As the public offering of shares in the Australian plaintiffs’ law firm Slater & Gordon moved toward and then became a reality, the number of articles and blog postings discussing the possibility of public ownership of American law firms has increased. The most recent RSS feed to hit my computer was the posting Everything You Wanted to Know About Owning a Law Firm, but Were Afraid to Ask published yesterday at the Law.com Blog Network. Bruce MacEwen at Adam Smith, Esq., and Larry Ribstein at the University of Illinois College of Law are among those who have written about the issue. Bill Gratsch at Blawg’s Blog noted the listing of Slater & Gordon’s shares. And, the Georgetown Law Center for the Study of the Legal Profession will host a symposium next year that will discuss the issue.
The articles and postings I’ve read all have been good; and, generally they conclude that the U.S. ethical rules currently prohibit non-lawyer ownership of law firms. In some states, ethical rules also prohibit the sharing of legal fees with non-lawyers. As Bill Gratsch noted in his posting, “My mind's eye can already see the forces, for and against, lining up...” When that great debate finally is joined in earnest, however, the ethical issues will prove to be nothing more than a giant red herring.
Nope – the real issue will be fear. It’ll be fear of the type described by Franklin D. Roosevelt in his First Inaugural Address as being “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance." And who will be gripped by this paralyzing terror and what is it that they will fear? Lawyers. And they’ll be terrified by the prospect of just plain ole’ financial accountability - “transparent” financial statements, financial discipline, true cost control, public financial reporting, and quarterly earnings pressure, to name a few.
Let’s take a quick look at what some outsiders have said about financial practices within the “privately-held” legal industry. Based on the results of his recently completed 2006 – 2007 survey of attorney billing practices, William G. Ross of the Cumberland School of Law noted:
• Approximately two-thirds of the respondents to the 2006-07 survey stated they had specific knowledge of bill padding.
• 54.6 percent of the survey respondents admitted the prospect of billing additional time had at least sometimes influenced their decision to do work that they otherwise would not have performed.
• 34.7 percent of the respondents engaged in “double billing”, while only 51.8 of the respondents thought the practice was unethical.
According to The Wall Street Journal’s Law Blog, Bill Henderson - a law professor at Indiana University-Bloomington who studies law firms – suspects “many law-firm management committees may be minimizing the reported number of equity partners for the purpose of raising profits per partner in the Am Law 100. He feels that at some firms, the inner circles don’t share the actual (higher) number of equity partners with the rest of the firm’s partnership.”
In an interesting 2004 case study of eLawForum (a link to the study is in the margin under “Articles of Interest”), Harvard Law School Professor Clay Christensen and Scott Anthony summarized:
• . . . But because corporations accept the sole-source market, law firms play a cat-and-mouse game with the billable hour and cost-plus pricing, hoarding productivity gains and saddling clients with both cost and outcome risks.
• With one hand, law firms give discounts on hourly rates to their largest clients. With the other hand, they take back what they have given by raising the base hourly rates to which the discounts are applied and increase the number of hours they bill to do the same work. Law firms are masters of the cat-and-mouse game of the billable hour. As long as they respect the procedures mandated by the law department, law firms can circumvent any attempts at cost reduction by controlling the two key variables—the base rate and the number of hours spent.
Somehow, I don’t think the “industry” is going to want to subject that kind of behavior to the intense scrutiny that comes with being publicly held.
In any event, the debate should be fun to watch. Soap boxes will be mounted, brows will furrow, obfuscation will abound, carnival barkers will be everywhere, and shouts about ethical concerns for clients will rain down – and no one should watch without putting on their waders because it’ll get deep. And if you pay real close attention, you even may be able to smell the fear.