European Court of Justice to Review Ban on Outside Investment in German Law Firma

European Court of Justice to Review Ban on Outside Investment in German Law Firma

A legal case brought by Berlin legaltech entrepreneur Daniel Halmer against the Munich Bar Association has prompted the European Court of Justice (ECJ) to review the ban on the third-party ownership of law firms in Germany.

This decision has potentially significant implications for the liberalisation of the EU legal market. In 2020, Halmer sold a 51 per cent share of a law firm he established to an Austrian company, resulting in the Munich Bar Association revoking the firm's license.

Halmer's legal team, which included Hengeler Mueller partner Dirk Uwer, argued that the ban on third-party ownership of law firms violates EU principles around the freedom of capital movement, the freedom of establishment, and the Services Directive. As a result, the Bavarian Lawyers' Court has asked the ECJ to review the ban this week.

Daniel Halmer, the founder of Berlin-based online legal service for consumers Conny, stated that the issue of third-party ownership of law firms in Germany is crucial to small or medium-sized law firms' ability to invest in the necessary technology for providing consumer law services.

“We invested €5 million in the software we needed to set up our business. Under the traditional law firm model, that is too expensive for most firms. There is a younger generation of lawyers in Germany who appreciate that the rules around ownership need to be reformed. If we are successful, it will jump-start innovation within the legal sector right across the EU,” Halmer said.

Halmer's legal team is challenging the rule that prohibits financial investors from holding any interest in companies for the joint practice of law, known as anwaltlichen Berufsausübungsgesellschaften, even if compliance with lawyers' professional obligations and autonomy is ensured by other legal provisions and the company's articles of association.

Alison Hook, who co-founded the consultancy Hook Tangaza, remarked that the impact of technology on attitudes towards external financing in German law firms has been evident for some time. However, there are contrasting views on the matter, which has hindered progress towards change at the national level.

“The presence of an Austrian element in this case, which makes this the first cross-border European case of external law firm ownership to reach the ECJ, means that this looks like a good test case and one which could have far-reaching consequences beyond Germany and beyond the EU,” Alison Hook added.

Markus Hartung, the managing partner of consultancy Chevalier and a former Germany managing partner of Linklaters, is a notable proponent of changing the rules. He argues that the ban on outside ownership of law firms is not based on evidence but on the dogmatic belief that lawyers will forget their professional duties when they come into contact with money.

“As a result, the market opportunities of young or innovative lawyers were always impaired because there are no bank loans for such investments. The established legal profession can therefore keep innovative competitors at bay by means of this ban on outside ownership,” Hartung said.

Hartung stated that although he couldn't predict the ECJ's decision, based on previous case law, bans without exceptions were not proportional.

In addition to Hengeler Mueller's Uwer, Halmer was also represented by Moritz Quecke, a partner at Berlin-based GQL Gussone Quecke Legal. On the other hand, the Munich Bar Association was represented by Christian Wolf, who is the chair for civil law, German, European, and international civil procedural law, and the head of the Institute for Procedural Law and Legal Law at the University of Hanover.

It is anticipated that the ECJ's decision will take around two years. Nonetheless, Halmer expressed optimism at the case being referred directly to the court, stating that he is "very encouraged" by this development, indicating a strong case.