New Small Firm Staffing Economics: Leverage is Dead

New Small Firm Staffing Economics: Leverage is Dead

During my second year in law school, I interviewed for a part-time law clerk position with a small private firm. I think the interviewer wanted to probe whether I understood law firm economics (which I didn’t). At some point, they said, “See, we’ll pay you $7.00 an hour and then we’ll bill your time at $35.00 an hour.” My first lesson in leverage.

Before the internet, email, laptops, and smartphones, leverage was a key economic principle underlying most law firms. The firm was a pyramid and the people at the top made a good part of their money by billing out associates at way more than their salaries. As a partner, the more work you could generate for associates, the more money you could make. If you were an associate, your goal was to become a partner.

At the time, Rule 5.6 of the Model Rules of Professional Conduct, which bars nearly all types of non-compete agreements for lawyers, was little more than an honorable homage to the holy principle of client choice. Clients had to be able to choose their lawyers. Hence, when a lawyer left a firm, the firm could not prevent the lawyer or the client from continuing that relationship. But there was little risk to the law-firm leverage model from a ban on non-compete provisions because lawyer mobility was impeded by lack of technology.

Rules of Professional Conduct threaten the future of the practice of law

To leave an established firm and start your own, you would need to set up an office with typewriters, furniture, a desktop computer, server, phone system, and staff. A large bank loan would be needed to fund operations for at least the first several months. A lawyer would need to put up their house as collateral for the loan. To ask your clients to follow you to your new firm, you would have to call them one by one or send them letters by mail, each of which might have to be typed individually, probably by someone other than the lawyer, because most lawyers did not know how to type (when I started practicing in 1990, few lawyers had computers on their desks. Computers were for secretaries to use). Want to leave big law and start your firm? Good luck with that.

Today, almost all lawyers need to start a law firm is a laptop and a smartphone. Give your notice to the firm, send an e-mail blast to your clients, and keep working. Rule 5.6 renders the firm nearly powerless to stop you. They can’t bar you from contacting your clients, they can’t get lost future profits out of you, and they can’t handcuff you with financial penalties for leaving.

Sounds great, right? If you’re unhappy at your firm you can leave and take your marbles with you. This is what most lawyers think, especially newer lawyers. And when lawyers with large books of business become dissatisfied with their compensation or the management of the firm, they often do leave for another firm or to set up their firm. Freedom! Self-determination! Hasta la vista!

Compensation models are changing and firms are struggling to find a solution

This paradigm shift has had a significant impact on both large and small firms. Yes, some mega-firms thrive because they handle complex litigation and transactional matters that require large teams of lawyers to tackle and they have worldwide brands and relationships that bring in clients.

But many large and medium-sized firms have been forced to move toward “eat what you kill” compensation formulas to keep their most-productive lawyers, particularly the rainmakers, happy. This weakens the bonds between lawyers in a firm. Instead of a team with a common mission and identity, many firms have been divided into a bunch of individual book-of-business fiefdoms stitched together by a common name and shared overhead.

Firms have learned that if they don’t maximize the take-home pay of their best lawyers, those lawyers will just take their clients and leave. I have heard senior lawyers talk about not letting associates or junior partners have direct contact with valued clients because of the risk the younger lawyer will develop a close relationship with the client and take that relationship to a new firm someday.

Mobility is effecting loyalty and career trajectories

Mobility affects smaller firms slightly differently. Many associates leave after a couple of years. Part of the reason they leave is that they look at how much work they do, they look at how much they are being paid, and they conclude that they could make more money out on their own. They may not appreciate how hard it is to get new clients in the door or to keep a law firm running, but by the time they figure that out, they are long gone. As a result, leverage – the business model in which lawyers make more money by hiring young associates at a low rate and billing them out at a higher rate – is dead or dying.

Firms have a little financial incentive to hire and train new lawyers

Beyond crass compensation formulas and senior lawyers grumbling about the next generation’s lack of loyalty, there are more insidious consequences: firms don’t want to hire new lawyers. Corporate clients are becoming increasingly aggressive about refusing to pay for two lawyers to attend motions, depositions, etc. So firms have to bear that training costs themselves.

Smaller firms not only have to absorb training costs but the nature of the work at small firms often means that the associate develops a direct relationship with the client, even if the associate did not bring that client into the firm. Why invest in new lawyers if they are just going to pick up and leave just when they are starting to become profitable?

In all sizes of law firms, I see a reluctance to hire new lawyers. Lateral hiring of lawyers with three to five years’ experience and a budding book of business is increasing; firms are hiring and training paralegals to perform tasks that new lawyers used to do.

Meanwhile, new lawyers are left to figure it out for themselves in solo practices or small firms with a classmate or two. They do not receive the training and mentoring that used to be obtained through established law firms. Many of them have to feel their way through depositions, negotiations, and transactions. They get by but they’re rough around the edges.

I hear more experienced lawyers complain about short-sighted litigation tactics and missing professional courtesies. As a profession, we are not taking as good care of our own and we are all the poorer for it.

Should law firms embrace non-compete agreements?

There may be many potential solutions to these issues. But an obvious solution is our fixation with the prohibition on non-compete agreements – Rule 5.6. Nearly every other business allows non-compete agreements: medical device companies, accountants, doctors (except in California, where all noncompetes are prohibited). Have you tried to find your doctor after he or she has left the clinic they worked at? It’s like they went into a witness protection program. Your medical issues are not so sensitive that they can’t be handled by another doctor but for your legal issues, if you couldn’t choose your lawyer it would rank up there with a crime against humanity.

Non-compete policy and the effects on client experience

This commitment to client choice doesn’t make much sense. After all, lawyers fire clients all the time. A lawyer has broad discretion under Rule 1.16(b)(1) to withdraw from representing a client as long as there is not a material adverse effect on the lawyer. Lawyers drop clients when they take in-house positions, become judges, or quit practicing to raise children. Their clients survive with a new lawyer – imagine that.

What if we changed Rule 5.6 to allow limited forms of non-compete agreements or perhaps limited embargoes on soliciting clients after a lawyer left a law firm? Yes, it could strengthen the hand of law firms as institutions and put them more in control of compensation and clients. But it could also allow firms to invest in the future. Less mobility, more investment. Maybe it would tighten the bonds between lawyers at firms so that they have to give some value to the future of the institution and not just their self-interest.

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Attorney Advertising Rules Are Killing Us

updating the rules of professional conduct

One of the most frequent excuses we hear for the glacial pace of innovation and problem-solving in the legal profession is that our ethical rules are too confining. Eric Cooperstein and Megan Zavieh propose to remove this last barrier and use this 4-part series to highlight the ethical rules that most desperately need updating. Excuses be damned, these changes would free lawyers to innovate, adapt, and‚ hopefully‚ bridge the gaping access-to-justice divide. This series focuses on updating the Rules of Professional Conduct that threaten the very future of law practice.

Introduction

There’s plenty of talk about the future of lawyering. Artificial intelligence, machine learning, chatbots, and countless other disruptive technologies promise to change the practice of law as we know it.

But most lawyers head to the office each morning and clock into the same law practice they’ve always known. Threats presented by the future of lawyering seem remote, at best. Most feel powerless to do anything about these changes anyway, so they keep plugging along.

It’s not likely these lawyers will power up their desktops one day and discover that their clients have magically disappeared. More likely, lawyers will slowly notice that their client base is shrinking and their revenues are falling. After further inquiry, they may find their prospective clients are being siphoned off by others‚ probably non-lawyers‚ and slowly realize they are ill-equipped to deal with the decline in business.

The challenge is to embrace innovation while simultaneously preserving the practice of law as a profession. Along the way, we may also tackle the access-to-justice gap. First, we need to reexamine the structures that stand between lawyers and innovation and talk about updating the Rules of Professional Conduct.

Laggards

A common complaint from lawyers who try to innovate their law practices is that some of our profession’s ethics rules create roadblocks and lag the real world. They’re right.

For example, other industries experimented with part-time and remote work arrangements decades before those practices infiltrated the law. Even then, when lawyers did eventually start experimenting with virtual law offices and remote employees, some ethics regulators went into hyperdrive trying to preserve the old ways. To this day, New York as a “bona fide office” requirement that requires New York-licensed lawyers to maintain a physical office in the state if they want to handle New York legal matters, even if the lawyers are dual-licensed and live in another jurisdiction.

Do We Need to Update the Rules of Professional Conduct?

We, as technology-forward, innovation-friendly ethics lawyers, have a generic sense that the profession is trying to “do” innovation better. For example, lawyers are arguably better today than ever at appropriating technology and culture change from other segments of the economy. But while law firm cultures may be evolving at a speedier clip, innovation is thwarted by some old ethics rules.

Whether this is a good thing or a bad one is subject to some debate. Traditionalists maintain that ethics rules protect the public and mitigate risk through torpor. The futurists counter that protectionism is only a virtue if the thing it shelters from change is worth preserving in the first instance.

There can be no debate, though, that the system traditionalists seek to protect exacerbated‚ or, more likely, caused‚ the access to justice gap and our plodding advances in the delivery of legal services.

It is time we update the Rules of Professional Conduct.

Among rules most ripe for change are those about marketing legal services to the public.

Attorney Advertising Rules Need Updating

There was a time, before 1977, when the rules prohibited lawyers from advertising their services. Legal advertising has come a long way in the last 40 years, but the rules still suffer from decades-long lag. These rules, written from their authors’ patriarchal perches, were guided by one (perceived) truth: the general public is woefully unsophisticated and paralyzingly unable to survive exposure to advertising. There is no evidence, however, that the public is as gullible as the rules and their drafters assume.

The public is not as gullible as the rules and their drafters assume.

ABA Model Rules 7.1 and 7.2 serve as the foundation for most states’ advertising rules. And, at that base level, it makes some sense. They say, among other things, that lawyers can’t make false or misleading advertisements or pay for recommendations and that every advertisement must include a name and contact details for at least one lawyer or law firm responsible for its content. But many states, viewing advertising as evil, have cobbled on onerous and sometimes bizarre restrictions.

better call saul attorney advertising

For example, Florida requires lawyers to submit advertisements to the bar for review. You read that correctly: Florida has an office of lawyers devoted to pre-viewing and pre-approving (with a $150 fee per ad!) lawyer advertisements. Direct mail and e-mail, television and radio spots, yellow-pages ads (remember the yellow pages?), and internet advertising are all subject to review. Florida lawyers violate the rule if they have not submitted a proposed ad 20 days in advance. And they can only launch it if the bar approves. The Florida Bar publishes a 35-page book of advertising restrictions and guidelines.

Imagine an attorney becoming aware of a pressing issue for a potential client, like an impending foreclosure or potential fraud. She could not send a letter to the potential client without waiting at least 20 days for the bar to review it.

In New York, lawyers must have detailed descriptions of routine services for which they advertise a flat fee available to the public at the time they publish the fee. New York also has particular requirements for approving and retaining all advertisements and “computer-accessed communications.”

Texas, for its part, has severe and burdensome internet advertising rules, too.

Do these restrictions protect the public? It is hard to tell. At a minimum, no available empirical data supports these various limits. Worse, they very obviously hinder lawyers’ ability and willingness to risk reaching people most in need of their assistance. And its cynicism is apparent: lawyers left unbridled will mislead the public and otherwise violate the rules.

The inherent fallacy is that the public cannot sift through advertisements. And it is nonsense. Turn on any major sporting event and the name of the game and the field on which it is played likely begins with an ad (see, e.g., college football’s Cheribundi Tart Cherry Boca Raton Bowl). Ride any high rise elevator and ads amuse its captives on high definition screens. Social media ads are ubiquitous. Radio disc jockeys read sound bites in a manner that suggests that they had used the advertised services, and public restrooms feature TV screens with a constant deluge of ongoing ads.

logo - CHERIBUNDI TART CHERRY BOCA RATON BOWL

Some (most?) states have created rules about advertising. But those states have lagged‚ often dramatically‚ in editing and updating them. What rules apply to lawyers making YouTube videos, posting on Twitter and Facebook, and launching podcasts? Few regulators have addressed them, and lawyers are left petrified and paralyzed in the absence of any useful guidance. Those same lawyers are always aware of the regulators’ prior peccadilloes, so they are unlikely to innovate for fear of scrutiny.

Some lawyers are creating videos for the public’s benefit, and they’re trying to navigate rules not designed to address video. Video-savvy lawyers look to ethics opinions about social media (to the extent those exist) to chart a course for video. But many are left to guess about how they should advance ethics regulators’ patriarchy while also providing marketing materials to their future clients.

The lag between the technology adoption lifecycle and ethics regulators’ prescience about lawyers’ use of that technology in legal advertising is incapacitating and getting worse. Facebook surpassed 300 million active users in 2009. That is, a cohort of people roughly the population of the entire United States has been using Facebook for nearly a decade. For context, here are some things that didn’t exist in 2009:

  • iPads
  • Google Chrome
  • Pinterest
  • Google Maps
  • The Marvel Cinematic Universe

Amusingly‚ or sadly, depending on one’s perspective‚ California was viewed as a forward-looking state when it issued its Facebook posting ethics opinion three years later in 2012. Most states have still not issued specific guidance on how lawyers can use social media ethically.

The problem is obvious: years after Facebook has gone entirely mainstream (and, arguably, begun its inevitable decline into obsolescence), millions of lawyers still have no fundamental guidance about how to identify themselves as being responsible for an ad there or, in the case of Twitter, how to post mandatory disclaimers in 280 characters.

Lawyers likely react to this regulatory framework in one of two ways. Most do nothing at all, leaving the world’s most disruptive and powerful marketing channel ever invented to sit idly by as lawyers try to modernize their marketing and advertising and crusade for access-to-justice. The more adventurous ones guess and cross their fingers. To be sure, this is no way to run a self-regulated ethics system.

Recent “Progress”

A revolutionary overhaul of the advertising rules is long overdue. Some may even claim that an overhaul is imminent. After all, the ABA approved a resolution in August 2018 to revise the advertising rules. In our view, the changes do little to advance lawyers’ ability to advertise in useful ways.

Rule 7.2 now allows lawyers to use “all media” (a change from “written, recorded or electronic communication, including public media”). In a nod to virtual law practices, lawyers can now designate other contact information on an ad instead of an office address. And lawyers can now send gifts of appreciation to referral sources.

Conclusion

To be clear, the ABA’s resolution will not result in seismic shifts. Lawyers will still labor under self-imposed restrictions that hinder our reach to potential clients and worry professionals across the land. If anything, the ABA’s revisions show how glacial, marginal, and incremental evolution cripples our profession. That is, while media and business change rapidly around us, we nibble around the edges of our old rules. That there was change at all feels like progress, perhaps, but we’re only falling further behind.

Regulating lawyer advertising at a microscopic level is unreasonable and ineffective. Regulators should stop trying to control the nitty gritty of attorney advertising. They should take a higher-level approach instead and focus on existing rules that require lawyers to be honest and forthright when communicating with the public. Limiting regulation to an unambiguous, evergreen rule like that would unlock lawyers’ creativity and give regulators all the ammunition they need to police our profession from troublesome advertising practices.

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How To Become A Small Town Lawyer

Go Rural, Young Lawyer! featured image

I met with a lawyer a couple of weeks ago in a small town about two hours outside of the Twin Cities. Our conversation turned to operating a law firm in a small town and the lawyer told me two things I probably knew but did not really appreciate. One was a complaint about how difficult it is to attract new lawyers to join law firms in rural areas. The other was the lawyer’s prediction that in the next ten years, half the lawyers in her quarter of the state were going to retire from the practice of law.

That prediction probably is not unique to Minnesota. New lawyers unable to find a job in a major American city may want to broaden their job searches beyond their local beltways.

There are many benefits to practicing in a smaller community. First off, there is plenty of work to do. All those farms you pass as you drive that two-lane road into the country? That farmland is worth several thousand dollars an acre in many areas. Those farm families need estate plans, contracts, and business advice. There are teachers, small business owners, bankers, and other professionals as well. The folk in small towns sometimes get divorced, commit the occasional DWI, and get in car accidents. They need local lawyers and they do not want to pay for some lawyer from the city to drive out to the rural courthouse to represent them. They need trusted advisors they can form life-long professional relationships with. That could be you.

Not sure what area of practice is best for you? In small towns, many lawyers are generalists. They take a variety of cases and get experience in multiple areas. Eager to get inside a courtroom? You may get more opportunities in a small town than you would as an associate in the big city.

The economics can work as well. The cost of housing may be less than half of what you would find in a major city. Your mortgage could be so small that even with your law school debt you would have less overall debt than you would have living in the city.

I know, you could never give up the city. You would miss the theater, even though you only go once or twice a year. Where would you shop? (Although you do most of your shopping online nowadays.) A small town only has one movie theater! (Of course, you stream most of the movies you see through Netflix.) These fears of cultural isolation may be just that — fears. The lawyer I met with told me that she and her colleagues are simply more intentional about going to the city for entertainment and probably do so more than city-folk. Many people in the city think nothing of traveling three hours each way in the summer to go up to the family cabin; rural residents just do a “reverse commute” to attend sporting events, concerts, and other big city attractions. I have a client who lives 2½ hours from Minneapolis and has seasons tickets to the Minnesota Twins.

Granted, there are some impediments. If you are single, it may be harder to find a mate in a smaller community. Even if you are married, your spouse may not be able to find suitable work in the same area.  But rural lawyers love to tell you how nice it is to raise children in a small town, where they can ride their bikes to every friend’s house and you know the parents of all of their playmates.

Quite frankly, rural lawyers probably do not want you to just show up for two or three years and then pack your bags and go back to the city. But there is always the possibility that once you get out to the country, you might like it and stay. There is risk in any venture, whether it is joining a big firm or starting your own practice. In tough economic times like these, some new lawyers may want to open their minds to a different type of risk and go west — or north, or south, or east — to find a job beyond their urban dreams.

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Two states opt for sane lawyer advertising rules

yellow-pagesWithin recent days two states – Maine and Alabama– have turned back restrictive lawyer advertising proposals (first heard from the ABA’s Will Hornsby, who is now on twitter). Let’s hope it’s part of a trend.

Maine became another of the vast majority of states to adopt rules (effective Aug. 1, 2009) consistent with the ABA’s revised Model Rules of Professional Conduct. In the advertising arena, however, Maine departed from the ABA Model in two important respects. When it comes to soliciting business from prospective clients, ABA Model Rule 7.3 broadly prohibits live contact with anyone who is not a lawyer or does not already have a family, personal, or business relationship with the lawyer. This is the anti-ambulance chasing rule.  Unfortunately, it applies not just to accident victims and patients in hospital beds, but to all prospective clients, including CEOs, corporate directors, people needing estate planning, etc.

But Maine’s new version of Rule 7.3 narrowly tailors the restriction only to where it’s needed: for “non-commercial clients” where the solicitation by the lawyer “involves or has substantial potential of harassing conduct, coercion, duress, compulsion, intimidation or unwarranted promises of benefits.”  Then it goes on to state that the test for determining whether a solicitation is improper is multi-factored, requiring an analysis of the sophistication of the client regarding legal matters, the physical and emotional state of the prospective client, and the circumstances surrounding the solicitation. Now there’s a rule that should be a model for other states!

Regarding written solicitations of new clients, the ABA and many states require that the words “Advertising Material” appear on  the outside of the envelope, putting the solicitation letter on the fast track to the prospective client’s trash can. Not Maine. As noted in a comment to Maine’s new rule, concerns over client harassment, overreaching, and deception are adequately addressed by its other advertising rules, so there’s no need for a warning about the contents of the envelope. It’s almost like Maine wants its lawyers to be able to get new clients.

Maine also retained the unique “Aspirational Goals for Lawyer Advertising” that it adopted in 2005. Essentially, Maine has taken many of the black-letter restrictions from other states on crass slogans, wild dramatizations, the use of professional actors, etc., and asks Maine’s lawyers to stay away from unseemly advertising that might bring down the reputation of the entire profession.  One would assume that if the aspirational standard was not working, the Maine Supreme Court would have taken this opportunity to impose greater restrictions.

In Alabama, the Montgomery Advertiser reported  that the Alabama Supreme Court had rejected a petition by the Board of Bar Commissioners to ban “paid actors, jingles and wreck videos” from lawyer advertising to raise ads up out of the muck. Apparently, the Court gave no explanation for its decision but some may speculate about the lucrative residuals that may come from writing catchy jingles for law firm commercials.

These developments come close on the heels of the NJ Supreme Court’s decision last June  to allow NJ attorneys to refer to themselves as having been blessed with the label “SuperLawyer” (as long as they have been so anointed). Restrictive advertising rules for NY are under review by the 2nd Circuit, and a plan to implement a program for pre-publishing approval of lawyer ads in Louisiana is still winding its way through Federal court (as tweeted by La. ethics attorney Beth Alston).

If this keeps up, we may eventually see sane lawyer advertising rules prevail across the country.

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