifted in 1987and 1988 respectively. However, the Law Society retained a general ban on ‘rewardingintroducers’ until March 2004.33 The ban was lifted following pressure from the Officeof Fair Trading (OFT), which is responsible for monitoring markets for anti-competitive practices.34 The OFT’s report on the professions in March 2001 con-cluded that restrictions on paying referral fees were ‘hampering both the development

28. Legal Services Act 2007, P 5.29. LordYoung ‘Common sense, common safety’ (London: Cabinet Office October 2010) p 7.30. Foreword by David Cameron, ibid, p 4.31. J Peysner ‘Referring to justice’ (2008) 19 European Business Law Review 1105.32. Legal Services Consumer Panel Referral Arrangements (London: LSCP May 2010)at [1.4].33. Jackson, above n 2, ch 20 [1.3], [1.6].34. Fair Trading Act 1973, s 2.



of an online market-place (for example, payment to an intermediary firm that “intro-duces” clients and suppliers over the internet) and the ability of solicitors to competewith non-legally qualified practitioners’.35

Over the last 6 years the CMP industry has grown quickly. As at July 2009 therewere 2885 authorised CMPs, a rise of 62% on the previous year. This figure excludesinsurers and trade unions which are subject to their own regulations. In 2009 theturn-over of authorised CMPs was £361 million, up from £281 million the previousyear. Referral fees in personal injury claims make up the bulk of the market.36 Almosta quarter of all consumers find a lawyer via an intermediary of some kind, includingCMPs.37

There is also an elaborate regulatory system governing referral fees and CMPs,which was put in place in response to perceived problems with the industry. There wasconcern that some CMPs engaged in aggressive marketing techniques, misled con-sumers about their chances of receiving compensation and the amount they couldreceive, and failed to disclose referral fee arrangements. A report of the BetterRegulation Taskforce in 2004 entitled ‘Better Routes to Redress’ recommended thatthe industry should be warned that, if its practices do not improve, strict regulationwould be brought in.38 The industry did not clean up its act and so the Governmentintervened.39

CMPs are now regulated under P II of the Compensation Act 2006 and accompa-nying regulations. CMPs are required to obtain authorisation from the Secretary ofState to carry on business as a CMP,40 and are subject to a code of conduct that requiresCMPs to disclose the existence and amount of any referral fee to the client, prohibitscold calling in person and forbids giving cash incentives to the claimant to make aclaim.41 The Secretary of State also has the power to investigate complaints aboutCMPs and take specified enforcement action.42

Solicitors are also subject to regulations regarding payment of referral fees. TheSolicitors Code of Conduct 2007, r 9 prohibits lawyers from accepting any arrange-ment with an introducer which would compromise their independence,43 andrequires full disclosure to the client in writing of the financial arrangement enteredinto by the lawyer and introducer regarding the client.44 Solicitors cannot enter intoan agreement with a CMP unless the CMP also undertakes to comply with r 9. If asolicitor has reason to believe that the CMP is breaching r 9, they must take allreasonable steps to ensure that the breach is remedied, and terminate the agreementif it continues.

35. Director General of Fair Trading Competition in Professions (Report No 328, 2001)pp 3, 14.36. Ministry of Justice Claims Management Regulation: Annual Review 2008-2009 (2009)pp 18, 20.37. Legal Services Consumer Panel, above n 32, at [2.2].38. Better Regulation Taskforce Better Routes to Redress (Cabinet Office, 2004) [4.1]; p 23.39. Ministry of Justice, above n 36, p 12.40. Compensation Act 2006 P 2, s 4, s 7.41. Conduct of Authorised Persons Rules 2007 r 2, 6, Client Specific Rule 11.42. Compensation Act 2006 P 2, s 5.43. Solicitors’ Code of Conduct 2007, r 9.01.44. Ibid, r 9.02.



PART II – THE FUNCTION OF REFERRAL FEES IN THE CIVILJUSTICE SYSTEM

Referral fees help prospective consumers of legal services to make informed choicesabout whom to retain as a lawyer. Prospective claimants find it difficult to assess thequality of legal service providers. Most have no experience of the legal process, do notunderstand the process, and have only limited information about the quality oflawyers. To deal with this problem, clients can use specialised agents such as a CMPto find a lawyer. CMPs can develop expertise regarding the cost and quality of legalservice providers, eg average fees payable by the client, average time taken to resolvea case, number of cases won at trial, number of accredited specialists at the firm,number of complaints made and upheld by the regulatory body etc. CMPs can alsoacquire a working knowledge of which claimant solicitors obtain the best settlementsfor their clients. Settlement terms are normally confidential, so it can be difficult forthe public to find this information. Yet industry insiders can acquire knowledge of the‘going rate’ for various injuries, and which lawyers tend to obtain or better those rates.Referrers are arbitrageurs who assist consumers navigating their way through a legalservices market where the product is opaque and most people use the service onlyonce.45

In theory, the matching service provided by CMPs strongly promotes access tojustice because hiring trained legal advisers is the principal means by which peopleenforce their rights. Referral fees can also promote access to justice in a moreelementary fashion. By alerting the public to the circumstances in which they mayhave a valid legal claim, CMPs can encourage people to enforce their rights when theymay not have otherwise contemplated consulting a lawyer.

On the other hand, some are uncomfortable with the idea of lawyers or CMPscreating business for themselves by encouraging people to litigate.46 Greater access tojustice is not a universally shared goal. By definition it means increased litigation andcan create what some describe as a litigious society or a compensation culture. Thosewho see this as an unwelcome phenomenon point the finger at CMPs for drumming uplitigation, and that charge is probably correct. This is what CMPs are designed to do:to connect potential clients with lawyers so the client can assert their rights.

Whether this is a positive or negative development depends in large part on aperson’s view of the role of law in society. One possible view is that the function ofprivate law is to promote the peaceful settlement of disputes by allowing parties tosubmit their grievances to an independent and impartial body which will determine thedispute according to law. If this is the role of private law, then lawyers or third partiesstirring up disputes is both counterproductive and wasteful of resources.

However, it can also be argued that part of the function of private law is to promotehuman welfare, by according rights and obligations that deter the infliction of harmand facilitate activities that are beneficial to individuals and society. On this view,there is value in having people with specialist legal knowledge proactively informingthe public about the availability of legal services and when those services may beneeded.47

45. Claims Standards Council (the trade association for CMPs) quoted in Jackson, above n 2,ch 20 [3.1].46. See eg Lord Young, above n 29.47. See eg M Freedman ‘The professional responsibility to chase ambulances’ in Lawyers’Ethics in an Adversary System (Indianapolis: Bobbs-Merrill, 1975) ch 10.



Concerns about ‘drumming up’ litigation may have some merit in the contextof opt-out class actions, where litigation is brought on behalf of persons who neednot do anything in order to participate in the litigation. But England does not havesuch a system of collective redress. The referral fees market only operates becauseprospective clients actively express their interest in being referred to a lawyer. Unlessprospective clients make a conscious decision to seek legal advice, the referrer hasnothing to sell.

No doubt some claims are brought by people who would not have pursued theirgrievances without CMP or lawyer marketing of legal services, and no doubt someclaimants may not have had a grievance until they saw such marketing. But in everycase it is the claimant who must decide to seek advice from a lawyer, and agree tolitigate if they are advised they have a claim. While reducing litigation may be adesirable goal, reducing litigation at the point of entry to the court system is inherentlyregressive because it prejudices those who lack the information and resources neededto enforce (or defend) their rights.

The obvious, but important, point is that people have a right to access informationabout their legal rights and obligations. Publishing the relevant statutes and case lawis not enough. The information must be readily understandable by lay persons. Giventhe primary method by which people acquire information about their legal rights is byconsulting trained legal advisers, ‘access to legal advice must be protected’.48

Access to legal assistance is a basic requirement of the rule of law and the right ofaccess to court under ECHR Art 6. To access legal assistance, people need informationas to what lawyers’ services are available. The state has reduced its legal aid budgetand left the funding of civil claims (other than family matters) largely to privateoperators. Having made this policy choice, it is important that the state does notunreasonably restrict private operators from disseminating information about legalservices whether provided by themselves or others. Prohibiting the marketing oflegal services in the absence of a publicly funded information service would dispro-portionately affect those from lower socio-economic backgrounds from gaining anunderstanding of their legal rights. These groups often have difficulties accessinginformation about their rights and services that may assist them. A legal system thatdoes not take account of the greater difficulties faced by some in accessing the systemthreatens to undermine principles of equal treatment. While it is impossible to devisea litigation procedure that eliminates the financial and social advantages enjoyed bycertain classes over others, the principle of equality dictates that the law should try toensure, as much as possible, that litigants operate on a level playing field. Thisprinciple is firmly established in ECHR jurisprudence in relation to litigation alreadycommenced,49 but the principle also logically extends to persons with valid legalclaims who are yet to commence them. Justice is not an Aladdin’s cave. A legal systemcan hardly claim a level playing field if many with good, or reasonably arguable,claims (or defences) are not able to get onto the field.

Rules designed to reduce rates of litigation, which would have the effect of denyingaccess to court to some people who have identical substantive rights to others who arestill able to assert those rights, could be a breach of ECHR Art 6. This might includea ban on promoting legal services. A New South Wales ban on marketing personalinjury legal services so as to avoid entrepreneurial lawyers drumming up litigation was

48. A Zuckerman On Civil Procedure (London: Sweet & Maxwell, 2nd edn, 2006) p 614.49. See eg Steel and Morris v UK (App no 6481/01) (2005) 41 EHRR 22.



the subject of a constitutional challenge to the High Court of Australia in 2005.50 Bya five to two majority the High Court upheld the ban. It held that the rule of lawdepended on the availability of professional legal services so that citizens might knowtheir rights and assert them, but because the advertising ban did not restrain or inhibitthe provision of legal services it was constitutionally valid.51 In a dissenting judgment,McHugh J stated it would be a triumph of form over substance to hold that theConstitution protects the free flow of communications between a lawyer and a clientafter the lawyer is retained, but not communications prior to a retainer being agreed.52

This statement echoes the ECtHR’s jurisprudence that the ECHR is designed toguarantee rights that are practical and effective.53 In Golder v UK the court held thatthe right to fair trial specified in Art 6 necessarily included a right of access to court,and a right to communicate with a lawyer for that purpose.54 Mr Golder was a prisonerwho was prevented by the Home Secretary from contacting a lawyer with a view topursuing a civil claim. The court held this breached Mr Golder’s Art 6 rights.

The judgment recognises that to give effect to the procedural guarantees affordedto parties in a pending lawsuit, the right of persons to access the litigation processmust also be protected. Moreover, a crucial part of the right of access to court is theright to communicate with a lawyer both during litigation and in anticipation oflitigation. By analogy the right to communicate with a lawyer necessarily includes theright to find a lawyer.

An advertising ban only prevents lawyers from contacting members of the publicdirectly or indirectly, not the other way round. Yet the difference is one of degreerather than of kind. The rule of law depends on the public being aware of theavailability of legal services. The High Court of Australia acknowledged this, but inthe view of the majority ‘professional directories’ and ‘telephone books’ performedthis awareness function.55 With respect, this is an outdated view of the way the publicnow obtains information about goods and services, especially with the increasinguse of digital media and the Internet. As already mentioned, one of the OFT’sobjections to a ban on referral fees was that it hampered the development of an onlinemarket-place.56

Were a ban on marketing legal services found to breach Art 6 in the absence of apublicly funded information service, this would not necessarily invalidate a ban onreferral fees. Banning referral fees would dramatically reduce advertising of lawyersservices by third parties but lawyers would still be free to advertise directly. The mainpoint is that marketing is an effective means of providing information about legalrights and legal services. And many believe that CMPs have been very effective atmarketing this information as we will see in the next section. It could be said that, inpractice, referral fees have helped secure the right to seek legal assistance and accessto court guaranteed by Art 6.

50. APLA Ltd v Legal Services Commissioner (NSW) [2005] HCA 44 at [8].51. Ibid, at [30]–[34] (Gleeson CJ and Heydon J).52. Ibid, at [86].53. S v Switzerland (App no 12629/87; 13965/88) (1992) 14 EHRR 670.54. Golder v UK (1979–1980) 1 EHRR 524.55. APLA Ltd v Legal Services Commissioner above n 50, at [30]–[34].56. Director-General of Fair Trading Competition in Professions, Report No 328 (March2001) at [210] (p 14 of report).



PART III – THE TRACK RECORD OF THE CMP INDUSTRY INENGLAND AND WALES

(a) Facilitating the law enforcement process

According to the Law Society, CMPs have been ‘highly successful in enabling thosewho have suffered injury to gain redress’.57 This claim is difficult to verify, but the factthat even some opponents of referral fees accept that CMPs have brought more peopleinto the justice system lends some support to the claim.58 The Legal Services Con-sumer Panel investigated the effect of CMPs on claimants’ decisions to litigate as partof the Legal Services Board’s review of referral fees. The investigation consisted of aseries of interviews and surveys with consumers of legal services, analysis of statis-tical data on litigation rates, and consultations with interested parties.59 The Panel’smain findings were:

1) There was significant unmet legal need (people who have a potential claim but do notpursue it), particularly among the socially excluded. Consumers’ ability to access thelegal system is highly dependent on how effectively they are connected to legaladvice.60

2) Consumers value CMP marketing because they help people to claim who might nototherwise have done so, and their client care skills help people to use the justice systemwhen they are at their most vulnerable.

3) Referral fees have resulted in more people bringing Road Traffic Accident claims.4) People with serious injuries are already intent on pursuing a claim, but CMPs influence

their choice of lawyer. 61

The statistics on litigation rates confirms that there have been significant increases inroad traffic accident claims in the last decade. However, litigation rates for otherpersonal injury claims, including employer, medical and public liability, have beenstable or falling.62 When speaking to a Parliamentary Committee in 2005 Lord Phillipsdismissed suggestions there was a compensation culture in England, noting that lessthan 1% of patients who have suffered an untoward event in the course of theirtreatment bring a claim against the hospital.63 Similarly, in a report in 2004 the BetterRegulation Task Force stated that the compensation culture was a myth.64

However if a ‘compensation culture’ includes not only rates of litigation, but beliefsabout legal rights and obligations, then there may be such a culture if media coverage

57. Submission of the Law Society to Sir Rupert Jackson’s Costs Review, Jackson, above n 2,ch 20 [3.14].58. Legal Services Consumer Panel, above n 32, at [5.3].59. Ibid, at [2.21].60. A finding supported by a number of other studies: eg DJ Harris et al Compensation andSupport for Illness and Injury (Oxford: OUP, 1984).61. Legal Services Consumer Panel, above n 32, at [5.32].62. R Lewis, A Morris and K Oliphant ‘Tort personal injury claim statistics: is there acompensation culture in the United Kingdom?’ (2006) 30 Journal of Personal Injury Law 87at 102; J Hand ‘The compensation culture: cliché or cause for concern’ (2010) 37 Journal ofLaw and Society 569 at 579. Available data come from Compensation Recovery Unit (CRU)of the Department of Work and Pensions, NHS statistics and Insurers’ Bodily AwardStudies.63. Constitutional Affairs Committee, Third Report Compensation Culture (London: TheStationery Office 2006) at 754–II.64. Better Regulation Task Force Better Routes to Redress (London: 2004) p 3.



is any guide. There is growing concern that when people are involved in an accident,rather than keep calm and carry on, they now rush to court. When announcing theGovernment would ban referral fees, the Justice Minister argued that people werebeing encouraged to sue ‘leaving schools, business and individuals living in fear ofbeing dragged to the courts for simply going about daily life’.65 Media coverage of thisissue has increased exponentially since the mid 1990s, but as Hand has documentedmany of the notorious cases reported or cited by commentators were actually dis-missed in court.66 Whether or not there is a culture of blaming others for everymisfortune we suffer, it does not reflect the law. The Better Regulation Task Forcenoted that the courts are very good at sorting ‘the wheat from the chaff’ by filtering outunmeritorious claims, which are not themselves filtered out by lawyers.67

There is also concern that ubiquitous marketing by CMPs creates false expectationsas to what types of claims might succeed and to how much compensation people maybe entitled. This is one of the costs of allowing private operators with vested intereststo provide information services. Whereas the state can directly control the quality ofinformation provided to the public, CMPs have an incentive to talk up potentialclaimants’ prospects because they normally receive a fee regardless of whether thereferral results in a successful claim.

The subjective aspect of the compensation culture turns out to be mistaken beliefsabout entitlements and obligations. Mistaken beliefs about the law can be costlybecause, among other things, they may alter peoples’ behaviour in socially undesir-able ways. The main ways to stop CMPs contributing to this problem is to either banreferral fees outright, or strictly enforce marketing standards to stop misleadingadvertising. According to the Ministry of Justice’s ‘Impact of Regulation Assessment’on CMPs ‘there is now virtually no misleading information in advertising particularlyon websites’. Misleading information can be given in person or by telephone. Whilethe practice is not widespread, it can be damaging to those given misleading infor-mation.68 Ironically, media commentary warning about litigation out of control mayhave the very chilling effect on socially desirable behaviour that the commentators areprotesting against.

(b) Making the law enforcement process more efficient

If one accepts that the marketing of legal services facilitates access to justice, and thatthe rule of law and the right of access to court require a minimum amount of publicinformation about legal services, law makers must decide how much informationand/or marketing there should be, and who should pay for it. It is unrealistic to expectthe state to provide a comprehensive public information service given governmentshave cut their funding of the civil justice system. In theory, a free market approachwould be the most efficient means of providing information about legal services andhelping clients find the legal representation they need. Basic principles of contractwould suggest that the client, the lawyer and the referrer could negotiate agreementswhich maximise the benefits to each for the lowest possible cost: the client finds a

65. Ministry of Justice, above n 3.66. J Hand, above n 62, at 572.67. Better Regulation Task Force, above n 64, pp 14–15.68. M Boleat ‘Claims management regulation, impact of regulation third year assessment’(MoJ, 2010) at [4.14].



competent lawyer without having to search for one; the lawyer gets work withouthaving to advertise for clients; and the referrer gets a fee for their skills in advertisinglegal services and matching prospective clients with competent lawyers.

A free market approach, as operates in many states in the US, would allow lawyersto decide how much to spend on acquiring clients, and let the client decide whetherthey are prepared to pay the higher fees the lawyer has to charge in order to recoverthose costs. Provided there is full disclosure of any referral fee for an introduction,prospective clients can decide whether to incur those costs or go to another lawyer.This theory is supported by experience in the conveyancing market in England.Because consumers bear the full costs of conveyancing services, they are more likelyto shop around for the best deal. A study conducted by Charles Rivers Associates forthe Legal Service Board indicates that conveyancing costs are lower among firmspaying referral fees.69

At their most basic, referral fees are a solicitor’s acquisition costs (ie the cost ofacquiring clients) which have been externalised to a CMP, plus a premium to the CMPto reflect the risk of providing the service. The act of referral does not generate newcosts; it works a redistribution of costs based on the division of labour. There areseveral reasons why lawyers might choose to pay referral fees rather than advertisedirectly. Lawyers may not have the expertise or funds to advertise on a sufficientlylarge scale to attract clients. Lawyers entering the market may think it is more efficientto pay referral fees for client introductions than to take the risk of trying to establisha profile through marketing. Evidence suggests that most law firms choose to payreferral fees rather than advertise directly.70

CMPs which specialise in marketing can do it more efficiently and generateeconomies of scale. In turn, lawyers can focus on their core business of providing legalservices. This specialisation should lead to efficiencies in the marketing of legalservices by CMPs and the provision of legal services by lawyers. A referral marketshould also foster greater competition among legal service providers. It allows newlegal service providers to enter the market more easily by paying for client referrals,rather than having to build a reputation and client referral networks over time. Allthese benefits should reduce the costs of legal services.

However, legal costs have not fallen since referral fees were permitted. Insteadthey have continued to rise, and referral fees have also risen dramatically. Industryexperts have indicated that referral fees of approximately £400 were common in 2005for personal injury claims, rising to £600 in 2007. Now fees in excess of £850–£1000are not uncommon.71

What explains these increases? The answer is that for a number of reasons there isinsufficient market pressure to keep legal costs down but none of these relate toreferral fees per se. The first reason is cost shifting. Cost shifting may be sound inprinciple but without proper regulation it gives rise to perverse incentives. In anuncapped cost shifting system, the marketing costs of the claimant’s lawyer are borneby the defendant (and ultimately their insurers) because the overwhelming majority ofclaimants win their claims or reach a favourable settlement. Claimant solicitors canincrease the amount they spend on acquiring clients, knowing that the costs can be

69. Legal Services Consumer Panel, above n 32, at [6.40]; £543 compared to £687 forproperties valued at £200,000.70. According to interviews with industry participants conducted by Oxera Consulting LtdMarketing Costs for Personal Injury Claims (ABI Research Paper 15, 2009) p 3.71. Ibid.



passed onto defendants as part of their hourly fee.72 This increase in expenditure putscompetitive pressure on other claimant lawyers to increase their own expenditure onacquiring clients, sure in the knowledge that they will not be paying for it either. Thisis the definition of moral hazard. Referral fees in uncapped cost shifting systems arelikely to involve excessive rent because the persons agreeing to the fee have noincentive to reduce the price, and the persons paying the fee have no capacity tocontrol it.

If there is a rule that legal costs should be borne by the losing party, then the amounta lawyer can spend on acquiring clients must be regulated. Law makers and the courtsmust decide what constitutes reasonable acquisition costs, either as part of a lawyer’shourly fee or as their fixed recoverable costs. Some allowance must be made for thelawyer’s acquisition costs, for where legal services are not provided by the state thereis a public interest in ensuring that the business of being a lawyer is commerciallyviable.73

But how much allowance should be made for a lawyer’s acquisition costs is adifficult policy question. The amount must allow for a minimum level of informationand marketing needed to ensure a reasonable level of awareness about lawyers’services and when those services are needed. Beyond that, we need to identify theoptimum level of marketing. This would take account of the effectiveness of market-ing in creating awareness about rights and encouraging people to take advice whennecessary. It must also balance the goals of facilitating access to justice for prospectiveclaimants and reducing litigation costs. Keeping costs down promotes access to justicefor all litigants, and helps reduce insurance premiums.

Currently the hourly fees of claimant lawyers in personal injury litigation are about25% to 30% higher than fees charged by defendant lawyers.74 According to theAdvisory Committee on Civil Litigation Costs, the evidence suggests that referral feespaid by claimant solicitors are the main difference between these two rates.75 Whilethis discrepancy may seem unreasonable, the acquisition costs of defendant solicitorsare typically lower than those of claimant solicitors. There are dramatically fewer realdefendants than claimants because the entity normally on risk is the defendant’sinsurer. Therefore the number of potential clients a defendant solicitor needs to reachis much smaller. Defendant solicitors can also rely on their insurer clients to providethem with a steady stream of repeat business, whereas claimants would be veryunlucky if they were to provide repeat business to claimant solicitors.

Substantive fairness requires that the extra acquisition costs of claimant solicitorsare factored into their recoverable legal costs. If not, then all else being equal,defendants could retain better quality lawyers than claimant solicitors because theyhave lower acquisition costs and can pay higher salaries. While there needs to be adifferential between claimant and defendant solicitors’ acquisition costs, whether25% to 30% reflects a reasonable differential is difficult to tell. What can be saidwith some confidence is that because referral fees are currently negotiated withoutany downward pressure in the market, their current size is likely to be too high. On

72. Referral fees for claims management services are not recoverable from the losing party asa separate item. An attempt to recover claims management services provided by an insurer aspart of an ATE insurance premium were rejected by the Court of Appeal in Re Claims DirectTest Cases [2003] EWCA Civ 136, [2003] 4 All ER 508.73. Jackson, above n 2, Executive Summary [2.8].74. Advisory Committee on Civil Costs Report on Guideline Hourly Rates (March 2010) p 3.75. Jackson, above n 2, ch 20 [2.4].



the other hand, the Advisory Committee on Civil Litigation Costs noted that thereis no evidence that CMPs are making profits significantly in excess of comparablenon-CMP firms.76

Identifying a reasonable amount for a lawyer’s acquisition costs in fixed costshifting systems raises different problems. The costs of referral fees in fixed costsystems are shared between the defendant, the claimant’s lawyer and the claimant. Alitigant’s fixed recoverable costs make some allowance for lawyers’ marketing costsbut it is for the lawyer to decide how much they spend on any particular overhead,from acquisition costs to staff salaries. If a lawyer chooses to spend comparativelylarge amounts on advertising or referral fees, then they must bear those extra costs ifthese cannot be passed onto their clients. There is evidence that the size of referral feesin fixed cost litigation has also been increasing substantially. In low value trafficaccident claims, where costs are fixed pursuant to Civil Procedure Rule (CPR) 45, thesize of referral fees is normally higher than 50% of the total recoverable costs.77

CMPs might explain this seemingly high figure by arguing that acquisition costsare a major overhead for claimant solicitors. If they are willing to pay such amountsfor referrals, knowing that they or their clients will foot the bill, then such costs reflecta fair market rate. The Association of British Insurers claims that high referral fees infixed cost litigation indicate that total recoverable costs are too high and could bereduced. If total recoverable costs are reduced, the size of referral fees would alsofall.78 Claimant lawyers raise a different concern. They accept that referral fees are toohigh but hold that many claimant lawyers have little choice but to pay them because,without referrals, they cannot obtain a regular supply of work. However, solicitors canonly afford to pay such high fees by cutting the quality of service they provide theirclients. This creates a risk of ‘under-settlement’ for the claimant.79

The size of referral fees in fixed cost litigation shows evidence of market failure. Intheory, if referral fees are too high then other CMPs could obtain a competitiveadvantage by offering lower fees, increasing their market share and still making areasonable profit. Secondly, if claimant solicitors have to cut the quality of servicethey provide in order to pay for high referral fees, claimants would be reluctant to signup with these lawyers and take their business elsewhere. Neither market responseappears to be happening in practice. The reason is limited competition and a lack ofinformation about the service. First there is a relatively stable supply of prospectiveclaimants for personal injury claims. People either suffer an injury or they do not.Those injuries are either legally compensable or they are not. Secondly, some CMPshave a substantial competitive advantage in signing up prospective claimants. Roadtraffic claims are a good example because accident victims will typically call theirinsurer immediately after the accident. Thirdly, insurer CMPs who also pay out on theliability side for defendants have conflicting interests. On the one hand they have aninterest in a strong and profitable referral fees market, but they also stand to benefit bydistorting the referral fees market as part of a campaign to lower total legal costs. Thuswhile an insurer might charge a referral fee of £700 to £900, their industry associationand in some cases the insurer itself, will argue that the amount is excessive anddemonstrates that legal costs could be reduced.80 Finally, where claimants can choose

76. Advisory Committee on Civil Litigation Costs, above n 74, p 7.77. Jackson, above n 2, ch 20 [4.7].78. Advisory Committee on Civil Litigation Costs, above n 74, p 5.79. Author interview with Simpson Millar LLP Solicitors, August 2009.80. Jackson, above n 2, ch 20 [3.4].



whether to sign up with the lawyer to whom they are introduced, it seems there is alack of transparency about the size of referral fees being paid in breach of thedisclosure requirements.81 Nor are claimants being told that referral fees are notrecoverable from the other side so that economies have to be taken in processing theclaim.82 In a large number of cases, claimants are not even aware that they are dealingwith a CMP and mistakenly believe the CMP is a law firm.83

All these factors create a strong case for regulation of referral fees. Under a freemarket approach all that is needed is better disclosure of referral fee arrangements, sothat the consumer can make an informed choice about whether to agree to sucharrangements. However, even full disclosure may not be sufficient to protect consum-ers adequately from practices which are manifestly against their interests. This isperhaps evident in the problems with the matching service provided by CMPs.Jackson concluded it was debatable whether CMPs are providing a quality referralservice which helps prospective claimants find competent lawyers. He stated thatbased on discussions with those familiar with the market ‘in very many cases . . .referrers simply refer cases to the highest bidder. That is in no sense matching case tosolicitor or remedying the information asymmetry’.84

The reason that the referral fee market does not operate the way it should in theoryis the very same reason that it is needed in theory: legal services are an opaque productwhich most people use only once. Just as consumers face difficulties in assessing thequality of legal service providers, they also face difficulties in assessing whetherCMPs provide value for money. Issacharoff and Ortiz note that this is the centralparadox of agency relationships: ‘For the very reason that we need agents in the firstplace, we need a new set of agents to tell us how to assess the performance of our[primary] agents’.85 And so on.

Certainly the lack of disclosure by CMPs and lawyers about referral arrangementsmakes matters worse. Were claimants told that the amount their lawyer paid for thereferral was more than 50% of their total fees, most would appreciate this could reducethe quality of service the lawyer provides. Apart from this warning sign, consumerscan make only limited judgments about the service they receive, and usually at the endof the process. While there may be strong demand for an independent claims broker-age service, the consumer is not in a strong position to monitor that service.

Nonetheless, CMPs must employ some quality control measures, especially thosewho have an ongoing relationship with the claimant (eg a trade union), those who areon risk for the loss, and those whose principal or only source of business is referrals.And unlike lawyers, CMPs can offer claimants an independent appraisal service.While professional associations also provide referral services, their ultimate functionis to represent their members’ interests, and the information they supply to the publicabout their members is typically limited.86

81. Solicitors’ Code of Conduct, r 9.82. Jackson, above n 2, ch 20 [3.12].83. Legal Services Consumer Panel, above n 32, at [3.7].84. Jackson, above n 2, ch 20 [4.3].85. S Issacharoff and D Ortiz ‘Governing through intermediaries’ 85 Virginia Law Review(1999) 1627 at 1649.86. See The Law Society ‘Find a Solicitor’ available at http://www.lawsociety.org.uk/choosingandusing/findasolicitor.law.



PART IV – REFORM OPTIONS AND THE REQUIREMENTS OF EUCOMPETITION LAW

Jackson recommended a total ban on referral fees in personal injuries claims in hisfinal report and, were his recommendation not accepted, that referral fees should becapped at a maximum of £200 per case.

To assess the merits of this proposal, we need to consider how a ban or cap wouldalter the costs and benefits of the current referral fees market. Jackson concluded thatreferral fees have not proved to be beneficial to claimants or the providers of legalservices: a fortiori, nothing valuable is lost if they are banned. However the CMPindustry has been effective in helping people access the justice system. CMPs havealso delivered limited efficiency benefits including economies of scale in marketingcosts (which are probably outweighed by the rising costs of referral fees) and reducedinformation asymmetry between consumers and legal service providers. These ben-efits would be lost in the event of a ban. Jackson might argue that such benefits can beprovided by less costly means, yet it is not clear that a ban on referral fees wouldeliminate the costs associated with the referral fees market.

Jackson makes some curious claims regarding the effects of a ban. He suggests aban would increase choice for potential claimants regarding legal services, rather thandecrease them.87 Before the event (BTE) insurers already have incentives to nominatea preferred service provider in their insurance policies, as a means of controlling thecosts and quality of the service. At most, referral fees add to this incentive. However,the EU Legal Expenses Directive makes it clear that an insured has the right to choosehis own lawyer where negotiations have failed and it is clear that recourse has to behad to legal proceedings.88 In the recent decision Eschig v UNIQA SachversicherungAG89 the ECJ affirmed that any attempt to restrict the right to choose a lawyer in legalproceedings would be a breach of the directive. In cases where there is no pre-existingcontractual relationship, CMPs only increase the options available to claimants tryingto find a suitable lawyer.

Just as importantly, the difficult policy questions examined above cannot be neatlysidestepped by a total ban. Law makers will still have to decide what allowance shouldbe made for lawyers’ acquisition costs where legal costs must be paid by the losingparty. In a system where referral fees are banned, solicitors would be forced toadvertise directly for work. As the CMPs industry body, the Claims StandardsCouncil, argues: ‘Abolishing referral fees would have no effect on marketing costs; itwould merely change their composition’.90 Jackson accepts that lawyers would con-tinue to advertise their services in the event of a ban, but argues these costs have beendriven upwards ‘by the ratcheting effect of referral fees’.91 This argument is flawed.The ratcheting effect is created by the underlying cost rules, not by acquisition costsor any other solicitors’ overhead. Where costs are fixed, high acquisition costs can beexplained by a lack of transparency and competition in the CMP market. Abolishingreferral fees might reduce the amount lawyers have to spend on acquisition costs, butat the expense of competition among legal service providers.

87. Jackson, above n 2, ch 20 [4.2].88. Council Directive 87/344/EEC of 22 June 1987, Art 4; implemented by the InsuranceCompanies (Legal Expenses Insurance) Regulations 1990.89. Case C-199/08 [2010] 1 All ER (Comm) 567.90. Jackson, above n 2, ch 20 [3.1].91. Ibid, at [4.8].



This raises a critical legal question. Would a ban on referral fees be consistent withUK and EU competition law? TFEU Art 101 prohibits anti-competitive agreements orpractices by undertakings that fix purchase or selling prices or any other tradingconditions, and limit or control production, markets or technical development. TheChapter I Prohibition in the Competition Act 1998 introduces a similar prohibition –modelled on TFEU Art 101 – on undertakings adopting agreements or concertedpractices which affect competition within the UK. Because the relevant provisions arealmost identical this discussion will focus on the position under TFEU Art 101. Onepotentially significant difference between EU and UK law is that a ban might violateEU law even if introduced by way of legislation. As a consequence of Member States’duty to cooperate in achieving the objectives of the Union, a state can also breach Art101 if legislation strengthens or encourages anti-competitive agreements by privateoperators.92

There is no case-law on whether a ban on referral fees violates EU competition law,perhaps because referral fees are not common in Europe. Nonetheless challenges havebeen made to laws regulating the structure of the legal profession and the fees they cancharge. The two leading cases are Wouters et al v Algemene Raad van de NederlandseOrde van Advocaate93 (concerning a Dutch ban on multi-disciplinary partnerships,specifically prohibiting accountants from owning a stake in law firms) and Cipolla vFazari and Macrino94 (concerning an Italian law setting minimum and maximumlawyers’ fees). These cases provide some insight into the ECJ’s interpretation of Art101 as it applies to the liberal professions, and how it might deal with a ban on referralfees. In both Wouters and Cipolla, the ECJ held that the relevant measures were arestriction on competition but could be justified on public interest grounds, namely,safeguarding the administration of justice and protecting persons in receipt of legalservices. Thus the relevant inquiry is a two stage test.

(i) Would a ban adversely affect competition within the meaning of Art 101?

The main way a ban on referral fees could adversely affect competition is because itconstitutes a barrier to entry into the market. Industries that depend on referralnetworks to generate business are difficult to break into because referrals are normallymade in the expectation of a quid pro quo. For example, a claimant solicitor mayaccept referrals from unions for unprofitable work in the expectation that it will leadto the union referring clients with profitable claims. Referral networks are built onrelationships of trust, and these take time to establish. A business seeking to enter anindustry where referrals are common is therefore put at an immediate disadvantagevis-à-vis his competitors, and this is bound to limit competition and likely to affecttrade between Member States.

In Cipolla the ECJ held that fixing minimum legal fees was, not surprisingly, arestriction on lawyers’ freedom to provide services. Minimum fees prevented lawyersfrom other Member States using price to compete with more established Italianlawyers. This resulted in reduced competition and choice for consumers.95 Similarly,

92. Under TFEU Art 3 (ex Art 10 TEC); Case C-198/01 Consorzio Industrie Fiammiferi[2003] ECR I-8055 at [16].93. Case C-309/99 Wouters et al v Algemene Raad van de Nederlandse Orde van Advocaaten[2002] ECR I-1577.94. Joined Cases C-94/04 and 202/04 Cipolla v Fazari and Macrino [2006] ECR I-11421.95. Ibid, at [58]–[60].



banning referral fees would limit an effective method that new entrants could utiliseto compete with established players in the English legal services market.

A ban on referral fees is also likely to inhibit technical development. Referral feesnot only produce economies of scale; they can also improve standards and innovationin the delivery of legal services. According to the Legal Services Consumer Panel, theregular flow of work guaranteed by referrals from CMPs has enabled some firms toinvest in innovative IT and case management systems.96

(ii) Can the restriction on competition be justified in light of the objectives ofthe ban, which is to improve the administration of justice?

Not every measure which is likely to affect trade between Member States and limittechnical development is automatically prohibited by Art 101. Account must be takenof the objectives of a ban on referral fees and whether they are designed to further thepublic interest. If they do, the Court must then consider whether the consequentialeffects restricting competition are inherent in the pursuit of those objectives.97 Finallythe Court must be satisfied that a ban does not go beyond what is necessary in orderto attain the objectives, ie it must not be more restrictive of competition than isnecessary.98

Wouters was referred to the ECJ in an Art 234 reference (now TFEU Art 267)where the Court does not make findings of fact but rather gives a preliminary rulingwhich the domestic court must apply to the case before it. However, the judgmentprovides a clear basis for a Dutch court to uphold the ban on multi-disciplinarypartnerships on the grounds it was designed to protect the independence of the legalprofession, which is subject to duties of loyalty and confidentiality that did not applyto accountants.99 As for the requirement that the measure adopted must be the leastrestrictive means of achieving the public interest objectives, the Court demonstratedthat it would show a high degree of deference to the National Bar Council’s assess-ment of the need for, and content of, the measure.100

The Court followed a similar line of analysis in Cipolla, which was also submittedto the Court as a reference for a preliminary ruling. The Court held that whether therule fixing minimum fees could be justified on public interest grounds required anassessment of whether it ‘actually serves the objectives of protection of consumersand the proper administration of justice . . . and whether the restrictions it imposes donot appear disproportionate in the light of those objectives’.101 The Court acceptedminimum lawyers’ fees could be a proportionate measure to the goal of protecting theadministration of justice.102

Applying this analysis to referral fees, the critical issue is whether a ban isnecessary in order to reduce the costs of litigation – the public interest objectiveidentified by Jackson; or whether other less restrictive measures could be adopted. Theobvious alternative to a total ban is to cap the amount lawyers can pay in referral fees,or to cap the amount of recoverable costs for such fees. Both approaches would be less

96. Legal Services Consumer Panel, above n 32, at [1.26].97. Ibid, at [97].98. Cipolla, above n 94, at [31].99. Wouters, above n 93, at [105].100. Ibid, at [108].101. Cipolla, above n 94, at [64]–[65], [70].102. Ibid, at [57].



restrictive than a complete ban, and, if effective, more proportionate to the goal ofcontrolling costs. Fixing recoverable acquisition costs would be the least restrictivemeasure on competition, and provide consumers with a valuable guide as to whethertheir lawyer is paying too much for referrals.

The task of setting fixed or recoverable acquisition costs could be given to theAdvisory Committee on Civil Litigation Costs,103 or it may be possible to establish aCosts regulator with a brief to monitor data on the components of lawyers’ costs andrecommend regular revisions.

Law and policy makers already have to take account of the recoverable acquisitioncosts of claimants’ solicitors when setting their fixed total costs, or when settingguidelines for reasonable hourly fees. As such it is difficult to see what a complete banwould achieve other than changing the composition of acquisition costs from indirectto direct marketing.

A better public interest ground for banning or capping referral fees (a form of pricefixing) is the need to protect the quality of legal services to the public, and the dueadministration of justice. The analysis of the ECJ in Cipolla is apposite here. TheCourt noted that consumers have great difficulty in judging the quality of legalservices because there is frequently an asymmetry of information.104 In Cipolla thiscounted in favour of price fixing, because the minimum fees needed to provide areasonable level of service could only be decided by experts, as opposed to theconsumer. The court also acknowledged there can be a correlation between price andquality of service. Fixing minimum fees could reduce the risk of deterioration in thequality of legal services by preventing lawyers from undercutting each other onprice.105 Similarly, if the amount of referral fees is also capped in fixed cost systemsthis reduces the pressures on lawyers to cut the quality of service.

There are other methods of maintaining quality control. Having an accreditationsystem, such as the expert accreditation scheme run by the Law Society, could helpclients find lawyers who provide a high level of service. However, relying on thissystem alone may not be sufficient in practice because, even if a firm had a number ofexperts, high referral fees create pressures to reduce the amount of time spent runninga claim or the number of experienced staff working on a claim. According to theAccident Compensation Solicitors Group, often the people who handle referred lowvalue personal injury claims are young, inexperienced and unqualified staff, poorlytrained and equally poorly supervised.106 Furthermore, it must be acknowledged thateven with a cap on referral fees, firms may adopt similar work practices in order tomaximise profits. While price control may enable law firms to provide an adequatelevel of service, it does not guarantee it.

It might also be possible to rely on the threat of professional negligence suits as ameans of quality control. Critics argue that relying on professional negligence suits tomaintain standards will only lead to more costly litigation. This is unconvincing. Acredible threat of professional negligence suits will in most cases be sufficient incen-tive for lawyers to maintain proper standards, and thus avoid litigation. As with otherareas of law, the likelihood of enforcement can be an effective deterrent to those whomight otherwise breach the standards required of them.

103. Which sets the guidelines on reasonable hourly fees.104. Cipolla, above n 94, at [68].105. Ibid, at [66]–[67].106. Submission of the Accident Compensation Solicitors Group to Sir Rupert Jackson’s CostsReview, Jackson, above n 2, at [3.12].



On balance, capping referral fees in fixed cost systems would probably beaccepted by the ECJ as a measure which is proportionate to the objective of pro-tecting persons in receipt of legal services. As Ian Forrester QC argues: ‘a certaindegree of price fixing has been accepted by the Commission, if the aim and result ofsuch price fixing is to ensure quality control’.107 Furthermore, given the level ofdeference the ECJ has demonstrated to Member States and even to private under-takings on whether the measures or agreements they adopt are necessary and pro-portionate to a public interest objective, it may be that the court would be reluctantto review a cap on referral fees.

A complete ban on the other hand is more susceptible to challenge. It is worthrecalling the context in which a ban would operate. The UK is about to embrace fullythe brave new world of multi-disciplinary partnerships (MDPs) and alternative busi-ness structures (ABSs) that the Dutch bar prohibits. The LSB argues that it is notpossible to predict how people will behave once the market has been freed up, and howor whether the new legal service providers will use referral fees.108 Larger ABSs willhave the capacity to advertise for claimants on a mass scale, and in the absence ofCMPs referring claimants to traditional law practices, ABSs may come to dominatethe personal injuries market. If that is the case, then lawyers’ acquisition costs wouldbecome a matter of internal pricing for ABSs.109 One of the regulatory objectives ofthe Legal Services Act is to ‘promote competition in the provision of [legal] ser-vices’.110 The fact that the UK is radically opening up the legal profession to muchgreater competition would not prevent it from banning referral fees if it were deemednecessary. But a ban would certainly go against the trend of greater competition, andmay raise judicial eyebrows at the ECJ, prompting greater scrutiny of the reasons forthe ban.

Reviewing Jackson’s report it appears that reducing costs, or maintaining quality,are not the only reasons why he recommended a ban. His report reflects palpableuneasiness with third parties profiting from other people’s misfortune and the processof injured persons asserting their legal rights. He states that:

‘In my view, it is offensive and wrong in principle for personal injuryclaimants to be treated as a commodity . . . [T]he very language of the claimsmanagement injury characterises personal injury claims as a commodity. Strongcases ready to be pursued are described as “oven ready”.’111

This is a strange criticism to make in light of Jackson’s other recommendations. Heaccepts there is nothing wrong in principle with third party funding of litigation,112

where the funder is almost always treating the claimant’s claim as a commodity to beinvested in for substantial returns; nor in allowing contingency fees,113 where thelawyer effectively embarks on a joint commercial venture with the client. Indeed

107. CD Ehlermann and I Atanariu (eds) European Competition Law Annual (Oxford/Portland,Oregon: Hart Publishing, 2004) p 271.108. Jackson, above n 2, ch 20 [4.15].109. Peysner, above n 31.110. Legal Services Act 2007, s 1(1).111. Jackson, above n 2, at [4.11].112. Ibid, ch 11 [1.2].113. Ibid, ch 12 [4.1]–[4.2].



Jackson accepts principles of freedom of contract provide a strong argument in favourof allowing clients and their lawyers to enter into such arrangements.114

Profiting from the enforcement (and defence) of legal rights is either offensive orit is not. If it is offensive, then it is true of all lawyers and third parties charging andfunding claimants and defendants. Under the traditional costs model, where clients arecharged by the hour without an upper limit and regardless of the outcome of the case,lawyers also undoubtedly treat legal claims as commodities. As with any market andany principal/agency relationship, there is potential for abuse. The LSB acknowledgesregulation is needed to minimise this risk.115 But given that the burden of funding civilclaims is left largely to private operators, it is discriminatory to single out and excludeone type of operator on the grounds that they treat litigants as commodities when allother commercial operators do the same.

CONCLUSION

Referral fees are controversial. To critics like Jackson they add an extra layer of costto the litigation process with no benefit to the client or legal service providers.However, this paper has argued that allowing referral fees makes it easier for peopleto access the justice system. Referral fees are not required by ECHR Art 6 but they canhelp secure that right in practice for many claimants. The efficiency gains that mightbe expected from allowing referral fees have been limited in practice, partly becauseof the opaque nature of the legal services market, a lack of transparency by CMPs, andcost shifting rules which reduce the incentive on claimants and claimant lawyers tominimise legal costs. In its recent recommendations on referral fees, the LSB saidthere needed to be full disclosure of referral fee arrangements, and prospectiveclaimants should be advised they have a right to shop around for a lawyer. Thesedisclosure requirements need to be backed by active monitoring and enforcement.116

Better regulation of CMPs combined with proper regulation of the cost shiftingrules, including making appropriate allowance for lawyers’ acquisition costs, wouldbe a better and more proportionate way of reducing the costs of referral fees andmaintaining the quality of legal services than a ban.

Subject to the deference shown to Member States in deciding whether a measure isnecessary to protect the administration of justice, a complete ban is probably alsoincompatible with EU competition law.

Given cost shifting is one of the causes of high referral fees in uncapped costshifting regimes, it is equally likely – indeed it is widely accepted – that the otherconstituent parts of lawyers’ fees are also too high. While Jackson’s recommendationsto reduce costs in civil litigation will take the sharper edges off cost shifting (particu-larly recoverability of success fees and ATE premiums), he did not challenge thesacred cow of cost shifting. His recommendations to improve regulation of costshifting in fast track claims by fixing costs in all claims in the fast track (claims of avalue of £25,000 or less which can be resolved in one day at trial)117 are welcome, andbroadly reflect a German approach where recoverable costs are fixed by statute. Forclaims above that amount, however, Jackson’s proposals are effectively a series of

114. Ibid.115. Ibid, ch 12 [4.10], [5.1]; ch 11 [6.1]; LSB, above n 6, at [1.21].116. LSB, above n 4, at [1.14], [1.18], [1.21].117. Jackson, above n 2.



patchwork measures built around the principle of partial cost shifting. One reasonnormally given for not going down the US path, where each party bears their owncosts, is that the risk of adverse costs deters unmeritorious claims. Yet this argumentwill no longer be maintainable for personal injury claims because Jackson is alsorecommending qualified one way cost shifting for such claims.118 As such, instead ofa free market US rule or the fully regulated German cost shifting system, the Englishsystem is likely to continue to take a middle and expensive path.

118. Ibid, Executive Summary [2.6].



referral fees – the business of access to justice

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