Ideoblog

Women come and go

From a Harvard Law School student, via the Harvard Blog, comes the Love Song of the Delaware Court of Chancery. It's very clever. But, alas,

The muttering retreats of restless nights in one-night cheap hotels and sawdust restaurants with oyster-shells

becomes

the nimbly wrought conceits of high-paid lawyers in nearby hotels who work so hard all day for corporate shells.

There's something very sad there, that in a way captures the essence of the original.

As you, dear law professors, survey your students, don't you sometimes bemoan all that talent lost to other pursuits? Not that law is at all a bad thing. Been very good to me. But still. . .

I remember while in law school I still harbored dreams of being a writer – not the kind I am now, but the real kind. I took a graduate fiction seminar, a continuation of the seminars I took in college. The teacher was Richard Stern, perhaps the best non-famous American novelist. He told me that in order to be an even decent writer the first thing I had to do was quit law school. I tried to tell him about lawyer novelists and he only laughed at the names I mentioned.

Would-be-writers-now-law-professors, do these lines fit you?

No! I am not Prince Hamlet, nor was meant to be; am an attendant lord, one that will do to swell a progress, start a scene or two, advise the prince; no doubt, an easy tool, deferential, glad to be of use, politic, cautious, and meticulous; full of high sentence, but a bit obtuse

Maybe.  But still at least I left real writing to the talented.  I did not overreach, to become at times ridiculous, almost, at times, the Fool.

Law firm 10Ks

David Lat ponders, “What if New York’s Law Firms Went Public.” This in the wake of the IPO of the Australian firm Slater & Gordon, which I have discussed a lot over the last year (see my lawyers archive).

Steve Bainbridge notes that Lat's humorous take raises the serious question “how we’d square client confidentiality rules and SEC disclosure obligations.” Indeed, as discussed at the Georgetown conference last week (which Lat attended), a lot would change if law firms took on non-lawyer owners. I raised the question whether firms that include law practice as part of their business model would be fundamentally different from firms that don’t. For example, would a firm that combines investment banking and law (a scenario I discussed here) be essentially an investment banking or a law firm?

Slater & Gordon, which is a law-only firm, operates under disclosure exceptions that accommodate client confidentiality, indicating that this problem is manageable. But as law becomes absorbed into other businesses, I speculate that the practice of law will cease being so special. This affects not just confidentiality, but also conflicts rules, and the whole panoply of rules that keep lawyers from being treated like ordinary business people.

Whether one welcomes that result or not, the competitive pressures on the law biz virtually ensure that things will soon move in this direction.

The future of law practice

The Georgetown Conference on the Future of the Global Law Firm was, I think, a very successful conference featuring an interesting extended discussion among regulators, academics in various disciplines, law firm consultants and top partners of big law firms.  Here's some comments by Gordon Smith. There was much too much to summarize in detail, but here are some overall reactions.

To begin with, the shape of the legal industry today tells us very little about the future. That's because this shape has been largely dictated by regulation of the structure of law firms, including restrictions on conflicts of interest, ownership and enforcement of non-competition agreements. These rules constrain firms that practice law in raising capital, retaining talent, and attracting clients.

In the long run, this regulation is doomed. Markets are demanding lower legal costs and more flexibility, and there is international competition to supply these demands. Markets and contracts will work around the rules. The rules themselves will be history when, for example, New York law firms have to start competing with, among other things, a liberated UK legal services industry.

Post-deregulation, there's no telling what will happen. At the conference, I hypothesized law firms with varying levels of lawyer control, as well as a bewildering variety of non-law firms selling various types of legal expertise. Bruce MacEwen aptly referred to the coming "Cambrian explosion" in the legal business, in which evolution is unprecedented and rapid.

Certainly there will be many variations on the globalization of law practice – firms that send their lawyers all over the world, franchise local offices, or practice international law from a home base. Even firms with local clienteles will have global supply chains, just like non-law firms today. Much legal work is already being routinized and shipped to India.

These developments are going to force us to rethink what it means to practice law or have legal skills, and how to teach people these skills. It's important to keep in mind that practicing law didn't used to be high-falutin. Once upon a time you apprenticed for it like other trades, and didn't even need a college education. That was before a powerful trade group called the American Bar Association and its equivalents throughout the world figured out how to make law practice a high-priced profession. Global competition may return us to some version of those days.

Just as the lawyer market has been protected by regulation, so has the law school world. So we still put all law students through something like the standard three-year routine that has survived for a century. We say that every one of them needs to be able to do the same set of things.  After all, a specific definition of law practice is essential to what it means to be a profession. 

In the future, however, the legally skilled may be people sitting in Bangalore who have never seen the inside of a US law school. Others, as Bill Henderson suggested, may be trained by law firms, as these firms wake up to the inefficiency of buying resumes. The market value of some kinds of lawyers may skyrocket, while that of others may plummet. Surely in this world we can't expect to be selling all law students the same $100,000 education.

The bottom line is that lawyers have been living within the comfortable protection of a regulatory monopoly. One of these days the zoos will close and the animals will be left to fend for themselves in the wilds of the markets. I'm glad that I was able to spend a nice long career in the zoo, although I think it will be pretty exciting out there in the jungle.

Tomorrow at Georgetown: The Future of the Global Law Firm

Here’s a prior post on this conference, with some links.

I’ll be speculating about what the law firm of the deregulated future may look like. Basically, law may be practiced in firms that lawyers don’t own or control, and that don’t even specialize in law. And this may have profound effects on what lawyers do, and on whether there will even be professionals that resemble the lawyers of today. Others will be talking about the interesting developments that have led us to the brink of these important changes. Many of the speakers are responsible for these developments.

I'll have more later.  This should be interesting.

Georgetown conference on the global law firm

I’ve been talking about the prospects for publicly traded law firms, and more generally about the future of the law firm. Here's some links. Now you can go to the Conference at Georgetown on “The Future of the Global Law Firm," April 17 and 18.

Bruce MacEwen (aka Adam Smith, Esq) describes the background of the Conference. As discussed here, the Conference was spurred by UK legislation that would permit law firms to become publicly-traded enterprises, and comes out of a “conversation” by Mitt Regan of Georgetown, Bruce and me.

More specifically,

This symposium will bring together scholars from a range of disciplines, legal practitioners, regulators, and consultants and experts on professional service firms to discuss a variety of forces that are likely to shape the global market for law firm services in the years to come. Participants from the United States, United Kingdom, Canada, and Australia will explore issues such as the financial, organizational, and cultural dynamics of law firms; management strategies and business models in the global legal services market; law firm access to various sources of capital; and the impact of market forces on professional ethics, values, and identity. Analysis of these issues will be informed in particular by discussion of legislation in the United Kingdom authorizing nonlawyer equity investment in law firms, and of the emergence of the publicly traded law firm in Australia. The goal of the symposium will be for scholars and practitioners to engage in a dialogue that illuminates the challenges that lie ahead for law firms that aim to operate and compete on the global stage.

Participants include, among many others, Bruce, Mitt and me, Andrew Grech, managing director of Slater & Gordon, the first publicly traded law firm, Steven Mark, Legal Services Commissioner, New South Wales, Australia, and some US law profs, including Gordon Smith, Bill Henderson and Larry Mitchell.

If you're interested in what law firms will look like a few years from now, you should go.  Hint: they may not be "law" firms.

The unraveling of the Bear deal

As I pointed out a week ago:

[Bear] shareholders. . . will have the last word – they get to vote on the deal. A Bear shareholder who got in on last night's conference call said he'll vote against. He's probably not alone, particularly if things calm down and Bear's value increases before the vote. Another possible issue here is the the extent of the Bear directors' obligation to shop the company and the nature of any deal protection provisions. * * * Does this mean that Bear might end up getting its cake (Morgan stops the run on the bank) and eating it too (no fire sale to Morgan)?

Today’s NYT reports:

JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations. The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal. . . .JPMorgan would pay $10 a share in stock for Bear, up from its initial offer of $2 a share. . .

Among other things, the article notes that “[s]ome shareholders could seek to file lawsuits to block the deal, claiming that the unusual board vote was an act of coercion.

Meanwhile, the Fed is balking. It’s especially sensitive to mounting accusations of a bailout favoring Bear shareholders that would increase the political pressure for a homeowner bailout. But if the Fed refuses, then the Bear shareholders will scream.

And Bear’s board is trying to protect the deal though a sale of 39.5 % of the firm to Morgan, which it’s hypothesizing won’t require shareholder approval (I wonder about that).

A really interesting aspect of all this is that part of the move to renegotiate the agreement is apparently because the sale agreement “inadvertently included” a provision requiring Morgan to guarantee Bear’s trades even if shareholders voted down the deal.

Steve Davidoff analyzes the agreement.

Under the merger agreement, if Bear’s shareholders vote down the takeover deal for a year, Bear can terminate the agreement. This we already knew. But it also appears that, in such circumstances, JPMorgan’s guarantee to backstop Bear’s liabilities stays in place — forever. That is, even after the rejection from Bear’s shareholders, JPMorgan’s guarantee would continue to apply to any liabilities Bear accrued up to the termination of the agreement. This provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee.

The basic problem is that Morgan gets to terminate the agreement if Bear’s directors change their recommendation, but not if the Bear shareholders vote it down. But Morgan could use its power to run the company “to prevent Bear from incurring new liabilities [not covered by the guarantee] if the deal appeared on the verge of collapse. This would likely be questionable under Delaware law, but JPMorgan might still try it.”

If the deal does collapse, there will likely be litigation in which Wachtell and the banks point fingers at each other.

Two lessons: agree in haste, repent in leisure; and it's not over until the fat lady sings.  In this case the fat lady could be the Bear shareholders, the Delaware courts, or both.

Update: In the above post I said “I wonder about” the assertion in the Times article that a 39.5% sale would avoid a shareholder vote. According to this Steve Davidoff followup, I had reason to wonder.

License to steal

The lead in today’s WSJ is about a new wave of panic-driven regulation about to sweep over markets in the wake of subprime and product safety concerns. Sounds like SOX on stilts. The worst idea going is Paulson's gambit to hold mortgage brokers to “strong national licensing and enforcement standards.”

The problems with this suggestion are made clear by a WSJ op-ed co-authored by leading licensing expert Morris Kleiner. Kleiner notes that the evidence on state licensing of mortgage brokers, like that on licensing generally, shows little positive relationship with quality of service – what you might expect from a law whose intent and effect is to reduce competition. As the authors point out, “Quality matters; licensure doesn’t guarantee quality.” For example, states that impose stringent entry requirements on mortgage brokers “have a higher foreclosure rate on subprime mortgages, and a higher percentage of mortgages with high rates of interest.”

We have licensing requirements, as Kleiner and his co-author point out, because politically organized groups seek protection from competitive markets. Existing practitioners are grandfathered in. The intent and effect of licensing rules is to restrict entry, not to ensure quality. The industry’s goal is higher prices and profits, not a better world.

I pointed this out a month ago, discussing a Forbes article on licensing. As Kleiner was quoted as saying in that article:

Occupations are politically powerful, Members get together and say, 'We need to protect the public.' If you oppose it, they campaign against you." Often there is no one lobbying against the bills. So with all the pressure and contributions coming from one side, it's an easy bill for governors to sign.

As I told the Forbes reporter: "It would be nice if there was an American Clients Association protecting the people."

For more thoughts on licensing, specifically lawyer licensing, see Lawyers as Lawmakers: A Theory of Lawyer Licensing, 69 Mo. L. Rev. 299 (2004), online draft version.

I’m not sure we need more regulation, but assuming we do it should pinpoint the abuses while encouraging, rather than thwarting, competition. To the extent that mortgage brokers got us into this mess, does it make sense to reward them with juicy new protection from competition?

Another stupid lawyer licensing case

A jailhouse lawyer helped an inmate draft a pro se cert petition. The Supreme Court took the case, something that happens very very rarely. Now it appears the South Carolina attorney general's office is investigating the helper for unauthorized practice of law. Here's the AP story and WSJ Law Blog. It seems this is permitted by the federal authorities (the inmates here were in a federal prison). Only the states have problems with it.

I have argued that there is no client-protection case for lawyer licensing laws. See Lawyers as Lawmakers: A Theory of Lawyer Licensing, 69 Mo. L. Rev. 299 (2004) (draft), and this PoL discussion. Clients can be protected by voluntary certification requirements, perhaps backed by anti-fraud rules. Licensing is really all about protecting lawyers from lower-cost competition. They get this protection because they have political clout.

And the social costs are significant for the poor and disadvantaged trying to navigate in a law-bound world -- as aptly illustrated by this case of an obviously skilled person providing assistance where licensed help probably wasn't available.

The only solution is making the public aware of the costs of protecting lawyers. In that regard, perhaps we should thank the South Carolina AG and all those other state authorities that bring these highly publicized licensing cases.

The profitability of taking law firms public

I've been talking about the prospect of publicly traded law firms, sparked by the public offering of the Australian firm Slater & Gordon. Here's some links.

One important question about such firms is whether they will work in the sense of being profitable. If they do earn big bucks, this will put pressure on US regulation of these structures. Initial returns are in – S & G's half-year profits up 56 percent since the IPO.

Hedge funds financing lawsuits

A hedge fund, appropriately named Juridica, has listed on London’s AIM market with 80 million pounds of funding to invest in business-to-business lawsuits. HT MR. Juridica will invest in US and UK lawsuits, joining another recently launched fund, MKM Longboat, which will finance European lawsuits.

According to the Times article, Juridica has backing from well-known investors such as Invesco. The article points out that

[p]ursuing legal claims can be frighteningly expensive. Plaintiffs have to commit management time and cash years into the future with no certainty of success. Getting an outside investor to share some of the financial pain can be very attractive. So can tapping their litigation experience. While most large companies are well resourced with in-house lawyers, few have litigation experience.

The article also notes the challenges facing the fund managers: assessing the strength of the cases and likely collectible damages, bargaining with the plaintiffs and structuring the terms of engagement. The article concludes:

Law firms in the US remain one of the few no-go areas for outside equity capital investment. They also appear a safe bet to prosper in the chilliest of economic conditions. No wonder capital is starting to seek out imaginative ways to try to piggyback on their good fortune.

For more on financing law firms, see this exchange with Mitt Regan and Bruce MacEwen and many other posts in my lawyers' archive.  And the involvement of publicly traded hedge funds dovetails with another of my interests -- the increasing role of partnerships in large and publicly traded businesses.