CHAPTER EIGHT
LEGAL ECONOMICS: PUTTING A PRICE ON PRICELESS
Justice is open to all, like the Ritz hotel.
Sir James Matthew (Irish jurist)1
Every June, commencement speakers dutifully inform new lawyers that justice is priceless. When that bromide lands, cynics can see the future reflected in students’ eyes. Those that moisten belong to the handful of lawyers about to embark on a lifetime of public service. Those that roll belong to the vastly larger group, those trudging toward careers whose worth will be measured in billable hours. And the eyes that narrow belong to the future partners of elite law firms, the few who realize that “priceless” is the adjective of the auction house. “Priceless” assures bidders that they are competing for a prize so valuable that its worth can only be determined by a contest whose weapons are tenacity and money, a struggle determined when the gavel falls, revealing the identity of the winner and cost of her victory. The potentially remorseful bidder can take solace, for however many dollars changed hands, a bargain was had, any sum being minute against the infinity of “priceless.” And that’s just for a Matisse; what number could encompass “due process” or “life, liberty, and the pursuit of happiness”?
The frenzied salons at Sotheby’s and Christie’s are not, of course, the images commencement speakers hope to conjure. But they are the right images all the same. Legal services are not priced for Walmart; legal help is beyond the reach of many Americans. The crisis of legal expenses has been growing for decades, and will get worse, with legal prices rising almost 50 percent faster than general inflation.2 Speakers who know this can hardly admit it: as law school deans, prominent judges, and eminent politicians, many have been complicit in driving up legal costs. At most, these luminaries can make noises about pro bono work and donations to legal aid societies. Those are worthy things, but they defray, not deflate; charity no more arrests legal inflation than Oprah’s Pontiac giveaway changed the price of cars.
That legal costs receive less attention than the latest mutation of Roe or the dramas of the Senate Judiciary Committee does not mean that legal economics are unimportant—quite the contrary. Money is an awkward subject, and idealists do not want to admit that costs shape Americans’ rights more profoundly than most laws or theories. Indeed, legal costs will soon become the most important variable in the calculus of rights, save the Constitution. Nothing less than the legal system’s legitimacy is at stake, though inflation is not a subject the legal establishment is keen to tackle. But how did law come to be so expensive and why do Americans spend so much on it? The specific reasons are numerous, but the basic dynamic is this: almost everything about American legal culture favors spending more, and almost nothing counsels spending less.
Law has always been a pricey undertaking wherever practiced, but nowhere more so than in contemporary America. The common law’s archaisms are sometimes blamed, and while there’s some truth to this, it’s really an excuse masquerading as an explanation—America can hardly junk its entire legal system, so the subtext of the common-law defense is that high prices are unavoidable. Yet, legal services are cheaper in other common-law countries, which shows that law can be made more affordable in America without pawning liberty or resorting to kangaroo courts. Indeed, those degradations may be the natural product of failing to address legal inflation, as the rise of “inexpensive” arbitration shows. Curbing costs, however, requires a shared sense of urgency that has gone missing, and the first step in achieving that urgency is to realize that legal costs burden everyone.
Everybody Pays, Somehow
Because law is inescapable, its costs are inescapable. This is true even for people who will never hire a lawyer. The corporations who supply life’s necessities engage in constant legal activity, with costs passed on to everyone. If Alcoa’s lawyers jack up rates, the price of tinfoil rises. If Google and Apple embroil themselves in litigation, shareholder returns fall. And if government finds itself in need of more and more expensive lawyers, the mix of taxes and benefits will change. Like the billable hour, each increment may seem small, but the cumulative effect is large.
The total costs of American legal beavering cannot be precisely calculated, but all reasonable estimates produce substantial figures. By Bureau of Economic Analysis (BEA) estimates, the American legal industry’s “value add” (its rough contribution to GDP) is ~$260 billion.3 Because much legal work nestles within in-house law departments, a full measure of the legal economy is larger, perhaps as much as $440 billion (ten times the size of the waste management industry).4 And then, of course, there’s the government, which is essentially a legal creature with its own considerable expenses, but that lies beyond the present discussion.
Most of law’s $260–$440 billion is billed to corporations, but individuals spend about $100 billion on legal services directly.5 On a rough per-capita basis, that $100 billion accounts for almost 1.5 percent of gross median personal income (or ~1.7 percent of after-tax income).6 By itself, that seems neither negligible nor dire, but it understates the true pain of legal costs. The per-capita cost of weddings is low, but that doesn’t mean weddings are cheap; it just means that even Elizabeth Taylor gets married only so many times in one life (eight, for Ms. Taylor). Like weddings, when legal events occur, they can easily absorb much of an American’s annual income, as the following table shows.7
Table 8.1: Typical Costs—Common Legal Events
Event: Simple Contract
Legal Costs for Plaintiff or Initiator: $300–$1,500
Legal Costs for Defendant/Respondent: N/A
Typical Duration: 1–15 days
Event: Simple Business Formation (LLC)
Legal Costs for Plaintiff or Initiator: $500–$3,000
Legal Costs for Defendant/Respondent: N/A
Typical Duration: 1–30 days
Event: Prenuptial Agreement
Legal Costs for Plaintiff or Initiator: $2,500–$7,500
Legal Costs for Defendant/Respondent: N/A
Typical Duration: 1–6 weeks
Event: Contested Divorce
Legal Costs for Plaintiff or Initiator: $15,000–$30,000+ plus judgment
Legal Costs for Defendant/Respondent: $15,000–$30,000+ plus judgment
Typical Duration: 6–30 months
Event: Contract Litigation
Legal Costs for Plaintiff or Initiator: $91,000
Legal Costs for Defendant/Respondent: $50,000–$150,000+ plus judgment
Typical Duration: 6–24 months
Event: DUI Defense
Legal Costs for Plaintiff or Initiator: N/A
Legal Costs for Defendant/Respondent: $5,000–$10,000+
Typical Duration: 6–8 months
Event: Simple Bankruptcy
Legal Costs for Plaintiff or Initiator: $1,500–$5,000
Legal Costs for Defendant/Respondent: N/A
Typical Duration: 3–6 months
Event: Employment Dispute
Legal Costs for Plaintiff or Initiator: $10,000–$50,000+
Legal Costs for Defendant/Respondent: $80,000 + judgment ($10,000–$50,000+)
Typical Duration: 6–24 months
Event: Medical Malpractice
Legal Costs for Plaintiff or Initiator: $10,000–$100,000+
Legal Costs for Defendant/Respondent: $50,000+ plus judgment ($100,000+)
Typical Duration: 24–44 months
Event: Automobile Tort
Legal Costs for Plaintiff or Initiator: $17,500–$50,000+
Legal Costs for Defendant/Respondent: $50,000+ plus judgment
Typical Duration: 20 months
These prices lie out of reach for many. Here, it’s appropriate to offer a brief and necessarily discouraging word about legal aid, subventions offered to lower-income persons who require help with civil legal matters.* Well over 60 million Americans qualify for legal aid, should they need it. However, in 2016, public legal aid budgets totaled just $1.6 billion (~0.5 percent of legal spending), of which federal government typically supplied 25–35 percent via the Legal Services Corporation (LSC). For fiscal 2018, the White House requested $0 for LSC, though Congress ultimately appropriated $385 million.8 These figures are enhanced by pro bono work, though it’s hard to estimate the total value of donated time (and perhaps only 36 percent of lawyers hit the ABA’s aspirational target of fifty hours per year).9 Whatever the precise dollar equivalents are, subsidized assistance is meager. Up to 70 percent of low-income households need aid in a given year; many do not know where to look, and those who do will often be turned away: depending on the state and the type of case, aid applications are denied anywhere from 50 to 99 percent of the time.10 While legal aid changes the lives it does reach, it does not change the macroeconomics of law.
The reality is that Americans must expect to bear their own legal expenses, and many cannot, even those in the middle class. In 2014, the scholar Deborah Rhode reported that “a majority of the [legal] needs of middle-income Americans remain unmet.”11 But even those with ready cash to cover a retainer and expected fees for a “typical” case might still not be able to afford legal help, because there’s no guarantee that an engagement will not grow more complex or will produce a satisfactory result. Will an employment discrimination case take fifteen, fifty, or five hundred hours of attorney time—and will the result be a win, a loss, or something in between? The most seasoned lawyer could not hazard anything more than an educated guess, because every legal event turns on factors beyond the exclusive knowledge and control of a client and her attorney. A legal bill is the product of hourly rates and time spent, and there’s always considerable uncertainty around the latter variable, for reasons we’ll take up later. Hourly rates are at least knowable in advance, and even if they are not the main drivers of the cost crisis, they provide a sensible place to begin.
Renting Minds by the Minute
Most lawyers bill by the hour; more precisely, by six-minute increments.* Many lawyers assume hourly billing is just another of their profession’s ageless traditions, while many clients suspect that the practice was created by lawyers to inflate bills. In fact, the billable hour was introduced just sixty years ago, partly at the behest of clients who wanted objective means to evaluate legal bills, and partly to help lawyers keep track of their time and charge appropriately. Today, everyone hates the billable hour (though no one has forwarded a practical alternative), but when it was introduced, all sides greeted the practice as a bold and necessary innovation. The experiment has not been a resounding success, but no comparable effort at reforming legal economics has been made since.
The billable hour replaced a long-standing practice of charging fixed fees, a convention that (now) seems attractive, but which always had severe shortcomings. The model was simple in theory: clients described the work they needed and legal professionals set a fee. From Independence to the mid-nineteenth century, fees were not only fixed, but often capped by state laws.12 For example, in the 1790s, Pennsylvania set a maximum fee of $4.00 to handle a suit to judgment.13 In Delaware, a contract or pleading might cost $1.50 or so, with many fees set at a maximum of a penny per twelve-word line.14 Using Delaware rates, a lawyer who drafted 2,000 words per day could earn about twice the wage of a semi-skilled laborer.15 This hardly condemned lawyers to penury, but at statutory rates, no lawyer could count himself a gentleman and no brilliant gentleman would deign to be a lawyer. The customary workaround was a gratuity based on a lawyer’s reputation and success. John Adams received “gifts” and Alexander Hamilton almost certainly did, too, though the musical doesn’t dwell on this tidbit.16
As the nineteenth century economy liberalized, rate caps disappeared and the profession destabilized. Lawyers, prone to inertia, kept charging fixed fees. But legal work had grown more complex and time-consuming, so lawyers found themselves losing money on unexpectedly long engagements. Worse, as law became a proper profession, clients cut off gratuities; one does not, after all, tip a doctor for a successful surgery. By 1958, middling lawyers earned less than middling doctors (possibly, God forbid, less than dentists).17
As we saw, both lawyers and clients agreed that the future lay in the billable hour. At first, hourly billing simply helped legal wages equilibrate with those of other professions. As the decades passed, rates kept rising, especially for elite attorneys. By the mid-2000s, media marveled at the $1,000-per-hour lawyer; just a decade later, senior lawyers in San Francisco and New York commanded almost double that. At historical pace, the $10,000-per-hour lawyer should arrive no later than 2047 (and well before on the coasts). As consolation, that figure is quoted in 2047 dollars; deflating to today’s dollars, that’s perhaps $4,600, or $77 per minute. If this prediction seems too bold, consider that the future might have arrived already: some experienced advocates demand $1 million for a Supreme Court brief, and in 2016–2018, New York law firms competed for the best attorneys in the range of $10–$11 million.18 At 2,400 hours per year, that works out to $4,600 per hour, as it happens, though these eight-figure attorneys were paid for both their labor and the small businesses they had built. But we still can’t be sure that no one charges $10,000 per hour today. Wachtell Lipton, America’s highest-earning firm per capita, presents a simple and usually substantial bill for services rendered, recording a unitary number that reflects various factors including hours worked and a premium for the firm’s “value-add” (hearkening to the days of lawyer gratuities, but this time with the servers setting the gratuity).* Is the hourly rate $1,500 or $15,000? Only Wachtell knows.
Wachtell is exceptional in every sense, but rank-and-file law is hardly cheap. Median hourly rates approach $350 per hour, and though half of lawyers charge less by definition, it’s difficult to find competent counsel for less than $150–$250 per hour anywhere, and virtually impossible in big cities.19 Legal time has been appreciating at roughly the same rate as luxury goods—a category to which law will soon belong, if doesn’t already.
Why Hourly Rates Are High
In the equilibrium charts of Econ 101, prices relate to supply and demand, with hourly rates at the intersection of the two curves. The microeconomic model is accurate as far as it goes, but only becomes revealing when the supply curve is decomposed into its constituent parts, starting with the cost of legal education. New attorneys with debt owe an average of $96,000 if they attended public school and $134,000 if they attended a private institution, to which economists would add another $150,000 of opportunity costs (representing the amount new college graduates could have earned by working instead of going to law school).20 In theory, prospective lawyers should demand an extra $35,000–$50,000 annually as compensation for going to law school.21 Adding that to baseline wages for recent college graduates, aspiring lawyers shouldn’t (to paraphrase Linda Evangelista) get out of bed for much less than $100,000 per year. And on average, they don’t, not at big firms.22 But tuition doesn’t explain the rates billed to clients. A lawyer who earns $150,000 for a 2,200 hour work-year makes less than $70 per hour, a lot less than the $250–$450 per hour that bigger firms charge for that same sixty minutes. (This chapter focuses on the major firms because they account for a large fraction of total legal expenses and set compensation trends.) Some of the distance is closed by factoring in mundane costs of benefits, administration, overhead, and so on. These costs tend to be higher than average, as law firms cluster in expensive cities to be near clients and courts. But a generous allowance for routine overhead still leaves a gap.
A particularly disturbing explanation for the remainder is the private subsidy of public expense. A federal judicial clerk in New York earns from $70,000 to $95,000 (depending on experience), below the economically rational average salary, barely enough to cover student loan payments and an outer-borough apartment, and far less than the $160,000–$180,000 base salary at top firms.23 For clerkships to be viable, someone must cover the difference, and private firms do the heavy lifting, paying clerkship bonuses of around $50,000, amortizing the additional opportunity costs of clerkship.24 The longer a lawyer clerks, and the more prestigious the court, the bigger the bonus: $75,000 for a double clerkship and $300,000–$350,000 for the rarest prize, a turn at the Supreme Court.25
A similar dynamic holds for legislators, regulators, and federal prosecutors. Ex-officials bring prestige and (firms and clients hope) special knowledge and influence, as when a former U.S. Attorney switches from prosecuting white-collar criminals to defending them against his old colleagues. Salary enhancements range from modest to embarrassingly generous. To put it bluntly, government lowers its own costs by imposing an implicit tax on users of private legal services, with a whiff of corruption thrown in as a transaction fee.
Another factor, less frequently discussed, is the inefficiency of the legal market—the opacity and difficulty of simply finding legal representation. When individuals require an attorney, they often take whatever referrals their networks provide; there’s no legal Amazon, with customer reviews and two-day shipping. Even if there were, many individuals need lawyers in moments of crisis, and have little time to shop around, no leverage to negotiate (not that many lawyers would haggle), and focus less on cost than on making bail or fending off a sudden custody suit. Corporations operate in a slightly more efficient market, having greater knowledge and bargaining power, but they still can’t do that much about price. As law firms consolidated, companies found themselves turning to the same 100–200 firms, and outside the biggest cities, companies might now have fewer than a dozen plausible choices, all charging near-identical rates. Because switching costs are very high, corporate clients can do little to mitigate rising costs except to demand occasional discounts or pay bills tardily—passive-aggressive tactics that firms anticipate and offset by inflating rates accordingly. The inefficiency of finding a lawyer probably adds more frustration than inflation, though. The main drivers of hourly rates are educational debt, opportunity costs, overhead, and public subsidy.
There is, of course, legal profit, and law firms have a mostly undeserved reputation as exceptional money spinners. With margins of 30–50 percent gross (and perhaps 15–20 percent net), the better law firms’ takings align with those realized by Apple and Goldman Sachs, while many law firms outside the richest 100 have margins closer to those of a public utility.26 Perhaps some of that profit can be reasonably described as economic “rent” due to state bars’ local monopolies on law, but the empirical evidence for this is weak, and even cutting firm margins to the S&P 500’s average wouldn’t reduce hourly rates by much. Summing up all the variables explains why hourly rates are high, and perhaps justifiably so. Therefore, true cost containment depends less on restraining rates than on containing growth in the second part of the cost equation: time. For legal costs to stabilize, labor intensity must fall—i.e., lawyers must become more productive.
Management and Incentives
Robert Solow joked that the computer age could be seen everywhere but in the productivity statistics, and this is certainly true for law. Dictaphones have given way to Dells, but on the whole, most legal work remains no more efficient than it was forty years ago in the sense of fewer inputs per output—and quite possibly, litigation is getting less efficient. The usual excuse for productivity stagnation anywhere is that efficiency gains have been channeled into quality improvements. Thus, movies are more time-consuming and expensive to produce than ever, but the effects are slicker and make for better cinema. This has always been difficult to prove (Ridley Scott’s career might demonstrate the reverse), though it’s at least plausible. But lawyers have difficulty substantiating the quality excuse and clients have an even harder time believing it.
Why hasn’t law become more efficient? The moral hazards of the billable hour usually take the blame, for translating waste into money. That’s possible at the margins, but after sixty years of hourly billing, it seems that some new legal mammal should have supplanted the hourly dinosaurs, innovating away all those unjustified billions. Silicon Valley has plenty of lawyers marinating in a culture of “disruption” who know that the first firm to achieve radical improvements would instantly become the most valuable practice on earth. Yet, Silicon Valley firms have birthed no Elon Musk of the law.
The surprising answer to the efficiency riddle is ethics. Productivity-enhancing technologies require wagering huge sums. Uber and Lyft have transformed the way people get from A to B, but through mid-2018, they had collectively raised $15–$20 billion.27 They may yet become profit machines like Google and Facebook, and their investors (disclosure: I’m one) might do very well. But innovation’s speculative riches are foreclosed to law firms. American legal ethics prohibit non-lawyers from owning, controlling, or drawing profits from law firms, so lawyers cannot tap outside equity funding, the traditional means of financing innovation.28 Nor can firms self-fund. Latham & Watkins, the world’s biggest law firm by revenue in 2015, had a top-line of just $2.65 billion, with income about half that.29 Even if L&W paid its partners nothing, the firm would need at least a decade (and perhaps three, given the legal industry’s notoriously self-flattering accounting) to amass what Uber alone has raised, and L&W’s partners would bear the risk of total loss.* Innovation also takes time, so even if the experiment succeeded, the partners who funded the enterprise might well be retired or dead before any profits were achieved.
Truly radical innovation therefore cannot be expected from within law, but nor should we expect substantial innovation from without. Again, ethics create stumbling blocks. Non-lawyers cannot practice law, so anything other than the most basic and collateral work must be done inside a traditional firm. At most, companies like LegalZoom can sell standardized forms at low cost, but anything more risks lawsuits from the local bar association (and indeed, LegalZoom has had to fend off several). Perversely, the ethical rules designed to promote clients’ interests make it impossible for lawyers to provide what clients want most of all: lower costs. Other nations have begun to dabble with allowing non-lawyers to invest in firms. But America, ostensible home turf for innovation, refuses to experiment.
Lawyers do not seem keen to even try, viewing experiments as pointless distractions from the (equally pointless) work of shuffling documents by the hour. Manufacturers can swap capital and technology for labor, but service businesses are famously resistant to productivity enhancements, or so goes the usual thinking. The hoary textbook examples are barbers, who can only cut so much hair, no matter how many computers they buy. Lawyers believe the same holds for law and confine themselves to tinkering at the edges. Firms gamely tout initiatives like telecommuting, outsourcing, knowledge management, or whatever else precipitates out of the Harvard Business Review’s word cloud in a given year. But partners’ hearts aren’t really in the game. Lawyers believe that law is no mere service, but something of an art, and art (Andy Warhol notwithstanding) can’t be mass-produced.
Yet, much of law, especially corporate law (legal argot for transactional work), is less art or service than product—indeed, a commodity product amenable to efficiency improvements. Capital constraints foreclose radical innovation, but some improvements require little more than cut-copy-paste. For example, all hedge funds use the same suite of documents; to be reliable counterparties, funds must use nearly identical documents. Taking basic documents and making slight, client-specific tweaks would greatly reduce costs. But once again, there are ethical barriers. Lawyers can only bill for new work and accordingly, they do new work, even if that only consists of reviewing, in great and unnecessary detail, documents that have been reviewed hundreds of times before. This is obviously unsatisfactory. No one bats an eyelash when Sony sells a million identical TVs and charges the same price for each, on the grounds that mass-production lowers unit costs, allowing everyone to share in gains. Clients wouldn’t mind the Sony model applied to law. Moreover, clients often choose a firm precisely because its template documents represent the best of their type, hiring Firm X on the grounds that its U.S./Mozambique software licensing agreement is the finest ever drafted, needing only a few client-specific tweaks to achieve the desired result. Lawyers should be able to charge (repeatedly) for a best-in-class product, and clients would happily license firms’ intellectual property at healthy rates, though less than what firms charge for fully “custom” work—and in the process, lawyers could achieve higher margins and be liberated to work on more useful tasks. But ethics forbid this model, and lawyers waste lifetimes pondering whether round is still the perfect shape for a wheel.
Some clients, exasperated by what feels like a charade, have pushed to return to fixed fees. This is the past recast as the future, and doomed to fail absent major changes. Legal culture would require a near-total overhaul, because lawyers are anal, completist, and risk-averse. Clients might accept the risk of minor imperfections, but lawyers won’t and can’t. For junior lawyers, a mere typo can be a source of profound embarrassment, while a substantive mistake is seen as a potentially career-ending disaster. Most errors are minor, and their economic consequences far lower than the costs incurred to avoid them—perfect is always much more expensive than very good. But perfectionism is not paranoia. Opponents will gleefully exploit any blunder, and law’s adversarial culture is so deeply entrenched that even senior partners revel in exposing mistakes made by their own teams, however trivial. (No other profession gets as much emotional mileage out of the well-placed [sic].) Fear of malpractice claims exacerbates these tendencies. In tort law, negligence suits can fail when a defendant shows she took all reasonable steps to avoid an accident. The same holds for legal malpractice, and because negligence is determined by reference to “reasonable” and “industry-standard” practices, law’s culture of anality and duplication becomes self-reinforcing.
Lawyers work to reduce not only their risk, but their clients’, and this absorbs endless billable hours because it requires predicting and managing the future. Prenuptial agreements must accommodate marriages of uncertain duration; wills and trusts try to dictate the fates of up to three post-mortem generations; and incorporation documents govern entities whose lives are notionally perpetual. Lawyers must strive to account for all the calamities fate and human nature supply, so documents swell to cover every conceivable contingency, including the possibility that the law itself might change. Other industries cope with uncertainty by using probabilities derived from large data sets and by spreading risk around, as when insurers write thousands of life insurance policies based on actuarial tables. Lawyers have no comparable tools, in part because lawyers are the risk-management tools of last resort. Insurers, for example, cannot model everything, and when the imponderable arrives, they expect their attorneys to have drafted emergency exits into underwriting agreements.
Grim though the lawyers’ positions may be, the private garden of corporate law is at least theoretically amenable to productivity improvements. If ethical rules and legal culture changed, clients could insist on more efficient practices by waiving certain malpractice claims and sanctioning legal work that involves something less than gross overkill. Those strategies are viable only when clients have unilateral control. In regulatory and litigation matters, clients are just one voice among many.
It Only Gets Worse
All the factors that make private law expensive are magnified in truly adversarial proceedings, supplemented by new and costly variables. In contested matters, the stakes are often higher, the facts unique, the incentives perverse, participation nonconsensual, the issues more complicated, and the other players at best indifferent and most of them outright hostile. Not surprisingly, the bills are larger.
Some of the growth in total legal spending is a product of the regulatory state that expanded in the wake of the Progressive Era. Before 1890, businesses could reasonably assume that most of their activities were unregulated; if Consolidated Biscuits wanted to dye its crackers magenta or acquire a competitor, it simply did so. By the mid-twentieth century, expectations flipped; the default assumption is that every activity falls into some regulatory scheme or requires fancy footwork to qualify for an exemption. The tricky questions are which regulations apply and how, matters on which clients seek constant guidance. Because many regulations are vague and heavily fact-dependent, lawyers must toil to provide even qualified answers to basic questions. (The process must be repeated with each change to the law; for many companies, it’s an annual endeavor.) To obtain additional assurances, clients can instruct their lawyers to solicit “no action” letters, which describe a client’s proposed conduct to a regulator and ask if it will provoke an enforcement action. Because an adverse reply can be worse than not asking at all, great care and expense are spent on these inquiries. Alternatively, clients can ask lawyers themselves to provide a semi-definitive answer, thereby establishing grounds for an advice-of-counsel defense should litigation arise.30 Given lawyers’ own potential liability (and that of their insurers), firms are reluctant to provide definitive advice, and the most formal expressions, “opinion letters,” are pricey—$100,000 to tackle a single issue is not uncommon. Industries such as finance, which derive substantial revenue from operating at the regulatory frontier, pay willingly and well for these opinions; it’s no coincidence that Manhattan law firms grew and prospered in tandem with Wall Street. And because Manhattan firms set salary expectations for the legal industry generally, the financial-regulatory complex helped push up prices for everything else.
Legal culture reaches its full neurotic bloom in litigation. Anality and risk aversion, always severe, become near-crippling, and proofreading becomes a $500-per-hour obsession. Thought experiments multiply, as lawyers try to predict not only the behaviors of the opposing party, but those of the judge, her clerks, the jury, and the courts of appeal. The field of inquiry also expands dramatically. What was once a mere contract, a piece of semiautonomous and mostly self-contained private law, is connected by litigation to the universe of precedent and interpretation. And with the advent of case law databases, the size of the visible universe expanded dramatically.
Before computers, research was comparatively brief. Most research began with, and often ended in, practice guides compiled by experts—the efficient commodification of intellectual property that ethical rules forbade in other contexts. The arrival of giant databases reduced these guides to starting points for journeys that could be endless. Clients hoped that computerization would speed research, but this was never going to happen. For cultural reasons, computerization might make legal research better (or anyway, more exhaustive), but it would never make anything cheaper. More cases online meant more cases to parse, more arguments to consider, more work to do. What if this case contained the magic key? Or the next? Lawyers burrowed into the world’s least satisfying Wikipedia rabbit hole and remain there, with every new click producing hefty costs.
As exhaustive as legal research became, nothing added as much expense as discovery, the process of collecting and exchanging evidence. Corporate basements that once contained boxes of documents became server rooms whose capacity doubled every year, accumulating electronic junk that lawyers would be forced to sort. The great antitrust cases bookending the twentieth century show just how bloated evidentiary records have become. When the government broke up Standard Oil in 1911, the Supreme Court noted an “inordinately voluminous” record of 12,000 pages.31 Nine decades later, the DOJ and various states sued Microsoft for antitrust violations. Though Microsoft’s misconduct covered just five years and focused on perhaps four primary acts (versus forty years and thousands of misdeeds in the Standard Oil cases), the documentary record in the Microsoft litigation dwarfed its predecessor.32 Microsoft disgorged millions of pages, employing “a team of 40 lawyers and paraprofessionals [each] working between 60 and 72 hours per week” for the exclusive purpose of rummaging up and reviewing documents—and that, just for one phase of the dispute.33 The court exhibits and deposition snippets by themselves rivaled the entirety of the Standard Oil files; United States v. Microsoft was to its predecessor case what Standard Oil was to a gas station.34
As technology had done for legal research, so it did for evidence, making enormous pools of data available without commensurate gains in usability. The functional practice in “discovery” (a process likened by one of my mentors to shoveling excrement from one side of a room to another, for eternity), is that the parties make insane demands of each other, asking for every scrap of evidence conceivably relevant to the case. The parties will squabble over “overbroad and unduly burdensome requests,” often requesting court intervention at additional expense, and sometimes parties descend into spite, e.g., digitizing everything at unreadably low DPI or (in days past) setting up vast warehouses in Siberia with the heater switched off, leading to more fights.
Even when lawyers played fair, and with the benefit of reliable optical character recognition, keyword search, and other sorting protocols, masses of data proved hard to parse, as anyone who has sifted a Gmail account knows. Small cases were not greatly altered, but larger cases changed profoundly. A 2010 survey submitted to the Judicial Conference showed that major cases that went to trial averaged 4,980,441 pages of documents produced.35 This understates volume, as parties only hand over what they must, meaning that lawyers had to winnow some unknowably large mass to get production down to 5 million pages. And even then, most of those 5 million pages were dross, not that either side could know without reviewing the lot. In the cases studied, the percentage of ultimately useful documents was abysmal: out of 5 million pages, an average of 4,772 pages (0.1 percent) were helpful enough to mark as exhibits for trial.36 It’s not correct that 99.9 percent of the discovery expenses were wasted, but nor is it true that discovery spending could be reduced by 99.9 percent.
As storage capacity grows, so will litigation expenses. In 2008, it cost large corporations a median of $17,507 to produce one gigabyte of data—$940 to round up the data, $2,931 for processing/formatting, and $13,636 for attorneys to review the results.37 (The dead minimum cost per gigabyte in the study’s sample was a still-forbidding $2,489.) The constant growth in email, attachments, databases, and so on, all housed in a limitless cloud whose capacity is measured by exabytes (each one equal to 1 billion gigabytes), suggests that discovery costs will keep rising.
Judges should do more to help contain costs, but as we saw in Chapter 6, courts do not treat discovery disputes as the central events they have become. American judges have the power to control discovery, but are reluctant to do so. Perhaps they fear that to judge discovery will prejudge a case. But judges also dislike discovery, and prefer to instruct parties to “work it out” (without fully appreciating how much the parties usually hate each other). When that fails, judges will farm out discovery disputes to magistrates, or to private “discovery masters” employed by the parties at additional expense.
Judges have the obligation to protect parties from abusive discovery requests based on nothing more than attenuated possibilities that seemingly irrelevant information might be important or open profitable avenues for exploration. In 2015, the Federal Rules of Civil Procedure tried to strike a balance by emphasizing that the burden of discovery be proportional to the nature of the case, but this will only be effective if judges take it seriously.38 Little suggests that they will. Even before 2015, judges could tailor discovery, impose sanctions, and shift fees if they concluded that one party had been chasing a wild goose, though they rarely did so.
Growth in litigation expenses will eventually decelerate (but not reverse), whether or not judges intervene. Modern discovery can often cost almost as much as a case is worth. Parties will increasingly settle because the cost of litigating outweighs the value of justice which, as we’ve repeatedly seen, is hardly “priceless.” The state of class-action lawsuits serves as a general warning about the impact of legal costs. These large cases are brought to vindicate the rights of millions of consumers (think of all the mail reading “Legal Notice: Purchasers of Defective Toaster Ovens Please Respond”). Legal expenses consume much of the value of these suits, so when plaintiffs win, they might receive fifty cents on the dollar, and in many cases, next to nothing.39 Class actions have their special problems, but they reflect the future: a world where legal expense renders the value of victory at $0.
Cheaper Abroad
In legal costs, American exceptionalism (a term attributed to Stalin and not meant as flattery) remains alive and well, with legal spending per capita unusually high compared to peer nations. Qualitative differences between legal regimes make it harder to compare legal outlays than GDPs, but a rough sense can be had examining attorneys per capita and prevailing hourly rates.40 America ranks first among its large peers. America has ~50 percent more practicing lawyers per capita than Canada, and American lawyers charge higher rates—around US$200–$300 per hour for freshly minted American lawyers versus an average US$160 per hour in Canada.41 If anything, international comparisons may be too generous to the United States, because of the greater prevalence of fixed-fee contracts abroad.
Many of the factors that make American law costly feature less prominently overseas. Foreign legal education is generally cheaper, reducing hourly rates. Foreign law is often less complex, which may be surprising, given the common trope that Europe is an overregulated mess. But a Europe bound in red tape is an image drawn from the past and, for the purposes of our discussion, somewhat beside the point. Foreign regulations often cover more activities and regulatory levies can be higher, but the regulations themselves are often easier to apply, and that’s what really matters for legal costs. For example, most peers have higher tax rates, but lower costs of tax compliance, because their tax codes are simpler, their bureaucracies speedier, and legal expense accordingly lower. For a hypothetical medium-sized company, the accounting firm PwC and the World Bank estimated that tax compliance would take significantly longer in America (175 hours) than in Canada (131 hours), Sweden (122 hours), the UK (110 hours), or Norway (83).42 Some of the extra time is spent on accounting, but quite a bit represents legal work, given the complexity and fragmentation of the American tax code. What holds for tax holds for American law generally; America ranks in the middle among OECD (Organisation for Economic Co-operation and Development) countries for regulatory burden and quality.43 It’s also likely that social dynamics such as income inequality and concentrated market share, both more prominent in America than in Europe, raise prices. While concentrated wealth slightly improves client leverage over fees, it greatly reduces appetites for hard bargaining. To protect their significant profits, American businesses find an extra $100 per hour or another million pages of discovery to be comparatively reasonable. Certainly, corporate general counsels, whose jobs depend on avoiding catastrophe, think as much. Whatever the reasons, it would appear that American companies spend almost 70 percent more on legal services, as a fraction of their revenues, than the global average.44
Fear is an unusually potent driver of American legal spending. American criminal sentences are harsh, so defendants who can afford lawyers have incentives to spend heavily. Prison is not the only worry; in America, background checks are routine and a minor conviction can foreclose a menial job. By contrast, European sentences are generally less punitive, and the economic consequences of conviction can be lower. In France and Germany, criminal background checks are generally limited to fields in which prior history is salient, like finance or policing.45 Even Europe’s high degree of urbanization and public transport might help; a garden-variety DUI can be devastating for workers living in American suburbs, while presenting lesser inconveniences to more urbanized Europeans. This is not to say Europe is a defendants’ paradise, only that it harbors fewer incentives to litigate charges to the bitter end.
The higher stakes in American noncriminal law also encourage heavy legal spending. Although Europe has forceful regulators, when America assesses regulatory fines, the amounts tend to be large, as are awards at trial. Stories that make corporations shudder abound, from the McDonald’s my-coffee-was-too-hot case (a $2.9 million verdict subsequently reduced to a still-impressive $640,000) to multibillion-dollar class-action settlements.46 Punitive damages often comprise the bulk of newsworthy judgments (94 percent in the original McDonald’s verdict, and 75 percent even after the award was trimmed), but this is mostly an American worry. Civil-law countries generally disallow punitive damages in private cases and many common-law nations restrict their use and amount. In America, fear of erratic and hostile juries further encourages corporations to spend heavily on defense. Again, this is a lesser concern overseas, where juries in civil cases are less common or simply not available.* 47 There’s no way to directly measure the consequent increase in legal costs, but insurance premia, which quantify fear and liability, provide reasonable proxies. One study concluded that corporate liability insurance premia in America were 2.6 times that of a basket of Eurozone, mostly civil-law countries, with legal environment accounting for most of that difference.48 Even among common-law nations, America remains an outlier, with liability insurance consuming significantly more resources than in Canada and Britain.49
In common-law countries like America, the price of a verdict is not always limited to the results of any one case. When litigation raises a novel issue, a loss can create precedent, and precedent paves the way for dozens of other suits and billions in additional damages. In civil-law countries, precedent is less of a concern; standard cases are judged on their individual merits with few larger implications. Continental jurists would find it unusual if half a dozen lawyers turned up in rural France to fight a 20,000 suit over an unsafe product, but in the heyday of tobacco litigation, Philip Morris was content to dispatch a Gulfstream filled with lawyers to fight smokers’ lawsuits whenever and wherever they occurred.
Missing Restraints
One paradox of American legal economics is that litigation costs are high in part because the costs of commencing suits are low. At heart, America permits speculative litigation to a degree that most nations do not. Foreign courts generally expect a plaintiff to bring tailored charges supported by at least some evidence already in the plaintiff’s possession, often with a degree of specificity (matching claims, witnesses, and documents) that is nearly impossible for American litigators to imagine.50 When defendants reply, foreign courts expect equally solid responses, frowning on laundry lists of farfetched or wildly contradictory defenses. These barriers serve to narrow the dispute rather than to prevent it entirely. (Once upon a time, American rules required more detailed pleading—but that time, rather pungently, was before 1938–1957; i.e., before the great inflation in American legal costs.) What can deter suits from ever beginning, or recommend their early termination, are cost-shifting provisions that require the loser to pay most (or all) of the winner’s fees and costs. This practice is called the English Rule, and as the name suggests, it’s not just a civil law phenomenon. Under the English Rule, wildcatting can be an expensive proposition.
Americans, by contrast, sometimes view the right to sue based on a hunch as something like a God-given right. The rules of civil procedure mostly ratify this sentiment: to commence suit, a plaintiff need only put the defendant on notice of the general nature of the suit and defendants may respond with similar vagueness.51 A few types of cases, such as those involving fraud, must be alleged with “particularity,” but this is no real barrier to the savvy lawyer. Regardless, each side is free to allege legal theories that are inconsistent or even mutually exclusive. Except where required by statute, there’s no English-style verification requirement, no requirement for supporting evidence, and indeed, no functional requirement of preexisting factual or legal grounds for suit so long as it’s “likely” that facts will ultimately be discovered to support the claim or a “nonfrivolous” basis for believing that the case will establish “new law” permitting relief.52 The resulting canvas can be immense and one can reasonably question whether pleading does anything more than inform parties that someone is irked enough to sue. In 2007 and 2009, the Court tried to clamp down on the flimsy suits that the old rules allowed, requiring allegations to be at least “plausible.” Much as the academy despised the Court’s pleading reforms at the time, there’s little evidence they had substantial effects. It’s heresy in law schools to suggest that the Court might not have gone nearly far enough when it tightened pleading standards, but other countries have demanded more without sinking into barbarism.
Because American pleading is so permissive, the main deterrents to filing suit are the expenses a party might incur directly. But again, American law is unusually forgiving. Under the American Rule, each party expects to bear only its own costs, win or lose. In the case of speculative contingency fee cases (mostly used in personal injury cases and consumer class actions), the lawyer-investor bears the loss, further distorting incentives. Courts are reluctant to invoke special rules to shift fees (or sanction lawyers) when parties gin up pretty ridiculous claims and defenses.53 As a result, there are few disincentives to commencing a suit and forcing the other side into an expensive discovery process. The upside is that it’s much safer for small parties to sue bigger parties. In Europe, an individual smoker with a 60 percent chance of prevailing might never sue if faced with a 40 percent chance of a loss that would saddle her with British Tobacco’s legal fees (certain to be substantial).
While American law makes it easy to bring wide-ranging lawsuits, it provides few incentives for judges to address the resulting bloat. The default posture for American trial judges is passivity. Any departure from that mold risks rebuke from higher courts, so the easiest thing to do is let marginal complaints and rambling discovery run their full course. Judges in civil-law countries cannot afford such indulgences. Civil-law judges preside over the discovery process, and in many countries are expected to personally review and summarize the evidence. They have no incentive to condone America’s no-stone-unturned discovery practices. Moreover, because civil law litigation unfolds iteratively, rather than culminating in a grand trial, judges can whittle down a case’s legal issues serially. The idea of collecting all the evidence based on an unsupported complaint, before disposing of preliminary legal issues, strikes many other nations as bizarre. And the American practice of allowing litigants to demand evidence without obtaining court approval, even from third parties (email services are a favorite target notwithstanding the Stored Communications Act), feels like another invasive lunacy. As a result, many peer nations have filed exceptions to the Hague Convention, which governs international evidence collection.54 Countries including Germany, Switzerland, France, and even the UK, routinely refuse to help when Americans demand discovery within their borders.55
Sundry Oddities: Privatization, Perverse Incentives, and Firm Instability
A few final factors deserve brief consideration. Private legal spending is unusually high in part because many of the large cases prosecuted by private attorneys in America are delegated to public legal actors overseas. This is most evident in vindications of what are essentially public rights, which in America are frequently led by class-action suits seeking extraordinary damages. Private lawyers expect greater financial rewards than public actors, adding to costs. Occasionally, a class action will succeed beyond all expectations, and the prospect of lottery-like winnings seduces some plaintiffs’ lawyers into frivolous lawsuits and unethical behavior; the nation’s most prominent securities class-action lawyer, Bill Lerach, went to prison for hiring plaintiffs.56 Other nations dispose of the morally hazardous waste of these suits by demanding greater energy from their regulators and prosecutors.
The second problem is that the conventional law firm model is a financially unstable, resource-destroying mess. Large firms pride themselves on reporting high profits-per-partner and many achieve this through imprudent leverage. Firms maximize partner payouts, leaving them thinly capitalized, often greatly indebted to banks, and highly fragile. Unexpected downturns have sent many firms into receivership, as happened to Brobeck.* Other firms, having temporarily maximized human gearing by hiring legions of associates (literally called “leverage” in the business), weather adversity by firing their troops en masse, destroying years of investment. Even in good times, firms waste their assets by treating junior associates like disposable widgets (FBU, or “fungible billing unit,” was current slang when I was a litigator). Most firms expect associates to bill at least 2,000 hours per year which, factoring in administrative activities, requires 2,400 worked hours—anything less will be penalized, while anything more will receive a modest bonus. Associates are stressed, dissatisfied, and without any opportunity to cultivate the new client relationships on which they will be judged when it comes time to make partner. When that time comes—if they haven’t already quit, disgusted by a profession that reduces the average corporate associate to a document butler—only one-third of associates can reasonably expect a partnership offer. The others, spent and broken, are tossed out. The results are high turnover, rapidly depreciating human capital, volatility, and higher legal costs as firms spend heavily to recruit fresh cannon fodder. It’s no way to run a business, but law firms are not run by businessmen. They’re run by lawyers, traditionally the less intelligent examples whose connections and expertise will not be missed when they are shuffled into firm management.
The rapid growth in legal costs is an inevitable product of American law itself. Real improvement requires reforming large swathes of the system’s structure, culture, and incentives. The best targets for reform are obviously the rules and habits already discussed, those that have made law so expensive in the first place. The wrong targets—though these are the targets law has settled on—are to simply eradicate whole species of lawsuits, e.g., by shunting them into arbitration’s memory hole or neutering them via doctrines of immunity.
All reform requires political consensus, which does not presently exist. Legal costs are not visible or urgent for most voters until the moment they arrive in the form of a personal event. Legal inflation is also not fully visible to American governments, because their wage bills are tacitly subsidized by private firms, while the public bears the greatest costs of judicial inefficiency. Other nations, which defray a larger fraction of legal costs for private citizens facing serious criminal and civil litigation, have stronger incentives to reform their legal systems, as governments bear costs of inefficiency more directly; Britain is one example: not as generous with civil aid as it used to be, but more generous than the U.S. is.57 Since the 1990s, Britain has also required more active case management by judges and created specialized procedures more attentive to the nuances of differently sized cases.58 In 2004, Australia allowed law firms to accept outside capital, affording law firms the flexibility to invest and streamline that has long been available to other industries. Australian firms took new capital and four even went public.59 In 2007 and in 2011, the UK also liberalized outside investment.
These foreign experiments are too young, and overlapped too much with the Great Recession, to permit full judgment. British court reforms appear to have sped litigation; the outside investment rules in Britain and Australia are still fresh, and partly marred by one firm’s disastrous acquisition of an insurance business (though the loss was borne by the firm’s equity base, not its clients). The true outcomes will be known in time, but whatever the results, they reflected serious attempts to address inefficiencies in the legal market.
Achieving truly significant improvements in legal inflation will require a technological revolution, as all productivity enhancements do. Artificial intelligence presents the most obvious solution, and already shows real promise at performing routine legal work. By 2018, AIs were better at performing certain legal tasks than experienced lawyers, and their broader deployment could speed discovery, draft basic documents for human review, and so on. (AI is not very capital intensive, and many natural language technologies were developed for other markets.) AI may be the one area where efficiency improvements from without are possible. Whether legal AI will be allowed to realize its potential is a question of law firm incentives, professional ethics, and social values. So far, American bar organizations—state-by-state monopolies—have vigorously resisted change. The public might also resist AI’s incursions, as law is among the most human of endeavors. Legal inflation may decide for us, though it would be better if we chose now—justice, after all, involves nothing if not a sense of free will. But on the present course, when Alexa and Siri replace Paul Clement and Clarence Darrow, we will have no option but to click “Accept” on the terms and conditions of our new legal world.