Ethical Rules, Agency Costs and Law Firm Structure

Abstract

The ethical rules of the legal profession, while ostensibly designed to reduce agency costs that arise between lawyers and clients, may actually exacerbate these costs by frustrating the operation of structural devices within law firms that would constrain lawyer-client agency costs in the absence of regulation. This article traces these effects of ethical rules on non-lawyer ownership of law firms, vicarious liability, noncompetition agreements and conflicts of interest. It also analyzes possible causes of perverse effects of ethical rules in the motivations of lawyers, judges and law professors, and considers possible cures, including enforcing lawyers' contractual selection of the applicable state ethical code.