The European Court of Justice (ECJ) is to review the ban in Germany on the third-party ownership of law firms in a case that could lead to a major liberalisation of the EU legal market.

The move follows a legal challenge by Berlin legaltech entrepreneur Daniel Halmer, who is disputing a decision by the Munich Bar Association to revoke the licence of a law firm he set up in 2020 after he sold a 51% share of the enterprise to an Austrian company.

This week, the Bavarian Lawyers' Court asked the ECJ to review the ban after Halmer’s legal team, which included Hengeler Mueller partner Dirk Uwer, argued that it violates EU principles around the freedom of capital movement and the freedom of establishment as well as the Services Directive.

“This is about the ability of small or medium-sized law firms to invest in the technology they need to provide consumer law services,” said Halmer, founder of Berlin-based Conny, an online legal service for consumers bringing claims in the fields of tenancy, employment and telecommunications.

“We invested €5m 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’s legal team challenge the rule that ‘financial investors may not hold any interest in 'anwaltlichen Berufsausübungsgesellschaften' (companies for the joint practice of law) even if other legal provisions and the company's articles of association ensure compliance with lawyers' professional obligations and lawyer autonomy’.

Alison Hook, co-founder of consultancy Hook Tangaza, said: “It has been clear for a while that technology is shifting attitudes in Germany to external finance in law firms but there are strong opinions on both sides of the debate and this has made change slow at a 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.”

One prominent supporter of a change in the rules is Markus Hartung, managing partner of consultancy Chevalier and former Germany managing partner of Linklaters.

He said: "The ban on outside ownership of law firms without exception was never justified on the basis of evidence, but was based purely on dogma: that lawyers 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.”

He added: “Of course, one cannot predict the ECJ's decision, but according to previous case law, bans without any exceptions are not compatible with the principle of proportionality."

Also representing Halmer, alongside Hengeler Mueller’s Uwer, was Moritz Quecke, a partner at Berlin firm GQL Gussone Quecke Legal. The Munich Bar Association was represented by University of Hanover professor Christian Wolf, chair for civil law, German, European and international civil procedural law and head of the Institute for Procedural Law and Legal Law. 

A decision by the ECJ is not expected for around two years but Halmer said he was “very encouraged” by the fact that the case had been referred directly to the court. "It suggests that we have a very strong case,” he said.

Last year, the German Federal Lawyers' Act underwent a major reform which for the first time permitted lawyers to join multi-disciplinary partnerships even if they are in the minority. However, the law against third party investment in law firms remained intact.