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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Greater transparency of the results of investigated complaints?

(First published on slaw.ca)

It is difficult for prospective clients to obtain good information about lawyers and paralegals. The significant growth of brand advertising is cogent evidence of this. Potential clients assume that brand is evidence of quality when that may well not be the case. Substantial sums are paid for brand advertising because it works. Similarly, the advertising of dubious awards and reassuring photographs evidences that lack of genuine information about quality.

Concerns about lack of information

A recent market study in England and Wales by the Competition and Markets Authority said that:

… consumers generally lack the experience and information they need to find their way around the legal services sector and to engage confidently with providers. Consumers find it hard to make informed choices because there is very little transparency about price, service and quality … lack of transparency weakens competition between providers and means that some consumers do not obtain legal advice when they would benefit from it.

A similar conclusion was reached based on Ontario research in the 2010 Report of the Ontario Civil Legal Needs Project:

A significant challenge is to find ways to encourage more people to receive the full benefit of the existing resources available to them. People often can’t find legal help because they don’t know where to look, or because they perceive they won’t be able to afford it.

In a recent column, I wrote about market failure as a consequence of lack of consumer information potentially leading to a race to the bottom as high quality lawyers and paralegals (the “peaches”!) are unable to distinguish themselves from “lemons”.

What might help potential clients?

What can usefully be done about the lack of available information as to quality? There are a number of possibilities. One is to encourage genuine referral services (as opposed to mere brokerage services) and genuine ranking services (whether based on peer, client or other assessments) that assist potential clients in finding appropriate assistance.

Another is to move toward enhanced credentialing or limited licensing as a signal of expertise. Unlike some other professionals, all lawyers have unlimited licenses to practice law yet few, if any, have the competence to practice in all areas of the law. Beyond word of mouth and self-serving advertising, how is a client to figure out who to retain? While licensing tells potential clients that minimum standards of competence have been met and provides some assurance of professional conduct, the mere fact of licensing does not allow potential clients to distinguish between individual licensees.

The Law Society is a source of some useful information beyond the mere fact of licensing. The certified specialist program provides an indication of expertise. Public Law Society Tribunal records provide some information with respect to past professional conduct.

A look at 2016 LSUC complaints information

With the issue of useful information in mind, I read with interest the recent LSUC reports 2016 End-of-Year Report for the Professional Regulation Division and the Analysis of Complaints in Professional Regulation in 2016.

The number of complaints[1] received in the Professional Regulation Division has remained stable in absolute number at slightly less than 5,000 per year despite increasing numbers of lawyers and paralegals. The number of complaints per lawyer and paralegal in private practice is very similar at just over 10% for each type of licensee. The trend is generally downward for both over the last six years.

In 2016, the Intake Department dealt with some 4,400 complaints. 2,152 complaints were sent for investigation. 2,243 complaints were closed in the Intake Department. Of the 2,243 closed complaints, 236 were marked as “resolved” suggesting that there was something to resolve but not something meriting formal investigation. The balance were closed for a number of reasons including the conclusion that no further regulatory action was required, the absence of jurisdiction and the formal (or practical) withdrawal of the complaint.

In 2016, 2,018 new complaints were instructed for investigation[2] and investigations staff closed 2,334 instructed complaints. Perhaps not surprisingly, client service issues are the most common followed by integrity, governance and financial issues. To state the obvious, potential clients are interested in knowing whether they will be well served by professionals with integrity who are prepared to be governed and deal properly with financial matters.

How investigated complaints are ultimately dealt with is interesting. Over the last three years, only between 10% and 15% of investigated complaints have been transferred for prosecution. During the same period, approximately 40% have been closed on the basis that there is no evidence or insufficient evidence warranting regulatory action.

There is a substantial number of investigated complaints where the result is some action short of prosecution. Some are closed with diversion such as a Regulatory Meeting, an Invitation to Attend, a Letter of Advice, a recommendation for a practice or spot audit or by an undertaking from the licensee[3]. In the last three years, some 2% to 4% of investigated complaints have been closed investigations with diversion. A more substantial proportion of investigated complaints (approximately 20% to 30% over the last three years) have been closed with a staff caution or with best practice advice. The bottom line is that approximately one-quarter to one-third of investigated complaints raise regulatory issues and result in a regulatory response short of prosecution.

There are different types of complaints information

To make the obvious point, the Law Society has information about lawyers and paralegals that is not publicly available and which might well provide useful information to prospective clients. But the obvious counterpoint is that some of the same information could be unfairly prejudicial to the licensee if publicly available.

There is a spectrum of regulatory engagement from (i) mere receipt of a complaint to (ii) instruction of a complaint for investigation to (iii) determination after investigation that regulatory action is merited short of prosecution to (iv) prosecution. There was a time when our regulatory process was so lawyer-centric that even prosecutions and findings of professional misconduct were not transparent. That time has passed and the question now arises, given the genuine difficulty faced by potential clients in obtaining information, whether the current balance is the appropriate balance.

Discussion in England and Wales

Greater disclosure by legal services regulators is currently being discussed in England and Wales. The 2016 Interim Legal Services Market Study Report of the Competition and Markets Authority asked[4] “Are there any measures of quality that can readily be collected by regulators or government … on observable trends in quality of legal services?”. The Solicitors Regulation Authority (the SRA) responded saying that there are “a number of other indicators regulators can use, which cumulatively can give an indication of quality” including claims against the compensation fund, insurance claims and complaints data. The SRA also said:

Our Codes contain the minimum requirements for those we regulate, all of which are mandatory. We also require diversity data to be published. We are currently considering what information about SRA regulated individuals or firms we should publish or require firms or individuals to publish, and are planning on releasing a discussion paper by the end of the year subject to decisions being taken by our Board. The areas we are looking at include regulatory action, complaints data, insurance claims data and accreditations.

The Law Society of England and Wales[5] responded to the subsequent SRA discussion paper by raising concerns about accuracy and relevance and suggesting that it was better for law firms to voluntarily provide information in the competitive market. Of course, this approach would mean that negative information about solicitors would not be made available.

Thinking about disclosure

It is to be expected that lawyers and paralegals would be uncomfortable with greater transparency of complaints or claims information. We imagine this from our own perspective and fear disclosure of unfair or misleading information (and even true but embarrassing information). For example, it would be natural for family law lawyers to be concerned about disclosure of complaints from the opposite party given the often dysfunctional nature of family law proceedings.

That said, it is clear that further and better information about lawyers and paralegals is needed. From the client perspective, better transparency is desirable while, of course, protecting confidential and privileged information.

Perhaps the practical answer to concerns about disclosure of unfair or misleading information is careful focus on what should be disclosed. If there is only disclosure about investigated complaints which have led to a regulatory outcome then what would be disclosed would be the result of investigation and evaluation. Fear of disclosure of malicious or unfounded complaints would not be justified.

It might also be worth considering whether there should be disclosure of single or stale matters. It may be that little if any real information is provided if a single matter is disclosed or if a relatively ancient episode continues to be disclosed. Treating stale matters as such is somewhat analogous to the evolving “right to be forgotten” that is of increasing importance in which so much personal information is available and for so long on the internet. As well, it may be worth considering whether contextual information could also be provided, for example the average number of such complaints for licensees generally or, say, family law lawyers specifically.

Up to this point, the discipline process has not been discussed. The main point to be made here is that allowing transparency about some investigated complaints and a formal discipline record are different things. There is no need and no apparent reason for the information available to the public also to be information that is treated as relevant by the Law Society Tribunal in assessing appropriate discipline penalties. There is good reason to limit Tribunal panels to consider only findings of professional misconduct by prior panels.

But the “right to be forgotten” discussion raises a point that some have made about formal discipline histories. To use an extreme example, should there continue to be transparency about a reprimand given 25 years ago absent any subsequent proceedings? Discipline panels routinely conclude that a stale disciplinary history is irrelevant for current purposes. Perhaps it should also irrelevant for the public purposes.

If it is accepted that potential clients have insufficient information to properly assess the quality of lawyers and paralegals (leaving them instead reliant on brand advertising, irrelevant and misleading “awards” and photographs of reassuring faces), then it follows that we should be thinking carefully about whether further information can be disclosed. It also follows that it is proper to think about the utility and the fairness of further disclosure.

It should be recognized that lawyers and paralegals will almost inevitably resist disclosure of complaints information, even investigated complaints leading to regulatory action. But it should also be recognized that there is another perspective that must be considered which, as always, has no advocate.

[1]      Complaints can come from clients, other parties, other lawyers, judges and the Law Society itself. While professional regulatory process is largely reactive, the Law Society itself initiates the complaints where matters come to its attention that may deserve further consideration.

[2]      The Law Society Act provides that the Law Society has certain investigative powers where the conclusion is reached that there is sufficient information indicative of professional misconduct or lack of capacity. In these circumstances, PRD says that a complaint has been instructed for investigation.

[3]      Some of those transferred for prosecution are also closed with diversion.

[4]      This interplay between the competition authority and the legal services regulatory provides an example of a productive interplay in which competition issues are raised while the regulator keeps independence.

[5]      Unlike our law societies, the Law Society of England and Wales is the representative of and advocate for solicitors.

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Too many new lawyers? Build a wall?

[Originally published on slaw.ca]

Over the last few years, there has been much debate about how to deal with the significant increase in the numbers of Canadian and foreign law school graduates seeking licensing in Ontario. While the number of articling positions has significantly increased, the number of applicants has increased even more quickly. The Law Practice Program (LPP) was established several years ago as an additional pathway to address this shortfall and to pilot a new approach to experiential training.

With a recent proposal to terminate the LPP facing substantial opposition, the Law Society of Upper Canada is now developing “long-term recommendations for an appropriate, sustainable Law Society licensing process”[i].

In this column, I hope to make three points. The first is that the question of an appropriate licensing process is far from new. It is unlikely that easy and obvious answers will be found. The second is that history shows that prediction is very difficult, especially about the future[ii]. We have far too much confidence that we can predict the supply of and demand for lawyers.

The third point is that there is more than a little self-interest involved in a self-regulating profession seeking to regulate the number of lawyers. Even if we could do so with accurate predictions and with actual authority, there is reason to question whether the public interest is pursued in limiting numbers in response to economic anxiety within the profession.

I also hope to provide some historical information which may be useful in thinking about these issues.

45 years ago – Articling and the “Problem of Numbers”

In 1972, Bert J. MacKinnon[iii], as he then was, presented the Report of the Special Committee on Legal Education to Convocation of the Law Society of Upper Canada. The Special Committee Report described the then context saying:

Increasingly in recent years, the Law Society of Upper Canada became concerned about a number of problems related to legal education. In particular, it was felt that the time required to qualify for the Bar (up to 9 years) was too long. Also, the last full scale investigation of legal education in Ontario had taken place in 1955-57. Since then, there has been radical changes in the nature of law, the profession itself, the law schools and the number of students requesting admission to the law schools. Consequently, a further review of the problems became necessary.

The reference to a “full scale investigation of legal education” in 1955-57 is significant. That is when the current approach to legal education was established with a required minimum of two years undergraduate education followed by three years of law school, then the Bar Admission Program and then articling.

As of 1972, the Bar Admission Program was an eighteen month program following law school. According to the Special Committee Report, the time required to qualify for the Bar was thought to be too long. There was also a concern about the number of students seeking to become lawyers. Forty-five years later, the issues aren’t all that different.

As described the Special Report, the existing schools at Osgoode Hall and U of T became approved law schools in the late 1950s, Queens and Ottawa opened law schools in 1957, Western opened in 1958 and Windsor opened 1968. It took forty-five years for the next law school to open at Lakehead University in 2013.

The Special Committee Report summarized the then current problems as follows (i) Length of Process of Legal Education, (ii) Separation of Legal Education into Distinct Elements, (iii) The Problem of Numbers, and (iv) Financing Legal Education. One could see recent debates about legal education and licensing in these same terms which is instructive. Some problems may be somewhat inexorable with new balances needing to be found from time to time.

My main reason for looking at the Special Committee Report is its discussion of “The Problem of Numbers”. This is a discussion which doesn’t go away. In the late 1960s when William Howland[iv] was Treasurer, Convocation debated whether to restrict the number of lawyers called to the bar. It did so again in 1983[v] when the Special Committee on Numbers of Lawyers reported the majority view that “in the present circumstances more lawyers are engaged in private practice than are needed to provide proper legal services to the public”. I have little doubt that the issue of “numbers” has and will emerge from time to time over the generations.

By 1972, there had been 15 years of experience with law schools being the entry point for legal education and licensing. During these years, the number of law schools had dramatically increased. There must have been a sense of rapid change and concern about what might to come. As of 1972, the Special Committee Report noted:

Until the mid ’60s, the capacity of the Ontario law schools expanded at the same rate as did the other university faculties. However, in the late ’60s, their capacity began to level off while the numbers of graduates with first degrees continued to increase. The present capacity of the six Ontario law schools in their first year classes is between 1,000 and 1,100 but the total number of applicants in 1972 exceeded 3,000 at the very least.

Sitting in 1972, the immediate future looked like about 1,000 or so new lawyers annually with about three times as many people wanting to get into law school as there were spaces for them. One can only speculate what might have been thought in 1972 about the situation thirty years later.

15 years ago – Looking back and looking forward

As it turns out, 2002 looked astonishingly like 1972[vi]. There were still six Ontario law schools. The capacity of their first year classes was essentially unchanged at 1,176 students. The number of applicants for law school admission in Ontario was essentially unchanged at 3,457 applicants. The number of foreign trained licensing candidates was less than 100.

I doubt that anyone in 1972 would have thought that the significant changes over the prior 15 years would be followed by 30 years of very little change. And if one reflected in 2002, what would the next 15 years have looked like? Given the primacy of recent experience, I expect that a seer would have expected little change. Of course, that would have been wrong.

The last 15 years, new lawyers and licensing

By 2016, a new Ontario law school had been opened (Lakehead) and plans for another had been announced (Ryerson). The number of applicants for Ontario law schools had increased by 817 or nearly 25% to 4,502. The capacity of the Ontario first year classes had grown by 373 or nearly over 30% to 1,549[vii].

More significantly, the number of law school graduates from outside Canada seeking licensing has increased even more. From 2002 to 2014, the number of certificates issued by the NCA[viii] for all of Canada had increased from 120 to 779. Nearly three-quarters of this increase[ix] was from graduates of American, Australian and English law schools. Canadians going to foreign law schools represented a substantial portion of this increase.

Over the last 15 years, the demand for law school admission has significantly increased as has law school tuition. In Canada, Australia, England and the United States[x], law schools responded to this opportunity.

The result has been a significant increase in the number of Ontario licensing candidates. While the number of articling positions has increased significantly, the increase has not been sufficient to meet the increased demand. To address this difference, the Law Society established the Law Practice Program (LPP). In 2016, approximately 2,200 lawyers were called to the Bar with approximately 220 coming from the LPP[xi]. There are approximately 1,900 articling positions which is obviously a substantial increase from 2002.

As matters stand, those who are qualified and wish to become lawyers in Ontario are able to do so. There is of course a cost to the LPP. But the alternative would seem to be a barrier to licensing.

As might be expected, these significant recent changes have caused alarm. Coupled with the slowed economy since the financial crisis of 2008, discussion has turned again to “The Problem of Numbers”. As usual, the expectation is that the new normal is the future. While that might be true, it would be right to be sceptical about our ability to project the future and to be concerned about measures taken to respond to current insecurities.

Looking beyond new lawyers – past growth in the legal profession

Looking just at those becoming and wanting to become lawyers can be misleading. While “entry” numbers are important, there are more than 50,000 licensed lawyers in Ontario (as of 2014)[xii]. Of these, over 23,000 were practicing and insured and nearly 13,500 were practicing and exempt from insurance. This means that there were some 38,500 Ontario lawyers in private practice, in-house and government in 2014. A few hundred additional new lawyers annually is significant and no doubt feels even more significant. But the increase should be understood in context.

How did we get to where we are. Records from the Great Library provide some useful historic information. According to Law Society Committee records, there were 14,747 lawyers in private practice in 1989 and 4,275 lawyers in education, government and other areas[xiii] . Ten years later, the Law Society reported 16,942 lawyers in private practice, 2,906 in government and 4,778 in education, in-house, not-for-profit and other.

Overall, the number of practising lawyers increased by 561 lawyers[xiv] or 2.3% annually during the 1990s. This compares with an increase of 700 lawyers or 2.7% annually during the following 15 years from 1998 to 2013.

To summarize, there were approximately 19,000 practicing lawyers in 1989. By 1998, there were approximately 24,000 practising lawyers. By 2014, there were approximately 32,500 practising lawyers. The net annual increase of practising lawyers was nearly 600 lawyers in the 1990s and averaged 700 lawyers in the following 15 years. The rate of increase has grown from 2.3% to 2.7% annually.

Private practice vs in-house practice

But this overall perspective can be deceptive. During the first 10 year period from 1989 to 1998[xv], the number of private practice lawyers increased by a total of only 14.9% while the number of practising lawyers in other categories increased by 79.7%. During this period, in-house law departments rapidly increased[xvi]. The number of private practice lawyers increased by 220 lawyers or 1.4% annually while the number of practising lawyers not in private practice increased by 341 lawyers or 6.0% annually.

Looking at the next 15 years[xvii], there were 17,032 insured practicing lawyers in Ontario in 1999 while there were 5,067 practising lawyers exempt from insurance. This latter category included lawyers who were in-house and in education. I expect that most were in-house lawyers and will refer to them that way for simplicity.

By 2014, the number of private practice lawyers in Ontario had increased over 15 years by approximately 400 lawyers annually (i.e. 2.1%) from 17,032 to 23,057. The number of in-house lawyers had increased by approximately 300 lawyers annually (i.e. 4.3%) from 5,067 to 9,549. It may not have been intuitively obvious that over 40% of the net increase in practicing lawyers over the last 15 years has been outside of private practice.

Comparing the 10 years starting in 1989 and the subsequent 15 year period starting in 1998, the number of private practice lawyers increased more rapidly in the later 15 year period at 2.1% annually compared to 1.4% during the earlier 10 year period. On the other hand, the in-house etc. group grew more slowly in the latter period at 4.3% annually compared to 6.0%. Nevertheless, the number of in-house lawyers continued to grow more rapidly than private practice and a decline from the earlier very rapid growth of in-house lawyers was likely inevitable. Reflecting on the growth of in-house law departments, the greater rates of growth of the numbers of in-house should be no surprise.

Looking more closely at private practice

We know that there was significant growth in large firms in the 1980s and 1990s and that there has appears to have been diminished growth in large firms since the 2008 financial crisis. Unfortunately, we have no good information looking at these differences prior to 1998. But, there is information from the FLSC archive by firm size since 1998[xviii].

Over the 15 years from 1998 to 2013[xix], the number of lawyers in private practice in firms of more than 50 lawyers appears to have increased by 112 lawyers annually (i.e. 2.9%). Looking at the 5 years since 2008, the annual increase appears to be essentially unchanged at 110 lawyers annually for a lower annual percentage of 2.5%.

During the same 15 years, the number of sole practitioners increased by 114 lawyers annually (i.e. 1.6%) and the number of lawyers in firms of 2 to 10 lawyers increased by 151 lawyers annually (i.e. 2.6%). But in the 5 years since 2008, the number of sole practitioners has increased by 193 lawyers annually (i.e. 2.7%) while the number of lawyers in firms of 2 to 10 lawyers has increased by 207 lawyers annually (i.e. 3.2%).

Combining these “soles” and “smalls”, the increase is 400 lawyers annually (i.e. 3.0%) for the last 5 years of the period compared to 266 lawyers annually (i.e. 2.1%) for the entire 15 year period.

So what is the implication of this information. It seems clear that the experience in the “sole and small” sector has been quite different than in large firms and in-house. The “sole and small” sector was comprised of roughly 15,100 lawyers as of 2013. Over the 5 years ending 2013, some 400 net lawyers annually (up from 266 lawyers annually over 15 years) or 3.0% annually (up from 2.1%) were added to “sole and small” sector.

This increase is very likely the product of increased law school admissions, increased NCA numbers and somewhat diminished large firm growth. No doubt the addition of nearly 150 net more lawyers annually compared to a decade ago is causing competitive stresses.

Putting this change in broader context, it is useful to understand that the “soles and smalls” generally serve individuals. As such, the available work is likely correlated with number of people in the province. In 1998, there were approximately 1,030 Ontarians[xx] per lawyer in sole or small firm practice. By 2013, there appears to be approximately 900 Ontarians per “sole and small”. It follows that there will be greater competition for work in this sector. This analysis also suggests that there will be proportionately more inexperienced lawyers in this sector than there were which is a source of concern especially where practice in isolation is relatively common.

But none of this demonstrates that there are too many lawyers for the available work. There is no basis by which to judge how many is too many or too few especially given the substantial evidence of unmet legal needs. It may be that the increased number of lawyers will simply increase competition for limited work – or it may be that innovation will result in new services being provided to Ontarians – or there may be some combination of both.

Looking beyond new lawyers – projected future supply and demand

The analysis to this point has been historic. One point that can, and should, be taken from this historical review is that trends have changed and that the recent past has often looked quite different than the near future turned out to be. It is all too easy to assume that recent trends will continue when that is not necessarily true. For example, the number of applicants for law schools in the United States grew over many years – and has dropped dramatically in recent years[xxi]. Unlike in Canada, law schools are closing in the United States as demand falls in response to decreased opportunities.

Looking to the future, the Higher Education Quality Council of Ontario recently commissioned a study from Prism Economics and Analysis (the “Prism Report”) projecting the labour market for teachers, lawyers, physicians, nurses, architects and engineers. The headline conclusion for lawyers was “Based on the Lawyers Supply-Demand projection model developed in this research, it is estimated that over the 10-year period until 2025, there will be 1.6 new licensed lawyers for every new practicing position”.

The essential assumption made in the Prism Report is that there will be a significant decline in the number of new practising lawyer positions over the next 10 years while the number of law school graduates and new licensed lawyers will increase slightly. The result is a projected significant difference between supply and demand. This imbalance between supply and demand presumes a significant decrease in demand and no corresponding effect on supply.

On the demand side, the Prism Report assesses two components of demand; expansion demand (the increase in the demand for legal services) and replacement demand (the need to replace lawyers who leave practice because of voluntary withdrawal, retirement or death). As to replacement demand, the Report projects an increasing retirement rate and mortality rate with the “greying of the bar”. The Report notes the tendency of lawyers to retire later in life than the population generally and later than other professions. The Report does not address whether this trend toward late retirement will be true for in-house lawyers although the number of potential retirements from in-house practice may not be significant over the next decade given relatively low numbers in in-house practice in the 1980s.

More significantly, the Report projects a significant decline in expansion demand based on unreferenced projections of “slowing economic growth combined with increased globalization, the adoption of new technologies and rising competition”. As a result, the Report forecasts expansionary demand of some 320 lawyers annually over the next ten year down from a current estimate in the range of 700 to 1,100 lawyers.

It should be clearly understood that the most important variable in the Prism Report is the projected expansionary demand. The ability to make this sort of macroeconomic projection is highly suspect. Looking back at long term general economic forecasts and long forecasts for the demand for doctors, nurses and teachers shows that these sorts of forecasts are rarely right. While the Prism Report may be right that we are about to enter an unprecedented period of significant decline in expansionary demand, it is appropriate to be highly sceptical about the reliability of that prediction. If the expansionary demand since the financial crisis of 2008 is instead assumed, the conclusion of the Report would be quite different.

Figure 2-1 from the Report shows the annual historic and projected change in supply and demand for new lawyers from 2005 to 2025 with the first ten years being actual and the second ten years being projected. Notably, the number of new practising positions is just slightly less than the number of new licensed lawyers during the first ten years. A radical change is projected during the next ten years based on macroeconomic assumptions[xxii].

My point in this review of the Prism Report is not to throw rocks but rather to highlight the inherent fragility of the projection. I fear that the apparent reliability of charts and numbers will add fuel to protectionist fears.

What to make of all of this

It would be great to be able to make wise projections about the supply and demand of lawyers going forward. But, in my view, history shows that doing so is a mug’s game.

Lawyers in 1972 would not have guessed that the number of licensing candidates would remain essentially constant over the next 25 years. The growth of in-house practice and large firms would not have been projected in the late 1970s. Lawyer graduating in the early 1980s would not have predicted that they had become lawyers at such a good time. In 2002, the rapid increase in the number of Canadian and foreign law school graduates coming to Ontario to be licensed was entirely unpredicted. In 2007, the economic crisis of 2008 and its effect on the legal profession (and the economy generally) over the next decade was unpredicted. The rapid decline in US law school applications at the same time as increasing applications by Canadians to domestic and foreign law schools was not predicted either.

The implications are two-fold. The first is that we should not design and implement regulatory policies based on a false belief that we have the competence to “manage” supply and demand (even if we had that authority as a self-regulating profession which we don’t).

The other practical implication is that we should stick to our knitting and address what needs to be addressed. The principal mandates of a self-regulating profession are competence and conduct. The foregoing analysis shows what we already know which is that there are more lawyers going into small and sole practice and that many of these new lawyers are foreign trained. The goal should be proper assessment of qualifications, proper experiential training and practice support to better ensure that those practising in relative isolation have support.

But the implication of an increased number of lawyers is not to build a wall.

____________________________________________

[i] November 9, 2016 Convocation

[ii] Yogi Berra is commonly credited for this expression although the Danish physicist and Nobel Prize winner Niels Bohr appears to have said this before Mr. Berra. http://quoteinvestigator.com/2013/10/20/no-predict/

[iii] The Honourable Justice MacKinnon was appointed to the Court of Appeal in 1974 and then Associate Chief Justice in 1978. He served as Associate Chief Justice until 1987.

[iv] Appointed to the Court of Appeal in 1975 and appointed Chief Justice of Ontario in 1977.

[v] When I articled in 1982/83, the market was pretty grim. Articling hire-backs the previous year were very low. Interest rates had exceeded 20%. The economy was in a recession. No one would have guessed that becoming a lawyer in the 1980s would turn out as well for my generation as it did.

[vi] Ontario Universities’ Application Statistics at https://www.ouac.on.ca/statistics/law-school-application-statistics/

[vii] In descending order, Ottawa added 164 first year spots from 2002 to 2016, Windsor added 77 spots, U of T added 42 spots, Queens added 33 spots, Western added 17 spots and Osgoode was essentially flat.

[viii] National Committee of Accreditation of the Federation of Law Societies

[ix] An increase of 478 certificates was from England (255), Australia (131) and the United States (92). 177 was from other countries. India, Nigeria and Pakistan are the largest sources after Australia, England and the United States

[x] Until the market changed dramatically for lawyers in the United States.

[xi] Approximately 50% of the LPP students are from Canadian law schools.

[xii] Federation of Law Societies Statistics http://flsc.ca/resources/statistics/

[xiii] This were presumably mostly in-house lawyers. It is amusing now to see this group of 2,317 lawyers described as “other”.

[xiv] There are of course both new lawyers and lawyers who leave practice.

[xv] Based on LSUC annual information from the Great Library for 1989 and 1998.

[xvi] During this period, the size of large law firm serving large clients also increased significantly. While the numbers are not available, I expect that the number of lawyers serving individuals and small businesses likely grew even less.

[xvii] The Federation of Law Societies (FLSC) has a useful statistical archive with annual information back to 1998. The 1998 statistics from this archive for Ontario appear to have been done on a different basis than for 1999 and following years. Accordingly, I have used 1999 as a base rather than 1998.

[xviii] Unfortunately (and ironically), the available information is less reliable after 2007. Until 2007, the number of lawyers in private practice equaled the number of the lawyers in firms. In 2008 and following, the number of lawyers in firms exceeded the number of lawyers in private practice which makes no sense. It appears that the reason for this anomaly is that the data started in 2008 to double count lawyers who were in more than one firm. I have assumed that this double counting is randomly distributed by firm size and have restated the numbers so that the number of lawyers in firms is forced to the number of lawyers in private practice. This introduces a source of error into this analysis with the effect of the error being unknown.

[xix] The anomaly in the FLSC archive as between 1999 and 1998 was in the practising-exempt category. The practising-insured category was consistent. As data by firm size is not available for 2014, the 15 year period from 2008 to 2013 is used.

[xx] Based on Statistics Canada data as to the Ontario population

[xxi] The number of LSAT tests administered has dropped from over 170,000 in 2009/10 to nearly 106,000 in 2015/16. The number of Credential Assembly Registrations has dropped from approximately 88,000 in 2009/10 to nearly 52,000 in 2015/16 http://www.lsac.org/lsacresources/data/lsac-volume-summary

[xxii] One wonders how the obviously unexpected election of Donald Trump and the Brexit vote affects the assumption of increased globalization for example.

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Access to justice needs access to research

First published on slaw.ca

In December, the UK Competition & Markets Authority released its Legal services market study focused on individual consumer and small business experience of purchasing legal services in England and Wales. Not surprisingly, this report (the “CMA Market Study”) found:

Overall, we have found that the legal services sector is not working well for individual consumers and small businesses. These consumers generally lack the experience and information they need to find their way around the legal services sector and to engage confidently with providers. Consumers find it hard to make informed choices because there is very little transparency about price, service and quality.

This finding will be entirely unsurprising to anyone with passing familiarity with the substantial body of work, in Canada and elsewhere, showing unmet legal needs and lack of access to justice and legal services.

Naturally given the mandate of the Competition & Markets Authority, the CMA Market Study comes at these issues from a market perspective. This report looks at whether the market for legal services works effectively and concludes that it does not. The above quotation from this report makes the fundamental point which is that individual consumers and small businesses are not generally sophisticated purchasers of legal services and the providers of legal services provide very little transparency about price, service and quality. Entirely by coincidence, I wrote about this very point in my last column Access to Justice and Market Failure which focused on information asymmetry and market failure. As the CMA Market Study says:

Our market study was prompted by a range of concerns raised by interested parties, including concerns relating to the affordability of legal services, the high proportion of consumers that were not seeking to purchase legal services when they had legal needs (‘unmet demand’) and the possibility that regulation might be dampening competition.

Most of these concerns can be linked to the fact that the legal services sector is characterised by incomplete or asymmetric information. Consumers are often unable to judge quality before (or sometimes even after) they choose to buy a legal service. Information asymmetries can give rise to consumer protection issues, which provides part of the rationale for sector-specific regulation.

If legal services are to continue to be predominantly delivered by the market rather than the state (through legal aid or otherwise), it is important to be clear thinking about the realities of markets. This market study is an important evidence-based contribution to that thinking. But the point of this column is not to focus on the CMA Market Study.

The point that I want to make in this column is to highlight the importance of high quality research to truly addressing problems of access to justice and unmet legal needs. Not an exciting point to be sure but an important one, I think.

 In reading the CMA Market Study, I was reminded of another quite different study. In 2009, the Department of Justice Canada released a report prepared by Ab Currie of its Research and Statistics Division. The report was entitled The Legal Problems of Everyday Life – The Nature, Extent and Consequences of Justiciable Problems Experienced by Canadians. This is a fundamentally important work that looked the everyday experiences of ordinary Canadians. The first paragraphs of this report (the “Justice Canada Report”) are important:

The problems of civil justice, of access to civil justice and of unmet need for service in civil justice are most commonly studied from the point of view of the justice system, mainly with regard to the courts. The large, and reportedly increasing, number of self representing litigants crowding the courts is the issue that currently dominates both public and professional discourse. This is certainly an important problem, one that is as much a problem for the courts, mainly with respect to justice system efficiencies, as it is for the individuals who find themselves adrift without professional assistance in the complex and unfamiliar environment of the civil courts.

However, a wider perspective than one that begins with the courts is required to understand the full breadth of civil justice problems. It is widely accepted that many people with serious civil justice problems do not have access to the courts and thus do not appear as un-represented litigants. It is also part of the growing orthodoxy that many problems could be better resolved using alternative means, without engaging in expensive and lengthy court proceedings.

Two points can be taken from this quotation. The first is that access to justice/unmet legal needs is not just about what happens in the courts. Given our training as lawyers and especially for litigators, it is not surprising that we tend to see these issues as being about courts. To a hammer, everything is a nail.

The second and more important point is that there are a number of different and necessary perspectives from which to understand the extent and causes of unmet legal needs. The Justice Canada Report looked at the unmet legal needs of ordinary people by focusing on the problems of everyday life. The CMA Market Study examines the operation of the market for legal services. Neither report focuses on non-market provision of legal services through legal aid and otherwise or effect of the law and legal institutions on access to justice. This is no criticism – to the contrary. Understanding how a complex system works, does not work and should be reformed requires thoughtful analysis looking at the different component parts of the system separately and together.

Returning to the Justice Canada Report itself, it is significant in several ways. The first is that it is a Canada-wide report. The importance of this cannot be underestimated. We have a real risk of parochial understandings and approaches especially given how much of legal services is within provincial jurisdictions.  The second is that there is significant efficiency and efficacy in doing serious research and analysis at the national level. To state the blindingly obvious, access to justice and unmet legal needs are not only local problems even if some of the solutions must be.

Further, the Justice Canada Report had a significant on subsequent work and understanding. The Ontario Civil Legal Needs Project undertaken as a joint research project of the Law Society of Upper Canada, Legal Aid Ontario, and Pro Bono Ontario  lead to Listening to Ontarians focused on demand for legal services among low and middle-income Ontarians and The Geography of Civil Legal Services in Ontario focused the demographic characteristics of the Ontario population and the distribution of legal services. In 2011,  a colloquium was held at the U of T law school which lead to Middle Income Access to Justice,a collection of essays  about civil justice issues from Canada, Britain, the United States, and Australia. Most recently, the Canadian Forum on Civil Justice has undertaken the Everyday Legal Problems and the Cost of Justice in Canada National Survey which addresses the costs to individuals and to society of addressing and failing to address legal problems. In providing these examples, I don’t want to suggest direct causal lines from one project to another and I’ve not attempted to create a comprehensive listing of important work in this area. The point that I make is that each important piece of research from one perspective enables and betters further research. Understanding that there are unmet civil needs leads, for example, to consideration of the costs of addressing and failing to address legal needs.

Earlier this year,  White House Legal Aid Interagency Roundtable Civil Legal Aid Research Workshop Report was released (not exactly a consumer-friendly name). Richard Zorza describes this report in his Access to Justice Blog

 Formally titled White House Legal Aid Interagency Roundtable Civil Legal Aid Research Workshop Report, this Report represents a major milestone in one of the [U.S. Department of Justice Office for Access to Justice’s] most important initiatives.  It is no accident that since the Office was created, and particularly since [the Legal Aid Interagency Roundtable] was set up, we have seen an explosion of research interest in access to justice.  Prior recommendations to create research capacity in this field went unheard ever since the 1980’s when this capacity at [Legal Services Corporation was closed down.

Again, the point o f this column is not to examine the substance of this US report which is well described in Richard Zorza’s blog. Rather, the quotation above shows a parallel with the impact of the Research and Statistics Division of the Department of Justice in Abe Currie’s Justice Canada Report. Research capacity matters. Sadly, whether the US research capacity continues must now be uncertain given the recent election. In England and Wales, the CMA Report provides important insight but the ongoing research capacity of the Legal Services Board is important as is the fact that this research is not just from the lawyers’ perspective. This is inherent in the history and mandate of the Legal Services Board as well as a reflection of the impact of the LSB Consumer Panel.

So what is the punch line to all of this. The starting point is that research capacity matters. The next point is that good research leads to more good research and analysis. A virtuous cycle follows. Further, we cannot effectively address serious systemic issues like access to justice and unmet legal needs by intuitive responses that reflect our own limited perspectives. We need solid research and analysis.

What this leads to is to make two final points. The first is to encourage the Department of Justice to continue the good work that is reflected in the Justice Canada Report. While we now have further capacity, there is real value in maintaining  long term research capacity and Department of Justice is a natural place for such capacity given its breadth, depth and resources.

The second comes out of a recent discussion. There are many players in the legal system including attorneys general and their ministries, legal aid providers, the courts, law societies and universities. Each are busy doing their own work and thereby generating information/data about the justice system. While it is understandable, each player sees the value of its own information to itself but will not see the value to others including to researchers. Perhaps the time has come to take an open data approach to information about the legal system with a view to encouraging research and analysis addressing access to justice and unmet legal needs.

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Access to justice and market failure

First published on slaw.ca

Lemonish Lawyers [1]

The problem of access to justice is likely the result of a number of causes. Unnecessary complexity in substantive and procedural law is likely part of the problem. Our adversarial court-based administration of justice is problematic both where powerful actors have disputes with ordinary people and where family disputes require resolution. Ease of access to information through the internet may be both part of the solution and part of the problem.

Market regulation and access to justice

Our approach to legal services regulation plays a role as well. Limiting who can provide legal services restricts how legal services are provided and protects licensed lawyers and paralegals[2] from new forms of competition. Some problems cannot be economically addressed by spending the time of legal experts at costly hourly rates yet innovative new ways of providing legal services are prohibited.

Limiting legal service provision to licensed lawyers has always seemed to me to provide a logical explanation for the puzzling gap between legal services supply and demand. While there are substantial unmet legal needs, lawyers simply can’t survive if they drop their rates to the level that cost-effectively addresses most ordinary legal needs. Ordinary people won’t spend more to solve a problem than the problem is worth. Allowing new ways of obtaining legal services logically addresses this gap. Said another way, the market for legal services is constrained by limiting the supply side thereby causing unmet demand.

I make these points (none of which are new) as context for the balance of this column which suggests that there may other market failures present in the legal services market that impair access to justice. On this view, new ways of understanding and addressing problems of access to justice appear.

Information asymmetry and market failure

In the 1960s, economic theory evolved from its earlier focus “on figuring out the conditions that would allow markets to work perfectly” to a new focus on “what would happen when these conditions fail”[3]. One of the requirements for perfect markets is perfect information. Perfect market models assume that buyers and sellers are perfectly informed and accordingly can effectively see the value to them (“utility” to an economist) of goods and services that are bought and sold.

Of course, it is absurd to think that market participants are perfectly informed. Virtually inevitably, potential sellers know more about their wares than do potential buyers. George Akerlof was awarded the Nobel Prize in economics in 2001 for his research addressing the problems that arise in markets where sellers have material information that buyers do not (i.e. “asymmetric information”).

Akerlof’s research led to publication of his 1970 paper The Market for Lemons: Quality Uncertainty and the Market Mechanism[4]. As an example of a market with asymmetric information, Akerlof examined the used car market. Unlike the new car market where most all cars of a particular type have the same qualities, there are “lemons” and “peaches” in the used car market. Sellers know whether their cars are lemons. Most buyers have no ability to assess the quality of a used car. There is asymmetric information on a fundamental question on which value depends.

If “lemons” are worth $2,000 and “peaches” are worth $10,000, what happens in a market in which buyers can’t tell the difference? The answer is smart buyers won’t pay more than about $2,000 for any used car, buyers who only want a “peach” won’t buy at all and owners of “peaches” won’t be able to sell them for a reasonable price. Asymmetric information similarly can cause a downward quality spiral where producers see no point in providing “peach” quality service because purchasers can’t tell the difference and so will only pay “lemon” prices[5].

This problem of asymmetric information is part of the reason that cars depreciate so much when first purchased and driven off the lot and is part of the reason that “used car salesman” is a term of derision.

The labour market provides another example of market failure based on asymmetric information. Why is it that it is easier to find a job if you have a job and why does it get harder to find a job the longer that one is unemployed? The answer is that prospective employers don’t know whether the prospective employee is a lemon or a peach and rely on limited and often inaccurate information to avoid employing a lemon. Where an employer can’t effectively judge the quality of a prospective employee, employers assume that the currently employed are of higher quality than the unemployed and that the recently unemployed are of higher quality than the longer term unemployed.

But if asymmetric information leads to market failure, how did eBay come to be such a success? Buyers and sellers deal with each other virtually and at a distance. Information asymmetry is a particular problem where buyers and sellers don’t know each other and buyers can’t inspect the products being sold.

The answer appears to be that eBay took great care to provide market signals on which potential buyers could rely. One of eBay’s solutions is the establishment of an “Expert Community” where thousands of eBay members post advice on how to avoid buying a “lemon” or otherwise being taken advantage of. eBay encourages and organizes ratings of buyers and sellers so that confidence is enhanced by information from other market participants and so that taking advantage is deterred. As well, eBay has established one of the largest dispute resolution systems in the world. eBay has effectively reduced information asymmetry and has provided remedies that allow transactions to proceed despite a degree of information asymmetry.

On reading about information asymmetry and eBay in the recently released book The Inner Lives of Markets[6], I was struck by the question of information asymmetry in the practice of law. Clients would not need lawyers if they did not require expert assistance. By definition, unsophisticated clients have difficulty assessing the quality of their legal advisors and the quality of the legal assistance provided to them. Indeed, law is described as a “credence good”. Unlike a great (or lousy) dinner, it is difficult for consumers of legal services to assess the impact of legal services even after they have been provided. Also, unlike a used car, there is no sticker price nor even price negotiation prior to sale.

The market for legal services for ordinary people is fairly characterized as a market with asymmetric information as to the quality of the lawyer, the price of the services on offer and what is reasonably achievable as a result of proffered services. Ordinary consumers are at a very decided information disadvantage compared to the lawyers offering their services.

Professional self-regulation as a way of addressing market failure?

Keeping the problem of information asymmetry in mind, professional self-regulation can be thought of in a different way. Lawyers have ethical obligations of candour which require disclosure of information relevant to their retainer and disclosure of errors and omissions. The Law Society provides assurance of competence by requiring legal training and by testing prior to entry to practice. Further assurance of competence is provided by mandatory errors and omissions insurance and, it is thought, by mandatory continuing professional development. The Law Society provides assurance of proper conduct by establishing codes of professional conduct and by disciplining for professional misconduct.

It is interesting in this context to note that the definition of professional misconduct in Ontario is “conduct in a lawyer’s professional capacity that tends to bring discredit upon the legal profession”. It is also interesting how the discipline case law justifies license revocation in cases involving fraudulent or dishonest conduct. As the Divisional Court recently said in Bishop v. Law Society of Upper Canada, 2014 ONSC 5057 at para. 28:

… [There is a] pressing need to send a consistent message that engaging in fraudulent conduct by a lawyer is a matter that will not be tolerated because of its impact on the profession as a whole.  As was observed by Sir Thomas Bingham M.R. in Bolton, at p. 519:

The reputation of the profession is more important than the fortunes of any individual member.  Membership of a profession brings many benefits, but that is a part of the price.

While we ordinarily think of professional self-regulation in terms of protection of clients and the administration of justice, it is quite plausible to see assurance as to candour, competence, quality of service and professional conduct as addressing information asymmetry. It signals to prospective clients that they can retain lawyers without fear that they are retaining a lemon lawyer.

In the same way, applying fiduciary law to the lawyer-client relationship can be seen as providing assurance in the face of information asymmetry and addressing the fact that law is a credence good. With this thought in mind, Justice Binnie’s statement in Strother[vii] takes on new meaning:

… Monarch was dealing with professional advisors, not used car salesmen or pawnbrokers whom the public may expect to operate on the basis of “didn’t ask, didn’t tell”, and who collectively suffer a corresponding deficit in trust and confidence.  Therein lies one of the differences between a profession and some businesses.

Perhaps the difference between a profession and some businesses is that professions organize their affairs more like eBay (and less like used car salesmen) by reducing information asymmetry by requiring candour and by providing effective remedies where candour is lacking!

To be clear, none of this is problematic. Providing assurances of candour, competence, quality and conduct does protect consumers and does allow clients to more safely retain licensees. But what is a new thought for me is that there is good self-interested reason for professions to provide these assurances because the alternative is reduced demand for professional services because consumers cannot easily differentiate between lemon and peach professionals.

The Access to Justice gap and market failure

As discussed at the outset, it is plausible that the access to justice gap is explicable in part by the choice to limit the provision of legal service to licensees and those directly supervised by licensees. If ordinary people don’t have sufficient information about the quality and cost of prospective lawyers, some will think it better simply to “lump it”, some will access other resources and some represent themselves.

It also plausible that the access to justice gap would be even worse if ordinary people did not have assurance of minimum competence, quality and conduct.

But it would be naïve to think that our minimum professional standards mean that there are no choices to be made between us. We know that is not true and that there are great, good and not-very-good licensed lawyers and paralegals. We know that prospective clients have limited ability to assess who is a good and who is a less good lawyer in general or for a particular problem. Clients have limited ability to assess whether they have received quality or substandard services.

What is interesting is the possibility that the access to justice gap may be, if only in part, explained by market failure arising from continuing information asymmetry despite minimum standards.

Said more simply, being a lemon is a relative thing[7]. While prospective clients have some assurance, prospective clients have limited ability to distinguish between lawyers. As a result, economic theory suggests that rational consumers are forced to assume that no lawyer is better than the minimum standard actually required. While perhaps not lemon standard, this standard is “lemonish”. Where a potential client is not able to sufficiently assess the quality of the professional or of the service provided, the amount that the potential client will be prepared to pay is limited or the potential client may not be willing to retain anyone at all”.

If this analysis is right then the answer may come from eBay. We should be considering how to provide better information and how to better address service problems.

The difficulty with this is that we professionals are conflicted. Where minimum professional standards are established, we all benefit because prospective clients see all of us in a better light. But where distinctions are drawn between us, some will be winners and some will be losers. And where distinctions are made based on imperfect information, some will be losers who ought not to be.

This reaction is seen in discussions about greater transparency in Law Society complaints and investigations. There is immediate unease when it is suggested that prospective clients have access to information about, for example, complaints rather than just about discipline proceedings.

There are other tools that might be considered. One is bringing an end to general practice by limited licensing, thereby requiring and signalling specific expertise.

In writing this column, I don’t claim to know what specific approaches make sense. But it does seem clear that information asymmetry is a “thing” and that it is particularly applicable in the legal services market and that market failure is a consequence of information asymmetry. It also seems clear that we should recognize that addressing information asymmetry through self-regulation will be challenging given the inherent competitive conflict within the professions.

If we are serious about the access to justice gap, we should accept that no one solution will slay the access dragon. Indeed, we have to accept that we cannot predict with confidence what solutions will be effective. But it is time to be creative and to actually attempt solutions.

And addressing the market for lemonish lawyers may be part of that. Better information may allow consumers to retain lawyers who otherwise would not.

And the added (and important advantage) would be that pressure to reduce quality to the lemonish levels would be reduced and those who provide higher quality would have a better prospect of being paid better prices where clients

[1] This column borrows heavily from Fisman and Sullivan: The Inner Lives of Markets: How people shape them and they shape us (2016 Pereus Books Group), https://www.amazon.ca/Inner-Lives-Markets-People-Shape/dp/1610394925

[2] I will refer to lawyers rather than lawyers and paralegals in the balance of this column for ease of reading. But the point is relevant for paralegals as much as for lawyers and perhaps more .

[3] Fisman and Sullivan supra., Chapter 3

[4] Quarterly Journal of Economics, 1970

[5] My thanks to Noel Semple for editing a draft of this column and pointing out the downward-spiral problem which seems highly relevant in some areas of the legal services market.

[6] Fisman and Sullivan supra., Chapter 3

[7] Strother v. 3464920 Canada Inc., [2007] 2 SCR 177 at para. 42

[8] Thanks again to Noel Semple for pointed out the following reference which notes that professional regulation ordinarily sees quality in yes/no terms. Ordinary licensing does not permit consumers to differentiate between licensees. Michael J. Trebilcock, Carolyn J. Tuohy and Alan D. Wolfson, Professional regulation : a staff study of accountancy, architecture, engineering and law in Ontario prepared for the Professional Organization Committee (Toronto: Ministry of the Attorney General, 1979) at pages 78-9: “all standard-setting mechanisms, including licensing, necessarily proceed on the assumption that quality is a discontinuous attribute. A licensing regime assumes that either one satisfies the required licensing conditions and provides a corresponding quality of service, or one does not meet the standards and is not permitted to provide any lesser quality of service on any terms. “

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The Devil’s Advocate

Published first on slaw.ca

Gavin MacKenzie, Amy Salyzyn and I participated in August in the Ethics Debate at the Canadian Bar Association Legal Conference. Amy moderated the debate. Gavin and I were the debaters. The topic was Should lawyers have a monopoly on the provision of legal services? I argued for the proposition. Gavin argued against.

The general topic was broken up into three separate propositions, each of which was separately debated. My role was to support the first two propositions and to argue against the third.

  • There is no good reason to allow anyone other than lawyers to provide legal services.
  • Professional values will be sacrificed if anyone other than lawyers is allowed to provide legal services.
  • The horse is already out of the barn door. The only practical choice is accept that the monopoly is lost.

As can be seen from previous slaw.ca columns, my position as a debater was rather different from my actual views on these topics. This made the debate more fun. Being an advocate is liberating especially in a formal debate where the goal is to try to both persuade and to entertain.

Being a debater – in formal debates and in real life

But debating from a perspective dissonant from my actual perspective made me think both about the substance of my actual views and about the way that we think about what we think.

Alice Woolley wrote a paper entitled The Problem of Disagreement in Legal Ethics Theory that I particularly admire. Alice both describes different competing theories and explains why the differences actually matter. She notes that each theory necessarily claims that it alone is correct. The paper is well worth a read given the centrality of legal ethics to how we should act, and should be required to act, as lawyers. But this is not the point of referring to Alice’s paper here.

In her paper, Alice writes:

Finally, when legal theorists engage in the task of theorizing, they should be aware that time spent arguing with each other is subject to the law of diminishing returns. While such debate undoubtedly helps to clarify the theoretical landscape, it is much less likely to lead to any theorist to changing her mind, and highlighting theoretical differences does not, in and of itself, do much to illuminate the problems of ethical practice.

When reading this passage originally, I was struck by the observation that intelligent people who have thought deeply aren’t persuaded by debating with each other. Rather, existing views are refined and differences highlighted. This rings true. At least three points follow from this. The first is that debates may well not be for the debaters. The second is that one of the fundamental goals of a democratic society is finding practical ways to resolve differences where agreement does not follow from debate. The third is that we humans are surprising resistant to changing our minds despite good reasons and new facts1.

While Alice wrote about intractable philosophical disagreement, disagreement continues for other more problematic reasons. With increased research and writing about cognitive psychology and cognitive biases, we now have a better awareness of the importance of confirmation bias. When we have an opinion on an issue, we do not receive new information neutrally. Rather, we tend to interpret new information as being supportive of our pre-existing opinions. We don’t wrestle with information that is inconsistent with our views. We hear arguments that support our views less well than we hear arguments that challenge what we think.

Indeed, there is research suggesting that new information inconsistent with pre-existing views is not just ignored. New inconsistent information can be perceived as being threatening and give rise to cognitive dissonance. As reported several years ago in the Boston Globe:

Facts don’t necessarily have the power to change our minds. In fact, quite the opposite. In a series of studies in 2005 and 2006, researchers at the University of Michigan found that when misinformed people, particularly political partisans, were exposed to corrected facts in news stories, they rarely changed their minds. In fact, they often became even more strongly set in their beliefs. Facts, they found, were not curing misinformation. Like an underpowered antibiotic, facts could actually make misinformation even stronger.

It is important for all of us to recognize that our opinions suffer these frailties. No matter how strongly we are convinced (and perhaps especially then), we have to work hard at keeping an open mind – to genuinely challenge ourselves.

Lawyers and their perspective

The issue of the lawyer’s monopoly seems to me to particularly raise these challenges. There are underlying philosophical questions. Important facts are uncertain. Disagreement is understandable and proper. But there also seem to be biases in play

To state the obvious, lawyers have a self-interest in avoiding new competition. Natural anxiety about economic well-being creates self-interest bias. Our personal and our professional identities are tied together. We value what we do and we find offensive that which suggests that we are part of the access to justice problem. We value our contributions to the legal system, and to society more generally, and are offended by anything that devalues those contributions. Even perfectly well-intentioned lawyers may well be affected by these biases. And once opinions are set, it is hard to come to a different view.

As a participant in the broader discussions about regulatory liberalization over the last several years, I have views. Because of this, I am at risk of confirmation bias in considering new information. Having written my thoughts down in slaw.ca columns and elsewhere, I’m at risk of explanation bias, the tendency to be tied to one’s previously expressed views.

This will be no surprise to most litigators. Our common experience is that our cases often seem to get better and better as we spend time on them. It is surprising how often we seem to have the better side of the case. It is often hard to be clear about the frailties of our cases.

The CBA Debate

With all of this in mind, it was interesting to be asked to be a debater on a subject with which I have been much involved, but not on the side that I would naturally take.

Substantively, the framing of the three propositions made three points of central importance. What is the reason for proposed change and is it a “good” reason What are professional values and how could they be sacrificed? Is the die already cast?

The process of preparing for the debate reflected the behavioural psychology described above. At first, I found it a challenge to cogently frame arguments against my own beliefs. Over time, my arguments made more sense to me – especially when I was trying to win the debate!

The first proposition raised the question of what actually motivates the broader debate and, more narrowly, how good must a reason be for it to be a “good reason”. I chose not to address the debate from the lawyer’s perspective on the theory that market incumbents naturally want to maintain their monopolies. That said, I’m inclined to think that liberalization would be helpful defensively given the challenges that the future holds. But that is not the main point and is not particularly persuasive to nervous incumbents.

The main point is access to legal services and unmet legal needs. I necessarily conceded that there are substantial unmet legal needs. My argument was that allowing paralegals in Ontario and allowing alternative business structures in Australia and England has not solved the unmet legal needs problem and that a legitimate goal does not justify change if the change does not advance the goal. I argued that our access to justice problems arise from the way that our system is designed rather than who may participate – the problem is “the coliseum not the gladiators”.

The second proposition raised the question of what are “professional values” and how are they put at risk. I argued that our professional values are obvious; serving clients (commitment and independence, confidentiality and candour) and serving the rule of law and the administration of justice. I conceded that lawyers were no more ethical than anyone else but observed that legal ethics are different than ordinary ethics. Lawyers can be better trusted to honour legal ethics being appropriately trained and, most significantly, being at risk of loss of their livelihoods for professional misconduct. I argued that businesses and capital can simply move on after ethical failure while lawyers can’t. And so, professional values are put at risk by liberalization.

The third proposition raised the question of where we really are as a practical matter. While there is much going on, my argument was that there are substantial and important areas currently served by lawyers that merits cautious protection in the interest of the clients and the society that we serve. Conceding that there is change at the margin, I argued that the centre must be held.

Standing back, I think there is some merit in these arguments. The argument for change is not overwhelming. There are risks in change. There is much that is good that should not be discarded.

But as I said in the discussion after the debate was over, this is an issue where the zealots on both sides have something to say but are wrong as well.

The challenges of unmet legal needs are very real. There is no one magic bullet that will kill the access to justice dragon2. Waiting until we find that one magic bullet means failing to address the problem using the various tools at our disposal. The coliseum is part of the problem as are the gladiators. And there is much to address that isn’t about coliseums at all.

There are advantages in having only licensed lawyers and paralegals. We are indeed easier regulate – given the existing regulator regime which is designed with us in mind. But it is fallacious to claim that modern business is not amenable to regulation. The idea that only lawyers and paralegals can be effectively regulated is nonsense. The reality of the modern regulatory world shows that.

Finally, the idea that the horse is already out the door is another “false binary” – a rhetorical claim that things are all or nothing. There is much that we do that should be honoured. There is much that we don’t do that needs to be done. And there is some of what we do where some new competition would be a good thing.

1 I don’t mean that all disagreements are capable of resolution. Some disagreements are driven by philosophical differences where “right” answers don’t exist. Other differences, especially hard policy choices, arise from factual uncertainty. Sometimes both of these are in play and there are no doubt other legitimate reasons for unresolvable disagreement.

2 The dragon is a canard!

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Debatable: Robo-Advising Could be a Boon for Access to Justice

First published in OBA’s Just Magazine as a debate with Joe Groia

For hundreds of years, lawyers have spent their time and expertise providing valuable assistance to their clients.

Lawyer incomes have remained reasonably stable in real terms over the decades. Statistics Canada reports the median professional income for Ontario lawyers was just over $125,000 in 2014. Over time, lawyer professional incomes have been reasonably well correlated with family incomes. This is not surprising. Intelligent, well-educated, hard-working lawyers have generally maintained their economic position – and lawyer incomes are tied to the ability of clients to pay their fees.

Considering lawyer incomes and overheads and the number of hours that can be billed in a year, it inevitably follows that lawyers charge fees in the hundreds of dollars per hour (whether described that way or not).

For some problems, this works pretty well. Limited lawyer time is required for a residential real estate transaction or a drafting a will. Most people buying or selling real estate or with an estate have the money to pay for the necessary legal work.

For other legal problems, there is a problem. In criminal law, family law and personal injury, the number of required lawyer hours means that many ordinary people can’t afford to pay. Ironically, many lawyers couldn’t afford themselves. This reality plays out differently in different areas. In personal injury law, lawyers are paid out of the ultimate compensation, if any. In family law, most litigants simply don’t use lawyers. In criminal law, legal aid assists the poor. For the middle-class, being an accused can be ruinous. Our justice system is a mostly unaffordable wonder for ordinary people.

What isn’t obvious is how little lawyers actually do for ordinary people. Surveys repeatedly show that lawyer work is generally limited to criminal law, family law, personal injury, real estate and estates law. Studies have shown that over 85% of all “justiciable events” are addressed by ordinary people without legal assistance.

Lawyers don’t offer services if people won’t pay for them and … lots of legal issues can’t be addressed at a cost of hundreds of dollars per hour.

So why would people not go to lawyers when facing a legal issue? The practical answer is that lawyers don’t offer services if people won’t pay for them and that lots of legal issues can’t be addressed at a cost of hundreds of dollars per hour. The result is legal needs that are unserved and underserved by lawyers.

Two other examples are helpful. Like lawyers, investment advisors spend time offering investment advice and transactional assistance. Unlike lawyers, investment advisors commonly charge fees based on the value of the investments involved. This means that investment advisors limit their clientele to those who have sufficient investable assets to pay their fees. So those with insufficient assets leave their money in their bank accounts, buy GICs or perhaps put their money in expensive bank mutual funds.

Tax assistance provides another example. Taxes can be complicated and difficult. For some, accountants prepare taxes. Others have used bookkeepers or tax preparers. But historically, many late April nights have been spent over kitchen tables trying to fill out tax forms.

In 2016, many people now use Quicken TurboTax or comparable products. Instead of teaching tax advisors how to spent their time preparing tax returns, Quicken has created a robo-advisor that can be downloaded and used at home. While the TurboTax software is no doubt expensive to create and maintain, the additional cost of a TurboTax download is relatively negligible. This low “marginal cost” means that the unit price is low. Ordinary people who once spent late nights stressing out over their tax returns now use a robo tax advisor instead.

In 2016, investment assistance is also provided by robo-advisors. The growth in the use of robo-advisors over the past several years is reported to have been significant. What is most interesting is that robo-advisory services are being provided to clients who don’t have sufficient investable assets to merit the interest of a traditional investment advisor. The same “low marginal cost” economics that permit TurboTax to be offered at relatively low prices apply here too.

So what about law? There are parallels between legal advice, tax advice and investment advice. Where provided through the traditional professional advisor, there are unserved needs because the labour-intensive expert model has lower limits to the price at which it can deliver. But where technology and capital are applied, lower priced services can be delivered.

This is not radical imagining. Examples already exist. The most recently, the Manchester Guardian reported “Chatbot lawyer overturns 160,000 parking tickets in London and New York”. While less newsworthy, Neota Logic and Littler Mendelsohn deliver robo compliance advice to Littler’s HR clients. This is not to suggest that a robo-advocate in court is desirable or even plausible. But there are aspects of existing legal services that lend themselves to robo-advisors. An obvious example is family law where complicated court forms and rules could be addressed with robo-assistance. Notably, a Quicken Family Law product was introduced in Texas several years ago only to be challenged by the state bar as unauthorized practice of law.

Of course, it is speculative to say that robo legal advisors can substantially address currently unserved and underserved legal needs. But the fact that this is speculative is because only licensed lawyers and paralegals are now permitted to provide legal services. And the ability to provide software-driven internet-delivered intelligent services is obviously increasing. What is possible today is not what will be possible in the years to come.

For some lawyers, this is scary. Some of what we do may well be more cost-effectively done in new ways. But lawyers don’t come close to fully serving the legal needs that exist in society. There can be no ethical justification for prohibiting that which lawyers don’t actually provide nor, more scarily, what can be effectively provided at lower cost. And there may even be opportunities for lawyers up to new challenges!

Ultimately, we can attempt to prohibit new legal services that lawyers cannot cost effectively provide. We can ignore new providers hoping that nothing goes wrong. Or we can thoughtfully regulate legal services in the public interest including “robo-lawyers”.

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