“Caveat Emptor” Is No Way to Practice Law

In the Opinion section of today’s Wall Street Journal, two fellows from the Brookings Institute espouse their philosophy for deregulating the legal profession:  Let anyone practice law; whether they’ve gone through law school or not, and allow anyone to own a law firm.

These are not new ideas, but the assertion that these ideas are the key to lowering costs of delivery of legal services is misplaced.

First, the licensing of lawyers is to protect the public; they are not there to protect the interests of lawyers. For example, an individual must be competent to represent and advocate for the interests of a client.  It’s the same principle as licensing doctors.  Incompetence either in court or in the operating room can cost people their lives.

Second, technology provides many avenues to reduce legal costs. Removing the licensing requirements has no impact on this issue. Yes, requiring a license does cost money and does cost time (opportunity costs for the student), but it also impacts the quality of services delivered … just as in the case of medicine (oh yes, and plumbing), etc. Why not remove licensing requirements for everyone in everything, from medicine, to plumbing, to driving a car. Licensing assures a minimum standard of quality. Licensing requirements in specific areas of human endeavor are society’s way of self-protection. Caveat emptor is acceptable, but not to the degree apparently desired by the authors of the Brookings report.

If lower legal costs are the objective, the argument should focus more on the pricing modalities as they impact the cost of legal services rather than the governance of the law firm. We’ve talked about this on previous occasions.

Third, the underlying premise that licensing provides an insurmountable barrier to entry and substantially raises costs by controlling supply might be true if one doesn’t look at the facts of recent and current reality. There are many more lawyers than the current demand can accommodate.  Many lawyers cannot find work. Thus, it is illogical to suggest that licensing is the cause for higher legal costs. Those lawyers who are working often provide legal services at lower rates than they used to charge. Even large law firms find significant resistance to raising their rates. Are legal expenses high? Yes, but compared to what? How low should these prices be before they are acceptable? And, if there is no regulation, we might likely see larger law firms pattern their pricing after one another, just as the unregulated airlines currently do, so that the benefit of lower costs would not be evident.

There is no price regulation now in the airline industry. Yet, it’s remarkable how similar airline prices are. Yes, there are a few low cost airlines such as Southwest. And, yes, there are also lower cost law firms as we sit here today, even with the regulations we have in place. The only benefit of the authors’ "non-licensing" proposal would be the destruction of minimum standards of quality. Caveat emptor might be acceptable if the public had a way of knowing what the quality standards should be … but they don’t and they won’t.

Combining other skills such as accounting into one organization (the old "multi-discipline" argument) is not required … many law firms already work closely with allied professionals for the benefit of clients. This is merely a non-issue.

Dewey, which went into Bankruptcy Court last night, did not fail for lack of credit. The firm had been extended bank lines of credit. It failed for lack of effective management. It’s unlikely that investors or others would have given Dewey more money if they understood the true nature of the firm’s economics and governance. Thus, this is also a non-issue for the authors’ arguments.

In sum, law firms function no differently from all other businesses. Good, solid business decisions must be made to attract customers/clients and operate cost-effectively. Dewey failed on both counts. The arguments put forth by the authors would not have changed this outcome. But, in the terms of business, by going into bankruptcy, the firm may be able to disgorge its unfunded pension obligations and become a viable candidate for acquisition by another large firm.  That’s when the principle of caveat emptor really comes into play – as a normal risk that businesses take every day.

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