The Business Of Law

When I was in law school there was a story that got told about a guy who tried to cut his hedges by holding his running lawn mower above his head by the handle.  You can guess what happened next.  He loses his grip on the lawnmower and ends up trimming himself rather than the hedges.   The end result: the addition to the lawnmower’s warning label of a ‘do not hold the lawnmower above your head’ caution.   My take on the story, admittedly once I stopped laughing, was that there should have been no need to state something so obvious. All the label really needed to say was that the operation of the lawnmower required common sense.

Today, the nation’s court system faces a similar dilemma as it seeks to manage juries in the age of smart phones  and Twitter. These and other new technologies and applications have not only changed the speed with which we can communicate with the world. They have also made it possible to communicate from virtually any place, at any time – even from a jury room, where such activity is expressly forbidden. Yet somehow it would seem that the ease and prevalence of these new technologies have stripped jurors of common sense when it comes to complying with the rules of the courthouse.

Let’s start with the basics.  Perhaps you’re a “Law and Order” junkie, or a follower of another television courtroom drama.  Maybe you’ve served on a jury, or witnessed a jury trial.  If you have, you’ve likely heard a judge give the jury instructions admonishing them not to discuss the case with anyone and prohibiting jurors from conducting any outside research beyond the evidence presented within the four walls of the courthouse.

Those basic jury instructions are now being forced to catch up with modern technology.  According to BLT: The Blog of Legal Times, a committee of the Judicial Conference of the United States has endorsed a set of model jury instructions for district judges to help them deter jurors from using cell phones, computers or other electronic technologies during jury service.

The intent of the rule is clear, and it’s consistent with the long-standing rules for juries.  Jurors should decide the case before them on the merits, based on only the evidence as presented in the courtroom.

To ensure this, judges will sometimes order juries sequestered, to prevent them from being exposed to outside information. But what do you do when a juror can access a dictionary, an encyclopedia and a copy of every newspaper in the world, all at the push of a button on their cell phone?

Similarly, in the old days, jurors were limited in who they could talk to on the phone while sequestered.  But how do you limit who jurors can talk to, when the media they communicate with expands to include not only mobile phones but also gchat, Twitter, Facebook, Blackberry Messenger, and text messaging?

The answer is that we make the jury instructions very specific, and we trust jurors to do the right thing.  Here are the key points of the proposed model federal jury instructions:

(Courtesy of our friends at: BLT, The Blog of Legal Times)

Before Trial:

…you should not consult dictionaries or reference materials, search the internet, websites, blogs, or use any other electronic tools to obtain information about this case or to help you decide the case.

…many of you use cell phones, Blackberries, the internet and other tools of technology. …You may not communicate with anyone about the case on your cell phone, through e-mail, Blackberry, iPhone, text messaging, or on Twitter, through any blog or website, through any internet chat room, or by way of any other social networking websites, including Facebook, My Space, LinkedIn, and YouTube.

At the Close of the Case:

During your deliberations, you must not communicate with or provide any information to anyone by any means about this case. You may not use any electronic device or media, such as a telephone, cell phone, smart phone, iPhone, Blackberry or computer; the internet, any internet service, or any text or instant messaging service; or any internet chat room, blog, or website such as Facebook, My Space, LinkedIn, YouTube or Twitter, to communicate to anyone any information about this case or to conduct any research about this case until I accept your verdict.

What do you think?  Important update, or needless revision?

No, it’s not a fairy tale.  The story of the lawyer and the entrepreneur is the vision of some forward-thinking administrators at Duke Law School and the University of Colorado School of Law. Both are in the process of launching LLM programs in “entrepreneurial law” as reported in the National Law Journal  (NLJ) and the WSJ’s Law Blog.

The idea is pretty straightforward. An LLM-level program in entrepreneurial law (with courses and clinics focused on entrepreneurship and emerging companies) will ideally give lawyers greater skills to advise start-up businesses—or to become entrepreneurs themselves.

In the NLJ piece, professors at both Duke and Colorado talk about how lawyers are increasingly called upon to advise start ups, and how a knowledge of business in general and entrepreneurship in particular will be helpful to lawyers in giving that advice.  I agree.  But to me, it’s the second part of the equation that is much more interesting—helping lawyers become entrepreneurs themselves.

Now, as regular readers know, I have argued over and over and over again that the legal profession needs to be more entrepreneurial. The fundamental model is in need of a huge overhaul to become much more innovative and customer-centric.  To do that, lawyers need to think more like business people.  Maybe having some courses in entrepreneurship will help. 

The Duke and Colorado programs promise to teach students about employment, organizational behavior and financial strategy.  These are, of course, critically important parts of business, and long overdue topics for law schools to begin covering.  That said, what about the other aspects of entrepreneurship? What about judgment, about knowing how to calculate risk, and when to take it, focusing on customers, and aligning incentives to maximize output and performance?  These are also critical, and they are not typically associated with law school curricula.

Instead, where entrepreneurs look to balance risk and reward, lawyers tend to minimize risk above all else.  Where entrepreneurs seek out innovation and efficiency, lawyers look to perfect the standard operating procedure, all the while billing by the hour.  Where entrepreneurs by their nature look for shortcuts, lawyers always seem to take the long route.  Where good entrepreneurs are maniacally focused on the customer, lawyers tend to be self-absorbed.

The bottom line is that the entrepreneurship programs at Duke and Colorado are a step in the right direction, and they will undoubtedly help lawyers as they advise their increasingly entrepreneurial clientele. But I’m hoping they will also teach lawyers how to be businesspeople in their own right. If they succeed in accomplishing that goal, the lawyer entrepreneur won’t have to be an oxymoron.

As close readers might recall, I have long called for an end to the billable hour model of legal service, arguing instead that contingency fees were a better solution for lawyers, clients and justice.

Well, as Claire Ruckin over at Legal Week reports, it appears that no less an authority than Lord Justice Jackson agrees with me.

Lord Justice Jackson, a widely respected appeals justice in the U.K., was asked to conduct an independent review of the rules governing the costs of civil litigation in the U.K. and to provide recommendations that would lead to greater access to the civil justice system.

Among Lord Justice Jackson’s conclusions are that lawyers in the U.K. be allowed to charge for their services through the use of contingency fees.

This is an important step for the U.K. because contingency fees had previously been prohibited on the grounds that lawyers with a significant final stake in the outcome might lose their ability to give impartial advice.

As a good English lord might say, that’s poppycock.

Contingent fees align the interests of counsel and clients, and they allow lawyers to take on costly and complex cases with little risk to the client. Finally, these fee arrangements promote efficiency because they encourage lawyers to be honest with their clients about the likelihood of success on the merits.

Most importantly, contingent fees are client-centric; something the legal profession could use a whole lot more focus on.

Whereas the billable hour essentially reimburses lawyers for their time, the contingent fee compensates the attorney for the client’s outcome. Lord Justice Jackson is 100 percent right, no matter how radical his proposal might seem to our bewigged brethren.

D.M. Levine over at AmLaw Daily had a recent blog post titled “Where Do We Go From Here?” The post covered a panel discussion hosted in December by LexisNexis on the future of the legal industry.

As D.M. reports:

The discussion, entitled “Evolution or Revolution: The Future of the Law Firm Business Model,” was moderated by Darryl Cross, vice president of client profitability at LexisNexis, and included panelists from various sides of the legal profession.

The debate was part of LexisNexis’s release of a survey of legal professionals on the future of the legal services industry.

Here are the study’s key findings:

•    71 percent of corporate counsels believe law firms are not doing enough to respond to current financial pressures.

•    57 percent of them believe the billable hour will be replaced by alternative billing arrangements.

•    52 percent of private practice lawyers believe the recession will permanently change the way law is practiced.

One of the panelists summed up the problem thusly: “We’re a profession that, over the last hundred years, has not done anything differently and the only industry that is proud of that.”

Can I get an “Amen”?

As I’ve said here, and here and here, the legal business model is fundamentally changing, and those that respond to those changes will have meaningful strategic advantages.

Which gets us to the question, why is the legal profession so resistant to change? Why are we the only industry that seems to innovate at a snail’s pace?  Here are a couple of possible explanations:

1.     Lawyers like consistency. That’s not a slur, it’s just a fact. Lawyers interpret and apply rules. The more consistent the rules, the more predictable the outcomes, and the easier their jobs are.  There’s nothing wrong with that, and my colleagues who are attorneys will say that there is an important place for consistency and uniformity when it comes to the law.  I agree.  But should that same need for consistency and uniformity apply to the business model?  I think too often we are an industry that does things because “that’s how things are done.”  That attitude is anathema to the entrepreneurial spirit that typically drives innovation and progress.  Bottom line, consistency is important, but thinking outside the proverbial box is the first step toward progress.

2.    Lawyers don’t like risk. Closely related to #1, most lawyers are at some level, in the risk mitigation business.  They minimize risk for their clients and they try to prevent financial harm.  And they should, and they’re right to do so because that’s what they’re being hired to do.  But does that mean that lawyers should be unwilling to take some risk in their business? Of course not.  At Sokolove Law, our contingent-fee business is based on taking risk, with our co-counsel and our clients.  We vet cases and the cases we think have merit, we take to trial with our co-counsel.  We all—our firm, the co-counsel, and the client—have some skin in the game.  It’s one of the reasons our clients come to us.  One of the principal complaints I hear about the traditional legal business model is that win or lose, the lawyers always get paid.  For many in the business community, that’s totally counter to the tried and true idea of shared risk.

3.    Consensus is stifling. One of the topics that came out of the LexisNexis panel discussion is that no one really has the solution to what ails the legal industry, and the fact that there is no consensus seems to be stifling any progress.  That’s totally true. For some reason, the legal industry seems to be convinced that until there is consensus about a new business model, we cannot proceed.  I don’t think there’s much merit to that argument.

There’s a theory in academic circles about “pioneers, imitators, and generics.” While it’s generally used to refer to product R&D, I think it applies to the legal profession as well.

The premise is that the pioneers reinvent the business model through innovation, the imitators perfect the model through trial and error, and the generics go along for the ride, dividing up market share.  The problem with the legal industry is that we have too many generics, and not enough pioneers.   We don’t need consensus to experiment, to try new things, new processes, and new ways of doing business. We need firms that are willing to step out and experiment, to break the mold, to be more responsive to the client’s needs, and to find new and innovative ways of conducting our business.

That’s what we’re trying to do at Sokolove Law.  For thirty years, we’ve been changing how people obtain legal services. Today, we are continuing to pioneer a new business model based on helping our co-counsel do what they do best, while also expanding access to the civil justice system for people who have had no access to it in the past.  If you’re interested in learning more about what we’re trying to do, drop me a note. I’d love to talk about it with you.

A recent Florida District Court of Appeal case could raise serious implications for so-called “third-party litigation financing” (TPLF).  TPLF is the practice of providing money to a party to a lawsuit with repayment of the loan contingent on the party “winning” the case.

Here’s how it works:  I am hurt, I want to sue the party that hurt me, but I cannot afford the costs of litigation.  Currently, there are lenders who will loan me the money to pursue the matter (based on their belief that I will win) and if/when I reach a settlement or am awarded damages, I have to pay back the loan plus interest.

The Florida case was significant since it held that a third-party funder was by law, a “party” to the lawsuit, rather than an arms-length lender.  The reason that this matters is because the court then held the lender liable for the other side’s attorney’s fees and costs — just as it held the named plaintiff liable.  That’s important, because if you’re a party to a lawsuit you expose yourself to all kinds of responsibility and liability that a lender certainly doesn’t bargain for.

For me, the Florida ruling is a chilling one for lenders because it says that if a lender lends you the money for a lawsuit, and tries to protect its loan by involving itself in the case, then they may have the same liability that you do.   In its decision, the court focused on the degree to which the lender sought to participate in the plaintiff’s prosecution of the lawsuit in order to protect its loan, honing in on the fact that the lender had the right to approve the choice of counsel, “veto power over whether litigation was filed, who would file it, and how it would be pursued,” and “final say over any settlement”.

Granted this lender played a much more active role than typical TPLFs but what a slippery slope the court’s decision starts us down.

Keep in mind that the court wasn’t saying the plaintiff was a shill for the lender.  But consider the potential ramifications of this decision.  Imagine that after you take over your father-in-law’s business, you find that you have to sue a big distributor that has just breached its supply contract, which may result in your company going under.   “Dad” knows the business better than you, he knows just the right lawyer, and has a serious personal stake in his son-in-law’s ability to provide for his daughter.  Maybe he still has some of his money tied up in the business.  So he gets involved and loans money to fund the lawsuit on the condition that he actively participates in how it is run. Do you now have to warn him that he might be on the hook for attorney’s fees if you lose?

Let’s step back from my intentionally one-sided fact pattern and talk about what is really going on here.  There is an ongoing war between those in favor of TPLF as a way to help people most in need get their day in court and those that see it as the work of the devil.   In October, 2009, the U.S. Chamber Institute for Legal Reform (an interest group founded by the U.S. Chamber of Commerce) issued a paper outlining their view of the matter.  In it, they wrote:

“The root of the problem with third-party litigation financing is that it introduces a stranger to the attorney-client relationship whose sole interest is a financial one. “

(As an aside, it’s always interesting when the U.S. Chamber of Commerce is attacking people for having a “financial interest.”)

However, that’s not the Chamber’s real argument.  Its real argument is that access to lending will increase the number of cases that are brought.  For the business community, which sees lawsuits not as an access to justice issue but simply another cost of doing business, that’s a problem.  Right now, businesses rely on the fact that most people don’t know how to or have the money to protect themselves.  If lenders are willing to finance suits, it becomes easier for people to sue, and that means more litigation, more settlements, and more money (and by the way, more compensated tort victims, though they always seem to forget that part).

We at Sokolove support more access to the civil justice system.  We’ve made it our business for over thirty years.  If lenders are able to allow more people to have their day in court, that is a positive development in our view.  Agree? Disagree? I’d love to hear from you.

Ralph Nader, crusading advocate for consumers, gave a talk recently at the University of Connecticut School of Law in which he blasted the legal profession and law schools for failing to adequately look out for “the administration of justice.”

Nader, who’s advocacy bona fides are without doubt, ripped into the system of legal education for spending too much time: “teaching substantive law, and too little encouraging students to think critically about why the law is what it is.”

Law.com has a nice write up of Nader’s talk here.

While I don’t necessarily agree with Nader’s politics on everything, I think he makes a great point here.  As I’ve written before, I think law schools spend too much time teaching lawyers about the way things are, and the black letter law, instead of talking about the underlying system of justice, and how we promote fairness and equality in society.  In many ways, our law schools are factories churning out widgets well prepared for the legal system as it is today, instead of how it ought to be.

If I can be so bold as to compare, I think our business schools (bias alert, I’ve got an MBA) do a much better job in their curriculum of trying to get young business leaders to think outside the box about the way the economy and business are evolving, rather than rigidly focusing on understanding the status quo.

Our economy and our profession are undergoing significant change.  Nader’s right that we need to rethink not only our business but also the way we prepare young people to enter it.  I’ll have more to say about that going forward. In the meantime, I want to know what you think.  Drop me a note, or leave a comment.

Sometimes smaller is better, that might be the lesson of recent developments in the business of law.

For years, the conventional wisdom was that the way to build a legal business and inoculate yourself form the ups and downs of the economy was to have more attorneys with a wide range of specialties scattered over the broadest possible geographical footprint.

But as we watch developments in our industry there is some evidence to suggest that just there are real advantages to being smaller.  To begin with the big firm model is to charge high prices to big prominent clients on complex matters.  That model presents several problems. Let me explain.

At big firms, pricing is based on a billable hour. Hours are billed on a sliding scale from the junior associates to the most senior partners.  That model has been vilified by business clients for years because it creates an incentive to have their legal work done by junior associates and then reviewed only briefly by senior partners.  The result is that the work often takes longer and there are real questions about the risk of error.  In addition, there are concerns that junior associates take more time to do basic work that would take more experienced attorneys less time.  The result, whether you pay $1,000 for the most senior partner, or $500 for the junior associate right out of school doesn’t really matter all that much, because it’s going to take the associate twice as long to do the work.  I’ve talked about the shortcomings of the billable hour before here.

Beyond the billable hour, the big firm infrastructure can often stifle business.   To begin with clients may not want to pay “big firm” rates, making marketing difficult, but beyond that as a practical matter, if a client is small, or is in need of minor legal assistance, the administrative costs of taking on a particular piece of business may not be justified. Think of how hard it can be to get a qualified carpenter to fix a minor repair on your house; many of the best qualified workmen only take “the big jobs”.  Want to replace your roof, or put on an addition, and they’re happy to help, but what if you just want to replace a squeaky door, or replace a piece of crown molding?

Finally, the big firm model does not allow the attorney to build lasting long-term relationships with the client.  Sure the senior partner and the general counsel of the client may have a social relationship, but the bulk of the legal work is done by overworked, multi-tasking, distracted associates focused on delivering their 2500 plus hours per year to qualify for their bonus, or in a down economy simply keep their job.  The incentive is to bill as many hours for as many clients as possible.  Simply put outputs rather than outcomes are the goal, and the firm’s objectives could not be more unaligned with the clients.

I recently came across an article in the Silicon Valley Business Journal three lawyers who left big firms to hang out their own shingle.  According to the article: “At the new firm, all are finding it easier to retain clients and capture others.”

But the article points something else out as well and that is that the lawyers who left the big firms were all confident in their marketing skills and their ability to attract clients, and that’s really the catch.

There’s no question that the smaller firm business model allows for a more client-centric focus, a closer relationship with the clients and their businesses, and even a more lucrative law practice where less revenue is devoted to bloated overhead, but that model only works if you can get clients.

That’s where Sokolove Law can help.  In the personal injury space, we have helped hundreds of firms market themselves and attract new clients, and we’ve overseen thousands of cases where clients were compensated for their injuries without paying the big firm rates.  We’re successful because we know how to market legal services to people who have been injured (after all we are the largest marketer of legal services in the country) and because our co-counsel firms are some of the best, most qualified attorneys within their areas of expertise.

So if you’re a small to medium-sized firm looking to perfect your marketing,please get in touch with me , maybe we can help.

Greetings readers, my name is Gabriel Miller, and I’m the General Counsel of Sokolove Law.  As the top lawyer for the largest marketer of legal services in the country, I spend a great deal of my time watching very closely the rules of professional responsibility across the country.  From time to time, I’ll weigh in here to comment on interesting happenings in the area of legal ethics.

Last week, law.com brought news that Connecticut outlawed the practice of hiring so-called “runners” to solicit legal business for personal injury lawyers.  The Law.com article had a great description of how the system worked:

“People known as “runners” would be on stand-by, listening to police scanners and waiting for an auto accident to occur so they could rush to the scene. Their job was to contact accident victims and steer them toward specific doctors, chiropractors and, often, personal injury lawyers. The runners would be paid for each client they delivered; sometimes the runners would wait in busy hospital emergency rooms and spot people waiting to be treated and then whisk them out with a promise that they knew a doctor who could see the person immediately.

Runners also obtained police reports and contacted accident victims at their homes. Connecticut trial lawyer, Kathryn Emmett also had heard from other trial lawyers that some accident victims were being encouraged to file insurance claims and lawsuits based on phony injuries”

Connecticut joins 9 other states who have outlawed this practice, punishing lawyers with up to a year in jail and fines up to $5,000 if they are caught hiring “runners”.

What’s really interesting about the law is that it brought trial attorneys and the insurance companies together on the same side of a political debate.  In fact part of the impetus for the law came from the Connecticut Trial Lawyer’s Association, whose members starting hearing about runners’ unscrupulous practices from their clients.

The practice is more common than one might think with lawyers in Philadelphia, New York, and New Jersey having been convicted in recent years for violations of anti-runner laws.

Simply put, the practice of hiring runners, and other such actions give all attorneys, but particularly personal injury lawyers a bad name. There is a big difference between providing access to the civil justice system by educating people about their legal rights and options, and preying on people when they are the most vulnerable.

The Connecticut Trial Lawyers and their colleagues around the country are smart to support reasonable regulation to weed out the bad actors.

If you have a question about this or another topic on legal ethics and professional responsibility or if you know of a topic you’d like me to comment on, drop me a note.

Get the smelling salts, I’m writing a blog post on “process management”. Seriously, I came across an interesting piece over at the Legal Intelligencer by Gina Passarella this week, that talked about the idea that the legal profession could improve its business model by indulging in a little bit of project, and process management.

“Egads” you say…and as Gina points out “process management is the antithesis of the billable hour model”.

But I ask: Does it have to be?

Why couldn’t lawyers price their work, not by the billable hour (whose death knell, I have predicted), and instead look to outcomes. The model is quite simple, instead of being at the whim of the billable hour, lawyers would look at an overall legal project, estimate how difficult the project is, and then provide the client with a cost. If the project can be completed in less time, then the law firm adds to their profit. If it takes longer, then the firm knows that it needs to perfect its method of estimating.

Imagine if you went to your mechanic to have the brakes on your car fixed and you were given two options. First, you could have the master mechanic with thirty years of experience fixing your kind of car. Good news is that it will only take him one hour to fix the problem; bad news is he charges 800 dollars per hour.

Second choice would be the new guy, he’s just out of mechanic’s school, and basically has no idea what he’s doing. He’ll tinker around for about 5 hours before he figures out how to replace the brakes, but the good news is he only charges about 50 dollars per hour. Only other issue is that if you have the new guy do it, are you really sure it was done right (I mean after all we’re talking about brakes here—pretty important). So again your choices come down to:

1. Have it done right in one hour, but pay $800 for it, or
2. Have it done (maybe) right, in five hours, but pay $250

Kind of feels like a Cornelian dilemma to me.

Wouldn’t you rather the mechanic just tell you how much it will cost to fix your brakes? You agree to the price, and if the shop can figure out how to fix the brakes really efficiently, then everybody wins—you get your car back sooner, and the shop has more profit?

I’m no MBA (o.k. I am Babson class of 1996), but it seems to make sense to me.

As has been widely reported, the third quarter of 2009 saw 13 mergers among law firms, bringing the total number so far in 2009 to 45.  There were 25 in Q1 2009 and 7 in Q2 2009.  In 2008 there were 70 mergers among law firms.

These figures might lead an outside observer to ask: Why the merger mania?  To be sure, there is much about the legal industry that is changing.  Many of these changes are outlined in an excellent article over at law.com (subscription required).

The article reports on a recent panel discussion at the ALI-ABA ACLEA 2009 Summit in Arizona held yesterday.

The panelists outlined a series of external forces—namely globalization, changing regulations, and evolving demands of clients, and they talked about the dramatic changes those forces could bring to the education of law students, the practice of law, and the business model of running a law practice or firm.

Here’s a brief excerpt:

The globalization of clients will continue to force even small firms to deal with matters abroad or represent foreign clients in the United States. Large and quick law firms will have the competitive advantage, he said, but smaller firms can compete with the use of technology.

Another big change that is already in the works is the switch to a buyer’s market. Law firms used to be the ones dictating how matters would be staffed and priced, but that is no longer, Bower said. Sophisticated clients are demanding that first- and second-year associates stay off their matters. They are also off-shoring work themselves or demanding their law firms do it, Bower said.

Perhaps the most dramatic change that is further down the road is one Bower called the “ticking time bomb” overseas. That is the Legal Services Act of 2007, which when it takes effect will allow law firms to raise capital like a public company.

Now I’ve talked about the Legal Services Act quite a bit and here’s how it relates to the merger mania that we’re seeing.  Law firms currently have limited ability to raise capital.  To innovate or expand the business, firms can either borrow money from a bank, raise capital from existing partners, or merge.

As you might imagine mergers often look like the easiest route to partners who don’t want to saddle the firm with debt, and certainly don’t want to dig into their own pockets to provide growth capital.

Of course the obvious question is why can’t firms raise outside capital to fund expansion like any other business.  The answer is that the rules of professional responsibility prohibit it.  That’s where the LSA comes in.

In the U.K. the LSA would allow firms to raise outside capital by selling shares in the firm.  Of course there are safeguards in place to prevent conflicts of interest, or lawyers putting the interests of shareholders ahead of their clients.

The net effect of the LSA though is that firms headquartered overseas will now be able to raise outside capital to grow and expand, and as U.S. law firms continue to compete in a increasingly global legal marketplace, the pressure of this outside capital will be enormous.

Will U.S. firms survive, will we change the rules to allow U.S. firms to raise outside funds to compete with their brethren across the pond.  As always, we’ll be staying tuned…