The Death of Big Law... and Birth of What? Larry E. Ribstein, University of Illinois Theoretical and Interdisciplinary Perspectives on Law, Lawyering and.

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The Death of Big Law . . .and Birth of What?

Larry E. Ribstein, University of IllinoisTheoretical and Interdisciplinary Perspectives on Law, Lawyering

and JudgingUniversity of Illinois College of Law

September 27, 2010

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Introduction• Why should we care about Big Law?– Law’s dominant business model– “Trickle down” effects on all lawyers

• Is law really a business?• The nature of the law business– “Bespoke” advice– Legal information as market commodity

• A non-traditional look at law practice– Theory of the firm– Intellectual property

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The Big Law business model

(Firm reputation=monitoring, mentoring, screening [mms])

Fee

Partners

Profit

Profit share

Expenses(including associate pay)

Client

Professionaladvice

services

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What drives the business model• Why clients pay the Big Law premium– Reliable referrals– One stop shopping– Firm reputation (monitoring, mentoring, screening)

• Features that sustain Big Law’s reputation– Equal or lockstep compensation– Partnership “tournament”– Vicarious liability

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The weak link in the business model

• Firm value = monitoring, mentoring and screening• Partners will leave for better offers• This depends on value of – Firm– Partners’ individual books of business

• Lawyers must decide how to allocate efforts• This depends on what other lawyers do

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Pressures on Big Law• Client demand– Global competition– De-professionalization– In-house counsel– Technology and markets– M & A environment

• Reputation– Increased associate leverage– Limited liability– Decline of hourly billing

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Big Law’s vicious cycle

Reputation and profits decline

Outside offers induce departures

Lateral hiring replaces departures

Hire more associates to pay laterals

Reduced MMS

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Lessons from busted firms• When reputational capital dissipates, firms unravel: –Partners leave because profits can’t bind them–Group exits reflect personal networks–Dying firms try to hire profits –Undiversified firms are exposed to sector shocks– Short term bank debt can hasten collapse

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What’s next?• Breakdown of the reputational capital model– Increased leverage (=vicious cycle)– Horizontal (all partner) firms – Vertical (one-owner) firms (Marc Dreier)

• And beginning of what?– Wal-Mart/Tesco model– Non-lawyer financing (?)– Beyond law firms and clients: Legal information firms– Examples: software, r & d, litigation finance

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Regulatory impediments to changes in law practice

• Non-lawyer ownership• Restrictions on non-competes• Lawyer licensing• Choice of law rule

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Pressures on rules: non-lawyer ownership

Rule 5.4

Litigation finance

Global competition

Who is anowner orpartner?

Management services

UK’s Big Bang (1986) US firms compete with UK UK’s Legal Services Act (2007) UK firms compete with US?

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Toward the legal information firm• Beyond one-to-one legal advice: the market for

legal information• How we get from here to there: incentives• Incentives=property rights• Some policy issues– General use vs. creation tradeoff– Limits of intellectual property law– Due process concerns with access to law– Protecting clients: one-to-one advice vs. market

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Copyright law• Limits of copyright law: Doesn’t protect. . . – Data– Legal ideas

• Preserving public access to law– Court opinions and statutes– Complaints– Private codes

• The licensing option

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Patent law• Patenting business methods:– Prior law: some abstract ideas– Bilski (Federal Circuit): Machine or transformation– Bilski (Supreme Court): ???

• Patenting legal ideas– Poison pills? – Due process concerns– Unocal case: California law required gasoline

companies to deal with Unocal

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Contracts and firms • Contracts supplement intellectual property law• Legal information firms – Protect intellectual property by owning it– Contract with employees for confidentiality– License information to other firms

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The new role of in-house counsel• The “buy-side” of the legal information market• Clients can replace law firms to – Coordinate legal talent– Evaluate lawyers

Client SpecialistsBig Law

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The future of law-only firms• Only where customized legal advice is important• Big Law– A few big transactional firms– Where “legal capacity insurance” is necessary– Firms can maintain reputational bond– Large specialist firms?

• Boutiques– “Horizontal” firms– Less infrastructure cost– Moderate reputational capital– Non-diversified

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Legal software and forms• Types of products– Transactional software– Software + legal advice– Mass tort complaints– Legal research

• Firm structure– Lawyers work for software firms– Law firms may make software as byproduct of advice

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Multidisciplinary firms• Many specialists may use the same information• Information needs to stay in the firm• Firm may uniquely combine specialties– Accountants– Lawyers– Engineers– Finance – Consultants

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Legal information + capital• Types of products– Litigation finance– Asset valuation– Patent-trolling– Bankruptcy claims– Legal risk management

• Firm structure– Firms protect information by employing lawyers– Confidentiality and non-compete agreements keep

the information in the firm

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Legal idea producers• Private firms can produce legal ideas– Law firms can bundle with legal advice– Non-law firms can produce research• Industry groups• SSOs• Xerox Parc for law

– Firms might copyright or patent some products• Private firms can produce litigation– Alternative to public courts– Firms own the case law, clients pay for it– Enforcement via public-private hybrid (Delaware)

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The death of big law school• Effects of Death of Big Law – Reduction of graduates’ expected wage– Reduced training and mentoring– Shift in demand for legal information

• Effects of the new legal information industry– Competing with private training and research– Need for technical expertise– What is legal expertise?

1817-?

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Conclusion• The traditional Big Law model is already dead• Law’s business model is archaic• Public policy demands broader access to law• Some kind of change is coming• Lawyers can manage it or watch it happen