“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)

The price of legal services is increasing faster than the CPI’s basket of goods and services.  Perhaps that is not surprising to those of us working in the legal sector. However, legal services are also losing wallet share.  In 1987, legal services made up 0.435% of the CPI-U basket.  By December 2016, the proportion was 0.245%.

This second trend is telling us something important about the future of law practice, particularly in the PeopleLaw sector.

This post breaks the analysis into three strands. Section 1 presents the CPI data, including technical information on the CPI sampling and weighting methodologies. Section 2 offers some possible explanations for why wallet share for legal services is trending downward.  Section 3 uses CPI data to compare legal services with cost and wallet share of college tuition and medical care.  (Preview: costs in the meds and eds sectors are outpacing the CPI-U, yet their wallet share is growing.)

1. CPI and “Relative Importance” within the CPI Basket

The chart below presents the relevant CPI data for legal services.  

In interpreting this graph, note two vertical axes. The green axis (left side) is the CPI-U with the base year set to 1986 (Index = 100).  Over the last 30 years, the green and grey bars show the cost of legal services rising nearly twice as fast as the overall CPI-U basket (334.5 versus 218.5).

The orange axis (right side) measures the “relative importance” of legal services within the CPI basket. The  orange trendline shows this statistic over time.  Basically, as the relative prices of goods and services change, consumers adjust how they allocate their money. The BLS tracks these changes through the Consumer Expenditure Survey. Through detailed interviews and spending diaries conducted twice a year from a representative sample of urban households (89% of the US population qualifies as urban), the BLS measures recent consumer behavior and re-weights the composition of the CPI-U basket.

In the chart above, you’ll note a sudden drop in 1997 in the relative importance of legal services (from 0.480% to 0.329% of consumer spending). This drop occurred because the BLS re-weighted the CPI basket for the first time in several years.  Since the mid-2000s, however, the BLS has re-weighted the CPI based on two-year rolling averages. Thus, the relative importance data for 2015 and 2016 are calculated based upon spending patterns from 2013 and 2014. See Relative Importance of components in the Consumer Price Indexes, Dec. 2016. When 2017 data are released, it will likely be based on weights from 2015-16.

Finally, note that the CPI data on legal services is limited to consumer spending. This is the PeopleLaw sector, which other data sources show is on the decline. See, e.g., Post 037 (between 2007 and 2012, individual consumer spending on legal services declined from $65.5 billion to $58.8 billion).  In the chart above, none (or very little) of the data reflect spending by organizational clients.

I share this technical information on the CPI so that readers have the full context for following troubling claim:  As the cost of legal services goes up, average Americans are finding ways to forego legal services. This is likely a major factor for the shrinking of the PeopleLaw sector, see Post 037, and an under-discussed factor in flagging law school enrollments, see Post 006. Many prospective students are drawn to law as a way to help people.  Yet, lawyers working in PeopleLaw are probably telling prospective law students, “It’s getting harder to earn a living.” See Post 037 (discussing results of 2017 Clio Report).

2. Why is the relative importance of legal services trending downward?

Unfortunately, we lack the data to answer this question with precision.  Below I offer two plausible contributing factors

a. The DIY law movement

One factor that might partially account for the decline in PeopleLaw legal expenditures is the rise of the DIY (do-it-yourself) law movement.  The online form-driven products may be an attractive substitute for an office visit to a local small firm practitioner. For a summary of these offerings, see We Rock Your Web review of The Best Online Legal Services.  It is worth noting that many of these offerings have an A+ rating from the Better Business Bureau).

Yet, the DIY companies are not a complete substitute for all legal needs.  We know this to be true because so many of the DIY companies are building out networks of vetted lawyers who can handle the large volume of legal work that cannot be handled by a simple form.

The most successful of these companies, LegalZoom, has positioned itself as publishing-technology-marketing company that throws off legal work to a network of independent law offices.  To protect and grow its brand, LegalZoom carefully monitors the client satisfaction figures of its referrals.  Cultivating and channeling the legal needs of consumers, and thereafter monitoring client satisfaction, is not the practice of law. However, it is a set of services that can potentially benefit both lawyers and the individual clients they serve.

b. Fewer state court filings

A second possible explanation for legal services’ decline in relative importance is waning value of state courts in resolving disputes. This trend line would occur when the cost of a lawsuit, including the need to retain a lawyer, becomes too expensive relative to the underlying problem or dispute.

In Post 006 and 037, I discussed the disturbing statistics in the NCSC’s Landscape of Civil Litigation in State Courts Report, which was published in 2015. Drawing upon 925,000 cases disposed of between July 2012 and June 2013 in ten large urban counties, the NCSC researchers identified 228,000 cases that resulted in a non-zero monetary judgment.  The median judgment amount was a mere $2,441 — hardly an amount that can support the cost of hiring a lawyer. Further, only 24 percent of cases had the benefit of attorney representation on both sides of the dispute.  Stated in the alternative, 3/4 of cases involved a party going it alone without a lawyer.

If things are as bad in large urban state courts as the NCSC suggests, it is likely that the volume of state court filings is on significant downward trajectory. The reason is simple — lawyers won’t file cases where they know, upfront, that they can’t recoup the value of their time.  Further, going to court without a lawyer is a daunting prospect most citizens would prefer to avoid.  Thus, the lower the case values, the fewer the case filings and the higher the volume of default judgments.

An insider in the Illinois court system tipped me off that state court filings were indeed trending downward.  To duration and magnitude of the change, all I needed to do was pull figures published from in Annual Report on the Illinois Courts, which are published online.

Illinois is a good sample because it is a “single tier” jurisdiction that handles every type of civil (and criminal) matter in the state, including small claims. Also, Cook County Circuit Court (encompassing Chicago) was one of the ten jurisdictions included the NSCS Landscape Report.

Below are the number of civil case filings in the Illinois courts from 1997 to 2016.

Since 2009, the number of civil filings (which includes all cases for monetary damages, real property disputes, review of administrative bodies, and proceedings related to probate, eminent domain, mental health, and municipal taxes) has tumbled from 791,000 to 430,000, a drop of 45.7 percent.  It is possible that the peak years (2009 and 2010) were driven foreclosure actions related to the financial crisis.  However, over the last 20 years, civil filings have declined from 634,000 to 430,000 (-32.2 percent).  Yet, the Illinois state population grew from 11.9 to 12.8 million people.

According to a recent report by the Illinois Supreme Court Commission on Access to Justice, “In 2015, 93 of Illinois’ 102 counties reported that more than 50% of civil cases involved a self-represented litigant on at least one side. In some case types, that number rose as high as 80%.”

Now let me boil is down:  At least in Illinois, which I doubt is an outlier, civil state court filings are the decline; and among those that are being filed, a large and growing proportion involve self-represented litigants.  In other words, the entire state-run judicial system appears to be breaking down, in part because the system is predicated on the assumption that all parties are represented by counsel, an assumption that increasingly does not hold.

Faced with a similar challenge, the province of British Columbia in Canada created a new Civil Resolution Tribunal (CRT), which implements mandatory Online Dispute Resolution (ODR) for low-stakes disputes (defined as $5,000 or less plus all condominium-related controversies).  The CRT is designed to be a consumer-friendly online process that operates without lawyers. See, e.g., B.C.’s trailblazing digital justice delivering, Vancouver Sun, Jan. 4, 2018. The UK is poised for a similar move. See, Online dispute resolution creates ‘exciting’ opportunity for change, says new report, Out-Law.com, Oct. 25, 2017.

3. “Cost disease” in the meds, eds, and legal sectors

I became interested in the CPI index for legal services when reading a book on “cost disease” by noted labor economist William Baumol.  See William J. Baumol, The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t (Yale 2013).

What is cost disease?  Basically, large productivity gains in some sectors (e.g., manufacturing, technology, agriculture) can have the effect of increasing the relative prices in other less productive sectors. This is particularly true for sectors that rely heavily on the labor of highly educated knowledge workers.

Baumol first identified this relationship when studying the economics of the performing arts. Baumol and his co-author William Bowen acknowledged that human ingenuity has devised many ways to reduce the labor necessary to produce industrial wares, yet “no one has succeeded in decreasing the human effort expended at a live performance of a 45 minute Schubert quartet much below a total of 3-man hours.” See Baumol & Bowen, Performing Arts, the Economic Dilemma 164 (MIT 1966). Despite the immovability of the musicians’ productivity, musicians’ wages went up with the rest of the workforce.

Within the economics literature, the industries most associated with cost disease are medical care and higher education. But, as Baumol points out,  other “personal service” sectors are also highly susceptive to cost disease. Examples include legal services, K-12 education, local police and fire (basically, most of government), and many others.  Cost disease is a serious policy issue because (a) goods and services like medical care and higher education are perceived as integral to our quality of life, and (b) when their costs rise much faster than the CPI-U (i.e., “cost of living”), it generates much political handwringing.

The graph below compares the CPI-U to the consumer price of three sectors prone to cost disease: medical care, college tuition, and legal services.

The consumer cost of legal services is roughly on par with medical care but significantly less than college tuition.  Yet, as shown in the table below, when it comes to wallet share, both medical care and college tuition are growing in relative importance within the CPI basket of goods and services.

Relative importance in CPI-U
CPI component 1987 2016 Change over time
Legal Services 0.435% 0.245% -43.7%
Medical Care 4.807% 8.539% +77.6%
College Tuition 0.840% 1.807% +120.3%

The large decline in relative importance for legal services suggests price elasticity — as the price goes up, consumer demand goes down.  In contrast, the relative importance of medical care and college tuition suggest price inelasticity — as the price goes up, consumers find a way to pay more.

It is worth noting that in the CPI-U tracks only consumer spending patterns. Americans are spending a larger proportion of their household income on medical care and college tuition.  However, medical care and college tuition are also finances by other parts of the modern economy.  In the case of medical care, this comes through employer-provided health insurance, Medicare, and Medicaid. Likewise, Department of Education student loans enable borrowers to effectively defer the cost of college tuition until after graduation.  Thus, the table above reflects only the costs paid out of current household income.

Yet, different consumer attitudes toward medical care versus legal services arguably have a dramatic impact on the willingness of young people to enter these two professions.  Below is a chart that compares applicants to law school versus medical schools.

Conclusion

Since Post 001 of Legal Evolution, I have harped on the topic of “lagging legal productivity.”  The above analysis shows that if legal services cannot be delivered more efficiently, ordinary citizens will forgo legal services.  This is not a prediction; it is a statement of what is happening today.  State courts are glutted with self-represented litigants. At the same time, lawyers struggle to find clients who can support their practice.

The problem is not the necessarily the escalating cost of a lawyer’s time ($260/hr in the most recent CLIO survey, see Post 037), but our failure to update our institutions so that ordinary citizens can resolve their legal problems in a convenient and cost-effective way.  In other words, it’s time to redesign some of our most hallowed institutions.  This is the challenge of the next generation of lawyers, judges, and legal educators.

The graphic above tells a simple, painful, and important story about the U.S. legal profession that we can’t afford to ignore.  The graphic compares the receipts of U.S. law firms in 2007 and 2012 based on “class of customer” data from the Economic Census, the U.S. Census Bureau’s official five-year measure of American business.  Although total law firm receipts increased from $225 billion to $246 billion, receipts from individuals declined by almost $7 billion. That’s a staggering sum.

Ordinarily, with such a large and sudden drop (10.2%), I worry about data quality.  Yet, these data appear to be continuations of trend lines that are several decades old.  Further, recent data published by Clio, the cloud-based practice management and time-keeping system used by a large number of solo and small firm lawyers, reveal that the economics of small firm practice are under severe stress.

As a society and a profession, we are heading to a place that none of us wants to go. Our biggest risk factor is failing to acknowledge the full magnitude of the problem.

The two hemispheres of practice

The structural significance of lawyers’ clientele — individuals versus organizations — was first noted by Jack Heinz and Edward Laumann in Chicago Lawyers: The Social Structure of the Bar (1982) (popularly known as Chicago Lawyers I).

Based on a randomized sample of 800 Chicago lawyers, Heinz and Laumann observed that lawyers tend to serve either individuals or organizations, but seldom both.  Further, type of client was strongly correlated with lawyer income, ethnicity, religious background, law school attended, home address, work address, and bar association membership.  “Only in the most formal senses, then, do the two types of lawyers constitute one profession” (p. 384).  This was the basis for their famous two-hemisphere theory of the legal profession. See also Deborah J. Merritt, Two Hemispheres, Law School Cafe, May 2, 2015.

Twenty years later, Heinz, Laumann and other researchers replicated the study based on a sample drawn in 1995.  See Heinz et al., Urban Lawyers: The New Structure of the Bar (2005) (Chicago Lawyers II).  One of their key findings was a dramatic surge of prosperity within the organizational sphere, with real incomes of large firm lawyers and in-house counsel nearly doubling.  Conversely, among solo practitioners, who disproportionately served individual clients, incomes fell from $99,159 (in 1995 dollars) to $55,000. By 1995, 32% of solo practitioners were working a second job compared to only 2% in 1975.

These are startling and sober statistics generated by careful social scientists. These findings are also 23 years old.

From stagnation to decline

The Chicago Lawyers I and II studies reveal stagnation taking hold within the PeopleLaw sector. Yet, more recently, we’ve moved beyond stagnation to a period of actual decline.  I do not use these words lightly. Yet this is the picture that emerges when the graphic above, which reflects U.S. Census Bureau data from 2007 and 2012, is combined with findings from Clio’s 2017 Legal Trends Report.

Clio is a cloud-based practice management and time-keeping system that has obtained enormous traction with solo and small firm lawyers. The 2017 Legal Trends Report is based on anonymized 2016 data from more than 60,000 U.S. timekeepers.

  • The total sample covers 1,026,000 matters, 10,981,000 hours, and $2.6 billion in billings.
  • Approximately 84% of matters are billed by the hour.
  • The average hourly rate for a lawyer is $260.
  • The average matter garnered slightly less than $2,500 in fees, with traffic offenses the lowest average (~$700) and personal injury the highest (~$3,300).

Yet, what is most striking about the Clio Report is that the average lawyer is billing only 2.3 hours per day.  Of that total, 82% is actually invoiced to the client; and only 86% of invoiced fees are collected. This translates into $422/day per lawyer ($260 x 2.6 x 82% x 86%), or $105,000 in gross receipts over a 50-week year. This is a sum that needs to cover office overhead, healthcare, retirement, malpractice insurance, marketing, and taxes, etc.  And note, these are averages, not the bottom decile or quartile. Further, these are lawyers at firms that have invested in practice management software.

Of the remaining 6 hours in the workday, lawyers are spending 48% of their time on administrative tasks (e.g., generating bills, configuring technology, client collections) and 33% on business development.  The report notes that lawyers spend roughly the same amount of time looking for legal work as they do performing legal work (p. 13).

The danger of not saying the obvious

In Post 006, I reported on statistics from The Landscape of Civil Litigation in State Courts report published by the National Center for State Courts (NCSC). The most startling statistic among many is that 76% of cases involve at least one party who is self-represented. The Report frankly states:

The picture of civil litigation that emerges from the Landscape dataset confirms the longstanding criticism that the civil justice system takes too long and costs too much.  As a result, many litigants with meritorious claims and defenses are effectively denied access to justice in state courts because it is not economically feasible to litigate those cases (p. v).

These are not the conclusions of a fringe group. The NCSC’s research agenda is set in collaboration with the Conference of Chief Justices and the Conference of State Court Administrators. This is the body formed at the urging of Chief Justice Warren Burger.

I’ll now state an obvious truth:  Our legal system as it pertains to ordinary people is unraveling.  Hundreds of millions of people can’t afford to hire a lawyer to solve their legal problems. As a result, they go it alone or give up altogether.  In turn, as the PeopleLaw sector shrinks, a large number of lawyers are under tremendous economic stress.  No amount of tinkering at the edges is going to fix or reverse these trends. Instead, we need a series of fundamental redesigns.

This needs to be said clearly and emphatically. This is because the collective and societal solution to the declining PeopleLaw sector is not for lawyers and legal education to pivot toward corporate clients who can still pay the freight, though this is undoubtedly the direction of drift if we fail to forcefully acknowledge the woeful imbalance of our current legal system.

Redesign or failure

As a law professor, I support innovations that make legal problem-solving more cost-effective.  Indeed, that is the purpose of Legal Evolution. See Post 001 (discussing the problem and consequences of lagging legal productivity).  In the segment of the bar that serves corporations, there is tremendous momentum building to make this happen, primarily because corporations feel an urgency to find cost-effective ways to manage the relentless rising tide of legal complexity.  This is what is driving the legal operations movement. Yet, I’m confidence that very few lawyers want to live in a society where corporate efficiency has become our primary goal. There has to be something more.

As Gillian Hadfield wrote in her recent book, Rules for a Flat World (2017), “People who feel as though the rules don’t care about them don’t care about the rules” (p. 79). The withering of the PeopleLaw sector is moving us closer to a place we don’t want to go.  We have entered a period where we are either going to redesign our legal institutions or they will fail. It’s time for lawyers and legal educators to find creative ways to restore the balance. Step one is acknowledging the magnitude of the problem.

What’s next?  See Student Capstone Presentations: Visitors Welcome (038)