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.

The TOTM Unlocking the Law Symposium is designed to raise a host of questions surrounding lawyer regulation, including ending lawyer licensure requirements and the ban on non-lawyer investment.

My thesis, for better or worse, is that we may be asking the wrong questions.  Despite the stringent regulations placed on lawyers, ingenious entrepreneurs—most of them non-lawyers—are finding ways to get into the legal services business.  Nobody needs to unlock the front door for them to enter.  They are climbing through the first floor windows, scaling down our chimneys, and seeping through our basement walls.  In ten years, much of the deregulation agenda will come to pass without any formal deregulation.  U.S. consumers and businesses are already voting with their feet.

Read the full piece here.

Several years ago, when Cliff Winston and I began looking at the incomes earned by lawyers, we were struck by several facts. First, after accounting for age, years of education, experience and various other demographic influences, we found that the income premium earned by lawyers had increased by about 50 percent between 1975 and 2004, with a large share of the increase coming near the end of the period. Second, the rate of increase in the number of lawyers in the United States had been declining for some time. Why, we asked, would the rising earnings premiums for lawyers have not attracted a sharp increase in the number of persons applying for entry to and graduating from U.S. law schools?

Read the full piece here.

Much of the writing on deregulating the legal profession asks skeptically whether it could or should happen.  It was logical to wonder what could change when the profession was locked up tight by the lawyers themselves. What opposing political interest group was comparably well-organized or well-informed? Consumers could sue to break up the regulatory monopoly, but who would represent them? They could boycott lawyers, but then would have to face law’s complexity on their own.  Besides, who could argue with lawyer licensing when so many other professions also had to be licensed?

Today unlocking the law is no longer political science fiction.  A number of forces have created alternatives to traditional U.S. lawyers and law firms, and therefore interest groups positioned to push their way into the competitive arena.

We are not alone:  Once U.S. lawyers lived in an impregnable fortress, surrounded by vast oceans, possessing the sole keys to their superior legal system and incomparable access to the world’s largest clients.  Now transportation and communication developments have shrunk the world and produced global trade and corporations.   The world demands global lawyers, and firms have responded by establishing global practices.  U.S. lawyer regulation now must compete with the rest of the world.

The UK Legal Services Act 2007 provides a glimpse of what is to come.  The Act, instigated by consumers seeking cheaper legal services, allows “alternative business structures,” including publicly traded law firms and firms combining legal advice with other services, including banking and finance.

In short, U.S. lawyers will be forced to compete with their deregulated counterparts in other lands.

Meet the new law firms.  Even within the existing U.S. regulatory structure, new kinds of law firms are arising.  I don’t mean just new versions of the traditional lawyer-only firm. Non-lawyer-owned firms, such as those managing legal process outsourcing, are selling a different but competitive product.  Such firms are already deregulating the U.S. legal services market.

Another kind of non-lawyer-owned firm is the litigation hedge fund.  As discussed in my Death of Big Law (at 801), “[h]edge funds investing in litigation are changing the traditional lawyer-client model of litigation.” Despite (or perhaps because of) prohibitions on outside-owned law firms, funding of litigation is increasingly coming from the capital markets.  The hedge fund’s lawyers provide the expertise as to how to value the lawsuits, but not the capital.  As discussed below, it’s not clear how long these lawyers will be human.

Non-human lawyers. As I’ve discussed repeatedly on TOTM, and in a recent article with Bruce Kobayashi, lawyers are increasingly having to compete with faster, cheaper and more accurate computers.  In other words, the information revolution is finally coming to law.  This of course is already happening with e-discovery, and more generally data management systems that feed into litigation.  It is also happening with automated contracting (e.g., here, here and here, and discussed here).  Computers can work with corporate data to provide high-tech compliance that reduces the need for litigation in the first place, or help firms make accurate litigation management decisions. Computers and the web also can help clients hire lawyers and price their services.

More interesting legal technologies are on the horizon.  If computers can play Jeopardy with the champions or write news articles, why shouldn’t they be able to argue cases in briefs or in front of judges, or predict the outcomes of cases?

The key insight here is that what we call law is basically information.  A judicial decision relies on information from prior judicial decisions.  These decisions collectively, as well as litigation information available from Pacer and other sources, processed by powerful computers, can predict future decisions at least as accurately as computers now predict the weather.  Future computer advances could leave humans far behind in what we now refer to as “legal reasoning.”

Non-human clients.  A skeptic might argue that while many alternatives to traditional legal services are already available, they all run up against a stone wall of regulation which lawyers are unlikely to dismantle.  Again, my point above is that these superior alternatives and technologies create their own interest groups that compete with lawyers not only in markets but in politics.  But there is an even more powerful force for change:  corporations.

Corporations have their own lawyers working in house.  These lawyers, who are backed by extensive resources and motivated to reduce legal costs, can buy and use whatever tools will help corporations deal with the law, including powerful software and computers.  In-house corporate lawyer-executives do not have the same incentives as lawyers in private practice to resist technologies that could put them out of business.  And corporate users of legal services do not confront regulatory impediments to these new technologies.

The immediate future might be a world bifurcated between corporate and individual clients.  This might seem to be another case of the haves coming out ahead. But how long can such an equilibrium persist?  With the cost of legal services soaring and the poor and middle class increasingly denied access to legal services, how long will lawyers be able to hold their fingers in the regulatory dyke?  Lawyers can’t resist change forever as long as the market produces more and cheaper and better alternatives to traditional legal services.

As discussed in my Death of Big Law, developments like those discussed above already have contributed to the demise of the traditional Big Law model.  While Big Law’s empire crumbles, new businesses and business models are rising from its ashes.  They are already invested in the future and have reason to fight for its deregulation.

Lawyers’ choice is simple:  (1) try to block change, refuse to engage in the debate, and increase the likelihood and extent of their future obsolescence; or (2) meet the competition head on and demonstrate how they can continue to add value in the new age of legal information (more on that in my next post).

Welcome to “Unlocking the Law: Deregulating the Legal Profession.”

Licensing and regulation of lawyers, long questioned by scholars, is emerging as an important public issue.  Legal costs are rising for individuals and firms with increases in litigation and regulation.  These costs tax business growth and entrepreneurship and impede ordinary Americans’ access to the civil justice system.  Meanwhile, the development of new business structures and technologies and significant regulatory moves toward opening up competition for legal services in the UK and elsewhere are forcing policymakers to address lawyer licensing and regulation.   The U.S. is certainly not immune from the economic and other institutional forces nudging toward a reconsideration of existing licensing and regulation regimes.  It is an excellent time to reexamine the costs and benefits of existing and alternative regimes in light of these changes.

The Unlocking the Law Symposium will be running today and tomorrow.  This symposium is designed to start an intellectual dialogue on this topic, bringing together legal scholars and economists with a variety of views and perspectives on the law and economics of the legal profession, regulation, and competition policy.   Just a few of the questions the Symposium will consider are:

• Should lawyer licensing be abolished?
• What alternative regulatory approaches or structures should be considered?
• What would a deregulated market for legal services look like?
• Does lawyer regulation raise issues different from those of licensing and regulating other professions?
• Does delegating to lawyers the power to restrict the right to practice law violate the antitrust laws?
• What are the First Amendment implications of regulating what non-lawyers can say about the law?
• To what extent can national or global competition alone break down barriers to law practice even without deregulation?
• What are the implications of deregulation of the profession for law schools?

We encourage both the participants and commenters to keep the discussion going in the comments.  In addition to Larry Ribstein and the other TOTM bloggers, we’re very pleased to announce an excellent list of participants with a variety of perspectives on the complex combination of issues involved with deregulating the law:

• Hans Bader
• Benjamin Barton
• James Cooper
• Robert Crandall
• Nuno Garoupa
• Gillian Hadfield
• Bill Henderson
• Dan Katz
• Renee Newman Knake
• Bruce Kobayashi
• George Leef
• Jon Macey
• Tom Morgan
• Walter Olson
• Richard Painter
• Eric Rasmusen
• Eric Talley

Without further ado, lets begin with our first set of posts from Larry Ribstein, Bill Henderson, and Robert Crandall.

The NY Times starts its op-ed against the AT&T / T-Mobile transaction with a false proposition about antitrust analysis of mergers: “The analysis begins with a mathematical formula for calculating the deal’s effect on competition.”  Any antitrust lawyer or economist will recognize the error.  A major change from the 1997 Horizontal Merger Guidelines to the 2010 version is that the former observes that agency analysis must begin with market definition and evaluation of concentration:

First, the Agency assesses whether the merger would significantly increase concentration and result in a concentrated market, properly defined and measured

However, the it is widely recognized that the 2010 Guidelines shed the cookie cutter, algorithmic approach to merger analysis in favor of a fact-intensive analysis involving multiple tools of which market definition and calculating market shares and evaluating concentration levels and changes is just one.  Indeed, the 2010 Guidelines expressly state:

The Agencies’ analysis need not start with market definition.

This is not trivial detail; these changes were at the very core of the changes in the new Guidelines promulgated by the Obama administration’s antitrust enforcement agencies.  The NYT analysis simultaneously relies exclusively upon market concentration statistics while appealing to the 2010 Guidelines which rejected that approach as authority.  Odd.  But not unsurprising.

What is more surprising is Professor Hovenkamp’s quote, whom we certainly can expect more from than the NYT.  Hovenkamp observes:

“It’s only a slight overstatement to say that if they weren’t going to block this one, the Justice Department might as well just throw the antitrust guidelines out the window,” said Herbert Hovenkamp, professor of law at the University of Iowa, who is considered by many to be the dean of American antitrust law. “This merger clearly seems to violate them.” …

“It was becoming legendary that the Bush administration wasn’t enforcing the old guidelines,” Mr. Hovenkamp said. “What good is a guideline that doesn’t provide any guidance? The Obama administration conceded that perhaps the old guidelines were too strict. So it made it easier, but at the same time said, ‘We’re going to enforce this.’ ”

I’ve got to believe Hovenkamp was quoted out of context here because, frankly, this doesn’t make much sense.  I doubt Hovenkamp would argue that the Guidelines’ thresholds were treated as gospel by any administration regardless of political ideology.   But what is absent from Hovenkamp’s discussion is the primary reason why the Guidelines expressly shifted away from concentration and toward direct analysis of competitive effects.  The answer doesn’t lie in politics.  Put simply, antitrust economists and lawyers at the agencies and elsewhere simply do not believe the HHI thresholds in the Guidelines provide a useful predictor for competitive effects.  The persistence of the HHI thresholds are at least somewhat a result of path dependency; despite some prodding, it proved too tempting for the agencies to keep the thresholds in given their appeal and general acceptance in merger precedent emerging in the 1960s and 70s.  But that was the age when those types of market structure arguments were in fact the economic state of art.  That is no longer true — and rejection of that general approach is a key (if not they key) component of the Guidelines’ evolution toward the current approach.

The theme of the NY Times article and the omission of any sense at all that the shift at the agency level has been the polar opposite of what is claimed — that is, away from treating HHI thresholds as gospel or even related to analysis of competitive effects and toward an analysis more directly focused upon competitive effects — I’m left puzzled by a few things in Hovekamp’s quote.  When the agencies have screamed from the rooftops that competitive effects and not market structure and market definition is what matters in merger analysis, the idea that not blocking a merger that nominally crosses otherwise meaningless thresholds in agency Guidelines threatens the rule of law or means that we ought not have Guidelines is at the very least overstated.  Of course, one could interpret the statement as a critique of leaving the thresholds in the Guidelines at all if one is not going to enforce them.  I agree with that.  But they’ve always been there and often been ignored when the agencies’ analysis concluded the merger would not harm consumers.

And of course, that interpretation is difficult to square with the statement that this “merger clearly seems to violate them.”    Violate them?  The Guidelines do not have the force of law.  If this merely means something like “the merger appears to be one that the agencies’ analytical framework articulated in the Guidelines indicates that they will challenge” — that’s fine.  But, that statement suffers the same analytical flaws described above. Violating the Guidelines would require a showing that the merger was likely to create market power and produce anticompetitive effects — to do so under the new Guidelines requires more than a simply counting the number of firms.  That type of analysis no longer passes muster in antitrust analysis at the agencies.  To claim a merger “clearly seems to violate” the Guidelines  by sole reference to the HHI thresholds at the same time the agencies have distanced themselves from them(in favor of more fact-intensive and direct analysis of competitive effects) is not consistent with the economic letter or spirit of the new Guidelines.

Filed under: antitrust, economics, merger guidelines, mergers & acquisitions, technology, telecommunications, wireless