Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

“Taking the Law Out of Harvard Law School”

Harvard Law School Langdell Library in Cambrid...

Harvard Law School Langdell Library in Cambridge, Mass. (Photo credit: Wikipedia)

The absurd disconnect between legal education and practice has often been noted, but Max Kennerly has a superbly-articulated critique of the continuing state of affairs at HLS and other law schools.

(No, I don’t agree with everything else on Max’s blog.)

Market Clearing in the Legal Education Market

According to the Law School Admission Council, the following data represent ABA applicants and applications for each of the past three falls:

three-year-aba1

three-year-aba2

The LSAC reports that “[a]s of 08/08/13, there are 385,358 Fall 2013 applications submitted by 59,426 applicants. Applicants are down 12.3% and applications are down 17.9% from 2012.” 

It’s surprising that the figures haven’t gone down further.  That’s probably due to various market imperfections, including incomplete information available to applicants about market conditions.

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From the Law of Supply and Demand File: Law School Applications Plummet

Oral arguments about to begin.

Density of future law school classrooms? (Photo credit: Wikipedia)

From today’s New York Times:

Law school applications are headed for a 30-year low, reflecting increased concern over soaring tuition, crushing student debt and diminishing prospects of lucrative employment upon graduation.

As of this month, there were 30,000 applicants to law schools for the fall, a 20 percent decrease from the same time last year and a 38 percent decline from 2010, according to the Law School Admission Council.

(Quote from “Law Schools’ Applications Fall as Costs Rise and Jobs Are Cut,” by Ethan Bronner.)

This is a painful but almost certainly necessarily market correction.

I covered competition issues relating to lawyer oversupply here.

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Are Bar Associations Anti-Competitive?

English: Title page of Adam Smith's Wealth of ...

Title page of Adam Smith’s Wealth of Nations, 1776. (Photo credit: Wikipedia)

From the abstract of a recent paper (via Antitrust & Competition Policy Blog):

 

The European Commission Report on Competition in Professional Services found that recommended prices by professional bodies have a significant negative effect on competition since they may facilitate the coordination of prices between service providers and/or mislead consumers about reasonable price levels. Professional associations argue, first, that a fee schedule may help their members to properly calculate the cost of services avoiding excessive charges and reducing consumers’ searching costs and, second, that recommended prices are very useful for cost appraisal if a litigant is condemned to pay the legal expenses of the opposing party. Thus, recommended fee schedules could be justified to some extent if they represented the cost of providing the services. We test this hypothesis using cross-section data on a subset of recommended prices by 52 Spanish bar associations and cost data on their territorial jurisdictions. Our empirical results indicate that prices recommended by bar associations are unrelated to the cost of legal services and therefore we conclude that recommended prices have merely an anticompetitive effect.

Aitor Ciarreta (Universidad del Pais Vasco), Maria Paz Espinosa (Universidad del Pais Vasco) and Aitor Zurimendi (Universidad del Pais Vasco), Are Bar Associations Anticompetitive? An Empirical Analysis of Recommended Prices for Legal Services in Spain.  This recalls Adam Smith’s famous statement in The Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  Of course, recommended prices — in a vertical distribution situation — are perfectly lawful.  But where a bar association is involved, there are horizontal (or possibly horizontal) aspects to the arrangement.  Cf. Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) (minimum-fee schedule for lawyers published by the Fairfax County Bar Association not immune from the Sherman Act); Arizona v. Maricopa County Medical Soc., 457 U.S. 332 (1982) (maximum physicians’ fee schedule violated the antitrust laws).

 

No doubt there is a current oversupply of lawyers.  However, the better way to address concerns about fees is to (lawfully) reduce the supply.  See this blog post, for example.

 

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ABA: Only 55% of Law Grads Found Full-Time Law Jobs

According to this news story in the National Law Journal, “[s]lightly more than half of the class of 2011 — 55 percent — found full-time, long-term jobs that require bar passage nine months after they graduated, according to employment figures released on June 18 by the American Bar Association.”

What’s to be done about this depressing statistic?  Now might be a good time for me to mention my prior post on “Competition Law, Policy and the Apparent Oversupply of Lawyers in the U.S.”  Competition policy and principles may have something relevant to say about this problem.

 

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Using iPads at Trial

Nice guest post on using iPads at trial over at the Virginia Appellate Law Blog.

“The advantages are perhaps at their clearest when we pack up to leave court for the day. We pick up our iPads and walk out, knowing that absolutely everything we need is in there. No more trial bags. Heck, this is true even during coffee breaks or the lunch hour — each lawyer can walk out of the courtroom holding, under his or her arm, all of the documents, transcripts and notes that may be useful.”

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Saturday Miscellany: The Business of Law

Maryland US business route template

Maryland US business route template (Photo credit: Wikipedia)

Interesting post at thecontractsguy.net — a roundup of other articles on the changing nature of the business of law.  “There can be no doubt that the legal profession is going through a significant sea change. More than ever before, we’re facing pressures to continuously improve the efficiency and quality of our services, and most firms — maybe all firms — must innovate in order to survive.”

 

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On the Legal Ethics of Using Newfangled Computational Engines

Mac OS I ?

There has been some discussion lately about the legal ethics of using computers in law practice.  In particular, there’s been discussion of cloud computing and “software as a service.”  See here and here, for example.  Ethics opinions and ethics pundits are discussing exactly how much security these services must have, and how much an attorney has to investigate them before ethically using them.

I confess I don’t understand this.  The ethics rules already require lawyers to maintain their clients’ confidences, and already require lawyers to maintain their clients’ property and records.  In the pre-computer days, all records were stored on paper.  Lawyers typically stored them in their offices, or in separate file rooms.  No one, however, ever bothered to ask: “Are deadbolt locks on office doors sufficient?  Are they required?  If you use a combination lock instead, do you have to call up the lock company and inquire how secure their combinations are?  Do you have to interview your janitorial staff and conduct background checks on them on a regular basis to ensure that client files to which they have physical access are safe?”

All of these physical security questions in pre-computer days were left up to a reasonableness standard.  If you were exercising reasonable care in preserving client documents and files, then you were complying with the rules.

What’s the difference with computers?  Why do some people feel that it is necessary to spell out in great detail what is secure, what’s not secure, and how much security needs to be investigated?  This seems like a waste of time and energy, especially given the rapid pace of technological change.  Not to mention the fact that modern, encrypted computer storage is probably much safer than the average physical deadbolt lock, as well as the fact that attorneys are not particularly well-situated to evaluate computer security.

Competition Law, Policy and the Apparent Oversupply of Lawyers in the U.S.

The state bars and the supply of law students

Recently, there’s been a great deal of discussion about the current and future state of the legal profession and the apparent oversupply of lawyers and would-be lawyers. See here and here, for example.

Because this blog focuses on competition-related issues, I thought it would be interesting to look at this debate through the prism of competition law and policy.

The state bars as monopolies

The market for young lawyers has been notoriously bad in recent years and especially in the wake of the financial crash of 2008. To some extent, the marketplace seems to have begun to correct itself, as this recent article reports (LSAT takers have declined rather dramatically over the last year).

The legal profession, however, is not a free market, and one may legitimately wonder whether traditional self-correcting market mechanisms will completely solve the oversupply problem. That is because the profession – like all regulated professions – is a sort of monopoly. Or rather, there are 51 monopolies in the country (D.C. has its own bar). If you want to practice law, you must be admitted to at least one state bar. That typically means you must attend three years of law school and pass an entrance exam. Although no lawyer, of course, has monopoly power, the state bars (sort of, as we’ll see) control the supply of legal services, and through unauthorized-practice-of-law prosecutions enforce the profession’s entry barrier.

But the bars are a curious form of monopoly: they don’t actually control the quantity or supply of lawyers. The bars can only indirectly (and I suspect ineffectively) calibrate lawyer supply by making the bar entrance exams somewhat harder or somewhat easier. But the real entrance point to the profession — law school – is not under the bars’ direct control. And this seems to be causing some significant problems, as explained below. The bars are a bit like Lucille Ball at the candy factory – the candies (students) keep coming faster and faster, and Lucille (the state bar) can’t really do anything about it.  (See the picture above from a famous episode of “I Love Lucy.”)

Are the bar monopolies good or bad?

Monopolies aren’t evil. Every business wants to build a better mousetrap, beat its competitors, and corner the market. If it succeeds through hard work and effort, the law says “kudos.”

The above analysis, however, applies to organic monopolies – those that develop as a result of their own business acumen or skill. In the case of the state bars, the monopolies are hardly organic. Rather, they are imposed by law. Because they are imposed by law, they are, by definition, lawful monopolies. If you didn’t go to law school and/or you didn’t pass the bar, good luck to you in suing your state bar under the antitrust or unfair competition laws – you are most unlikely to prevail.

Because the bars aren’t organic monopolies, we’re left with a policy question: are the bar monopolies good or bad? And when we ask are they good or bad, about whom are we inquiring?

There are at least two basic views about the question of the value of the bar monopolies. First, as argued in this New York Times op-ed piece by Clifford Winston from last October, law schools and bar exams aren’t necessary, and actually lead to supra-competitive pricing and limited access to legal services (especially by lower-income consumers).

Then we have the opposite view of writers like blogger Nathaniel Burney, who wrote this post entitled “The Legal Profession Needs More Bars to Entry, Not Fewer.”  The title of the piece accurately sums up its position.

Competition law perspective

So who has the better argument from the perspective of competition law?

Competition law typically focuses on harm to consumers, so let’s start there. Are state bars good or bad for consumers? The argument in favor of the bars has always been that consumers need to be protected from inferior or negligently-performed legal services. Because (many? most?) consumers cannot easily evaluate the quality of those services, a government agency is necessary to impose minimum thresholds of competence and to act as the profession’s gatekeeper. Many legal services are not equivalent to the production of widgets, so third-party private rating services are simply insufficient to provide adequate quality information to consumers.

There are, of course, numerous responses to this argument. Here are a few: Some (many?) consumers – particularly businesses – are sophisticated and can judge the quality of services themselves. Some more routine services can be competently performed by practitioners who have not spent three years in law school and/or have not passed the bar. Through bar admission requirements, bars only serve to restrict the supply of such services and raise their prices. The bar admission process has little to do with the actual practice of law, so although it imposes a barrier, it does not impose a meaningful one; bar passage does not correlate well with quality of service. And, as Clifford Winston explains, private rating agencies could evaluate and rate lawyers and provide quality information to consumers, much as the Zagat publications rate restaurants.

Let’s also consider the perspective of law students and lawyers (potential entrants and competitors in the legal services marketplace) – even though antitrust law typically doesn’t focus on harm to particular competitors. Everything else being equal, lawyers already admitted to the bar would probably like the entry barrier to be raised (putting aside their desire to find and hire reasonably-priced lawyer-assistants). Higher entry barriers mean tighter supply which should mean (again, everything else being equal) higher prices. Law students, or students applying to law school, have mixed incentives. In the short run, they benefit from lower entry barriers. In the long run, they don’t.

The law school disconnect

Now let’s consider the other marketplace actor we haven’t discussed yet: the law schools. After all, if the bars primarily serve as gatekeepers, one would think that they should actively help or eliminate the oversupply problem (especially if they are controlled by legal service providers, which is almost always the case). Although the bars can toughen or relax admissions requirements, they typically don’t impose numeric admission caps, and they can only indirectly affect the supply of new attorneys. (“Supply adjustments” by the bars through alterations to the entrance exams are also likely not very effective, at least in the short run, because there is a long queue of law students and law school applicants behind every new class of bar exam takers who are unlikely to exit law school or the profession because of a harder bar exam test.)

There are quite a lot of law schools in the U.S. – over 200 accredited ones, and a number of non-accredited ones – and the total number has grown dramatically in the last 30 years. Law schools are relatively cheap to run and administer (no expensive laboratory or scientific equipment is required), and one could cynically view them as profit centers for their universities.

Law schools generally have an economic incentive to keep the supply lines open and the entry barriers relatively low (if the bar exams are too difficult and too many law students don’t pass them, law school recruiting will presumably become more difficult over some length of time). Law schools may have been aided, if not abetted, in their apparent business plan to expand the number of law students by the existence of federally-subsidized student loans, which arguably have helped create an “education bubble” and explain the way-above-average-inflation annual increases in higher education tuition.

(I’m not saying that each and every law school has a plan to expand the number of students – almost certainly, not every school does — but collectively the schools have an incentive to increase the number of students, because each additional law student is “marginally” — as the economists say — profitable (which means in this context that additional law students are very profitable).)

Moreover, until recently at least, there may have been a sort of “lock in” problem familiar to competition law: at least some law students didn’t realize the nature or difficulties of the job market, because the information is relatively difficult to discover. (Some law students claim that the law schools actively misrepresented information about the state of the marketplace. I do not know whether that claim is true or not.)  The students then signed up for expensive three-year legal educations, often incurring large amounts of debt, and became locked-in to their educational and career path after their other options evaporated.

The American Bar Association (ABA) accredits law schools, and presumably exercises some amount of quality control. However, the ABA is not a bar in the traditional sense (it administers no entrance exam), and it is not directly affiliated with the state bars which do administer bar exams. Many states require bar applicants to attend an ABA-accredited school, and thus outsource whatever authority they might otherwise exercise over the schools. (Not all do, and some states, I believe, still let students “clerk” their way into the bar.) For whatever reason, the ABA has continued to accredit more and more law schools.

More schools, plus relatively easy access to student loans, have created an excess supply of attorneys — excess in the sense that not every attorney can find meaningful employment after law school within a reasonable period of time. True, greater supply in theory should mean lower prices for consumers – which is traditionally regarded as a pro-competitive outcome. However, greater supply also likely means that many lawyers are offering services they aren’t qualified to offer, resulting in at best sub-optimal results and higher attorney search costs associated with finding the right attorney, not to mention the societal costs caused by too many people entering the profession when they could be engaged in other productive activity.

The end result appears to be that economic actors who do not participate directly in the marketplace for legal services have a strong incentive to continue to stuff the would-be lawyer pipeline with an ever-larger number of lawyers, and the state bars can do little, if anything about the situation.  It’s not an entirely ridiculous stretch to compare the market dynamics to those in the housing market a few years ago. Mortgage companies (law schools) had access to large amounts of money via distant investors (government loans) and could use that money to drive up demand for housing (legal education) resulting in increased housing prices (increased tuition and an increase in the number of lawyers).  The mortgage companies (law schools) bore little if any risk because it was absorbed by downstream economic actors.  Meanwhile, the regulators such as the Fed, the FDIC, etc. (the state bars) couldn’t or wouldn’t much about it.

(There may be a separate market for legal education. I’m going to set aside concerns about the health of that market. If it is a separate market, it is much, much smaller than the total market for legal services, and seems less relevant (and certainly less important) for that reason. Instead, throughout this post my focus is competition in the marketplace for legal services, and the effects on consumers of those services.)

Suggested principles

Given the dynamics above, what should be done?  Here are a few principles that I suggest should inform the analysis of the attorney supply issue:

  1. Politically, complete deregulation of the legal industry seems implausible if not impossible.  Additionally, I disagree with Clifford Winston that private, third-party attorney ratings services would be sufficient, or always sufficient, to inform consumers about lawyer quality were there no entry barriers (no law school requirement and no bar admission requirement).  Private rating services are not always particularly effective — the rating of financial derivatives during the financial crisis is probably Exhibit A.  Also, would Mr. Winston advocate against entry barriers in any other profession? Say, for example, in medicine? There were few if any barriers prior to the late 19th century, and the quality of medical services was accordingly uneven and low. No, law is not medicine, nor is it rocket science, but it can and does involve important issues and large amounts-in-controversy. Eliminating all entry barriers might lower the costs of at least some legal services, but it will also cause serious and significant quality problems and raise the transaction costs of finding appropriate and competent counsel.
  2. That said, many more routine legal services need not be delivered by attorneys at all. Instead, they could be delivered by para-professionals, perhaps certified by a national authority after around a year-and-a-half of standardized training. Reasonable minds can differ about which services could be delivered adequately by para-professionals; I might start with residential real estate closings, title searches, wills and trusts for personal estates of less than $X, etc. Physicians’ assistants and nurse practitioners seem to be working very well for the medical field, and I don’t see any reason why a similar approach couldn’t be taken in the legal profession. Doing so would increase the supply of such services and lower their costs, and go a long way to solving Mr. Winston’s concerns.
  3. There should be one, national bar in the U.S. Having 51 separate bars is wasteful and expensive and often increases transaction costs. It’s not always clear when local bar membership is required in interstate or international transactions, and this uncertainty can cause expense, delay, and require the otherwise unnecessary services of additional lawyers. I think nothing puzzles non-Americans more about our system than the fact that it has 51 separate bars. When Americans seek counsel in England, they expect an English lawyer, not a London lawyer, and when they seek counsel in France, they don’t expect that counsel to be licensed in only one Department.  51 bars cannot adequately coordinate their activities to address quality and supply issues.
  4. There is a disconnect between entrance into the legal profession at the law school level and admission to the profession through the bars. The circuit should be closed. Having one national bar would help facilitate its closure.

A modest proposal

I suggest that there is a middle path between the Winston and Burney proposals, informed by the principles above. Here it is:

  1. Have one national bar.
  2. Grant that bar the power to accredit law schools throughout the country. Only students at accredited schools would be able to take the bar.  Grant the bar an antitrust exemption to allow it to exercise its accreditation power freely.
  3. Over a decade or so, reduce the number of accredited law schools by approximately one-third to one-half. Ensure that schools cannot evade the intent of the reduction by dramatically expanding class sizes.
  4. Design and administer a national bar exam that is somewhat, though not dramatically, more difficult than today’s average state bar exam.  Perhaps more importantly, make it at least somewhat more relevant to the actual practice of law, so that success on the bar correlates better with the actual practice of law.
  5. Develop a national program for paralegals, with a formalized curriculum of about 1.5 years and a national exam administered by the national bar entity.
  6. Allow paralegals to perform enumerated services independently, and other services under the indirect supervision of attorneys.

The above program, if implemented over a decade, would (i) increase the supply of routine but high-quality legal (or para-legal) services (especially to moderate income consumers) and lower their cost, (ii) enhance the quality of more complex legal services and enhance the ability of consumers to find appropriate counsel for such services, and (iii) eliminate the lawyer over-supply problem.  It may not be a panacea, but I think it would promote the good intentions of the deregulationists while safeguarding consumers and eliminating many of the externalities caused by the current dysfunctional system.

Neither of the alternatives seems palatable.  Complete deregulation won’t happen and will cause its own set of serious problems.  Maintaining the status quo but making bar admissions more difficult also won’t solve any fundamental problems and won’t address the disconnect between the current gatekeepers and the law schools that have an incentive to keep the supply spigot wide open.

 

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