I. Preliminary remarks
Germany has an exciting and dynamic legal tech scene. It has spawned novel, innovative legal services that lead to faster and more effective results in certain areas. Non-lawyer providers that specialize in enforcing consumer rights and take the cost risks off their shoulders on a commission basis to do so are creating effective access to justice (for example, helpcheck for life insurance rescission, myright for diesel plaintiffs, advocado or anwalt.de for brokering attorney services, Flightright and others for flight compensation, geblitzt.de for speeding tickets, wenigermiete.de for tenant claims, etc.). They enforce claims that individual consumers typically do not pursue with lawyers because they are dealing with seemingly overpowering opponents (e.g., airlines, landlords, government agencies, etc.) or because the cost risks of legal proceedings are disproportionate to the amount of the claim (“rational disinterest”).
But it is not only in the field of “consumer debt collection” that innovative offers are emerging. Law firms are also turning to the use of technology (e.g., in handling mass legal proceedings, increasing efficiency in law firms, dealing with redundant legal issues, and developing innovative advisory products for clients). And completely new providers are entering the legal services market (e.g., providers of mediation platforms for legal services and operators of “self-service offerings” such as contract generators).
Both groups – lawyers and non-lawyer legal tech companies – face enormous regulatory hurdles in Germany in tapping the potential for innovation. Law firms have too little entrepreneurial freedom of maneuver to be able to handle large technological investments and offer certain consulting models at all (no third-party participation opportunities, no commission models, no contingency fees). This also inhibits cooperation with platform operators, who are never allowed to appear in court themselves.
Germany is in danger of being left behind by the legal markets in the U.S. and the U.K., because they have already specifically created scope for new legal consulting models. According to the “Legal Technology” study by AGC Partners from April 2017, around USD 750 million has been invested in legal tech in the USA since 2012, partly because the business models described here have the necessary regulatory security (Legalzoom: USD 100 million, most recently financed with a further USD 500 million in July 2018, Avvo USD 132 million, Rocket Lawyer USD 72 million and most recently United Lex with a USD 500 million investment from CVC). By comparison, the three largest recent investments in Germany were Medienunion’s acquisition of Flightright (transaction amount unknown) and the funding rounds of German providers Advocado (2018), wenigermiete.de/Lex Fox (2019) and rightmart/Atornix (2019), each under €10 million, according to market data. The market is also much more developed in the UK, especially since the Legal Services Act greatly liberalized the legal framework for law firms back in 2007 (participation rights for non-lawyers; IPOs for law firms, etc.). The geographic online overview “CodeX LegalTech” by Stanford University shows the USA as the clear world market leader and Great Britain as the European number 1.
The Legal Tech Verband Deutschland is therefore committed to shaping a progressive and innovation-friendly regulatory environment that creates legal certainty for legal tech ventures inside and outside law firms. In doing so, the association is guided by the goal of protecting law seekers, legal transactions and the legal system from unqualified legal services and strengthening the rule of law.
II. In detail
1. Agreement on contingency fees and assumption of costs by lawyers
The Legal Tech Association Germany supports the move by the BÜNDNIS 90/DIE GRÜNEN parliamentary group to liberalize the law on lawyers’ remuneration, in particular the possibility of agreeing contingency fees and the assumption of costs. However, the proposed restriction to low amounts in dispute is not suitable for effectively countering competitive disadvantages of lawyers vis-à-vis debt collection companies. The Association is therefore in favor of abolishing the prohibition on agreeing contingency fees and assuming cost risks, irrespective of the amount in dispute. In contrast to debt collection companies, lawyers are not allowed to conclude “no win, no fee” agreements with their clients due to their professional obligations (Section 49b (2) sentences 1 and 2 BRAO). These models are attractive to those seeking legal advice and in particular consumers, as they enable them to pursue legal action without any cost risks. Remuneration is only owed in the event of success and the cost risks of legal prosecution are assumed by the legal service provider. In addition to agreeing on a success-based remuneration, lawyers must therefore also be allowed to assume the cost risks associated with legal prosecution (both court costs and the legal fees of the opposing party in the event of losing) in order to create equal opportunities between debt collection companies and lawyers. Under the current legal situation, lawyers are generally prohibited from doing both.
However, limiting contingency fees to low amounts in dispute is not sufficient to overcome the unequal treatment between debt collectors and lawyers in the design of remuneration models. On the contrary, mandates with higher amounts in dispute – and thus also higher margins for the legal service provider commissioned – would be reserved for debt collectors due to the more attractive remuneration models. However, the professional obligations to which lawyers are subject (e.g., law firm organization, independence requirement, duty of confidentiality; prohibition of representing conflicting interests) provide the guarantee for high-quality legal services – regardless of the amount in dispute.
There is also no reason to deny lawyers performance-based remuneration models because of their prominent position as “organs of the administration of justice” or to limit them to cases with low amounts in dispute. In particular, there is no danger of lawyers advising against the interests of their own clients on the basis of their own economic interests. This is because in “no win, no fee” models, the interests of both lawyer and client are equally focused on the successful enforcement of the law.
The law governing the legal profession also offers a high level of protection to ensure independent and high-quality legal services (law firm organization, independence requirement, duty of confidentiality, prohibition of representing conflicting interests, and much more). For this reason, lawyers are also trusted elsewhere when it comes to reconciling their own economic interests with the interests of the client (e.g. when it comes to assessing the prospects of success of an appeal or concluding a settlement that can earn another fee).
2. Interprofessional collaboration
The association welcomes the call of the parliamentary group BÜNDNIS 90/DIE GRÜNEN to submit a draft law that creates the conditions for enabling lawyers to cooperate interprofessionally beyond the current framework. The requirements of the Federal Constitutional Court on the cooperation of lawyers with physicians and pharmacists1 and the framework conditions of European law demand a coherent new regulation that goes beyond the decided individual case.
In the event of a corresponding liberalization, compliance with the law governing the legal profession and, in particular, the protection of client confidentiality must be ensured. The provisions of professional law applicable to service providers (Section 43e BRAO) and the provisions of criminal law on the protection of secrets (Section 203 StGB) can provide guidance in this regard.
3. Professional practice companies
The Association also supports the initiative of the Bundestag faction BÜNDNIS 90/DIE GRÜNEN for the submission of a draft law by the Federal Government for the reorganization of the legal professional practice companies and for the examination of the admission of further legal forms for the legal professional practice.
However, the association does not share the concerns of the parliamentary group with regard to the (feared) entry of large corporations into the legal services market. Corporations can already invest in legal tech ventures, but only if they are not organized as law firms. The admission of outside investments in law firms will therefore not lead to the feared shifts to the detriment of freelance lawyers, but will contribute to strengthening the market position of the legal profession vis-à-vis non-lawyer providers.
Due to the prohibition on third-party ownership, law firms currently have hardly any opportunities to externally finance initial investments in cost-intensive technologies and regularly do not have sufficient own funds. Know-how in the area of legal tech is therefore often created outside of law firms, namely at technology service providers and collection companies that are open to investment by venture capitalists. These companies are either in direct competition with law firms (if they offer the relevant legal services themselves in the form of debt collection companies) or lawyers have to buy services from them at a high price, which means that part of the added value of legal services is lost.
The Association therefore welcomes the openness documented by the Federal Ministry of Justice and Consumer Protection in its key points for a new regulation of the professional law governing lawyers’ professional practice companies for the permission of equity investments, which can be used to open up alternative financing channels for lawyers by means of venture capital (Item 7 there)2.
4. Increase in legal fees
The association also welcomes the initiative of the BÜNDNIS 90/DIE GRÜNEN parliamentary group to increase lawyers’ fees and to establish a linear adjustment of lawyers’ fees.
The law on lawyers’ fees is regularly adjusted to the changed economic situation only after a few years; the last time this happened was in 2013. In the meantime, the cost pressure on the legal profession has increased (in particular, rising personnel and office space costs), which now makes a renewed adjustment of the fee level necessary.
A regular linear adjustment of the attorney’s fee is in the interest of both those seeking justice and the legal profession. Lawyers ensure a nationwide supply of legal services and thus make a decisive contribution to effective access to justice. In particular, those lawyers who do not work on the basis of fee agreements that provide for a higher remuneration than the statutory remuneration need a secure income basis.
Against this background, the Association also opposes the drastic reduction of almost 50% in the fees recoverable for debt collection services planned by the Federal Ministry of Justice and Consumer Protection, which is intended to apply equally to the lawyer and non-lawyer sectors.
In this context, the almost halving of the settlement fee from 1.5 to 0.7 in the case of lawyers’ participation in payment agreements between the parties to the dispute is to be emphasized. This reduction in fees is even to apply generally, i.e. also outside of debt collection activities. Lawyers are required to avoid (judicial) escalation at every stage of a lawsuit. This idea of avoiding disputes is taken into account by the institute of the settlement fee. A halving of the fees virtually counteracts the goal of settling a dispute as quickly as possible and, above all, out of court, since the lawyer’s effort involved would no longer be adequately remunerated.
Why (here) of all things a halving of fees instead of their increase should result in a legislative proposal is incomprehensible in times of high cost burdens and fee increases that have been overdue for years.
III. Concluding remarks
The Legal Tech Verband Deutschland expressly supports the permissibility of commission models and the possibility of lawyers assuming costs. However, the permissibility of these remuneration models must not be limited to low amounts in dispute. Otherwise, there would be no equality of opportunity between lawyer and non-lawyer legal service providers. The provisions of the law governing the legal profession offer sufficient guarantee for independent and high-quality legal services even in the event of a liberalization of the legal remuneration regime.
The Association also welcomes the initiative to make the law governing the legal profession more flexible with regard to interprofessional cooperation and the admission of additional professional practice companies. Legislative activities in this area should, however, in particular also provide for more flexibility in the raising of capital for law firms (prohibition of third-party ownership), so that investments in technology are also made possible within law firm structures.
The association also supports the suggestion to increase lawyers’ fees and to adjust them linearly in the future. Lawyers make an important contribution to the “basic supply” of legal services and require an appropriate and calculable income basis. Therefore, efforts to cap or even halve the fees for legal services must be countered.
The motion of the BÜNDNIS 90/DIE GRÜNEN parliamentary group “Anwaltliches Berufsrecht zukunftsfest machen” (Making the law governing the legal profession fit for the future) addresses important obstacles that lawyers face when designing legal tech business models and that deprive lawyers of their economic freedom to operate. In summary, the Legal Tech Association Germany welcomes in principle the initiative of the parliamentary group BÜNDNIS 90/DIE GRÜNEN to propose legislative measures for the modernization and liberalization of the law governing the legal profession.