“It is never wise to discourage youthful idealism” — Steven Kinzer, journalist

In 1977, a 27-year old Yale Law graduate named Joel Hyatt resigned his position at the prestigious New York firm of Paul, Weiss, Rifkind, Wharton & Garrison to return to his hometown of Cleveland and open a storefront legal clinic that catered to the needs of working- and middle-class people.  Five years earlier, two recent UCLA Law grads, Len Jacoby and Steven Meyers, embarked upon a similar storefront concept in the Van Nuys section of Los Angeles, albeit they struggled to earn a living in the early years, primarily because their low-cost model lacked a steady flow of paying clients.

What inspired Joel Hyatt, and saved Jacoby & Meyers, was the Supreme Court’s decision in Bates v. State Bar of Arizona, 433 U.S. 350 (1977), which struck down the legal profession’s longstanding prohibition on lawyer advertising. Less than a decade after Bates, both firms were among the largest in the nation.  At their peak in 1985, Hyatt Legal Services ranked #2 in the NLJ 250 (674 lawyers) while Jacoby & Meyers reached #31 (297 lawyers).  By the mid-1990s, however, both firms had essentially vanished, abandoning the storefront clinic concept in favor of new business models that could save them from financial ruin [see graphic above].

The problems of cost and access that inspired the storefront revolution are still very much with us.  Yet, remarkably, very few lawyers under the age of 50 are familiar with Hyatt Legal Services and Jacoby & Meyers. More troubling, however, is that an even smaller number of lawyers understand why these two firms failed. The fresh perspective of youth is a remarkable tool. But so is history.  I am writing this post because we need a generation of lawyers that has the benefit of both.

The power of advertising

The storefront clinic model did not fail because of a lack of consumer interest. Rather, the difficulty was the inability to convert a customer base of millions of people into a stable and profitable business.

The underlying problem is suggested by the facts of the Bates case. In Bates, the U.S. Supreme court reviewed the legality of an advertisement in the Arizona Republic designed to attract customers to a Phoenix storefront legal clinic. Similar to Jacoby & Meyers, the clinic was premised on a low cost/high volume model. Prior to opening their law firm, both John Bates and Van O’Steen had worked as attorneys for the Maricopa County Legal Aid Society.

What years of experience taught them, however, was that their practice could only be viable if they had a sufficient volume of relatively routine cases; and that advertising was the only feasible way to generate the requisite demand. 433 U.S. at 354. Their ad [in graphic to the right] resulted in a disciplinary complaint by the State Bar. In turn, the Arizona Supreme Court upheld the Bar’s ethics rule that prohibited paid publicity in newspapers, magazines, telephone directories, radio or television.

In August 1977, two months after the U.S. Supreme Court ruled in favor of Bates and O’Steen, Jacoby & Meyers became the first law firm to experiment with TV ads.  The pitch was straightforward: large corporations have corporate lawyers; the poor have legal aid; now finally there is a convenient and affordable option for the middle class.

Below is a video of a first generation Jacoby & Meyers commercial from the late 1970s.

The advertisements proved to be remarkably effective in generating volume.  At their peak in the mid-80s, both Hyatt Legal Services and Jacoby & Meyers spent $5-7 million per year in advertising targeted at middle-class consumers in need of wills, divorces, bankruptcies, real estate closings, and representation in personal injury cases.

Paying for technology and marketing

According to the National Law Journal, Hyatt Legal Services had four partners in 1985 while Jacoby & Meyers had 22.  How did these firms afford the advertising along with the large upfront investments in real estate and computer technology?

Jacoby & Meyers set up a management company that provided various marketing and support services to the law firm. In 1983, this company took $4.3 million in funding from Warburg Pincus, a New York-based private equity firm.  Hyatt Legal Services received substantially more funding through a joint venture with tax preparation giant H&R Block. Similar to the Jacoby & Meyers arrangement, Hyatt Legal Services received marketing, office space, and support services from an entity called Block Management Company, which was 80% owned by H&R Block and 20% owned by Hyatt.  The initial idea was to better utilize the H&R Block’s office space during the large portion of the year when ordinary consumers were not focused on their tax return.  See Karen Dillion, “After the Revolution,” Am. Law., Apr. 1996 at 79.

In the year 2018, the innovation of setting up parallel law firm and services companies is commonly attributed to Clearspire, the NewLaw company founded in 2008 by Mark Cohen and Bryce Arrowood.  A more recent incarnation that has attracted a lot of attention is Attrium LLP (law firm) and Attrium LTS (legal technology services company). See, e.g., Bob Ambrogi, “Is ‘Revolutionary’ Law Firm Atrium A Case of Clearspire Déjà Vu?,” Above the Law, Sept. 18, 2017.  Yet, this is exactly the business configuration used by Jacoby & Meyers and Hyatt Legal Services a full generation earlier, albeit in the PeopleLaw sector as opposed to the corporate market. Cf. Post 053 (reviewing similar configurations by UnitedLex and Elevate). Throughout this period, Hyatt’s legal counsel was Yale law professor and legal ethics giant Geoffrey Hazard.  See Martha Middleton, “Hyatt’s TV Troubles,” Nat’l L.J., Feb. 13, 1984, at 9.

Financial losses

Unfortunately, investors in the storefront revolution did not fare well.

Despite massive increases in size and revenues, both Jacoby & Meyers and Hyatt Legal Services struggled financially. By 1990, Warburg Pincus had written off its entire investment in Jacoby & Meyers.  See Dillon, supra.  Further, to improve its balance sheet, Jacoby & Meyers began the process of divesting its many law firm offices and focusing more marketing effort in the area of personal injury, eventually finding relative financial success in aggregating claims for mass tort litigation.

In 1987, H&R Block sold its interest in the management company to Joel Hyatt, referring to its multi-year investment as “a wash.” Dillon, supra.  The financing of the buyout was provided by Robert M. Bass Group, the personal investment company of Texas billionaire Robert Bass. In turn, Hyatt Legal Services spun-out its prepaid legal services business into a separate entity, Hyatt Legal Plans Inc., which was partially capitalized by Robert Bass and $27 million from the Sheet Metal Workers’ National Pension Fund (the 130,000-member Sheet Metal Workers were heavy users of prepaid legal services through the benefits package they negotiated with employers). See Dillon, supra.

According to news reports of his 1991 tax filings, Joel Hyatt reported a $300,000 loss that year and had a $2.4 million deficit in his Hyatt Legal Services capital account due to accumulated losses over a period of years. See Mike France, “Hopes Hobbled; Legal Clinics: Lights Go Out On Storefronts,” Nat’l L.J., Dec. 12, 1994, at 3. Fortunately for Hyatt and his partners, as they were levering down their law firm network, in some cases selling the offices to local managing lawyers, they were gaining traction with their prepaid legal services plan, successfully landing accounts with General Motors, Caterpillar, Navistar, Mack Truck, American Express, and AT&T.  See Dillon, supra.

The final chapter of the storefront revolution occurred in 1997, when Hyatt Legal Plans was sold to Metlife. To this day, it operates as a Metlife subsidiary under the Hyatt brand.

Why did the storefront revolution fail?

Fortunately, the work of sociologist Jerry Van Hoy offers us some clues.  During the late 80s and early 90s, Van Hoy was a graduate student at Northwestern University and a research fellow at the American Bar Foundation.  Van Hoy’s PhD dissertation focused on the rise and operation of so-called “franchise” law firms.

Although Van Hoy’s research relied upon fictional names — Arthur & Nelson and Beck & Daniels — both organizations were reported to be pioneers in attorney advertising and both relied upon that success to build large multi-state networks of storefront offices. These facts limit the universe of possible franchise firms to two: Jacoby & Meyers and Hyatt Legal Services.  Van Hoy wrote up his findings in a peer-reviewed article, see “Selling and Processing Law: Legal Work at Franchise Law Firms,” 29 Law & Society Rev. 703 (1995), and a subsequent book, see Franchise Law Firms and the Transformation of Personal Legal Services (1997).

It is worth noting that Van Hoy conducted his field research in 1990 and 1991 when both firms had already passed their peak sizes and were working hard to find a operational model that would deliver a stable and satisfactory return to both the local offices and the national law firm.

Van Hoy paints a picture of low pay and long hours.  Staff attorneys at Arthur & Nelson earned an average income of $29,000 per year (with variability based on bonus) and worked an average of 57 hours per week.  Hours were slightly better at Beck & Daniels (50 hours per week), but the average pay, including bonus, was also lower ($23,000 per year).  Although the bonus schedule, which was based on type and volume of work, held out the promise of considerably higher incomes, those payouts proved elusive, as office managing lawyers often diverted the most lucrative work to themselves.

The economics of the business model also demanded a relentless focus on routine work. To achieve the optimal flow, front office secretaries would field phone calls, identify clients that matched up to the firm’s limited menu of service offerings, and schedule appointments. Once the prospective clients arrived at the office, a staff lawyer would sell the services, ideally within the standard 15-minute consultation. Finally, a back office secretary would complete the work with the benefit of firm templates and computer technology. The more novel and unusual the legal work, the less money the attorneys would make, as the extra work put them in the hole regarding monthly revenue targets.

Because “selling of services is often the longest part of initial consultations” and “divorce is the most commonly provided service” at both firms, “attorneys quickly learn not to let clients become too emotional.” 29 Law & Soc’y Rev at 719.  This was accomplished by carefully following intake scripts and relying upon well-rehearsed summaries of law that could bring prospective clients more quickly to decision points. One franchise attorney observed, “we just make circles in crayon,” referring to the client worksheets that were handed to secretaries to create legal documents. 29 Law & Soc’y Rev at 725.

Despite the relentless emphasis on volume, Van Hoy acknowledged that one of the virtues of the franchise model was that it was quick to screen out or turn away clients with legal problems that didn’t fit the firms’ cookie-cutter approach. Because only the most simple and straightforward cases remained, Van Hoy observed, “there is little reason to believe that clients are receiving inadequate services.” 29 Law & Soc’y Rev at 719. Based on months of observation in several offices of both firms, Van Hoy concluded, “[C]lients whose problems fit into the production systems appear to be well served by franchise law firms.” 29 Law & Soc’y Rev at 727.

Although the majority of paying clients may have benefitted from the franchise model, the long hours, low pay, and routine work proved to be professionally unsatisfying for the staff lawyers. At both firms, managing lawyers reported 100 percent turnover every two years. Franchise Law Firms at 91.  Not surprisingly, within the production system, staff lawyers were viewed as far more fungible than the legal secretaries who screened clients or performed the template-driven legal work.  Indeed, secretaries, often with little more than high school educations, routinely earned salaries only a few thousand dollars less than staff attorneys.  At one of the firms, the managing attorneys openly acknowledged that they would “rather lose a staff attorney than have to replace an experienced secretary.” 29 Law & Soc’y Rev at 710.

Van Hoy explains the lynchpin of the entire model:

Many lawyers employed by franchise law firms openly worry that licensure and court protections of lawyers from the unauthorized practice of law are all that protect their positions. And yet it is also inappropriate to say that secretaries have been elevated to the level of legal experts by franchise law firms. The point of mass production and the franchise organization of work is to reduce task complexity to the point where no experts are necessary.

29 Law & Soc’y Rev at 725.

Despite the fact that both firms placed the burden of office profitability on the office managing lawyers, the sizable revenue cut going to the national office (~35-40 percent) was insufficient to reliably cover all of the national firms’ operating costs. According to a 1996 article in The American Lawyer, Hyatt Legal Services tried to raise its prices for some of its core offering (e.g., raising the price for a consumer bankruptcy from $350 to $450), but “demand dropped significantly.” Dillon, supra, at 79. After the economy went into a recession in early 1990s, both firms moved quickly to exit the storefront legal business.

Lessons from the storefront revolution

One of the reasons that the problem of access and affordability of legal services is still with us is that members of the legal profession are unable to agree on its root causes. Cf. Post 057 (discussing framework for solving very difficult problems). Thus, I don’t expect all readers to agree with my analysis on lessons learned from the storefront revolution.

In brief, I believe that the youthful and idealistic visions of Joel Hyatt, Len Jacoby, and Steven Meyers failed because, within the existing regulatory structure, they were unable to balance the needs of ordinary people, who were cash-strapped and intimidated by the legal system, with the needs of licensed lawyers seeking rewarding work for adequate pay.

Some practicing lawyers may resent this characterization, but Hyatt Legal Services and Jacoby & Meyers were/are professional service firms.  The fundamentals of this model are explained by David Maister in his classic book, Managing the Professional Service Firm (1993).  Obviously, a professional service firm can only succeed if it can operate profitably.  Yet, that outcome is only possible if a firm’s management can simultaneously succeed in two markets: the market for clients and the market for talent. See Post 010 (discussing model in the context of managed legal services).

The graphic below depicts the Maister model:

To operate at a price point that ordinary consumer would accept, the franchise law firms had to efficiently filter out the mass of legal work that did not fit the firms’ template-driven model.  Although advertising revealed the volume of routine work to be incredibly large, the work itself proved to be professionally unfulfilling and insufficiently remunerative for the vast majority of law school graduates.

Yet, the overall personal services market was not much better.  Van Hoy grimly observed, “My data suggest that unsuccessful solo practitioners seek refuge as employees of franchise law firms far more often than staff attorneys become successful solo practitioners.” 29 Law & Soc’y Rev at 714. (Note this field work was conducted nearly three decades ago.)

Despite the high levels of dissatisfaction among line lawyers, Van Hoy reported the opposite experience for the secretaries:  “[W]hile many attorneys look forward to the day when they can move on to more satisfying work, their secretaries marvel at how nice it feels to be helping clients.” 29 Law & Soc’y Rev at 728.

Doesn’t this last observation suggest that there is, indeed, a large tranche of legal work that would be better performed by paraprofessionals or technology than licensed lawyers? If so, why are we so reluctant to accept this fact and modify the rules of professional conduct to ease the pathways for this type of practice?  Perhaps there is fear that these new models might climb the value chain and encroach upon more lucrative areas of practice.

Regardless, among those of us with law degrees, we ought to be able to acknowledge that these are tricky, emotional issues tied up with our self-image and professional identity.  For example, former Chief Justice Warren Burger once said that he would rather “dig ditches” than advertise.  Stephen Labaton, “Propriety on Trial in Lawyers’ Ad,” N.Y. Times, Mar. 21, 1988, at D1 (quoting C.J. Burger). A decade earlier, in his dissent in Bates, Burger wrote, “legal services can rarely, if ever, be ‘standardized.'” 433 U.S. at 386.  40 years of experience reveal that statement to be incorrect.  Based on his belief that law could not be reliably broken into standardized pieces, Burger concluded that advertising based on the promise of reasonable fees “could become a trap for the unwary.” Id. at 387.

Yet, for ordinary citizens with little money or sophistication, what are the alternatives?

To his credit, Burger was aware of the problem, writing, “the legal profession in the past has approached solutions for the protection of the public with too much caution, and, as a result, too little progress has been made.” Id. at 388. Burger’s preferred solution, however, was not to strike down the Arizona State Bar’s ban on lawyer advertising but, instead, to give the organized bar more time to solve the underlying problem of access and affordability. Id.  Unfortunately, 40+ years later, we remain in much the same place, while the storefront revolution set off by Bates has failed and, more troubling, is largely forgotten. Although we are supposed to a “learned profession,” Model Rules of Professional Conduct, Preamble Comment [6], we have a tendency to be ahistorical.

In the profession’s defense, these are profoundly difficult problems. Moreover, the closer we get to them, the more we see their complexity.

At a recent boot camp session at the Institute for the Future of Law Practice, an expert in legal design and process related her experience of helping out a local legal aid organization to improve its processes. The goal, of course, was to stretch limited resources to serve more clients. The legal aid attorneys, however, reacted with horror, as they could not imagine the emotional burden of managing an even larger caseload.  In their view, the hard limit was not attorney time but one’s human capacity to invest mentally and emotionally in the life and legal problems of individual clients.  That capacity is very high for legal aid lawyers, but it’s not unlimited.

Our inner guild

For the last decade, I’ve covered the storefront revolution in my 1L Legal Professions class.  See Legal Professions Material, Chapter 10 (section 10.3). During the class session, we review Van Hoy’s research data, including: (1) that staff lawyers found the work unsatisfying and unremunerative; (2) that legal secretaries did the vast majority of the legal work; and (3) that the lawyers’ role was primarily to act as a salesperson, a role made necessary by the ethics rules.  We also recount that, despite a large volume of clients obtaining value from franchise law firms, the model itself failed, primarily because it was unable to pay sufficient wages to lawyers.

I then poll the class and ask how many would be interested in taking a job in a franchise law firm. In most years, I seldom get more than one or two takers, and invariably they stipulate that a franchise law firm would be an employment option of last resort.

I then ask whether the ethics rules (specifically Rule 5.4 and Rule 5.5) should be modified to permit an alternative business model where this type of work could be performed by paraprofessionals, such as the legal secretaries at Arthur & Nelson and Beck & Daniels, who seemed to thrive in the franchise law environment.  Remarkably, every year a majority of students vote to maintain the status quo.  That, I believe, is our inner guild.  It is less likely a product of socialization during 1.5 semesters of law school than part of our human nature. I believe it can be overcome, but not without a lot of thought and effort by creative lawyers and leaders who can draw a compelling vision of the future. Cf. Post 056 (discussing my Deliberative Leadership class and why I created it).

I am also convinced the most likely people to fill this leadership void are young lawyers, similar to Joel Hyatt but separated by four or five decades of additional knowledge on how why these serious problems persist.

Further, these problems have grown in urgency.  Cf. Post 037 (presenting data on the decline of the PeopleLaw sector); Post 042 (presenting data that consumers are forgoing legal services). Last year, I read a line in Gillian Hadfield’s new book that I continue to think about daily: “[P]eople who feel as though the rules don’t care about them don’t care about the rules.”  Rules for a Flat World (2017) at 79.  At least in the U.S., I am worried that we have moved perilously close to this line. Who else but members of the legal profession can step up and attempt to guide the collective back to a safe place. To do that, however, we can only accept a legal system that works for ordinary people.

In remembering the storefront revolution, I have an advantage, as I was a teenager in Cleveland, Ohio when 27-year old Joel Hyatt launched Hyatt Legal Services and filled the airwaves with this fresh, charismatic pitch. Below is a 10-minute compilation of TV ads for Hyatt Legal Services.   If you watch the whole reel, you’ll likely be surprised by how much Hyatt’s language foreshadows the marketing of LegalZoom, Avvo, and other large companies in the PeopleLaw space. One line, however, [at 10:15] really stands out:

Somewhere, in all these dusty law books, a great idea got lost — the idea that law is for people, and people should be able to afford it.

Coda: Joel Hyatt remains in the legal business. He lives in Northern California and serves as CEO of Globality, a lawyer-to-lawyer legal marketplace that matches corporate clients with small and midsized firms throughout the world.  In my opinion, Joel Hyatt has more than paid his dues.

I wrote this post at least in part to advance the dialogue in my 1L Legal Professions class. I invite my fellow PR instructors to do the same.

What’s new? See Four charts to better understand the Class of 2017 (060)