On the theme of NYT Op-Eds (see Milan's recent post about defaulting on student loans), this piece by Theresa Amato raises a question I've been wondering about. This is a genuine question, not some sort of rhetorical pose.
On the assumptions (without doing lots of digging to verify whether it is true) that (1) 40% of law school graduates over the last four years have not found legal employment and (2) there are people with unmet legal needs who could afford to pay something for a lawyer, just not the fees that lawyers are currently charging, why haven't we seen downward pressure on attorneys' fees? Wouldn't really basic economics - you know, supply and demand and all that good stuff - predict that new producers would enter the market and attempt to compete on price? As I understand it, however, we haven't seen downward pressure on fees. In particular, the standard fee for personal-injury representation in most locales is still one-third. (Nora Engstrom at Stanford has done excellent work on the "stickiness" of fees in PI cases.) Why haven't some entrepreneurial recent law graduates tried to start up a shop that offers 20% contingent fees? They could be the next Uber and totally disrupt the industry.
I realize the answer to this is a market failure story, so what I'm asking is, what exactly is behind the market failure? The NYT piece suggests a couple of explanations which I've seen:
1. Recent graduates have massive debt repayment obligations and can't afford to take low-paying jobs providing legal service for poor people.
2. Recent graduates have inadequate training in the kinds of nuts-and-bolts skills they would need to open up a law practice - not only skills like drafting pleadings, interviewing clients, and taking depositions, but also law practice management skills like dealing with trust accounts and billing.
My response to #1 is that I'm not talking about legal services for indigent people, but competing for paying clients in areas such as personal-injury, consumer debtor representation, matrimonial law, and so on. I understand that if someone has $1,500 per month in loan repayment obligations, he or she would prefer to work at a large firm rather than starting a brand new Main Street practice. But the assumption of problem is that the recent graduate isn't choosing between working at Dewey Cheatham & Howe and hanging out a shingle; rather, the choice is between working at Starbuck's and hanging out a shingle.
As for #2, I can see that being part of the problem, but inadequate skills training in law school hasn't deterred generations of lawyers from hanging out shingles. Many state bars (NY, for example) have training programs for recent graduates which attempt to give them the basics. Again, it may be scary and not anyone's first choice to open a solo practice, but it must beat at least some of the available options in the non-legal employment market.
That leaves other possible explanations. When I've asked around, I've heard this one, which seems plausible:
3. Recent graduates don't have access to the start-up capital that they'd need in order to rent office space (or establish a virtual office, if that's allowed in the jurisdiction), get the minimum required subscriptions to Westlaw and whatnot, advertise their availability, purchase malpractice insurance, and tide over the business for the first 12-18 months before clients came in, work was done and billed for, and clients paid the bills. Restrictions on the form legal practices may take further exacerbate the problem by inhibiting innovation. One might imagine, for example, a venture capital firm providing seed money to 25 new law graduates to start their practices, in exchange for 25% of their billings, figuring at at least half of these practices would fail, but the successful ones will provide an adequate return. Of course that sort of structure is straightforwardly prohibited by Rule 5.4.
I still find it kind of hard to believe, however, that there is a big, unoccupied market niche that some smart person hasn't figured out a way to occupy. Again, I'm not talking about indigent legal services - that raises other problems of political will and indifference to the problems of poor people. The question is about Main Street practices serving the legal needs of ordinary individuals. Why haven't we seen downward pressures on attorneys' fees?