Are Regulatory Restrictions Killing The Law Firm Business Model?

There is an interesting op-ed in the Wall Street Journal today by the Brookings Institution’s Clifford Winston and Robert Crandall, authors of First Thing We Do, Let’s Deregulate All the Lawyers (the op-ed length version of which Jonathan blogged about here). The piece, cheerily entitled “The Law Firm Business Model is Dying,” uses the Dewey & LeBoeuf implosion as a jumping-off point to discuss how regulatory limitations on the legal market are undermining the law firm model.

Their basic thesis is this:

The problems these firms face today are twofold: Large clients are increasingly using in-house counsel to reduce costs, and the public is increasingly taking the do-it-yourself route given the growing access to a variety of legal services and documents on the Internet. The rational response would be for new, low-cost legal firms to start up, and for incumbents to reduce costs and attract new clients by providing innovative services.

But that is happening only to a limited extent because of state licensing requirements and American Bar Association (ABA) rules. Deregulation could open the market and transform the legal industry for the better.

The authors argue that the requirement that new lawyers have graduated from an ABA-accredited school and pass a bar examination “significantly limits the flow of new legal practitioners,” and requires that new attorneys recoup the cost of their education in the form of high salaries. That, the authors say, makes it difficult to control costs, and “[e]fforts to outsource some tasks have met with only limited success.” Furthermore, the authors say, ABA regulations prohibiting financial-services companies from having an ownership stake in law firms limit firms’ financing options and raise its capital costs in a way that the authors say hurt the highly leveraged Dewey.

The authors do not (by my lights) spend enough time discussing offshoring of legal jobs, but it is a timely, thought-provoking read.