Akzo case will preserve in-house lawyers' pay gap

By Scott Gibson

 (An edited version of this article appeared in Legal Week 30.09.10)

The recent recent European Court of Justice (“ECJ”) judgement on legal professional privilege in the Akzo Nobel case has caused much angst amongst in-house lawyers but has been largely dismissed by commentators as merely maintaining the status quo. Whilst this may be correct from a legal and operational point of view, an unforeseen negative consequence for senior in-house counsel is that it will reinforce the compensation gap between them and private practice lawyers.

The judgment essentially confirms a 30 year old precedent which states that, in relation to anti-competitive / anti-trust behaviour, in-house legal counsel do not have the same legal professional privilege as external (law firm) lawyers because the former are not considered to be fully independent of their employer. Although the ruling is limited to competition/anti-trust advice under EC law, there had been an evolving assumption in the legal community that in-house counsel would eventually be granted the same legal privilege as lawyers in private practice.

The in-house legal community is understandably troubled by the ruling and law firm competition partners have publicly lamented the decision on behalf of their in-house clients. Interestingly, having spoken to two “rated” law firm partners in this field, I am told that there will not be significantly elevated levels of work as a result of this decision as the matters covered would, in any case, be sufficiently weighty to require outside counsel.

In recent times it has appeared that the rise of the in-house commercial lawyer is inexorable. In the UK, over the last ten years the proportion of solicitors with practising certificates working in-house in commercial roles has risen by 59%. It may surprise many to know that today one in ten solicitors with practising certificates are working in-house in what the Law Society defines as Commerce and Industry.

This expansion has inevitably come at the expense of law firms who increasingly view in-house departments as both a source of legal work and a direct competitor for the same. Indeed many partners in law firms cite in-house legal teams, rather than rival law firms, as their most significant market competition.

As a UK-based legal recruiter I have tended to see this growing market as an opportunity and, to some extent, I have felt that regardless of whether we have an anemic economic recovery or, heaven forbid, a double dip recession the one continuing source of legal recruitment will be in-house.

The reason for this is threefold:

(i) cost – in most instances in-house lawyers are significantly less expensive than using outside counsel;         

(ii) increased regulation - in particular large set-piece governance legislation such as: The Companies Act (2006), The Bribery Act (2010) or, in the United States, the Sarbanes-Oxely Act, has demanded that companies review (and upgrade) the way they monitor and manage their legal risk;

(iii) legal enforcement - in the UK, regulators, who for many years had teeth but were often not using them to bite, are now enforcing legislation and imposing severe sanctions on companies and, crucially, individual directors.  

At senior level it is the sanctions, both civil and criminal, imposed on individual directors and officers of commercial organisations which have most closely focused the minds of management on the hiring and retention of quality senior in-house legal personnel.  Indeed, one US study has shown that the Sarbanes-Oxely Act has led to significantly elevated compensation and importance of the role of in-house counsel.

From a UK legal recruiter’s point of view a puzzling aspect of the expansion in numbers and importance of in-house legal teams is that it has not yet led to a requisite hike in the compensation of senior in-house counsel, which still lags significantly behind that of law firm partners. I had assumed that at the very senior level the gap would eventually narrow, however, the recent ECJ ruling has given me real pause for thought on this issue; the decision may have a much more pernicious impact on the prestige (and hence monetary value) of senior lawyers and General Counsel to the boards of their companies.

Regardless of the rights and wrongs of the decision, the ECJ judgement was a very public slap in the face for in-house lawyers and, in Europe at least, there will be a whiff of the “not quite a full lawyer” label attached to them as a result.  No matter that the judgement is limited to a very discreet area of law because, in the minds of at least some company officers, the inability to cleanly compartmentalise an anti-trust matter from say, a Bribery Act case with its draconian penalties, could terrify them.  This should not be overstated because, as I understand it, the regulatory powers are separate. For example the Office of Fair Trading makes a defined distinction between matters investigated under UK law (which are covered by privilege) and those under an EU mandate (which are not). However, it is at least possible that some future regulatory authority (perhaps a hybrid Economic Crime Agency) body may act differently.

It seems that in terms of the way corporates are advised there will not be any dramatic changes as a result of the judgment; senior in-house counsel will continue to undertake the same important “trusted advisor” role that they currently do and there will be no big competition work outflows to law firms hoping for a bonanza. Further, the proportion of in-house lawyers will continue to grow in relation to private practice for all the reasons above. Nevertheless, if a CEO or senior company officer knows their General Counsel is in some way fettered in their ability to advise, it will at some level, hamper the cause of senior in-house counsel as they try to close the still vast compensation gap with their private practice cousins. 

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