My previous post in this symposium argued that deregulation is upon us.  Here I’ll discuss what that could entail.

The legal information expert:  I summoned up the specter of computers practicing law.  There is in fact no doubt that computers can practice law as that term is defined by some courts and regulators: giving personalized legal advice.  Clearly computers already can process a lot of data and come to fairly accurate determinations of many types of legal questions.

This does not, however, mean that computers can replace lawyers.  It means that lawyers will have to learn to work with technology.  The “legal information experts” of the future will have to provide the human insights about the world of law that computers must have to do their jobs.  They must also make the choices that computers can’t. For example, what types of contractual structures work best with the new types of arrangements that arise in a constantly changing business world?  What choices should individual clients make among the alternatives that a computer provides?

This is good news for lawyers.  Lawyers can focus on the more sophisticated tasks that require human ingenuity as computers take over the routine.

The policy architect. Freed by technology from routine, lawyers can increase their involvement in designing laws and other legal structures.  Computers may be great historians but they are not yet equipped to make judgments about what the future should look like.  Lawyers need not leave lawmaking to legislators, but can participate in a private market for law. Kobayashi and I discuss in a recent paper the potential for such private lawmaking and the changes in the law that could make it happen.

The death of the law firm.  Although I’ve written the obituary for Big Law, regulation continues to sustain a semblance of the big law structure.  These firms are sustained by rules restricting referral fees and non-lawyer financing of firms engaged in the practice of law.  At a more basic level, law firms address clients’ costs of obtaining information about lawyer quality.  Law firms presumably can help by monitoring, mentoring and screening lawyers, so that the client just needs to choose a firm with a good reputation.  But as big law weakens, so does its ability to provide these services.  More importantly, the markets and technologies discussed in my previous post can step in and solve clients’ information asymmetry better than can today’s law firms.

The future of licensing.  It’s unlikely that lawyer licensing will completely die.  It will be hard to reconcile complete deregulation of law practice with continued licensing of doctors, tour guides and horse dentists.   But there’s an important difference between lawyers and these other professions:  the prodigiously powerful lawyer interest group has managed to restrict access to the extremely broad field of human activity called the “practice of law.”  This regulatory monolith is bound to fracture.

It’s not clear what will remain.  Certain types of services to consumers may require a license, on the theory that ordinary consumers can’t fully protect themselves from lemons. Also, courts may insist that licensed lawyers conserve public courts’ scarce resources.  Licensing may reflect something like the traditional British distinction between barristers and solicitors.

Another approach to licensing may be to change how it is done.  Lawyers now must be licensed in every state where they practice law.  This enables states to erect regulatory walls that impede national law practice.  It also forces professional rules to be uniform in order to accommodate our mobile and global society.

A better option, similar to a system I’ve suggested for law firm regulation, is a “driver’s license” approach, where lawyers get a license in the state of their principal residence which they can use to practice anywhere in the country. Unlike the internal affairs doctrine for corporations, states could issue licenses only to their residents.  Because lawyers are likely to practice mainly where they live, this helps ensure that the licensing jurisdictions will have a stake in good regulation and prevent a potential race to the bottom.  At the same time, the drivers’ license approach would enable more jurisdictional competition for lawyer regulation than we have today, and thus help pave the way for the developments discussed in my previous post.

Let me start with a couple of stories.

Story 1.  I’m an economist, but I got a chance to be like a real lawyer in filing an amicus brief recently (Barnes v. Indiana– here’s our brief).  We had only two weeks to organize, write, and file because of an oddity of the case (a petitition for the Indiana Supreme Case to rehear after an opinion that surprised everyone with its breadth). We had legal counsel, but pro bono, without paralegal help, and by email. It came down to the wire in writing and getting final approval from amici, so he suggested that I do the physical filing. I took the brief to Kinko’s around 9 p.m., but discovered they couldn’t do the binding by 11, and I needed to drive an hour get to the Indianapolis Statehouse and file by midnight. I went to my office instead, and did simple staple binding with green cardstock, which ran out so I used white cardstock for the back covers and made it to the Rotunda at 11:50. Alas, our counsel shortly got a notice that the back covers needed to be green too. But the Court Clerk was merciful, and allowed us to slip in replacement briefs without a formal motion.

Read the full piece here.

As a libertarian, I mostly concur in the critique of occupational licensure made famous by (among others) Milton Friedman. For the most part, licensure is a consumer-unfriendly affair that protects incumbent practitioners from competition, locks out promising new methods of service provision, and interferes with voluntary dealings between professional and client. It is dubious enough as applied to occupational groups such as doctors and plumbers, and downright ridiculous (as the Institute for Justice keeps reminding us) as applied to groups like cosmetologists, florists and interior designers.

Read the full piece here.

Fifteen years ago I published an article urging that non-lawyers be allowed to finance the cost of legal representation in return for a percentage of a judgment or settlement if the plaintiff is successful.    Common law prohibitions on champerty were widely believed at the time to prohibit third parties from buying an interest in litigation.  Few such litigation funding arrangements were available for plaintiffs, and lawyers perhaps predictably looked upon them with disfavor.   See Litigating on a Contingency:  A Monopoly of Champions or a Market for Champerty?, 70 Chicago-Kent Law Review 625-697 (1995) (Symposium on Fee Shifting).

Read the full piece here.

Last month the New York Times ran an editorial with the headline “Addressing the Justice Gap,” observing that “the poor need representation and thousands of law graduates need work.”  The piece proposed several solutions, but notably absent was the reform most likely to deliver legal services to those in need and to create jobs for unemployed lawyers:  corporations should be able to own law practices and provide legal representation.  It’s not only a matter of managing the justice gap in America in the face of an enduring economic recession and increased global competition; it’s also a matter of First Amendment concern.

Read the full piece here.

Innovation and entry by entrepreneurs is a powerful force for change. Joseph Schumpetersaw these forces as the primary engine for long-term growth, even as the process of creative destruction destroyed existing wealth, including monopoly rents associated with established regulatory regimes.  The forces of creative destruction seemingly have their sights squarely on the legal profession, promising greater access to legal services while simultaneously threatening licensed lawyers’ monopoly over legal services.

The traditional market for legal services is breaking down in the face of increased competition from numerous sources.  One of the biggest threats comes from new technologies that enable clients to perform many tasks formerly performed by lawyers.  For example, large clients now use of sophisticated search algorithms to substitute for hours of manual document search and selection formerly performed in large law firms.  As technology improves, it is not hard to imagine the expansion of tasks performed by computers rather than lawyers.  At the low end, legal software products allow unsophisticated consumers competently to perform a wide variety of legal tasks with little or no additional input from legal professionals.  These and other legal information products allow the seller of such information and services to take advantage of technology as well as economies of scale and scope that were not captured by the traditional market.

The speed and extent to which such legal information products transform the supply of law legal services depends upon the extent to which innovation and entry by entrepreneurs, especially by those outside the traditional legal sector, occurs.  In our forthcoming article, Larry Ribstein and I discuss two important impediments to such entry.  The first is the current system of legal regulations, especially those that forbid non-lawyers from practicing law, which directly suppresses legal innovation.

The current system of legal regulation is based upon the assumption that legal advice is conveyed through one-to-one agency relationships in which an uninformed client depends on her lawyer’s judgment and independence.  This assumption supports the system of attorney ethical rules designed to reduce the agency costs of this one-to one relationship by promoting lawyers’ loyalty to clients.  It also supports licensing laws to ensure lawyer quality.

However, these regulations are costly.  They constrain the supply of legal services by suppressing the use of legal information products and services that would directly compete with traditional legal services.  These rules further inhibit innovation by preventing use of private contractual arrangements that limit organizational flexibility and increase the cost of collaboration between lawyers and non-lawyers.  Moreover, it is far from clear that such rules would serve much of a beneficial purpose outside of the traditional model of legal advice.  For example, if consumers of legal services instead could use legal information products traded in a broad and transparent market, the underlying rationale for ethical rules and licensing would be greatly diminished.  Market competition would reduce consumers’ reliance on the traditional agency relationship and market-based mechanisms could help ensure quality.   Thus, one effect of the current system of legal regulations is to suppress the development of a robust market for legal information products that, left unimpeded, would likely threaten both the viability and underlying rationale of the current regulatory system.

How this struggle comes out in equilibrium will depend upon how much pressure is placed on the existing system by the amount of innovation and entrepreneurial entry that occurs.   This in turn will depend upon the returns to such investments, which will in turn depend upon the ability of the entrepreneur to capture the returns from his investment.   This brings us to the second impediment we identify, a system of relatively weak intellectual property right protection for legal information that reduces the incentives for legal innovation.   I will take up this issue in my second post.

I have spent the last few days reading the recent study by Clifford Winston, Robert W. Crandall, and Vikram Maheshri, entitled “First Thing We Do: Let’s Deregulate All the Lawyers” (Brookings Institution, 2011, $19.95).  In it, the authors marshal a variety of empirical methods to argue that the current practice of state bar admission and licensing of attorneys imposes an inefficient barrier to entry that keeps incomes high and reduces access to needed legal services (particularly among the poor). Moreover, the authors argue that the oligopoly rents enjoyed by practicing lawyers have grown further as the federal bureaucracy has grown, essentially feeding a legal / regulatory beast that that artificially increases the demand for lawyers, exacerbating the oligopoly problem.  Given these observations, the authors conclude that the current practice of law is severely afflicted by anticompetitive barriers to entry, regulatory capture, and artificially inflated prices.  In response, they advocate a good old school form of deregulation of the legal industry, allowing free (or nearly free) entry into the profession.  Although they are open to keeping state bar exams around (primarily as certification devices), bar membership should not be – in their view – a necessary condition to the practice of law.

Read the full piece here.

If this symposium is asking the single question whether U.S. jurisdictions should deregulate the practice of law, my answer has to be no.  My problem is that the question itself conflates at least three questions, and the answers to each should be different.

The first question is whether people other than licensed lawyers should be allowed to provide all or many traditional legal services.  The right answer to that question is yes.  First Thing We Do, Let’s Deregulate All the Lawyers, gives that correct answer, but it is far from a new insight.  The proposal is essentially to eliminate prohibition of the unauthorized practice of law.  I called for it in the Harvard Law Review in 1977, Deborah Rhode wrote a much more extensive argument in the Stanford Law Review in 1981, and dozens have made the same points since.  Almost everyone acknowledges that law firms have made extensive use of paralegal staff for many years, and even the ABA Commission on Professionalism admitted in 1986 that many services now delivered only by licensed lawyers could be handled as well by trained paralegals.

Read the full piece here.

Although it has the zing of a slogan that I myself have often used, the call to ‘deregulate’ the legal profession is misleading.  Yes, most of us who argue that the legal profession is excessively closed to competition—in a way that hampers both access and innovation, as I have argued in recent papers—think that the entry barriers are too high.  But the legal profession is not only over-regulated, it is also under-regulated.  The regulatory regime lawyers and judges have put in place is overly protective of lawyers’ interests and insufficiently protective of the public’s interest in an accessible, innovative, and efficient legal system.  So the goal should not be ‘deregulation’ but ‘right-regulation.’

Read the full piece here.