Category Archives: Legal practice

Cost disease, the practice of law and access to justice

(First published on slaw.ca)

How is it that we are such a wealthy society yet services that were once available are no longer available (at least at affordable prices)? Many people, but certainly not all, had help in their homes and farms, even full-time help. Doctors used to make house calls. When I was a child, the milkman[1] made deliveries each day. There used to be people who actually answered telephones in businesses.

What we call the “access to justice” problem seems to be similar in nature. We know that the number of self-represented litigants has dramatically increased over the last four decades. Ordinary people can’t afford lawyers. Even lawyers can’t afford lawyers. Yet, it seems that there was a time that people had a family lawyer just like they had a family doctor.

Some of this is pastoral myth. The idea that doctors were once available to all isn’t true as Tommy Douglas addressed in Saskatchewan in the 1950s. The poor didn’t have servants even though domestic help seems to have been more common than it is now. The image of the small town lawyer serving the whole town fails to recognize that there were income differences that must have affected who could afford to pay for a lawyer.

And while the price of legal services is a significant issue, it isn’t the only issue in the “access to justice” problem. There is also much to the idea that our legal system has become more and unnecessarily complex with attendant costs. A system of justice that is too expensive for most to access is a denial of access to justice even if the perfect justice can be obtained by those who can afford it.

While the problem of access to justice has more than one cause (and so must be addressed in more than one way), the cost of lawyers seems increasingly to be part of the problem. But why is that?

Cost Disease

A few weeks ago, I listened to a podcast on economics[2]. There was an interview with Larry Summers[3] who is a highly regarded economist[4]. Stephen Dubner, the interviewer, asked Summers about the cost of government and why it is that the cost of government doesn’t shrink. As Dubner asked:

You talk about us having conquered inflation, but lately you’ve been writing about the reasons why federal government can’t shrink. One of those reasons that I found really interesting — you talked about how changes in structural pricing that disproportionately affect government are huge. You talk about the Consumer Price Index from 1983 versus today and the things that have gotten relatively cheaper and the things that have gotten relatively much more expensive. Can you talk about that for a moment? I assume where that leads to is a conversation about what you economists call cost disease, yes?

Summers responded saying:

This is the phenomenon that was first noticed by the late Princeton economist William Baumol, that’s sometimes referred to Baumol’s Disease or cost disease. It refers to the fact that if workers become much more productive doing some things — and their wage has to be the same in all sectors, then there’s going to be a tendency for the price of the areas in which labor is not becoming productive to rise. That’s why it costs more to go to the theater relative to other things that it did when I was a child. That’s why tuition in colleges has risen. That’s why the cost of mental-health counseling has risen. All kinds of activities where it takes inherently a person one hour to provide a given service and where productivity growth is defeating the point. Productivity growth in education, after all, is a higher ratio of students to teachers — which is exactly the opposite of what we all want for our kids. Those structural changes are going to define our economy.

The cost disease thesis says that relatively unproductive sectors become more costly with productivity increases in other sectors because incomes increase in both productive and unproductive sectors as a result of increased productivity.

A core idea of cost disease is that there is labour mobility over time. In the long run, a sector will not be able to continue to pay people lower incomes if work is available to them elsewhere for higher incomes. Just because one sector is less productive than another sector doesn’t mean the less productive sector will be able to get away with paying its workers lower incomes. The cost disease thesis also reflects the economic view that incomes over time generally rise as productivity generally rises. Of course, there are questions about some of the underpinning of the cost disease thesis.[5]

But even if one does not accept the idea that productivity increases positively affect incomes generally[6], it must be true that sectors that do not become more productive will become relatively more costly unless these relatively unproductive sectors decrease incomes in their sectors.

Cost disease and the practice of law

I was struck by the application of the idea of cost disease to the practice of law. The last four decades have seen amazing productivity increases in other sectors of the economy. Computing capacity and networks have fundamentally changed the productivity of significant sectors of the economy. Before that, mechanization, electrification and industrialization radically changed the productivity of other sectors of the economy.

On the other hand, it also seems pretty clear that lawyer productivity has little changed over the long term. While there have been some productivity changes arising from modern technology, most of that has simply been to reduce overhead as lawyers do their own document processing.

This is particularly true in litigation. The approach to analyzing documentary evidence, interviewing clients and witnesses, discovering adverse parties and trying cases for ordinary people is highly lawyer-intensive without there having been material changes in productivity over the decades[7]. This may be less true in some of the solicitor’s practices where technology has made document production more efficient and where process efficiencies can be adopted in routine aspects of legal work where there is sufficient volume.

Of course, economic theories do not always hold in practice. There can be other factors at work. Market efficiency assumptions may not hold. But actual labour market information seems to show that lawyer incomes have followed incomes generally. A few years ago, I looked at census information over the last forty years or so and found that lawyer incomes generally tracked family incomes over that period. I also understand that research has indicated that lawyer, engineer and doctor incomes track a similar path[8].

Let’s assume for the sake of argument that lawyer incomes do rise and fall with incomes generally for whatever reason. That means that if other sectors have become more productive then the cost of what is produced in those sectors will have declined. Costs in sectors like law where productivity has not improved, or improved as much, will relatively increase.

I was excited by the new (to me) thought that apparent increases in legal costs and resulting diminution in access to justice could be explained in part by increased productivity in other sectors and the limited productivity increases in law. I went looking for further discussion of cost disease and, particularly, its application to the practice of law.

Not surprisingly, I found that this was not a new thought. For those interested in reading more, Professor Gregory W. Bowman posted two blogs on exactly this point over a decade ago in his Law Career Blog[9]. More recently, Emery Lee[10] published a journal article in the University of Miami Law Review entitled “Law Without Lawyers: Access to Civil Justice and the Cost of Legal Services”[11]

In his article, Lee looked at the cost of legal services for the “Big Guy” and the cost for the “Little Guy” i.e. the ordinary person. Lee said at pp. 514 to 515 that “In relation to the Little Guy, the cost disease is his problem. As discussed above, in general, it is not the levels, or amount, of discovery that keep the Little Guy out of court. Most of the Little Guy’s cases are not going to be discovery-heavy, and reforms designed to reduce discovery levels are unlikely to help the Little Guy.” and “The Little Guy has simply been priced out of the market for legal services. Reducing discovery levels is unlikely to solve this problem.”

So what?

As a profession, we have had difficult discussions about innovating our existing business structures. Some argue that we should simply focus on procedural and substantive simplification of the litigation process, that it is only litigation that is a problem and that solicitors’ practices are just fine. Accepting that simplification in litigation is important, my view has long been that the significant areas where people do not use legal services at all (sometimes called the 85%) must be addressed and that the cost of providing services is a major part of the reason for the lack of service in the 85%. Increases in costs arising from increased productivity in other sectors may be part of the reason that the 85% cannot be effectively served without significant productivity changes. This supports the idea that it is important to bring capital and technology to bear because increasingly expensive professional labour is simply too expensive for the task[12].

What is a significant implication for me is that decreased access to justice in the 15% served by lawyers, and particularly in litigation, may be the result of cost disease and the lack of productivity increases in law. Where access to capital is constrained as is true in the practice of law, labour is overwhelmingly the means of production. Where productivity in other sectors improves, the cost of legal work certainly relatively increases. And if labour costs actually rise generally with increased productivity, the absolute cost of legal work will increase as lawyer incomes rise with productivity in other sectors[13].

If “cost disease” is a material reason for the increasing cost of legal services and diminishing access to legal services, it follows that legal costs will continue to relatively increase unless productivity in the legal sector improves. Even without this analytic framework, it is obvious that new ways of providing legal services are already here and that they are less expensive and more easily accessible. This will only increase.

The implication is significant. If the traditional practice of law becomes relatively more and more expensive over time then fewer legal services will be consumed and the threat from new and less expensive forms of legal service will increase. Legal services regulation will not ultimately hold back this tide, nor should it in my view.

So the question is whether we should continue to restrict the practice of law to traditional practices or should we encourage real innovation in the way that law is practiced so that productivities are achieved.

I used to think that the answer was obviously that increased productivity should be encouraged because of the moral and policy obligation to promote access to justice. While still thinking that is so, I also think that existing legal practices are imperilled by our unwillingness to allow the conditions required for innovation. Cost disease is not just a disease suffered by consumers of legal services. Cost disease is suffered by lawyer and paralegal producers too and the consequences may be more severe if not addressed. Attempting to hold back the tide can work for a while but when the dike fails much can be lost that could have been saved.

Something to think about.

_____________________________

[1] Herb was our milkman and he had a very cool truck. He let me ride with him in his truck on our street when I was a little boy

[2] http://freakonomics.com/

[3] http://freakonomics.com/podcast/larry-summers-economist-everyone-hates-love/

[4] Even if not so much on other topics

[5] It is not so clear that the benefits of productivity increases are generally distributed. Labour market mobility is suspect with income disparities having increased over the last generation. Increases in productivity over the last generation have not resulted in increased real incomes for many people. Some increases in income have been enjoyed in distant economies with local labour markets facing downward pressures.

[6] i.e. that the wealthy disproportionately enjoy the profitability arising from increased profitability

[7] Significant e-discovery advances exist but are mostly irrelevant outside of “big business” disputes and mostly address the significant increase in e-documents in business over the last couple of decades. Litigation for ordinary people has not seen material productivity gains other than legal research, especially CanLii.

[8] Alice Woolley kindly reviewed a draft of this column. She advised that this observation was made in the research underlying Woolley, Alice and Farrow, Trevor C. W., “Addressing Access to Justice Through New Legal Service Providers: Opportunities and Challenges” (2015), 3 Texas A & M Law Review 549

[9] http://law-career.blogspot.ca/2006/07/baumols-cost-disease-and-practice-of.html and http://law-career.blogspot.ca/2006/08/baumols-cost-disease-and-lawyers-part.html

[10] Senior Researcher in the US Federal Judicial Centre

[11] Emery G. Lee III, Law Without Lawyers: Access to Civil Justice and the Cost of Legal Services, 69 U. Miami L. Rev. 499 (2015)

[12] If legal services are only relatively more expensive but not absolutely more expensive, it would still follow that consumption of legal services would decline.

[13] Whether because of increased productivity in other sectors or not, lawyer incomes have followed other incomes.

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Contingent Fees, Portfolio Risk and Competition – Calls for reform

(first published on slaw.ca)

In theory, contingent fee pricing is an elegant way of providing access to justice at a fair and reasonable price. In this column, I try to look at both theory and practice and also at prospects for reform.

Time and materials

Let’s start with a different approach to pricing. Legal work can be done on a “time and materials” basis (to use language from another industry), on a fixed fee basis or on a contingent fee basis. These different approaches shift risk between suppliers and consumers of legal services.

Legal work is still largely priced on a “time and materials” basis. While time spent is not the only factor considered when setting price, it is ordinarily the dominant factor.

Fixed Fees

Legal work is increasingly offered on a fixed fee basis. Where available, this is attractive to clients because of the increased certainty that fixed fees offer. Fixed fees can also allow increased competition as clients can more easily shop for a better price.

Where a fixed fee is agreed, the lawyer has the risk that the work may take more time than anticipated. Given that the lawyer likely has an understanding of what is required based on past work and given that the lawyer can make up losses on some fixed fee matters by gains on other fixed fee matters, this risk is mitigated. Where fixed fees are fairly agreed, it would be inappropriate for the client to be charged an increased cost because it turned out that extra time was required and it would be inappropriate for the client to demand a rebate because it turned out that less time was required than was anticipated. Either fixed prices are agreed or not.

But all of this assumes an effective market. For lawyers and clients, there is significant information asymmetry. Clients cannot assess whether a particular fixed price makes sense as clients ordinarily cannot assess the cost of the work to be done and likely outcomes. However, where prices are generally available, clients can “shop” based on price. Where prices are transparent and price shopping is possible, clients need not make their own assessments because a competitive market does so for them.

Contingent Fees

Contingent fees have some similarity to fixed prices. The price of the legal work is fixed as a percentage of the ultimate recovery. However, contingent fees add a further complexity as no fee is charged where there is no recovery.

There are two risks facing clients and lawyers, or paralegals, where personal injury and other disputes are to be resolved. There is the risk of non-recovery where liability is in issue. There is uncertainty as to the amount of the net recovery as both the amount of the recovery and the cost of obtaining recovery are uncertain. Because disputes can be settled at any stage (and are usually resolved by settlement rather than judicial decision), the cost of resolving a dispute is much more uncertain than, for example, the cost of completing a residential real estate transaction.

For the lawyer or paralegal, the risk inherent in contingent fees is mitigated by their expertise in assessing the risk inherent in particular matters and by their “portfolio” of cases. The situation of the client is very different. The client has no ability to assess the viability of their own case. The client has no portfolio through which to manage risk.

Portfolios of risks

While perhaps not obvious, investment by portfolio in the financial world offers the same risk management as having a portfolio of cases in the contingent fee world. A simple example shows the main advantage. Imagine a $1,000 bet based on a single coin toss. Heads you win $1,100. Tails you lose. There is a 50% chance of a complete loss. But imagine the same bet made on a portfolio of ten coin tosses. The probability of a complete loss drops to a little less than one in one-thousand and profit becomes very likely.

In the contingent fee context, a single contingent fee case can be very risky. But where work done in the losing cases can be recouped in the winning cases, risk is better managed. To make a very simple example, if there is a portfolio of cases each of which has a 50% chance of success and each of which requires a fixed amount work and disbursements worth $10,000, charging $20,000 for each case that is successful is a very low risk proposition even though the prospect of payment for any particular case is only 50/50.

Contingent fee work is more complicated than betting on coin tosses. The probability of success varies from case to case. The work and disbursements required in any given case is uncertain and difficult to accurately predict. More becomes known as the matter progresses. The outcome of a case is most uncertain at the outset. Assessing the amount of work to be done is also most uncertain at the outset of the matter. For a lawyer or paralegal, a contingent fee case is like a financial investment but with the added complexity that the amount to be invested is uncertain.

Modern portfolio theory says that risk is reduced by having a portfolio of risks. Before this was well understood, it used to be that trustees were only legally permitted to make certain “safe” investments. The idea was that the “prudent investor” would not make risky investments. However, we now know that a portfolio of higher risk investments can be low risk as a whole. The winners pay for the losers. The risk of having all losers is very much reduced by portfolio investment. Indeed, modern portfolio theory shows that a diverse portfolio of higher risk investments is likely to be more profitable than a portfolio of lower risk investments. But the investor must be able to enjoy the fruits of the winning investments for the portfolio to do its magic.

Contingent fees and markets

Injured people typically cannot afford the cost of the legal services required for their case. Borrowing the money to pay the cost of doing the necessary work is risky unless the case is not. Even assuming that recovery is quite likely, there is uncertainty as to the cost of obtaining recovery. Some cases settle quickly at low cost. Some cases go to trial or appeal. Contingent fees move this risk from the client to the lawyer or paralegal who can better assess the risk and reduce the risk by having a portfolio of cases.

But the contingent fee system will not work fairly in the real world unless there is an effective market in which contingent fees are set. Obviously, clients have limited insight into their cases. Otherwise, they would not need legal experts to assist them. Clients have no insight into the portfolio of cases maintained by their lawyers or paralegals. Where there is information asymmetry and a market which is not truly competitive, the party with superior information will have an advantage in setting prices. This either results in higher prices where the party with superior information is the supplier or by diminished demand from consumers or both.

It seems pretty clear that we do not have an effective market for contingent fees. While the problem of information asymmetry can be addressed by active bidding by informed suppliers for work, there is no good evidence of robust bidding being common. The significant growth of brand advertising appears to show that injured people have difficulty knowing who to approach for legal services. There is, at best, limited market information available to consumers or suppliers as to the costs of obtaining recovery. Unlike commodity products such as tomatoes or motor vehicles, assessing the expected value of a particular matter is not easy and requires information and expertise. We cannot directly assess whether the existing market is competitive as we have no information as to the profitability of the portfolios.

Ensuring fair and reasonable contingent fees

So how do we currently address the prospect of unfair and unreasonable contingent fees? The first way is by regulating the agreement entered into at the outset. The Solicitors Act establishes certain requirements and, in some circumstances, allows the parties to agree on a different approach with judicial approval. The second way is by considering, after the work is done, whether the contingent fee agreement and the contingent fee are fair and reasonable. For those who cannot represent themselves, the court must approve the ultimate fee. For others, the supervision of the court may be invoked by the assessment process.

The recent case of Evans Sweeny Bordin LLP v. Zawadzki, 2015 ONCA 756 considered judicial supervision of contingent fees and started with the proposition that “A contingency fee agreement is enforceable only if it is both fair and reasonable”.

The question of fairness and reasonableness could be considered based only on what was known at the outset of a matter. In theory at least, a contingent fee agreement that fairly and reasonably reflects the risk of non-recovery and of uncertainty in the cost of recovery would not need to be the subject of after the fact examination. Otherwise, the cases that are more lucrative for the lawyer or paralegal would not pay for the less lucrative cases and, as a result, lawyers and paralegals would decline to take on the higher risk or higher cost cases.

Nevertheless and as Evans Sweeny Bordin LLP makes clear, fairness is currently addressed after the fact, but as of the date of the contingency fee agreement. and reasonableness is addressed after the fact. For the later reasonableness assessment, the Court of Appeal cited with approval its earlier decision in Henricks-Hunter v. 814888 Ontario Inc. (Phoenix Concert Theatre), 2012 ONCA 496 which set out the following factors to be considered in the test for reasonableness:

(a) the time expended by the solicitor;

(b) the legal complexity of the matter at issue;

(c) the results achieved; and

(d) the risk assumed by the solicitor.

The Court of Appeal in Henricks-Hunter followed Raphael Partners v. Lam (2002), 61 OR (3d) 417 (OCA) which held that:

The factors relevant to an evaluation of the reasonableness of fees charged by a solicitor are well established. They include the time expended by the solicitor, the legal complexity of the matter at issue, the results achieved and the risk assumed by the solicitor. The latter factor includes the risk of non-payment where there is a real risk of an adverse finding on liability in the client’s case.

It is clear that our current approach to contingent fees provides for after-the-fact assessment and does not presume that a competitive market will result in reasonable contingent fees.

Calls for Reform – are caps the answer?

There has been much recent public controversy about contingent fees. There are private members bills calling for a cap on the percentage of recovery that may be charged. There are articles in the media decrying situations where the lawyer recovers more than the client or recovers an unusually high proportion of the recovery. The volume of advertisements on buses, taxis, television, the internet and elsewhere, without reference to price, may suggest that personal injury work is lucrative and worth substantial spending to attract work.

Unfortunately, the prescriptions may not address the disease or its symptoms. Following from the discussion above, where a limit is set on the percentage of the recovery that may be taken as a fee, the logical response may be not to take on riskier cases. Again assuming a competitive market and a diverse portfolio, the higher return winners pay for the higher risk losers. The policy problem is that we simply have no idea of the actual risk of the portfolio as a whole or its elements and we have no basis from which to conclude what percentage is unreasonable representing an uncompetitive market and what limit would fairly protect injured people and what limit would cause some injured people to lose access to justice because their cases will not be taken on. In an uncompetitive market, setting a limit can be tantamount to fixing a tariff as the cap becomes a signal to consumers who have no better information and may foster tacit collusion among firms.

There is another problem as well. For some cases which are vigorously defended, the cost of taking the case to trial is comparable to the amount in issue or even more. For those cases, a lawyer would generally be foolish to take on a case destined for trial if the potential recovery assuming success simply cannot fund the work required. But there are exceptions. A personal injury lawyer needs to be credible with defence counsel and insurers. Showing that cases will be tried if necessary makes settlement of other cases more likely. The threat of trial must be a credible threat to have value.

But it is said that there are areas of practice where the practical effect of limiting the contingent fee to a capped portion of the damages recovery would be that injured people would be denied access to justice. These are areas of practice where the risk and cost of obtaining recovery at trial is not commensurate with the damages award. even though it can be commensurate with the costs award together with a proportion of the damages award. Where there is a significant likelihood that a trial will be required, a lawyer is unlikely to accept a case where there isn’t a prospect of recovery of the lawyer’s risk-adjusted investment.

My point is not to argue in this column that there should or should not be a cap on the percentage fee. My point is that the question is tricky and that a cap may have unintended consequences and may not actually address the genuine issue at hand.

Some further thoughts about reform

As for the current after-the-fact assessment approach, there is value in that approach assuming that it is well done. At least in theory, assessing risk-return is a legitimate check on reasonableness. But there are at least two glaring problems1. The first is that an after-the-fact reasonableness assessment that looks only at the risk/return of the particular case fails to reflect that portfolio risk is less than the risk of any individual case. Absent portfolio information, there is a very real potential that after-the-fact reasonableness assessment is a Potemkin assessment. It looks real but isn’t. On the other hand, after-the-fact reasonableness assessment also fails to reflect the reality that only the “winners” get assessed. Portfolio information addresses this as well.

The second problem is that “successful” plaintiffs can have no idea whether their particular contingent fee is reasonable as they do not have the information that the courts have said is required for that assessment. They do not know the time expended by the solicitor, the legal complexity of the matter at issue, or the risk assumed by the lawyer. All that they know is the result achieved. There is no current obligation to disclose the other requisite information. There is no obligation to recommend an independent opinion or an assessment for cases where these factors suggest unreasonableness. That is not to say that responsible lawyers and paralegals will not take these factors into account in setting their ultimate fees. But a fiduciary cannot be permitted to withhold information that is necessary to hold the fiduciary accountable. The system should empower clients who do not know that they should be unhappy with their fees. It would be better if the system did not cause clients who ought to be happy with their fees to become unhappy. But it is surely unacceptable to hold back relevant information because the information may be misused.

Standing further back, can we make the contingent fee system more transparent and accordingly more competitive with the intent that a fair contingent fee agreement may be more reliably seen to generate a reasonable contingent fee? The answer must surely be yes. But this requires that portfolio information be gathered from lawyers and paralegals and aggregated so that injured people can have a better idea of the contingent pricing offered to them, so that lawyers and paralegals can better compete for work and so that society, through the courts, the government and the Law Society, can genuinely understand the risks and rewards involved in contingent fee work.

It is to be expected that lawyers and paralegals will resist reforms that impose costs on them, limit their returns and create uncertainty as to whether their contracts will be honoured. Cries of “bureaucracy” and “freedom of contract”2 will be heard. But it is necessary that the interests of injured people be kept firmly in mind rather than just the competing voices of advocates and insurers.

But it would be best if creative solutions could be found that maintain access to justice for injured people through contingent fees while better ensuring that substantive justice is obtained – that the amount taken from the compensatory recovery of an injured person is not unreasonable taking into account the risks and costs involved.

1 Noel Semple kindly reviewed a draft of this column and provided a number of helpful comments and suggestions. Noel raises a third glaring problem which is that risk is often not appreciated after the fact. What was reasonably seen to be risky at the outset may well not seem risky when the results are known. The reverse can be true as well.

2 Despite that our current contingent fee system requires after-the-fact assessment for fairness and reasonableness and the relative vulnerability of clients, some still argue that any reform should be on the basis on caveat emptor.

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Innovate or be innovated

First published on slaw.ca

When the Chief Justice of Canada highlights global liberalization of legal services regulation, recognizes that our old monopolies are fading, says that the legal profession must embrace new ways of doing business and that the question is not whether our rules should be liberalized but how, even those most resistant to change must take heed.

On August 14, 2015, Chief Justice McLachlin addressed the Canadian Bar Association annual plenary in Calgary . In her remarks entitled The Legal Profession in the 21st Century, the Chief Justice suggested that the legal profession must ask itself three questions:

  • First, where does the profession stand as it enters the second quarter of the 21st century?
  • Second, what are the forces that have led to the challenges the profession is facing?
  • Third, against this background, how can the profession move towards the newer world it seeks?

Not surprisingly, the Chief Justice addressed the first question, in part, as follows:

Statistics support the view that accessing the justice system with the help of a legal professional is increasingly unaffordable to most people. Nearly 12 million Canadians will experience at least one legal problem in a given three-year period, yet few will have the resources to solve them. According to an American study from a few years ago, as much as 70%-90% of legal needs in society go unmet . We all know that unresolved legal problems adversely affect people’s lives and, ultimately, the public purse. Among the hardest hit are the middle class – who earn too much to qualify for legal aid, but frequently not enough to retain a lawyer for a matter of any complexity or length. Additionally, members of poor and vulnerable groups are particularly prone to legal problems, and legal problems tend to lead to problems of other types, such as health issues .

These are important points. Legal problems are common yet most legal needs go unmet. The middle class, the poor and vulnerable groups all suffer unmet legal needs.

On the second question, the Chief Justice focused on the powerful effects of technological change saying that:

… the digital revolution and the modern social and economic forces it has unleashed are creating new modes of delivery of traditional legal services, creating new demands and expectations for meaningful access to justice, and eroding the fundamental assumptions upon which the legal profession of the past was built. This is compelling the legal profession to revise old patterns and approaches – to seek, in Tennyson’s phrase, “a newer world”.

As to the erosion of fundamental assumptions, the Chief Justice said:

Liberalization of the rules that govern the legal profession is rapidly spreading to other jurisdictions, like the U.K. and Canada. Recognizing this, the Canadian Bar Association recently launched a “Legal Futures” probe into the future of the legal profession, to help the Canadian legal profession remain relevant, viable and confident in the face of change. Everywhere, more and more, the profession is accepting that the old monopolies are fading and that the profession must embrace new ways of doing business. And increasingly calls are heard for law schools to adapt their curricula to these new realities. The question is not whether the rules governing the legal profession should be liberalized, but how.

On the question of how can the profession move towards the newer world, the Chief Justice offered the following thoughts:

  • The first step is to accept the idea of change. Lawyers and judges need to stop fearing change. Rather, they must accept that change may be necessary. Change should not be seen as an evil, but rather as the source of new opportunities.
  • [Lawyers] will need to develop strategies to cope with the fact that in the very near future, straightforward, out-of-court work will face brutal competition. They will need to use technology in creative ways. And it may be that they will need to accept that some tasks traditionally performed by lawyers can be out-sourced to non-lawyers.
  • A … source of opportunity for the profession lies in expanding service to sectors that may not have benefited from legal services in the past. Many communities have traditionally been underserved in terms of legal services. Some suggest that the way of the future lies in cutting back legal services. A better way may be to find ways of delivering legal services to people who need them but have traditionally not received them.
  • Lawyers should not forget that those whose legal needs are not being met come in many forms. … These very different clients all have two things in common: They cannot afford legal services when delivered in the traditional way, and they cannot afford the disproportionate cost of pursuing a case in court. The consequences for legal businesses are plain: for businesses to thrive, they will need to find innovative ways to make their legal services more generally affordable.
  • [Another] source of opportunity lies in collaboration with other lawyers and other professionals, in recognition of the fact that clients’ problems are often complex, polyvalent and incapable of solution on uniform cookie-cutter models.

In my recent article So many lawyers, so many unmet legal needs, I addressed the apparent paradox that so many lawyers are looking for work and so many legal needs are unmet and suggested that regulation was part of the reason that the legal services marketplace does not evolve to permit supply to address demand. The Chief Justice’s call for regulatory liberalization and finding new ways of delivering legal services to people who need them but have traditionally not received them is to the same effect.

As the title to this column signals, innovation is needed and is inevitable. For lawyers, the question is whether we will innovate or “be innovated”. The point of this column is to talk about different types of innovation. As a recent discussion with a bencher colleague made clear, what we mean by innovation in this context isn’t always obvious.

Of course, some innovation is big and transformative. One example is artificial intelligence. The Globe and Mail recently reported on Ross, the app which uses IBM’s artificially intelligent Watson computer to do legal research. Scary stuff perhaps but the potential to directly deliver some lower cost legal services is obvious. Another innovation is the use of large business processes to deliver legal services. Some sneer at “commoditization” and reject the idea that lower cost services may be desirable, even necessary, in some contexts.

But some innovation is simpler and not necessarily transformative, at least from the perspective of practising lawyers. For example, we know that there are substantial civil needs in society that are not addressed by lawyers yet the lawyer’s monopoly extends to areas unserved by lawyers. Allowing others to serve these legal needs may not cause an explosion of legal services – but neither will it materially affect the legal practices of those who do not now serve those legal needs.

While it may seem surprising, the areas of legal services reserved to lawyers in England are limited to only six areas of legal activity essentially being appearing before the courts, conducting litigation, transfer of land and certain other property by instrument, probate activities, notarial activities and the administration of oaths. Other than wills writing which is controversially not a reserved activity in England, these six areas are quite consistent with the principal areas of private practice for individuals in Ontario namely criminal law, family law and personal injury (the litigation practices) and real estate and wills/estates (the solicitor practices)

Another example of simple innovation arises from the observation that our current regulatory system only permits practices owned by licensees and legal aid clinics to deliver legal services to the public. There are many organizations in society that are dedicated to serving vulnerable and other communities. It would be innovative, for example, to permit the CNIB to provide relevant paid legal services to the blind and partially sighted Canadians. The value of this approach is demonstrated by the pro bono legal services now delivered by Pro Bono Law Ontario’s Children’s Hospital Projects which provide relevant legal services to sick children and their families where and when needed.

A further area of non-transformative innovation is better and expanded service delivery by existing legal practices. A study released in July 2015 by the English Legal Services Board and Solicitors Regulation Authority entitled Innovation in legal services distinguishes between “radical” innovation and other innovation in the following categorization:

  • Service innovation – the provision of new or significantly improved services to clients
  • Radical service innovation – services new to the market and introduced before competitors
  • Innovation in service delivery – significant changes in the way services are delivered to clients
  • Strategic innovation – implemented a new or significantly changed corporate strategy
  • AMT innovation – implemented any advanced management techniques (AMT) such as knowledge management systems, Investors in People, etc
  • Organisational innovation – implemented major changes in organisational structure such as the introduction of team-working or outsourcing of major business functions
  • Marketing innovation – implemented changes in marketing strategies or channels

While we often think that innovation only means fundamental change like Watson/artificial intelligence, many important innovations are evolutionary within existing businesses rather than revolutionary. And of course, innovation is the product of many factors. Competition is one factor and especially competition, or potential competition, from other innovators. Expertise and money are also factors. The consequences of failure and the prospects for success are others. Regulation can constrain innovation by limiting innovative competition and by limiting the human and economic resources available for innovation.

The Innovation in legal services report mentioned above provides evidence of the effect that regulation has on innovation. Steve Brooker, Director of Research for the Legal Services Board, summarized some of this in his presentation to the International Conference of Legal Regulators held in late July in Toronto. As Mr. Brooker noted, the research showed that ABSs are 13-15% more likely to introduce new legal services than other types of regulated solicitor firms and that legislative change and regulatory change are the two most commonly cited drivers of innovation. Mr. Brooker also observed that the research shows greater innovation in the unreserved areas with 43.5% of unregulated providers being owned by non-lawyers, 10% of revenue being generated from innovative products compared to 5% of revenue for solicitors firms and with 2.3% of revenue being spent on branding/marketing compared to 1.6% for solicitors and 0.5% for barristers’ chambers.

We are challenged by the Chief Justice to embrace change. As a matter of professionalism, we should be vitally concerned that the public have access to legal services. Allowing others to provide legal services is part of the answer. Allowing and encouraging innovation from current legal practices to address currently unserved legal needs is another.

Some lawyers resist change because the consequences of change may not be positive. Competition, especially innovative competition, carries the prospect of loss. But trying to ensure that change does not occur is ultimately a pointless exercise. Change will happen. New forms of supply and unserved demand create inexorable pressures. My view is that it is in the interest of the legal profession and in the public interest that innovation happen within the legal profession so that the legal profession does not wither in the face of change. And it is in the interest of the legal profession and in the public interest that others be permitted to do what can properly be done by others.

While attending the CBA annual conference, I had the benefit of attending a presentation by Jonathan Smithers, the new President of the Law Society of England and Wales (the representative body, not the regulator). Jonathan’s background is conveyancing and land law. He heads the residential property team at Cooper Burnett in Kent and was previously Chair of the Conveyancing and Land Law Committee at the Law Society. His presentation centered on the ABS experience in England and Wales. While indicating that it was too early to judge the ultimate effect of ABS liberalization, Jonathan’s view was that ABS is not likely to be the source of transformative change to access to justice nor a source of harm to the public interest or the interests of the solicitors. Rather, Jonathan was confident in the ability of able solicitors to innovate and compete and accepting of the necessity that they must do so. Most significant to me was the message that the simple fact that new innovative entrants are permitted has caused existing solicitor practices to step up their game and innovate. His confidence in English solicitors and his obvious professional and business expertise were impressive.

The Chief Justice is one of many voices calling for innovation. The voice of the Chief Justice is, of course, particularly authoritative but can only be persuasive. It is for our self-regulated profession to decide through our governing bodies what change is appropriate. But as the Chief Justice said, the question is not whether to change. The question is what change is appropriate.

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Jack Batten on Big Law 40 years ago

1976 Saturday Night

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So many lawyers, so many unmet legal needs

My article So many lawyers, so many unmet legal needs is now published in the July/August 2015 edition of the ABA Law Practice Magazine

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So many lawyers

 

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July 7, 2015 · 5:40 pm

Partnership has its limitations

First published on slaw.ca

Perhaps because most law firms are partnerships, we don’t pay much attention to the practical implications of the partnership structure. This is understandable as there isn’t much of an alternative in our existing system at least so far as private practice is concerned.

A law firm partnership is very different than most ordinary businesses. In most businesses, the owners of the business are not involved in the business whether as workers or as managers. In contrast, law firms are owned and managed by people who provide services to customers (often with the assistance of others). In a law firm, the partners are the owners, the managers and the workers.

The combination of ownership, management and service provision in a law firm is particularly significant in that the partners provide the equity capital. In an ordinary business, equity capital is commonly raised through private capital or public capital. In a law firm, labour and capital come from the same source as does management – the partners.

There is another important difference between law firms and most other businesses. In many law firms, it is common for more young lawyers to be hired than will ultimately remain with the firm. Of course, some law firms are simply collections of sole practitioners who share overhead and perhaps an associate who will either join the firm as another sole practitioner once his or her practice is sustainable on its own or will leave the firm.

But in many law firms, a number of associates will be hired only some of whom will become partners. In these law firms, the model is “up or out” with some young lawyers becoming partners and others leaving. In the academic literature, this is sometimes described as the “tournament of lawyers”. Young lawyers compete with each other to stay with the firm. Academics once viewed this as a model applicable just to young lawyers but more recently the “tournament” has been said to continue throughout a partner’s career. Partners are said to continue to compete to continue as partners. While it was once less common, partners who are not seen as sufficiently valuable to the firm are often asked to leave.

This “tournament” is said to be a highly efficient (if perhaps harsh) way of organizing people. Unlike the ordinary business where there is hierarchical management, the lawyers in the “tournament” mostly manage themselves by figuring out what is necessary to win the prize. One of my partners once described this as a pie eating contest where the prize is more pie.

There must be a lot to be said for this structure as it clearly has been successful. One might hypothesize that it would be difficult to organize skeptical independent thinking professionals successfully in a traditional business organization. This structure is economically low cost in terms of management.

Yet the last thirty years have clearly shown that this is not the only effective way of providing legal services. The in-house model, whether business or government, has shown that ordinary business organization can deliver effective and sophisticated legal services. The in-house law department is not owned or capitalized by its lawyers. Hierarchical management is common. The “up or out” tournament model is not used in-house (or at least to the same extent).

There is of course one fundamental difference between the in-house lawyer and the private practice lawyer, namely finding work. The in-house lawyer exists to serve one client. The number and nature of the in-house lawyers is driven by the needs of the employer. For private practice lawyers, part of the tournament is finding and retaining clients for the lawyer and the firm.

So what are the implications of these observations about business structure. One implication may be diversity. It seems clear that in-house law departments do a better job of attracting and retaining women and, it seems, visible and other minorities. While other factors may well also be in play, I suspect that the nature of the “tournament” model is part of the reason. Where early success is determined by attracting work from within the firm (and thereby developing and getting better work) rather than by work allocation based on reasonably objective skill assessment and assessment of potential, there is ample opportunity for unconscious bias and even actual prejudice to have effect. I recently attended a sophisticated in-house group and found the explicit targeting of diversity results to be very interesting with managers being explicitly judged, in part, on meeting targets. In contrast, it would be difficult to identify who to similar incent and judge in a law firm where, mostly, no one is “in charge”. Causing change in private practice is indeed like managing cats given the very limited actual day-to-day management in law firms.

There are other significant issues to consider. In a private practice firm, it is difficult for partners to imagine doing things very differently. Why would a partner potentially render himself or herself redundant? Where a partner is mostly rewarded for their contributions to the firm, what incentive is there to invest time and effort in doing things in a way other than by partner contributions. The limited extent to which law firms are truly managed means that it is difficult for truly innovative decisions to be made (and implemented) rather than to just making the existing way of doing things better.

The combination of ownership with service provision is also important. In most firms, partners take out the profits annually and only keep enough equity capital in the firm as is required to provide infrastructure for existing practices. Partners have little, if any, economic interest in investing in anything that does not pay off in bettering existing practices. A significant long term investment in innovation is not very likely to provide returns for existing partners. Partners naturally prefer to enjoy the fruits of their labour (and capital). In contrast, the owners of a business with an in-house law department can make significant changes and innovations that are in the interest of the business but perhaps not in the interest of individual lawyers.

We see some of these challenges to innovation playing out in what some call “new law” where ownership is separated from those providing legal services. Cognition is a Canadian example in which legal services are being provided differently and attractively to clients. While the individuals who provide legal services are being compensated for their work, the long term enterprise value is enjoyed by the entrepreneurs who own and built the business. Yet it is clearly more difficult to finance a business when equity capital is not permitted from private or public markets and is not contributed by the lawyers doing the work. This limits growth and innovation.

All of this suggests to me that law firms may be particularly resistant to business and social innovation because of their nature. That said, it isn’t clear what to do with this observation if true. There is much about law firms that is clearly good for clients and for the lawyers in those firms. From a regulatory perspective, it is much easier to regulate when the owners, managers and workers are all regulated and subject to sanctions that can affect their future livelihoods.

There seems to me something of a “baby and the bath water problem”. Can we encourage/permit innovation in ways that aren’t too disruptive? I also wonder if the existing model isn’t more powerful than it appears since there is clearly room for business structure innovation despite limited actual innovation. It also seems odd to me that we know so little about the business of law both from theoretic perspectives and from empiric perspectives.

And so this column is more by way of musing and thinking out loud than anything else. As always, but particularly on this topic, comments welcomed!

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[1] Small law firms are quite like other small proprietorships where the owner is actively involved in the business.

[2] Tournament of Lawyers, 1991, Galanter and Palay

[3] The Elastic Tournament: The Second Transformation of the Big Law Firm, 2008, Galanter and Henderson, 60 Stanford Law Review

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