Biglaw

Dropping A Bomb On The Legal Monopoly

The Golden State’s bar mulls a monumental change to law firm ownership rules.

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In 1942, in a secret lab built inside a squash court underneath a stadium at the University of Chicago, scientists from the Manhattan Project succeeded in generating the first controlled nuclear reaction. The resulting energy wasn’t powerful enough to even power a light bulb, but their success changed the world forever. More than anything else, the promise and threat of nuclear power defined the back half of the 20th century, for good and for ill.

Forgive me if it seems like hyperbole, but the legal industry may have taken its own first steps down a historic path a couple of months back. Earlier this year, California’s State Bar commissioned a report on online legal service delivery models to determine if there were ways to change its regulations that would both help increase access to the legal system and further the goal of public protection. They sent Professor William Henderson of Indiana University off to prepare a report, possibly expecting he would come back with a boilerplate bromide that read “online access is good, but also bad, so let’s make a minor change to a minor regulation and call it a day.”

If that was what the Bar expected, Professor Henderson had other ideas.

The Henderson Report was published in July, and you can read it for yourself here. It advocates a sea change in the ethical rules governing attorneys.  Henderson breaks down the law into two segments, one serving ordinary individuals (“PeopleLaw”), and the other serving organizational clients. As most any private attorney can tell you, organizational clients are typically the easiest to build a career off of. They need more representation, they keep coming back once the relationship is established, and they tend to be more reliable paying their bills. Individuals, especially middle- and lower-class individuals, are harder to charge substantial rates to, and trickier to collect. Lawyers have therefore increasingly been competing for organizational clients, while the needs of PeopleLaw have gone increasingly unserved. PeopleLaw has been in a steady decline for the past 40 years. In just the five-year period from 2007-2012, the PeopleLaw sector shrank over 10 percent, meaning fewer attorneys are servicing those clients, and those attorneys are making less money.

That’s not to say things are rosy for the legal industry focused on organizational clients. Here, Henderson notes many of the same challenges I’ve discussed in this space at length, and the systemic changes our profession is undergoing. In short, alternative legal service providers and non-traditional law firm models are taking bigger and bigger bites out of the mid-tier and lower-tier law firm markets, while the upper-tier work is consolidating further and further into the few mega-firms at the top. Meanwhile, corporate clients are keeping more work in house to avoid ever-increasing law firm rates. Competition is fiercer than it’s ever been, and many firms aren’t demonstrating the capability or desire to change with the times and face these incoming challenges. Given that historical indicators suggest our economy is headed for a correction, and many firms aren’t even back to the shape they were in before 2008, the legal industry may be headed for deeply difficult times.

While I’ve been focused on these indicators as indicating trouble for law firms, Professor Henderson sees those same indicators as deeply troubling for the public at large. Professor Henderson’s research suggests that these market forces are making it more and more expensive for ordinary citizens to afford legal services, and there are few substitutes available to them. More and more people are choosing to go without legal representation, be it in court appearances or in transactional matters like estate planning or contract drafting. Some of the slack is being picked up by legal start-ups like Docracy or LawTrades, but overall the population of people who can’t get served by the legal profession is only growing.

Typically, an underserved market is a tremendous opportunity for the first person to figure out how to serve that market successfully. There are hundreds, maybe thousands, of industries that successfully cater to the public at large. So why can’t lawyers figure out how to crack this nut? The problem, according to Henderson, is chiefly one of managerial skill and industrial competence. Small-time practitioners just don’t have the resources or managerial training to implement systems to handle the kinds of low-stakes, high-volume work that PeopleLaw comprises. We’re trained to be attorneys, not business managers, and small operations don’t have the cash in pocket at any given time they would need to staff up, buy new software, and hope to generate a bunch of new business. In an ideal world, most attorneys need people with leadership skills and expertise to run their firms efficiently while the attorney spends their time out generating work and practicing law. In almost every other industry, management manages the company, and frees the talent up to produce the revenue.

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The legal industry has denied itself the key component of these types of relationships with non-lawyers: equity. Most companies looking to grow can give management a piece of the company itself in lieu of a salary. The company preserves its cash for its expansion, while the management gets to bet on its own success and participate in the upside of growth. Law firms can’t do that. Every single bar in the United States (save the District of Columbia) prohibits the ownership of law firms by non-lawyers. Our management class has to be 100% composed of attorneys, who typically have zero training in institutional management, and we typically expect those attorneys to also practice law and bring in their own book of business. We’ve cut ourselves off from the pool of managers that could be leading our firms into the future, and as a result we’re also leaving more and more ordinary individuals without any legal representation at all. This we should not abide.

Henderson’s proposed solution follows elegantly from his premises: let’s stop cutting our own legs out from under us. Relax the rules regarding law firm ownership, like the UK and Australia have done before us, and open the market up to innovation and investment from outside the legal industry. Doing so would mean law firms servicing organizational clients could upgrade their profitability and fight back against the alternative legal service providers on equal footing, while their organizational clients get better service than ever before. Attorneys in the PeopleLaw industry could get access to resources and expertise that would allow them to serve more people, more efficiently, for better results both to the public good and their private pockets.

Professor Henderson was sent to catch a fish and came back with a whale. Although there are plenty of skeptics, I think he’s onto something. I’ve long said the legal industry badly needs innovation and fresh ideas. Now, based on Henderson’s Report, I agree that that innovation won’t just help lawyers like me; it will help the kinds of ordinary citizens that need legal protection the most. For our own good, and for the public’s, we need to take the Henderson Report, and its recommendations, seriously.

And to the State Bar of California: the ball’s in your squash court now.

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James Goodnow

James Goodnow is an attorney, commentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of an NLJ 250 law firm. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management category. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

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