The Akzo Nobel judgment is bad news for in-house lawyers, says Scott Gibson, and will probably hit them in the pocket

The recent European Court of Justice (ECJ) judgment on legal professional privilege in the Akzo Nobel case has caused much angst among in-house lawyers, but has been largely dismissed by commentators as merely maintaining the status quo.

While this may be correct from a legal and operational point of view, an unforeseen negative consequence of the decision 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/antitrust behaviour, in-house legal counsel do not have the same legal professional privilege as external lawyers because the former are not considered to be fully independent of their employer. Although the ruling is limited to competition advice under European Commission 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 several experienced 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 10 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 10 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 which increasingly view in-house departments as both a source of and a direct competitor for legal work. 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 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 instructing 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 US, the Sarbanes-Oxley Act, has demanded that companies review (and upgrade) the way they monitor and manage their legal risk;

(iii) legislation enforcement – in the UK, regulators which 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 the senior level it is the sanctions, both civil and criminal, imposed on individual directors and officers of commercial organisations that have most closely focused the minds of management on the hiring and retention of quality senior in-house legal personnel. Indeed, there is some research that strongly supports the view that the Sarbanes-Oxley Act has significantly elevated the compensation as well as the importance of the in-house counsel role in the US.

From a UK perspective a puzzling aspect of the expansion of the number and influence 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 a 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 as seen by their companies' boards.

Regardless of the rights and wrongs of the decision, the ECJ judgment was a very public slap in the face for in-house lawyers and, in Europe at least, there will be a sense that the in-house Bar is being labelled as 'not quite a full lawyer' as a result. Even though the judgment is limited to a very discreet area of law, it is highly significant. In the minds of at least some company officers, the inability to cleanly compartmentalise an antitrust matter from, say, a Bribery Act case with its draconian penalties will be terrifying. Having said that, the judgment should not be overstated because European Union and UK 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 body (perhaps a hybrid Economic Crime Agency) 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 adviser' role that they currently hold 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 chief executive 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.