ANOTHER SHOT AT STUDENT LOAN DEBT

A recent Department of Education initiative has not attracted the public attention that it deserves. But it could have important implications for the federal loans that fuel higher education, including law schools. The Department seeks to create a framework for dealing with the thousands of students who recently filed “defense of repayment” claims.

The Wall Street Journal’s recent summary of the program could strike fear in the hearts of many law school deans and university administrators:

“In the past six months, 7,500 borrowers owing approximately $164 million have applied to have their student debt expunged under an obscure federal law that had been applied in only three instances before last year. The law forgives debt for borrowers who prove their schools used illegal tactics to recruit them, such as lying about their graduates’ earnings.”

But it could get even worse for the schools, as the Journal explains:

“Last week, the department began a months-long negotiation with representatives, schools and lenders to set clear rules, including when the department can go after institutions to claw back tuition money funded by student loans.”

Will the Department’s latest effort to impose meaningful accountability on institutions of higher education fare any better than predecessor techniques that have failed? There have been too many of those.

Lawsuits Haven’t Worked

Law schools have become poster children for the accountability problem and ineffectual efforts to solve it. In 2012 some recent alumni sued their law schools, but they didn’t get very far. The vast majority of courts threw out claims that the schools had misrepresented graduates’ employment opportunities. The winners on motions to dismiss or summary judgment included Thomas M. Cooley (now Western Michigan University Cooley School of Law), Florida Coastal, New York Law School (not to be confused with NYU), DePaul, IIT Chicago-Kent, and John Marshall (Chicago), among others.

Judge Melvin Schweitzer’s March 21, 2012 ruling in favor or New York Law School set a tone that other courts followed: Prospective students “seriously considering law school are a sophisticated subset of education consumers…” In other words, they should have known better. That might be true today, but at the time Judge Schweitzer wrote his opinion, he was wrong. So were the courts who followed his rationale to reach similar results. At a minimum, there were serious factual disputes concerning his conclusory assessment of an entire cohort of prelaw students.

In particular, the plaintiffs in the New York Law School case graduated between 2005 and 2010. Back in 2002 through 2007 — when those undergraduates were contemplating law school — NYLS claimed a 90 to 92 percent employment rate for its most recent graduating classes. But that stratospheric number resulted only because all law schools counted any job for purposes of classifying a graduate as “employed.” A part-time worker in a temporary non-JD-required position counted the same as an assistant U.S. attorney or a first-year associate in a big firm. Only after 2011 did the ABA finally require schools to provide meaningful data about their recent graduates’ actual employment results.

A notable exception to the dismissal of the cases against the law schools was one of the first-filed actions, Alaburda v. Thomas Jefferson School of Law, which is set for trial in March 2016. In that case, Judge Joel Pressman correctly found that a jury should decide the clearly disputed issues of fact. He got it right, but he’s an outlier.

The ABA and the AALS Haven’t Helped

Anyone expecting the profession to put its own house in order continues to wait. The changes requiring greater law school transparency in employment outcomes came about only because the public outcry became overwhelming and Congress threatened to involve itself. When political opposites such as Senators Dianne Feinstein (D-CA) and Chuck Grassley (R-IA) agree to gang up on you, it’s time to wake up.

Since then, the organization has returned to form as a model of regulatory capture. Twice in the last four years, it has punted on the problem of marginal law schools that survive on student loan debt. School that would have closed long ago if forced to operate in a real market continue to exist only because the legal education market is dysfunctional. That is, the suppliers — law schools — have no accountability for their product — far too many graduates who are unable to obtain full-time long-term JD-required employment after incurring the six-figure debt for their degrees.

And while we’re on the subject of regulatory capture, the current president of the AALS has now declared that there is no crisis in legal education. Her interview produced an article titled, “As Law Professors Convene, New Leader Looks to Unite the Profession.” Why all law schools should unite to protect marginal bottom-feeders exploiting the next generation of students remains a question that no one in the academic world is willing to ask, much less answer.

Now Comes the Fun Part

Ignoring problems does not make them go away. As the profession refuses to acknowledge a bad situation, it loses the opportunity to influence the discussion. Which takes us to the recent Department of Education activity relating to criteria for applying the burgeoning volume of “defense of repayment” applications.

Special interests are likely to resist meaningful change. From institutions of higher education to debt collectors who have made student loan debt collection a multi-billion dollar business, lobbyists will swamp the process. Still, attention seems assured for marginal schools exploiting a dysfunctional market. That’s a good thing.

As the disinfecting qualities of sunlight intensify, someday the ABA and the AALS may realize that an old adage is apt: If you’re not part of the solution, you’re part of the problem. Perhaps another round of bipartisan congressional interest will help them see the light.

A FIRM TO WATCH

Something worth watching could be happening at King & Wood Mallesons, one of the world’s largest law firms. It has an interesting history, a challenging present and, perhaps, an even more challenging future.

Past

Beijing-based King & Wood came into existence in 1993. If you look for photos or other information about either name partner, you won’t find them. Neither person ever existed. China doesn’t have U.S.-type ethics rules requiring that law firms carry the names of lawyers who work there (or did before retirement or death). The distinctly non-Chinese names are a branding exercise aimed at reaching a global audience.

In 2012, King & Wood merged with Australian-based Mallesons Stephen Jacques. In 2013, it added London-based SJ Berwin and now has 2,700 lawyers scattered across 30 offices around the world. It operates as a verein, meaning that the constituent firms are legally separate and don’t share profits. (Whether any verein is a real law firm is a subject for another day.)

Present

In July 2015, King & Wood Malleson’s Europe and the Middle East announced “rocketing” results.  Profits per equity partner had soared by 39 percent. During the year, the firm hired 15 lateral partners, including attorneys from Fried Frank, Linklaters, and Eversheds.

As London-based (and newly named) managing partner William Boss boasted, “This is an exciting time for our region….”

Maybe a bit too exciting, even for Boss.

Two days later, The Lawyer offered a potentially relevant footnote to the “rocketing” 39 percent jump in partner profits reported only two days earlier: “A number of insiders have questioned the large jump in PEP, attributing the growth to an exceptionally big and anomalous recovery for the firm on one piece of litigation.”

At about the same time, the firm revealed that it had completed its “partnership review” resulting in an almost 10 percent reduction in its London office equity ranks, according to The Lawyer. In addition, the firm lost some “big hitters.”

On January 15, 2016, William Boss resigned as managing partner — more than a year before his term was set to expire in May 2017. The firm said that he would remain in the position until April while the search for his replacement occurred.

Future

On January 20, The Lawyer reported that the firm had “launched a review of its capital contributions structure in order to ease cashflow, stop repeated delays to profit distributions and stem the flow of exits by ‘frustrated’ partners.”

What does that mean? Time will tell. But story in The Lawyer included these nuggets:

— “A number of sources close to KWM have accused the firm of withholding profit distributions over the last five years in order to keep up with tax bills, leading to a raft of senior exits last year.”

— “One source close to KWM said the firm had ‘only just’ paid out the full distributions due in August 2015, having previously paid just half the money owed in that quarter. Another said they had only been paid 25 per cent of their distributions for 2014/15, despite it being nine months into the financial year.”

— “Complaints about delayed profit payments follow a good year financially for the firm in the UK, Europe and Middle East, adding to the frustration of a number of partners, a source said. ‘It’s been a so-called record year for the firm but partners just aren’t getting paid,’ they added.”

— “The review could see its UK partners being asked to pay higher contributions to the firm in return for more units in the LLP.”

If the last item comes to pass, partners who write checks to the firm might want to understand exactly what they are buying and why.

THE CRISIS IN LEGAL EDUCATION IS OVER!

[NOTE: The trade paperback edition of my book, The Lawyer Bubble – A Profession in Crisis (Basic Books) — complete with an extensive new AFTERWORD — will be released on March 8, 2016. That’s just in time to put in proper perspective the latest annual rankings from U.S. News & World Report (law schools in mid-March) and Am Law (big firms on May 1). The paperback is now available for pre-order at Amazon and Barnes & Noble. Now on to today’s post…]

Wishful thinking is never a sound strategy for success.

“I don’t see legal education as being in crisis at all,” said Kellye Testy, the new president of the Association of American Law Schools and dean of the University of Washington Law School. She made the observation on January 5, 2016 — the eve of the nation’s largest gathering of law professors.

Perhaps her declaration made attendees more comfortable. Unfortunately, it’s not true.

The Trend! The Trend!

Law deans and professors cite the dramatic declines in applicants since 2010 as proof of law school market self-correction. Dean Testy echoed that approach: “I think there is a steadying out now after quite a crash in the number of students our schools are admitting….”

Two points about that comment. First, the decline in the number of applicants since 2010 is real, but that year may not be the best baseline from which to measure the significance of the drop in subsequent years. From 2005 to 2008, the number of applicants was already declining — from 99,000 to 83,000. But the Great Recession reversed that downward trend — moving the number back up to 88,000 by 2010 as many undergraduates viewed law school as a place to wait for three years while the economy improved.

Viewed over the entire decade that began in 2005, the “drop” since 2010 was from a temporarily inflated level. If the roughly four percent annual reduction that occurred from 2005 to 2008 had continued without interruption to 2014, the result would have been about 65,000 applicants for the fall of 2014, compared to the actual number of 56,000. That difference of 9,000 applicants doesn’t look like a “crash.”

A More Troubling Trend

Second and more importantly, many law schools solved their reduced applicant pool problem by increasing admission rates. Overall, law schools admitted almost 80 percent of applicants for the fall of 2014. Compare that to 2005 when the admission rate was only 59 percent.

During the same period, the number of applicants dropped by 40,000, but the number of admissions declined by only 12,000. Countering the impact of fewer applicants to keep tuition revenues flowing meant lowering admission standards. The ripple effects are now showing up in declining bar passage rates for first-time takers.

Student Enlightenment Interrupted

Transparency has given students access to data that should produce wiser decisions. Until the current application cycle, better information was contributing to the recent decline in the number of law school applicants. But the relentless promotional efforts of law school faculty and administrators may be interrupting that trend. Compared to last year, the number of applicants is up.

But law schools aren’t solely to blame. Responsibility for persistently dubious decisions also rests on those making them. A December 22 article in The Wall Street Journal, “U.S. Helps Shaky Colleges Cope with Bad Student Loans, includes this unfortunate example:

“Anthony C. Johns, 32 years old, regrets accumulating $40,000 in debt while attending Texas College, a private college in Tyler. He says he graduated in 2007 with an English degree but couldn’t land a full-time job.

“‘I think I applied for everything on CareerBuilder from teaching to banking,’ says Mr. Johns, who has defaulted on his Texas College loans. ‘Default was very embarrassing.’ Since then, he has enrolled in law school and borrowed $30,000 to pay for his first year.'”

The emphasis is mine.

The Biggest Problems Remain

According to LinkedIn, someone named Anthony C. Johns graduated from Texas College in 2007 and is currently a student at the Charlotte School of Law. That’s one of the Infilaw consortium of three for-profit law schools — Charlotte, Arizona Summit, and Florida Coastal. Owned by private equity interests, the Infilaw schools — like many others — survive only because unrestricted federal student loans come with no mechanism that holds schools accountable for graduates’ poor employment outcomes.

Ten months after graduation, Charlotte School of Law’s full-time long-term bar passage-required placement rate for 2014 graduates was 34 percent. The average law school loan debt of its 2014 graduates was $140,000. If Anthony Johns regretted accumulating $40,000 in college debt, wait until he’s taken a retrospective look at law school.

You Be The Judge

Perhaps Dean Testy is right and there is no crisis in legal education. Or perhaps it depends on the definition of crisis and how to measure it. When a problem gets personal, it feels different.

Since 2011 when the ABA first required law schools to report the types of employment their graduates obtained, over 40 percent of all graduates have been unable to find full-time long-term employment requiring bar passage within ten months of receiving their degrees.

Now let’s make those numbers a bit more personal. Saddled with six-figure law school debt, many recent law graduates might consider crisis exactly the right word to describe their situation. Where you stand depends on where you sit.

“BRIDGEGATE” TAKES A STRANGE TURN

Chief Justice John Roberts’ annual report on the state the federal judiciary reminds lawyers of their obligations to “avoid antagonistic tactics, wasteful procedural maneuvering, and teetering brinksmanship.” I wonder what he thinks of the “tactics, maneuvering, and brinksmanship” surrounding the latest chapter of “Bridgegate.”

Four Days in September

In 2013, the mayor of Fort Lee, New Jersey refused to endorse Governor Chris Christie’s re-election campaign. In apparent retribution, Christie’s deputy chief of staff Bridget Anne Kelly sent an email to David Wildstein, Christie’s appointee at the Port Authority of New York and New Jersey.

“Time for some traffic problems in Fort Lee,” Kelly wrote on August 13.

“Got it,” Wildstein replied.

On Friday, September 7, Wildstein followed-up: “I will call you Monday AM to let you know how Fort Lee goes.”

Everyone knows how Fort Lee went on Monday, September 10. The Port Authority closed two of three local access lanes on the upper level of the George Washington Bridge. Four days of gridlock near the town continued until September 13, when the Authority’s executive director (a Governor Andrew Cuomo appointee) ordered the lanes reopened.

Getting Ahead of One Story

Several months later, the Kelly-Wildstein emails surfaced. Immediately, Republican presidential hopeful Christie did the fashionable thing: nip a growing scandal in the bud by hiring a respected outside lawyer to conduct an internal investigation. He chose Randy Mastro, former chief of staff to New York City Mayor Rudy Giuliani. According to the firm’s website, Mastro is a partner and member of the management and executive committees at Gibson, Dunn & Crutcher, current winner of The American Lawyer’s biennial “Litigation Department of the Year” contest.

Christie promised that Mastro would “bring an outside, third-party perspective to the situation” with a “thorough” and “efficient” internal investigation. Gibson Dunn certainly had the firepower to accomplish that mission. Its Bridgegate team included five former federal prosecutors with “experience in internal investigations and criminal cases.” The state of New Jersey picked up Gibson Dunn’s tab. For the first three weeks of work, it charged $1.1 million.

Just two months after the investigation began, Mastro released Gibson Dunn’s final report and provided final witness summaries to the U.S. attorney and the New Jersey Legislative Select Committee on Investigations. The report exonerated Christie.

The New York Times described the ensuing press conference: “The former federal prosecutor who led the internal inquiry, Randy M. Mastro, frequently sounded like a defense lawyer making his case to a jury. He referred to Ms. Kelly as a liar, cast doubt on the credibility of the mayor of Hoboken, who accused the Christie administration of political intimidation, and slipped into lawyerly exhortations to the ‘ladies and gentlemen’ sitting before him.”

While Creating Another Story

On May 1, 2015, Wildstein agreed to plead guilty and cooperate with the government’s prosecution of Kelly and Port Authority deputy executive director William Baroni, Jr., both of whom were indicted. On May 27, lawyers for Kelly and Baroni sought court permission to issue subpoenas to Gibson Dunn for any notes, transcripts, and records that the firm had in connection with its investigation and report. Over Gibson Dunn’s objection, the court granted the motion.

After the subpoenas went out, Gibson Dunn objected again. It also responded that no such notes or recordings existed — none — and moved to quash the subpoenas as moot.

Defendants’ exasperated lawyers complained, “Gibson Dunn claims that it billed New Jersey taxpayers nearly $10 million but not a single lawyer took a single note during 75 interviews in the most high-profile political case in recent years.” (The court noted that the actual amount billed seemed to be about $8 million.)

The Court Was Not Amused

On December 16, 2015, Judge Susan Wigenton — a George W. Bush appointee — sympathized with the defendants’ frustration. She also explained what troubled her about Gibson Dunn’s position.

“Attorneys are trained to scrupulously document information when conducting internal investigations, including taking and preserving contemporaneous notes of witness interviews,” the court wrote in a ten-page opinion. “In the past, Gibson Dunn has done exactly that.”

But not for Bridgegate. Judge Wigenton chided the firm for “intentionally changing its approach in this investigation.” In particular, the affidavit of Gibson Dunn partner Alexander Southwell confirmed, “[W[itness interviews were summarized electronically by one attorney and then edited electronically into a single electronic file.”

The judge described the significance of that technique: “The practical effect of this unorthodox approach was to assure that contemporaneous notes of the witness interviews and draft summaries would not be preserved. Rather, they would be overwritten during the creation of the revised and edited final summary.”

Noting that the firm didn’t delete or shred documents, the judge observed that “the process of overwriting their witness notes and drafts of the summaries had the same effect.”

“This was a clever tactic,” Judge Wigenton continued, “but when public investigations are involved, straightforward lawyering is superior to calculated strategy. The taxpayers of the State of New Jersey paid Gibson Dunn millions of dollars to conduct a transparent and thorough investigation. What they got instead was opacity and gamesmanship.”

Gibson Dunn argued that defendants’ underlying motion was a “fishing expedition” and “a waste of time and judicial resources.” Defendants were “targeting a law firm’s work product, already knowing that most of what they seek does not exist…”

Nevertheless, what the court characterized as gamesmanship worked. The firm had no documents to produce, so the court granted Gibson Dunn’s motion to quash.

One More Thing…

The latest twist in the Bridgegate tale involves Debra Wong Yang, whom President George W. Bush appointed as U.S. attorney for the central district of California in 2002. In November 2006, Yang left the bench to become a partner at Gibson Dunn & Crutcher. The firm’s website notes that she works out of the Los Angeles office and has served as a member of the firm’s executive and management committees.

In a glowing introduction of Governor Christie as the keynote speaker at an event on June 9, 2011, Yang described him as her “very good friend” whom she had “known for ten years” — going all the way back to their time together as federal prosecutors. She said Christie was “the real deal” and “doing a remarkable job as governor.”

When Christie took the stage, he described how their families once vacationed together at the game ranch of a fellow U.S. attorney in Texas. “We are good and dear friends,” Christie said of Yang.

Fast-forward to Bridgegate

Here’s a summary of interesting events that followed:

—  According to the The New York Times’ review of Gibson Dunn billing records, two days after Christie hired the firm to investigate Bridgegate in January 2014, “Debra Wong Yang, a Gibson Dunn partner in California and a personal friend of of Mr. Christie’s, spent time in ‘meeting with client’ – Mr. Christie and his top lawyer in the governor’s office.”

— Gibson Dunn’s army of former federal prosecutors — including Yang — departed from the usual documentation process so that when the firm completed the investigation, no notes, transcripts or recordings of interviews existed beyond the final summaries provided to federal and state investigators.

— After Gibson Dunn’s report exonerated Christie, the firm continued working at taxpayer expense. According to the Times, it billed the state of New Jersey a total of $8 million from January 2014 through August 2015 “for the continuing defense of the governor.”

— Wholly apart from the dispute over what turned out to be Gibson Dunn’s non-existent internal documents relating to its investigation, on November 11, 2015 attorneys for Kelly and Baroni filed additional motions. They asked the court to direct the government to take a closer look at the adequacy of Gibson Dunn’s earlier document productions to the federal grand jury. Claiming that prosecutors should have challenged the firm’s disorganized and inadequate discovery responses, Baroni’s motion levels this accusation: “The government has given Gibson Dunn free reign to withhold and redact documents as that firm sees fit, as well as to produce documents in an abominable format.”

— Finally, according to the Timesin December 2015 Debra Wong Yang “co-hosted a $2,700-per-person fund-raiser in Los Angeles for Christie’s Republican presidential campaign.”

In an exclusive interview hours after Mastro released Gibson Dunn’s March 2014 report, the governor told ABC’s Diane Sawyer, “Sometimes people do inexplicably stupid things.”

Then again, sometimes things may not be as stupid as they first seem.

BIG LAW’S SHORT-TERMISM PROBLEM

Recently, the New York Times devoted a special section of “Dealbook” to short-termism. Big law firms made a prominent appearance in an article focusing on leadership transition. Citing statistics at the managing partner level, the Times reports that only three percent of law firm managing partners are under age 50. Twelve percent are over 70. Almost half are between 60 and 70.

The Tip of the Graying Iceberg

The core problem of transition runs deeper than a single demographic data point about the age of those at the top of the big law pyramid. The developing crisis goes far beyond the question of who the next managing partner will be.

At most firms, aging partners at all partnership levels are hanging on to clients and billings. For them, it’s a matter of survival. Except for lock-step firms, equity partners “eat what they kill” — that is, their closely guarded silos of clients and billings determine their annual compensation.

In that culture, hoarding becomes essential to preserving annual compensation that partners come to regard as rightfully theirs — and theirs alone. Stated in language that many senior partners use in criticizing today’s young attorneys, these aging lawyers have developed a wrong-headed sense of entitlement.

The fact that they’re making far more than they dreamed of earning in law school doesn’t matter to them. Neither does the fact that they are compromising the future of their firms. But their short-term gains could become the institution’s long run catastrophe.

See the Problem

Surveys confirm that law firm leaders recognize the resulting problem. Seven years ago, Altman Weil issued the first of its annual “Law Firms in Transition” series. Since then, the survey has documented a fundamental failure of leadership on this issue.

For example, in the 2011 survey, Altman Weil asked firm leaders to name the areas in which they had the greatest concerns about their firms’ preparedness for change: “The top issue, identified by 47% of all firms, was the retirement and succession of Baby Boom lawyers in their law firms.”

In the 2012 survey, 70 percent of managing partners had “moderate” or “high” concern about client transition as senior partners retire. On a scale of one (no concern) to ten (extreme concern), the median score was seven.

In the 2013 survey, only 27 percent of managing partners reported that they had a formal succession planning process in place.

Ignore the Problem

How have these leaders responded to what they have identified for years as the most pressing long-term problem facing their firms? Poorly.

The 2015 survey observes, “In 63% of law firms, partners aged 60 or older control at least one quarter of total firm revenue, but only 31% of law firms have a formal succession planning process.”

There’s a reason that law firm leaders balk at meaningful transition planning. It requires them to accept the fact that they won’t run their firms forever. But contemplating one’s own mortality can be unpleasant.

It also requires them to rethink their missions. Leadership is not about maximizing this year’s partner profits or pursuing growth for the sake of growth to create illusory empires over which a dictator can preside. It requires a willingness to create incentive structures that encourage long-term institutional stability.

Toward that end, lofty aspirations are easier to state than to achieve. But here are a few governing principles:

— Client service should be central to everything a law firm does.

— Partner cooperation should trump partner competition.

— Clients and billings should flow seamlessly to the next generation while allowing aging partners to retain a sense of self-worth as firms encourage them to prepare for their “second acts,” whatever they may be.

— The culture of a firm should encourage partners to sacrifice some short-term financial self-interest in the effort to leave the firm better than they found it — just as their mentors did for most of them.

Become the Problem

The most creative leaders understand that all of this means thinking outside the conventional billable hour box that remains central to the short-term growth and profit-maximizing mindset. In that respect, the contrast between the absence of true leadership and clients’ desires is striking.

Since 2009, Altman Weil has done an annual survey of corporate chief legal officers, too. The survey asks the CLOs: “How serious are law firms about changing their legal service delivery model to provide greater value to clients?”

The responses are on a scale of one (not at all serious) to ten (doing everything they can), Every year since the survey began, the median score has been three. Three out of ten. Stated differently, as far as clients are concerned, their outside lawyers have little interest in responding to demands for change.

Likewise, LexisNexis/Counsel Link’s most recent semi-annual report analyzing six key metrics confirms the impact of short-termism:

— Clients want alternative fee arrangements. AFAs account for only seven percent of all billings.

— Clients want relief from high hourly rates. For the trailing 12-month period ending on June 30, 2015, big firms of more than 750 attorneys had a median partner billing rate of $711 an hour — up 6 percent from the period ending on December 31, 2014. (For firms of 501-750 lawyers the median hourly rate during the same period increased by only $5 an hour.)

The Future Is Here

As big firm leaders drag their feet, clients aren’t waiting for them. They have figured out that the biggest of big law premiums isn’t always worth it. An October 2013 study of $10 billion in client fee invoices by LexisNexis/Counsel Link concluded the “large enough” firms of 201-500 lawyers are eating into the market share of firms with more than 750 lawyers.

From 2010 to 2013, the biggest firms saw their market share drop from 26 percent to 22 percent. Meanwhile, the market share of the “large enough” firms increased from 18 to 22 percent. For high-fee matters totaling $1 million or more, the shift was even more dramatic: “large enough” firms increased their market share from 22 to 41 percent.

Anyone believing that most big law firm leaders are long-term thinkers preparing their firms for a challenging future is ignoring the actual behavior of those leaders. Most of them are focused on getting rich today. That’s not a strategy for success tomorrow.

DEWEY, THE D.A., AND SECRETS

“There aren’t too many secrets in this case,” said Judge Robert Stoltz on December 5. He was referring to the Dewey & LeBoeuf trial over which he presided. The multi-year effort to convict Steven Davis, Stephen DiCarmine, and Joel Sanders produced a raft of acquittals on many charges and a hung jury on the more serious offenses.

Actually, there are two big secrets in the case, but no one is talking about them.

Secret #1: Why Zachary Warren?

Former Dewey chairman Steven H. Davis won’t face a retrial. Assistant DA Peirce Moser has offered him a deferred prosecution agreement. As reported, he will not have to admit guilt and can continue practicing law. When my kids were young, they would have called this a “do-over.”

Judge Stoltz’s reference to secrets was in response to Moser’s suggestion that the retrial of executive director DiCarmine and finance director Sanders should precede the first trial of former low-level staffer Zachary Warren. The longer Warren dangled in a world of uncertainty, the more leverage it would give Moser in his relentless pursuit of someone who never should have been indicted in the first place. Appropriately, the judge denied Moser’s request.

That leads to secret number one: Why is the Manhattan DA’s office squandering its scarce resources to pursue Zachary Warren at all?

I’ve written extensively about Warren’s plight. At age 24, he worked at Dewey & LeBoeuf for about a year from mid-2008 to mid-2009 as a client relations specialist. His principal job was to pester Dewey & LeBoeuf partners into making sure clients paid their bills.

Apparently, his mistake of a lifetime came on December 30, 2008. That’s when he accepted an invitation to join 29-year-old finance director Frank Canellas and 53-year-old chief financial officer Sanders for dinner at Del Frisco’s steakhouse. There he allegedly witnessed the creation of what the DA’s office called a master plan of accounting fraud. As his price for that free dinner, Warren would get indicted five years later.

When Zachary Warren left Dewey & LeBoeuf in June 2009, did anyone in the world think that the firm was unlikely to repay its bills, much less collapse — ever? No.

In 2010, was Warren even at the firm as others worked on the bond offering at the center of the DA’s case? No, he was a one-L at Georgetown.

Even if obtained, would a conviction of Warren result in anything positive for anyone inside or outside our justice system? No.

Warren’s indictment was a travesty. The jury’s rejection of the DA’s case against his superiors is reason alone to drop the effort to prosecute him.

Unsatisfying Answers

So why is Moser so determined to try Zach Warren? One possibility is that the same phenomena contributing to Dewey & LeBoeuf’s downfall infects the DA’s office: hubris, ego, lack of accountability for mistakes, and an unwillingness to admit errors that would prompt thoughtful individuals to change course. Maybe it’s a lawyer personality thing.

Another possibility is the public servant manifestation of greed: the DA wants to put a Dewey & Le Boeuf notch — any Dewey & LeBoeuf notch — on its convictions holster. After Cyrus Vance, Jr. personally announced the indictments in a circus-like press conference on March 6, 2014, Moser suffered unambiguous defeat. In fact, even the plea agreements that the DA’s office squeezed from former firm staffers who later testified at trial now look silly. Unfortunately, the resulting penalties aren’t silly for those who are stuck with them.

To put the DA’s pursuit of Zachary Warren in context consider this. According to published reports, assistant DA Peirce Moser has offered him a plea deal, too. But it is more onerous than the DA’s deferred prosecution agreement with Davis.

There is no just world in which that makes any sense.

Secret #2: Where is the Money?

Prosecutors told the jury that it would not see a “smoking gun.” That’s because the DA didn’t know how to look for or describe it. But the gun was there. It was pervasive, insidious, and hiding in plain sight. It was the environment that caused staffers to fear for their jobs if powerful partners weren’t happy. That meant making sure they received millions more than the firm had available to distribute, even if it came from bank credit lines and outside investors in the firm’s 2010 bond offering.

That leads to secret number two: Why didn’t the DA follow the money?

The public could have reasonably expected Vance to direct the power of his office toward the most egregious offenders and offenses. That didn’t happen. Sure, Davis had a major responsibility for the strategy that brought the firm down. But the executive committee consisted of top partners who were supposed to be fiduciaries in running the firm for the benefit of all partners and the institution. Likewise, as most of the firm’s so-called leaders walked away with millions — far more than Davis, DiCarimine, Sanders, or Warren received — bankruptcy creditors got between five and fifteen cents for every dollar the firm owed them.

In a November 2012 bankruptcy court filing, Davis himself teed up what should have been the central issue in any attempt to assign blame for the firm’s problems:

“While ‘greed’ is a theme…, the litigation that eventually ensues will address the question of whose greed.”

The DA’s office never pursued that question.

Just Rewards

Shortly after Vance’s March 2014 press conference, assistant district attorney Peirce Moser received a promotion. He became chief of the tax crimes unit. The DA’s office announced that Moser’s new position would not preclude him from continuing to run the Dewey & LeBoeuf case. Based on his prominence at the most recent court hearing, it’s still Moser’s case.

If no good deed goes unpunished, sometimes it seems that no bad deed goes unrewarded.

MIZZOU FOOTBALL LESSONS

The legal profession could learn something from the events culminating in Tim Wolfe’s resignation as president of the University of Missouri system. So could all of higher education. But those lessons have little to do with race.

Who is Tim Wolfe?

He’s a businessman.

Wolfe’s family moved to the Columbia, Missouri area when he was in fourth grade. For 30 years, his father was a communications professor at the University of Missouri. Wolfe quarterbacked his high school football team to a state championship. He earned an undergraduate degree from MU in personnel management.

After college, Wolfe became a sales rep for IBM where he worked his way up to vice president and general manager of its global distribution center. After 20 years at IBM, he became executive vice president of a consulting services company. From there, he moved to software maker Novell Americas, where he was president when another company acquired Novell and left him unemployed.

In December 2011, the University of Missouri’s board of curators announced Wolfe’s selection as its 23rd president. His base salary was $459,000.

What Happened? For a While, Not Much

As recently as August 2014, the board of curators thought that Wolfe’s performance had earned him a contract extension from February 2015 through June 2018. A year later, his troubles began.

On September 12, the president of the Missouri Student Association posted a Facebook item about vile racist slurs he’d received. By October 10, a group calling itself Concerned Student 1950 (the year Mizzou first admitted black students) staged a homecoming parade protest. On October 20, the group issued eight demands, including the ouster of Wolfe.

Exactly what he did to make such a shortlist is far from clear. The New York Times and the Wall Street Journal put some blame on his proposal to close the university’s respected press as a cost saving measure. But he withdrew that proposal after hearing from objectors.

The Times and the Journal also implied that Wolfe was responsible for canceling health insurance for graduate students. But that situation is more complicated. As the graduate studies office announced in August, new Affordable Care Act requirements prevented the university from paying those premiums. Instead, the university would provide a one-time stipend to all qualified graduate students. Under the ACA, the university said, it was unable to link the stipend to health insurance or to ask whether recipients needed or planned to purchase a policy. Failure to implement the new IRS regulations would have resulted in fines of $100 per student.

Was It Race?

After a swastika with feces appeared in a campus bathroom on October 24, Concerned Student 1950 met with Wolfe personally. Three days later, one of the protest organizers announced a hunger strike. On November 6, a student posted a video in which protesters asked Wolfe to define systematic oppression.

“I’ll give you an answer, and I’m sure it will be a wrong answer,” he said. “Systematic oppression is because you don’t believe that you have the equal opportunity for success.”

“Did you just blame us for systematic oppression, Tim Wolfe?” shouted a protester. “Did you just blame black students?”

Wolfe’s insensitive comments were unfortunate. But they’re not the sort of thing that costs a university president his job. And they didn’t cost Wolfe his — until the football team weighed in.

And Then…

On Saturday, November 7, the entire Mizzou football team — 84 scholarship players and their coaches — proclaimed unanimous solidarity with the protest movement. Within 36 hours, Wolfe resigned.

Like many universities, the University of Missouri created the monster that can devour it. College football is big business, especially in the Southeastern Conference. The average SEC head football coach makes almost $4 million a year. President Wolfe’s base salary was about one-tenth of what the school pays coach Gary Pinkel. Throughout the country, college football generates enormous revenues that pay for coaches, athletic scholarships, and stunning athletic facilities.

Whether and to what extent this circle of riches makes its way back to support a school’s principal mission — educating young people — isn’t clear. Earlier this year during its dispute over whether college players could unionize, Northwestern University claimed that, considered as a whole with other sports that football subsidized, the athletic programs were money-losers for the school. On November 7, Northwestern broke ground on a new $260 million athletic facility.

Pocketbook Threat

The tipping point for Wolfe came when the football team — with a mediocre record of four wins and five losses — said it would boycott its November 14 game against BYU. That game alone would have cost the university $1 million. But the potential impact could be far greater if the team fails to win the two more games needed to qualify for a postseason bowl appearance.

Now we come to the lesson for big law firms. The internal gap between the highest and lowest paid equity partners at most firms is enormous and growing. Likewise, the frenzy to recruit lateral rainmakers continues unabated. Those trends have produced a “don’t-get-me-angry” group that is analogous to what many college football teams have become. A handful of individuals exerts disproportionate influence over an entire institution, but the resulting culture affects everyone.

Football Cognitive Dissonance

Society is conflicted about football. Every weekend, millions of people watch college games. I’m among them. Our behavior creates market demand that gives college football an outsized influence over higher education.

At the same time, we’ve become uncomfortable with some of the adverse individual consequences that the market doesn’t consider, such as lifelong brain damage from concussions. Economists call these externalities. It’s one reason that half of Americans don’t want their sons playing tackle football. When things get personal, they’re somehow different.

Big Law Cognitive Dissonance

Likewise, most law firm managing partners admit that recruiting high-powered rainmakers doesn’t usually improve their firms’ financial performance. Independent studies confirm that lateral hiring is dubious strategy. Yet the lateral frenzy continues as newly hired partners parachute into the top ranks of many firms.

Unfortunately, short-run disappointment with the financial impact of a lateral hire is the least of the problems associated with aggressive inorganic growth. The strategy can destroy a firm’s cohesion, impair its sense of professional mission, and increase its vulnerability to financial shocks. In the resulting environment, everyone in the institution suffers.

Living through the financial and cultural consequences of lateral hiring failures could have prompted law firm leaders to rethink their strategic plans. But that hasn’t happened. After all, such a reversal would require leaders to overcome their confirmation bias, transcend hubris, and admit mistakes. That’s less likely than a major university relegating football to its proper place in the institution’s broader educational mission.

By the way, Mizzou may also offer a lesson to some law school deans: make friends with your university’s football coach.

THE STRANGE CASE OF STUDENT LOAN DEBT

The Obama administration has a multifaceted approach to the student debt crisis. It’s time for a policy consistency checkup.

— The President says he wants all young people to pursue higher education and he hopes parents will encourage their kids to do so.

— The President says he wants to hold colleges and vocational schools accountable financially for graduates’ poor outcomes. At many schools, those outcomes include stunning rates of attrition and dismal employment results for graduates.

— The President says he wants to end soaring tuition that creates enormous student debt.

— And the President says students should avail themselves of income-based repayment (IBR) and loan forgiveness, even though those programs will produce large long-term hits to the federal treasury.

— But when students and their parents find themselves swamped in educational debt because graduates can’t find jobs offering a realistic shot at repaying their loans, the President’s Department of Education jumps to the schools’ defense. In its vigorous resistance to discharging school loans in bankruptcy, the administration provides another layer of protection to marginal schools that remain unaccountable for their students’ poor outcomes.

A Case in Point

In 2012, Republican presidential candidate Mitt Romney suggested famously that, if necessary, students should borrow from their parents to attend college. It’s not Mitt’s fault, but two years before he become governor of Massachusetts and continuing through 2007, one of his constituents, Robert Murphy, took out a loans totaling $221,000 to do exactly that for his three kids.

Unfortunately, when Murphy’s manufacturing company closed and moved overseas in 2002, he lost his job as its president. Since then, he hasn’t found work. He’s now 65 years old.

To cover living expenses, Murphy’s IRA retirement account valued at $250,000 in 2002 is now gone. He and his wife live on $13,000 a year that she earns as a teacher’s aide. In 2014, their $500,000 home was worth $200,000 less than the mortgage on it — and was in foreclosure.

As interest accrued, the balance due on Murphy’s educational loans for his kids increased to more than $240,000 by 2014. He now represents himself in a bankruptcy case that has reached the United States Court of Appeals for the First Circuit. The issue is how the court should interpret and apply the “undue hardship” requirement for discharging educational debt. The statute doesn’t define the phrase and the federal appeals courts have adopted differing standards. All are difficult for debtors.

Enter the Department of Education

In this and other cases, the government’s primary educational debt servicing contractor, Educational Credit Management Corporation (ECMC), has urged courts to apply the toughest possible rule in deciding whether to grant relief to student loan debtors. At the request of the court hearing Murphy’s appeal, the U.S. Department of Education intervened on October 12.

Murphy calculates that if he found a job paying $50,000 a year and worked until he was 77, the student debt he owes would actually increase — to $500,000. His government doesn’t care. The Department of Education spares no adjective in describing the parade of horribles that would follow upon discharging Murphy’s debt.

For example, allowing him off the hook would “impair the fiscal stability of the loan program…” Repaying the loans may require “that he remain employed at or past normal retirement age,” it argues, even though “his income may top out or decrease” and “further employment opportunities may be limited.” The government regards retirement account contributions, fast-food dinners, cell-phone plans, and nutritional supplements as “luxury expenses.”

Absent showing a “certainty of hopelessness,” the government urges, no debtor should get relief from student loans: “[A] debtor must specifically prove a total incapacity in the future to repay the debt for reasons not within his control.”

Welcome to America’s 21st century version of debtors’ prison.

Confused Priorities

What matters most, the government urges, is “protecting the solvency of the student loan program.” But if solvency is a function of how much the United States receives in return for the money it lends, aren’t income-based repayment and loan forgiveness greater long-run threats to the solvency of the program? Oh, I forgot. The long run is always someone else’s problem.

Even more to the point, debtors in Robert Murphy’s position will never be able to repay their loans anyway. Simply put, the government’s failure to write off Murphy’s bad loan — and others like his — just means that its accounting methods haven’t caught up with reality.

When that reality hits, some may look back and ask why today’s policymakers ignored the bad behavior of marginal schools at the front end. In fact, government policies encourage misbehavior. As the President delivers his “get more education” message to students and parents, marginal schools beat the bushes for enrollees who represent revenue streams of federally insured loans. Why isn’t the ability of those students to repay their loans the focus of efforts aimed at preserving the student loan program’s solvency?

Ask the Right Questions

Currently, schools have no financial stake in student outcomes and marginal schools have exploited the resulting market dysfunction. Did students complete degrees? Did graduates find decent jobs?

Anyone looking for a true picture of the “solvency of the student loan program” might consider those questions, along with this one: How many students are repaying their loans? Last month, the Obama administration released a new report providing some troubling answers to that one.

Three years after their loans had become due, more than one-third of all student loan borrowers had made no progress toward repaying their educational debt. None. And the bar for “progress” was as low as it could be: one dollar.

Profiting from Market Failure

At 347 colleges, more than half of borrowers had failed to pay down a single dollar of their principal loan balance after seven years. Of that group, almost 300 are for-profit schools. Through the federally insured student loan program that relieves them of any debt collection responsibility, some for-profit schools and their investors are making a lot of money off the rest of us.

Many of those same investors decry government intervention in anything. Like Mitt Romney — a vocal supporter of for-profit colleges during his 2012 campaign — they embrace competitive markets as the only proper way to produce correct decisions. But they’re delighted to exploit a student loan market that doesn’t work at all. Romney’s running mate, Paul Ryan, divided the country into “takers” and “makers.” A lot of those for-profit college investors feeding off government student loan largesse sure look like “takers” — albeit in nicely tailored clothing.

So much for the probative value of divisive partisan labels.

LEARNING FOUR LESSONS FROM FAILURE

On October 2, 2015, Northwestern University ended a six-year experiment — the two-year accelerated JD. Dean Daniel B. Rodriguez deserves credit for pulling the plug. Now comes the important part: learning the right lessons from failure.

Lesson #1: Beware of Public Relations Hype

With much fanfare in June 2008, Dean Rodriguez’s predecessor, David Van Zandt, released a document outlining his new long-range strategic vision: “Plan 2008: Preparing Great Leaders for a Changing World.” The centerpiece was an accelerated JD program whereby the school jammed three academic years of ABA-required curriculum into two calendar years.

Van Zandt worked tirelessly to sell the program. From local talk show appearances to speeches at law schools, he never let up. But one of his stated goals should have generated concern. Even as the market for lawyers plummeted, his keynote address at a February 2009 Southwestern Law Review symposium explained that he hoped to “tap a different population of students to expand our pool of potential applicants.” In particular, he wanted to “reach those who were planning on going to MBA programs.”

In other words, he offered a prescription for what the profession needed least: more law students who had been on their way to business school until the prospect of a Northwestern accelerated JD appeared.

Lesson #2: Dig Deeper

A program that “accelerated” a student through law school in two years instead of three sounded like an unambiguously good idea. But beyond the superficial appeal were troubling realities.

Students in the program started with a Web-based course even before they arrived on campus. In May, they began full-time study. In the fall, they joined first-year students in the traditional three-year program while also adding an extra course. For anyone on the two-year accelerated path, an already precious commodity — time during the first year to integrate experiences while contemplating one’s place in a diverse, challenging and changing profession — disappeared.

Even worse, Northwestern missed an opportunity. Total tuition for the two-year program was the same as that for the three-year degree. Accelerated students just paid more in tuition each semester. According to Van Zandt, students still benefitted financially because they could enter the job market sooner. Never mind how dismal that market remained.

Lesson #3: Ignore the Spin 

Many deans claim to be remaking their schools in ways that respond to the current crisis in legal education. For the sake of the profession, let’s hope that’s true. (But see Lesson #1 above.)

Even so, cramming three years of legal education into two was never particularly creative or innovative. For example, Southwestern Law School started its accelerated JD program in 1974. (Southwestern also has dismal full-time long-term JD-required employment rates for recent graduates.)

After leaving the deanship to become president of the New School in 2010, Van Zandt continued his defense of the Northwestern AJD in an online July 25, 2011 New York Times op-ed. In the process, he earned one of my “Unfortunate Comment Awards.” That was four years ago.

Lesson #4: Beware of Motivated Reasoning

Van Zandt spoke often about the importance of markets and market-based decisions. But it took six years (and a new dean) before Northwestern responded to what the markets were telling it about the AJD. As Dean Rodriguez announced on October 2, the program failed to achieve its aspirational target of 40 AJD students per year (Van Zandt had hoped eventually to enroll 65 AJD students annually):

“[D]ealing with this smaller program,” he said, “has impacted our ability to serve the objectives and needs of all our law students.”

As schools pursue various efforts to reduce the cost and improve the content of legal education, perhaps they’ll learn one more lesson: Don’t wait years to admit a mistake.

MORE ON MY NY TIMES OP-ED

Professor Milan Markovic (Texas A&M) and Dean Jeremy Paul (Northeastern) responded to my recent post analyzing their letters to the New York Times about my Times op-ed.

On September 17, The American Lawyer published Dean Paul’s response (and my reply) here: http://www.americanlawyer.com/home/id=1202737553089/Is-Legal-Education-in-Crisis-A-Dean-Responds?mcode=1202617075486&curindex=0

On September 10, the Tax Prof Blog summary of my earlier post prompted Professor Markovic’s response (and my reply), here: http://taxprof.typepad.com/taxprof_blog/2015/09/more-on-the-ny-times-op-ed-too-many-law-students-too-few-legal-jobs.html

The Tax Prof Blog entry also included a comment from someone identifying himself as Gary Lucas. A person with that name also teaches at Texas A&M. I replied to that one, too.

At this point, I’m content to invoke the legal principle of res ipsa loquitur (“the thing speaks for itself”) and let readers decide this one.

 

ANOTHER TRAGIC HAZING

In December 2013, Baruch College freshman Chun Hsien Deng accompanied his new fraternity brothers to the Poconos. He didn’t return.

At first, his death was a regional story in the New York Timeswhich reported on page A29 that law enforcement officials in Pennsylvania were investigating the incident. Deng had been involved in an outdoor game called “The Glass Ceiling” — a metaphor that his Asian-American fraternity used to depict the difficulty of breaking into the American mainstream.

“It involves blindfolding a person and placing a heavy item on his back,” the Times reported in December 2013. “He has to navigate to someone who is calling for him, and as he makes his way, others try to tackle him.”

Now that the investigation has led to murder charges, the story is front page news. I’m not going to repeat the gruesome details. But buried deep in the Times’ latest story is this item that caught my eye: As Deng was in obvious physical distress, his fellow students “reached out to the fraternity’s national president at the time.”

His name is Andy Meng.

Relative Blame

The prosecutor’s charges distinguish defendants based on levels of culpability for Deng’s death. Five people will face third-degree murder charges. How about Andy Meng, the supposed adult whom the students consulted for advice?

Apparently, the charges against Meng involve “hazing and hindering apprehension.” His lawyer proclaimed that Mr. Meng “was not in Pennsylvania at the time of [Deng’s] death, had no role in his medical treatment and did not commit any wrongdoing.”

As you’ll see, silence would have been a better approach.

Role Model Extraordinaire

What did Andy Meng allegedly do?

According to the Times article about the grand jury report, Meng “told [the students] by phone to hide everything showing the group’s symbol.” Evidently, one member told police, established protocol was to “first put away fraternity letters, paddles, banners, etc.”

Maybe the evidence at trial will show that Meng’s first and foremost concern was not to protect the fraternity. Perhaps he urged the students seeking his advice to do the right thing and do it quickly — seek professional medical attention; call an ambulance; get help ASAP. If so, his lawyer hasn’t included anything to that effect in his statement.

More importantly, if Deng gave that advice, the students didn’t follow it. Instead, they wasted valuable time. They fretted about the cost of an ambulance. One member talked to a friend whose grandfather had fallen and died recently. None of them did the obvious — call 9-1-1.

An hour passed before three fraternity members took Deng to the hospital. By then, he was “mumbling, shivering and snoring.” It was too late to save him.

Lessons Never Learned

All of this has now devolved into the ultimate lose-lose-lose situation. Deng died. The cover-up effort to protect the fraternity failed because the police found paddles, signs, and notebooks bearing the fraternity’s logo. And now 37 people face criminal charges, including five young men for third-degree murder.

Andy Meng isn’t among those charged with murder. His alleged response to the students’ plea for guidance produced charges of “hazing and hindering apprehension.”

Meng’s alleged behavior suggests that he wasn’t around to learn the lesson from President Richard Nixon’s fate: If the crime doesn’t get you, the cover-up will. It’s so much easier to the right thing at the outset, but that requires knowing what the right thing is.

For Andy Meng, the correct response to a frantic call from young fraternity brothers in the Poconos on that December night should have been clear — even for someone who “was not in Pennsylvania at the time.”

 

 

 

NY TIMES OP-ED FOLLOW UP

My August 25 Op-Ed in The New York Times went viral. It became number one on the Times’ “most-emailed” list. It rose to the top-five in “most viewed,” “most shared on Facebook,” and “most tweeted.” Within hours of publication, it generated more than 600 comments.

It also produced letters to the editor, three of which the Times chose to publish on September 2. Two are from law professors whose responses reveal why the current crisis in legal education is so intractable.

Letter #1

Milan Markovic is an associate professor of law at Texas A&M. He argues that current law students will soon have better job prospects because there are fewer of them:

“Not all of these students will graduate and pass the bar, but those who do will face much less competition for legal jobs even if the economy fails to improve.”

Professor Markovic perpetuates the sloppy analysis infecting virtually all academic discussion about law student debt and the crisis in legal education. In particular, his macroeconomic prediction about the fate of future graduates ignores a crucial fact: job opportunities vary dramatically according to school.

A 2018 graduate from Professor Markovic’s school — Texas A&M — will not have employment prospects comparable to students at top schools that regularly place more than 90 percent of their new graduates in full-time long-term bar passage-required positions. In that key category, Texas A&M’s employment rate for 2014 graduates was 52 percent.

Likewise, only three Texas A&M graduates in the class of 2014 began their careers at firms where attorney compensation is highest (that is, firms with more than 100 lawyers). Like the JD-required employment rate, big firm placement is another indicia of a school’s relevant market. That’s not a value judgment; it’s just true.

In fact, Professor Markovic is a living example of the distinct legal education submarkets. In 2006, he graduated from the Georgetown Law Center, which placed 281 of its class of 2014 graduates — more than Texas A&M’s entire 232-member class — in firms of more than 100 lawyers. Before Professor Markovic began teaching in 2010, he spent four years as an associate in two big law firms — Sidley Austin and Baker & Hostetler.

Let’s Run the Experiment

Professor Markovic objects to introducing law school accountability for employment outcomes. He argues that any reduction in federal funding “will not lead to less demand for law school or other graduate programs. Rather, students will turn to the private loan market, and private lenders will be only too happy to lend because graduate school loans — and particularly those allocated to law students and medical students — have historically been very profitable.”

Let’s run that experiment. But first, let’s create something resembling a functional market for legal education. Start by adopting my proposed sliding scale of federal loan guarantees based on each individual law school’s employment outcomes. In such a system, a school’s poor job prospects would mean a reduced loan guarantee amount for its students. Then implement one more change to the present regime: make law school debt dischargeable in bankruptcy.

Will private lenders be “only too happy” to make six-figure loans to students at any marginal law school, including places where fewer than half of graduates are finding jobs requiring a JD? Let a real market decide.

Letter #2

Professor Jeremy Paul is dean at Northeastern University School of Law. His letter to the Times editor notes correctly that many Americans cannot afford legal services and analogizes the situation to doctors.

“No one would say we had an oversupply of medical students if millions of Americans resorted to self-medication and treatment because they could not pay for a doctor,” he writes.

One commenter to Tax Prof Blog countered Professor Paul’s analogy with this one: “How can anyone say there are too many restaurants when there are still so many starving and malnourished people in the world? That’s how 12-year-olds think, not lawyers, which I’ve heard is law school’s reason for being.”

For the indigent needing legal services, there are not enough lawyers. But that’s because our society isn’t willing to pay for them. Based on the funding trends for the Legal Services Corporation and the federal government’s current obsession with austerity, the future in that respect is bleak. Compared to 1985, Congressional appropriations to the LSC are down 50 percent (in constant 2013 dollars).

Other than complain about the government’s failure to make the universal right to counsel in civil cases a priority, I can’t do anything about that problem. Neither can Professor Paul. But politicians’ reluctance to fund legal aid positions does not justify burdening today’s graduates with enormous educational debt for a JD that won’t lead to a paid position requiring that degree.

Experiments with Other People’s Student Loan Money

Professor Paul also observes that some law schools and bar associations are launching “incubator programs aimed at helping law graduates to serve clients of modest means.” That’s true. I was on the committee that developed such a program with the Chicago Bar Foundation. Will they result in more solo practitioners who, over the long-term, can squeeze out a living and a satisfying legal career? No one knows. But the participants in those programs are a drop in the bucket compared to the vast numbers of law graduates annually who can’t find JD-required jobs.

Like Professor Markovic, Dean Paul knows there’s no unitary legal education market. He graduated from Harvard Law School in 1981. For Northeastern Law School — where he has been dean since 2012 — the full-time long-term bar passage-required employment rate for the class of 2014 was 53 percent.

Completing the Circle

Professor Paul’s final observation is that “studies show that a law degree remains a sound investment…”

Which takes us back to the pervasive and persistent academic canard that aggregate data matter to individual decisions about attending particular schools. What study tracks outcomes by individual law school to “show that a law degree remains a sound investment” for graduates of every school?

No such study exists. But for those determined to resist necessary change in the broken system for funding legal education, magical thinking combines with confirmation bias to trump reality every time. Federal student loan subsidies unrelated to student outcomes encourage otherwise thoughtful legal academics to become unabashed salespeople.

Think of it as your tax dollar at work.

Would Professor Markovic and Dean Paul — among many others who similarly ignore the crisis in legal education — counsel their own children to attend a marginal law school that, upon graduation, assured them of six-figure debt but offered only dismal JD-required employment prospects? It probably depends on how they feel about their kids.

LABOR DAY

Labor Day marks the end of summer. It’s also a time to reflect on our relationship with work. Lawyers should do that more often. In that regard, some big law leaders will find false comfort in their 2015 Am Law Midlevel Associates Survey ranking.

In a recent New York Times Op-Ed, “Rethinking Work,” Swarthmore College Professor Barry Schwartz suggests that the long-held belief that people “work to live” dates to Adam Smith’s 1776 statement in “Wealth of Nations”: “It is in the interest of every man to live as much at his ease as he can.”

Schwartz notes that Smith’s idea helped to shape the scientific management movement that created systems to minimize the need for skill and judgment. As a result, workers found their jobs less meaningful. Over generations, Smith’s words became a self-fulfilling prophecy as worker disengagement became pervasive.

“Rather than exploiting a fact about human nature,” Schwartz writes, “[Smith and his descendants] were creating a fact about human nature.”

The result has been a world in which managers structure tasks so that most workers will never satisfy aspirations essential for job satisfaction. Widespread workplace disengagement — afflicting more than two-thirds of all workers, according to the most recent Gallup poll — has become an accepted fact of life.

Lawyers Take Note

Schwartz’s observations start with those performing menial tasks: “Maybe you’re a call center employee who wants to help customers solve their problems — but you find out that all that matters is how quickly you terminate each call.”

“Or you’re a teacher who wants to educate kids — but you discover that only their test scores matter,” he continues.

And then he takes us to the legal profession: “Or you’re a corporate lawyer who wants to serve his client with care and professionalism — but you learn that racking up billable hours is all that really counts.”

More than Money

Many Americans — especially lawyers who make decent incomes — have the luxury of thinking beyond how they’ll pay for their next meal. But relative affluence is no excuse to avoid the implications of short-term thinking that has taken the legal profession and other noble pursuits to an unfortunate place.

You might think that short-term profit-maximizing managers would heed the studies demonstrating that worker disengagement has a financial cost. But in most big law firms, that hasn’t happened. There’s a reason: Those at the top of the pyramid make a lot of money on eat-what-you-kill business models. They can’t see beyond their own short-term self-interest — which takes them only to their retirement age.

Maintaining their wealth has also been a straightforward proposition: Pull up the ladder while increasing the income gap within equity partnerships. The doubling of big firm leverage ratios since 1985 means that it’s now twice as difficult to become an equity partner in an Am Law 50 firm. Top-to-bottom compensation spreads within most equity partnerships have exploded from three- or four-to-one in 1990 to more than 10-to-1 today. At some firms, it’s 20-to-1.

What Problem?

Then again, maybe things aren’t so bad after all. The most recent Am Law Survey of mid-level associates reports that overall satisfaction among third- through fifth-level associates is its highest in a decade. But here’s the underlying and problematic truth: Big law associates have adjusted to the new normal.

Thirty-one percent of Am Law Survey respondents said they didn’t know what they’d be doing in five years. Only 14 percent expected to make non-equity partner by then. They see the future and have reconciled themselves to the harsh reality that their firms have no place for them in it.

No one feels sorry for big firm associates earning six-figure incomes, but perhaps someone should. As Professor Schwartz observes, work is about much more than the money. In that respect, he offers suggestions that few large firms will adopt: “giving employees more of a say in how they do their jobs… making sure we offer them opportunities to learn and grow… encouraging them to suggest improvements to the work process and listening to what they say.”

I’ll add one specially applicable to big law firms: Provide meaningful career paths that reward talent and don’t make advancement dependent upon the application of arbitrary short-term metrics, such as leverage ratios, billable hours, and client billings.

What’s the Mission?

Schwartz’s suggestions are a sharp contrast to the way most big law firm partners operate. They exclude their young attorneys from firm decision-making processes (other than recruiting new blood to the ranks of those who will leave within five years of their arrival). Compensation structures reward partners who hoard clients rather than mentor and develop talent for the eventual transition of firm business to the next generation. The behavior of partners and the processes of the firm discourage dissent.

“But most important,” Schwartz concludes, “we need to emphasize the ways in which an employee’s work makes other people’s lives at least a little bit better.”

Compare that to the dominant message that most big law firm leaders convey to their associates and fellow partners: We need to emphasize the ways in which an attorney’s work makes current equity partners wealthier.

Law firm leaders can develop solutions, or they can perpetuate the problem. It all starts from the top.

THE PERVASIVE AMAZON JUNGLE

Amazon’s founder and CEO, Jeff Bezos, hates the recent New York Times article about his company. He says it “doesn’t describe the Amazon I know.” Rather, it depicts “a soulless, dystopian workplace where no fun is had and no laughter heard.” He doesn’t think any company adopting such an approach could survive, much less thrive. Anyone working in such a company, he continues, “would be crazy to stay” and he counts himself among those likely departures.

The day after the Times’ article appeared, the front page of the paper carried a seemingly unrelated article, “Work Policies May Be Kinder, But Brutal Competition Isn’t.” It’s not about Amazon; it’s about the top ranks of the legal profession and the corporate world. Both are places where the Times’ version of Amazon’s culture is pervasive — and where such institutions survive and thrive.

The articles have two unstated but common themes: the impact of short-termism on working environments, and how a leader’s view of his company’s culture can diverge from the experience of those outside the leadership circle.

Short-termism: “Rank and Yank”

Bezos is hard-driving and demanding. According to the Times, his 1997 letter to shareholders boasted, “You can work long, hard or smart, but at Amazon.com you can’t choose two out of three.”

The Times reports that Amazon weeds out employees on an annual basis: “[T]eam members are ranked, and those at the bottom eliminated every year.” Jack Welch pioneered such a “rank and yank” system at General Electric long ago and many companies followed his lead. Likewise, big law firms built associate attrition into their business models.

Theoretically, a “rank and yank” system produces a higher quality workforce. But in recent years, a new generation of business thinkers has challenged that premise. Even GE has abandoned Welch’s brainchild.

As currently applied, the system makes no sense to Stanford Graduate School of Business professor Bob Sutton, who observed, “When you look at the evidence about stack ranking…. The kind of stuff that they were doing [at GE], which was essentially creating a bigger distribution between the haves and the have nots in their workforce, then firing 10% of them, it just amazed me.”

If Amazon uses that system, which focuses on annual short-term evaluations, it’s behind the times, not ahead of the curve.

Haves and Have Nots

Professor Sutton’s comment about creating a bigger gap between the haves and the have nots describes pervasive law firm trends as well. The trend could also explain why Bezos and the Times may both be correct in their contradictory assessments of Amazon’s culture. That’s because any negative cultural consequences of Bezos’ management style probably don’t seem real to him. Bezos is at the top; the view from below is a lot different.

This phenomenon of dramatically divergent perspectives certainly applies to most big law firms. As firms moved from lock-step to eat-what-you-kill partner compensation systems, the gap between those at the top and everyone else exploded. Often, the result has been a small group — a partnership within the partnership — that actually controls the institution.

Those leaders have figured out an easy way to maximize short-term partner profits for themselves: make the road to equity partner twice as difficult than it was for them. As big firm attorney-partner leverage ratios have doubled since 1985, today’s managers are pulling up the ladder on the next generation. It’s no surprise that those leaders view their firms favorably.

Their associates have a decidedly different impression of the work environment. Regular attrition began as a method of quality control. At many firms, it has morphed into something insidious. Leadership’s prime directive now is preserving partner profits, not securing the long-run health of the institution. Short-term leverage calculations — not the quality of a young attorney’s lawyering — govern the determination of whether there is “room” for potential new entrants.

About the Long-Run

Such short-term thinking weakens the institutions that pursue it. As Professor Sutton observes: “We looked at every peer reviewed study we could find, and in every one when there was a bigger difference between the pay at of the people at the bottom and the top there was worse performance.”

That’s understandable. After all, workers behave according to signals that leadership sends down the food chain. Dissent is not a cherished value. Resulting self-censorship means the king and the members of his court hear only what they want to hear. People inside the organization who want to advance become cheerleaders who suppress bad news. Being a team player is the ultimate compliment and the likeliest path to promotion.

One More Thing

Bezos’ letter to his employees about the Times article encourages anyone who knows of any stories “like those reported…to escalate to HR.” He says that he doesn’t recognize the Amazon in the article and “very much hopes you don’t, either.”

One former employee frames Bezos’ unstated conundrum correctly: “How do you possibly convey to your manager the intolerable nature of your working conditions when your manager is the one telling you, point blank, that the impossible hours are simply what’s expected?”

Note to Jeff B: Escalating to HR won’t eliminate embedded cultural attitudes.

Then again, maybe I’m wrong about all of this. On the same day the Times published its piece on the increasingly harsh law firm business model, the Wall Street Journal ran Harvard Law School Professor Mark J. Roe’s op-ed: “The Imaginary Problem of Corporate Short-Termism.”

It’s all imaginary. That should come as a relief to those working inside law firms and businesses that focus myopically on near-term results without regard to the toll it is taking on the young people who comprise our collective future.

THE ABA AT WORK — NOT!

Recently, I suggested that the ABA House of Delegates reject the June 17 Report of the Task Force on the Financing of Legal Education. The Task Force was supposed to tackle the crisis of massive student loan debt that is subsidizing marginal law schools. Its Report not only fails to fulfill that mission, but also ignores the central problem of a dysfunctional legal education market. As a consequence, it offers superficial recommendations that will accomplish little.

Doomed from the Start; Flawed at the Finish

As I observed when the ABA announced the creation of the Task Force in May 2014, no one should have reasonably expected its chairman, Dennis Archer — who is also chairman of the national policy board for Infilaw — to point his group in the direction of true market-based reform that would jeopardize revenues at marginal law schools. After all, Infilaw is a private equity-owned consortium of three for-profit law schools with dismal full-time long-term JD-required employment outcomes: Arizona Summit, Charlotte, and Florida Coastal.

On August 4, the ABA House of Delegates gave the Task Force Report a rubber stamp of approval by adopting five “Resolutions.” Only two are even operative; the remaining three now go the Council of the Section of Legal Education and Admissions to the Bar. Together, they constitute an abdication of the ABA’s role in an important national discussion.

The Details

Let’s start with the two resolutions that don’t require additional action by the Council of the Section of Legal Education and Admissions to the Bar. We’ll call them “urging” and “encouraging,” which means they are essentially toothless.

One asks the ABA to “urge all participants in the student loan business and process, including law schools, to develop and publish easily understood versions of the terms of various loan and repayment programs.”

The other asks the ABA to “encourage law schools to be innovative in developing ways to balance responsible curricula, cost effectiveness, and new revenue streams.”

On to Another Committee…

The remaining three resolutions “encourage” another ABA Committee to adopt equally ineffective measures: “enhanced financial counseling for students (prospective and current) on student loans and repayment programs,” “return to collecting expenditure, revenue, and financial aid data annually for each law school,” and “make public the information on legal education it currently maintains and information it collects going forward.”

It took the Task Force more than a year to come up with its recommendations. Expect another year or more to pass before the Council of the Section of Legal Education and Admissions to the Bar acts on the Task Force’s “encouragement.” If the Council takes up these issues, expect law schools to fight major battles resisting disclosure of their financial affairs. But it doesn’t really matter what the Council does or how long it takes because none of the recommendations will make a difference to the core problem: lack of individual law school-specific financial accountability for graduates’ poor employment outcomes.

One More Thing

On July 29, NPR’s Marketplace ran a brief report on the larger crisis in legal education. In his NPR interview, Dennis Archer defended his Task Force’s Report, saying, “People make choices about their lives. And they make choices every day.”

In the current dysfunctional financing regime that his Task Force refused to confront, law schools make choices, too. However, once students pay their tuition bills, law schools have no financial accountability for what happens next. Stated differently, the weakest law schools have the freedom to make the bad choice of maximizing enrollments, tuition revenues, and student debt, even if most of their graduates have dismal JD-required job prospects upon graduation.

The ABA makes choices, too. In the ongoing debate concerning one of the nation’s most pressing issues, it has chosen to remain silent. The next generation of potential ABA members is taking notice.

NPR’S MARKETPLACE REPORT

I was interviewed for this brief NPR Marketplace Report airing Wednesday, July 29, 2015: “Should Law Schools Pay If Students Don’t Get Jobs?

Listen all the way to the end, when Dennis Archer, chairman of the ABA’s Task Force on the Financing of Legal Education, offers his defense of the Task Force’s non-response to the current crisis resulting from a dysfunctional system.

ABOUT SANDRA BLAND’S DEADLY ENCOUNTER

“She had been pulled over for failing to signal a lane change.” — The New York Times, July 16, 2015

That’s the most important line in the Sandra Bland story. And it has become lost in the controversy over whether her July 13 death in a Waller County Texas jail cell was suicide. Attention now focuses on her mental state and the marks on her body. But everyone should be taking a closer look at officer Brian T. Encinia and why he stopped Bland in the first place.

Context and Cast of Characters

Bland was black; Encinia is white; Waller County has a notorious history of racism. Encinia was patrolling what The New York Times called “a sleepy state road” that leads from the highway to the entrance of Prairie View A&M University, where more than 80 percent of students are black. In 2004, the district attorney threatened to prosecute Prairie View students from other counties who tried to vote in Waller County. Students and the state’s Republican attorney general thwarted his illegal voter suppression effort.

Bland, a suburban Chicago native, graduated from Prairie View A&M in 2008 and returned to Chicago. On July 10, she accepted a job working with students at her alma mater. Youthful optimism notwithstanding, Bland must have known that she was re-entering hostile territory.

Encinia is 30 years old and has been a Texas state trooper for 19 months. According to a now-deleted Linked-In profile, he took a circuitous route to law enforcement. In 2008, he graduated from Texas A&M University with a degree in agricultural leadership and development. Then he joined Blue Bell Creameries where he left his position as an ingredient processing supervisor in 2014. (Blue Bell is now infamous for the nationwide listeria-related recall of its ice cream.) He also worked at the Brenham (TX) Fire Department.

Disturbing Details

A detailed examination of the complete 47-minute dash-cam video from Encinia’s squad car tells far more than the short excerpts airing on television. For starters, Bland’s car had Illinois license plates. To a white local cop in many places throughout America, she was a black out-of-towner worthy of presumptive suspicion.

Also noteworthy is the principal feature of the four-lane road on which Bland drove: it’s desolate. What constructive police work could possibly occupy Encinia’s time there? During the first 15 minutes of the video, only 36 vehicles passed in her direction. Two of them made illegal u-turns — without signaling — and continued on their way.

Through the Looking Glass

After Encinia pulled Bland over, he walked to the passenger side of her car and their interaction began:

Encinia: Hello ma’am. We’re the Texas Highway Patrol and the reason for your stop is because you failed to signal the lane change. Do you have your driver’s license and registration with you? What’s wrong? How long have you been in Texas?

Timeout #1

“How long have you been in Texas?” Encinia’s early question supports my “black driver, out-of-state plate, pull-‘er-over” hypothesis.

Back Through the Looking Glass

Bland: Got here just today.

Encinia: OK. Do you have a driver’s license? (Pause) OK, where you headed to now? Give me a few minutes.

Encinia walked back to his squad car. After making Bland wait a full five minutes, he returned to the driver’s side of her car and said, “OK, ma’am. You OK?”

Bland: I’m waiting on you. This is your job. I’m waiting on you. When’re you going to let me go?

Encinia: I don’t know, you seem very irritated.

Bland: I am. I really am. I feel like it’s crap what I’m getting a ticket for. I was getting out of your way. You were speeding up, tailing me, so I move over and you stop me. So yeah, I am a little irritated, but that doesn’t stop you from giving me a ticket, so [inaudible] ticket.

Timeout #2

According to Bland, she was changing lanes to get out of the way of Encinia’s speeding squad car as it approached her car. For that, Encinia pulls her over? Who signals while changing lanes to clear the path for a police car, fire truck or emergency vehicle approaching quickly from behind? Who signals when making a lane change when there are no other cars in sight?

Back Through the Looking Glass 

Encinia: Are you done?

Bland: You asked me what was wrong, now I told you.

Encinia: OK.

Bland: So now I’m done, yeah.

Encinia: You mind putting out your cigarette, please? If you don’t mind?

Bland: I’m in my car, why do I have to put out my cigarette?

Encinia: Well you can step on out now.

Timeout #3

It’s lawful to smoke in your own car. In fact, I assume Texans’ zeal for individual liberty makes it especially permissible in that state to smoke in your own car — perhaps while cleaning your gun.

Encinia didn’t answer Bland’s question because he couldn’t. There was no legal basis for his request, unless he thought she might use the cigarette as a weapon against him.

Back Through the Looking Glass

Bland: I don’t have to step out of my car.

Encinia: Step out of the car.

Bland: Why am I …

Encinia: Step out of the car!

Bland: No, you don’t have the right. No, you don’t have the right.

Encinia: Step out of the car.

Bland: You do not have the right. You do not have the right to do this.

Encinia: I do have the right, now step out or I will remove you.

Timeout #4

Encinia became defensive about Bland’s denial of a request for which he had no lawful justification (“Would you mind putting out your cigarette, please? If you don’t mind?”). So he bullied his way into an escalation of the conflict with a new demand (“Step out of the car”). With stunning speed, he lost his temper and started yelling.

The current focus on Bland’s mental history is misplaced; someone should investigate signs of anger, aggressiveness, racism, and generally inappropriate behavior in Encinia’s past. Even more pointedly, it’s worth scrutinizing the process that qualifies someone to become a “peace” officer for the Texas Highway Patrol.

One of my friends specializes in criminal law. Here’s what he tells black clients and friends: if you’re subject to a routine police stop in a white neighborhood, remain in your car so the policeman doesn’t perceive your act of getting out as aggressive. Perhaps Bland had received similar legal advice. Still, once policeman asks you to get out of your car, it’s wise to obey.

Back Through the Looking Glass

Bland: I refuse to talk to you other than to identify myself. [crosstalk] I am getting removed for a failure to signal?

Encinia: Step out or I will remove you. I’m giving you a lawful order. Get out of the car now or I’m going to remove you.

Bland: And I’m calling my lawyer.

Encinia: I’m going to yank you out of here. (Reaches inside the car.)

Bland: OK, you’re going to yank me out of my car? OK, alright.

Encinia (calling in backup): 2547.

Bland: Let’s do this.

Encinia: Yeah, we’re going to. (Grabs for Bland.)

Bland: Don’t touch me!

Encinia: Get out of the car!

Bland: Don’t touch me. Don’t touch me! I’m not under arrest — you don’t have the right to take me out of the car.

Encinia: You are under arrest!

Bland: I’m under arrest? For what? For what? For what?

Timeout #5

Encinia didn’t have an answer to her question. As described below, he and a colleague eventually developed one after the incident was over. But Bland knew her constitutional rights, even though Encinia never explained them to her.

Back Through the Looking Glass

A few minutes later, Bland was on the ground and in handcuffs as their exchange continued:

Encinia: You were getting a warning, until now you’re going to jail.

Bland: I’m getting a — for what? For what?

Encinia: You can come read.

Bland: I’m getting a warning for what? For what!?

Encinia then showed her the ticket.

Encinia: Come read right over here. This right here says ‘a warning.’ You started creating the problems.

Timeout #6

After Encinia extracted Bland forcibly from her car without telling her why, wrestled her to the ground, and placed her in handcuffs, he finally revealed that she was just going to get a warning for her supposed failure to signal a lane change. That’s astonishing. If Bland had lived to file a lawsuit against Encinia, she should have won.

Getting His Story Straight

After the incident was over, Encinia spoke with someone on his radio (presumably a supervisor) as they developed an underlying theory to justify his behavior:

“I tried to de-escalate her. It wasn’t getting anywhere, at all. I mean I tried to put the Taser away. I tried talking to her and calming her down, and that was not working….

“Evading arrest or detention. (Inaudible). Resisting arrest … She was detained. That’s the key and that’s why I am calling and asking because she was detained. That’s when I was walking her over to the car, just to calm her down and just to (say) stop.

“That’s when she started kicking. I don’t know if it would be resist or if it would be assault. I kinda lean toward assault versus resist because I mean technically, she’s under arrest when a traffic stop is initiated, as a lawful stop. You’re not free to go. I didn’t say you’re under arrest, I never said, you know, stop, hands up.

“Correct, that did not occur. There was just the assault part…

“Like I said, with something like this, I just call you immediately, after I get to a safe stopping point.

“No weapons, she’s in handcuffs. You know, I took the lesser of the uhh … I only took enough force as I — seemed necessary. I even de-escalated once we were on the pavement, you know on the sidewalk. So I allowed time, I’m not saying I just threw her to the ground. I allowed time to de-escalate and so forth. It just kept getting. (Laughing) Right, I’m just making that clear.”

Sickening and Sad

All of this suggests obvious questions that no one is asking:

— When did Bland fail to signal the lane change that caused Encinia to pull her over?

— Why did Encinia ask Bland to get out of her car? Because she kept smoking her cigarette after he asked her to stop?

— Shortly before Encinia first told Bland that she was under arrest, he grabbed her. But she hadn’t touched him. What was the charge for which he first said he was arresting her?

— What justified Encinia in forcibly removing Bland from her car? Her refusal to obey his dubious order that she get out on her own after refusing to extinguish her cigarette?

— What made Encinia laugh while he was on the car radio as a fellow officer on the scene told Bland she was under arrest for assault on a public servant — the only charge ever lodged against her?

Let’s hope Encinia is under oath when he provides the answers. The testimony of the person who caused him to laugh over the radio should be interesting, too.

Three days later, Sandra Bland was dead. No one is laughing now.

DEAR ABA…

Dear ABA (especially members of the House of Delegates to the upcoming annual meeting in Chicago):

For years, America’s dysfunctional system of financing legal education has produced too many lawyers for too few jobs — and too many law graduates with too much educational debt. A year ago, the ABA created yet another Task Force to consider the problem. The June 17, 2015 Final Report on the Financing of Legal Education embodies the failure of that Task Force’s mission. It now goes to the House of Delegates for approval.

If the Delegates are interested in rehabilitating the ABA’s credibility and restoring public confidence in the profession on an issue of critical importance to the country, they could take this simple step: reject the Task Force Report. That’s right. Rather than giving the typical rubber stamp of approval amid flowery speeches thanking Task Force members for their time and effort in generating a hollow ABA statement summarizing the obvious, the House of Delegates could just say no.

Round One

Some observers had hoped that the ABA’s previous Task Force on the Future of Legal Education might tackle the daunting issues responsible for our dysfunctional legal education market. After all, the ABA’s leaders promised that the 2012 Task Force would make “recommendations to the American Bar Association on how law schools, the ABA, and other groups and organizations can take concrete steps to address issues concerning the economics of legal education and its delivery.”

To its credit, the 2012 Task Force put its toe in those waters, observing that the “system of lending distances law schools from market considerations and it supports pricing practices that do not well serve either the public or private value in legal education.”

Let’s state the problem more bluntly: Marginal law schools are relying on exploding student debt to produce revenue streams that keep them alive. They get away with it because federal student loans come without school-specific accountability for graduates’ dismal employment outcomes. Schools have no financial skin in the game.

But the 2012 Task Force didn’t go beyond identifying the problem because, it said, “The time and resources available to the Task Force have made it impractical to develop a structure of equitable and effective solutions.”

Round Two

So in May 2014, then-ABA president James R. Silkenat announced the creation of a new Task Force — one specifically devoted to the Financing of Legal Education. It was supposed to pick up where the 2012 Task Force had stalled. It was going to “conduct a comprehensive study of the complex economic and political issues involved and produce sound recommendations to inform policymakers throughout the legal community.”

The 2014-2015 Task Force Report recites that 25 percent of law schools obtain at least 88 percent of their total revenues from tuition and that the average for all law school is 69 percent. It also reports that higher tuition has produced more student debt, even as job prospects for graduates of marginal schools have languished.

Since 2006 alone, average student debt has increased by 25 percent (private schools) and 34 percent (public schools) in inflation-adjusted dollars. Average student debt at graduation from private law schools in 2013 was $127,000; for public schools it was $88,000. Meanwhile, only about half of new law graduates are obtaining full-time long-term jobs requiring a JD.

But the new Task Force didn’t pursue this obvious market dysfunction. Instead, its Final Report offers superficial fixes: better debt counseling for students, better disclosure forms from the Department of Education, more dissemination of how schools spend their money, and continued experimentation with law curriculum. They ignore the core financial accountability problem, rather than confronting and addressing it.

Insularity and Self-Interest

The chairman of the 2014-2015 Task Force was Dennis W. Archer, former mayor of Detroit, former Michigan Supreme Court justice, and past president of the ABA. Did the ABA think no one would notice that Archer also chairs of the national policy board of Infilaw — a private equity-owned consortium of three for-profit law schools — Arizona Summit, Charlotte, and Florida Coastal.

The Infilaw schools feed on the market dysfunction that the current system for funding legal education creates. The job market for law graduates from schools such as Infilaw’s remains dismal. But even in the face of their graduates’ poor full-time long-term JD-required employment results, Infilaw’s schools increased enrollment and have become leaders in creating debt for their students.

Archer wasn’t the only problematic appointment to the 2014-2015 Task Force. Another member, Christopher Chapman, is president and CEO of Access Group — the collective voice of 197 ABA-accredited law schools.

According to the Access Group’s website, “During the course of our 30+ year existence, we became a leading provider of affordable student loans for aspiring professionals in law, medicine, dentistry, health, business, and other disciplines. As such, we served as a national originator, holder and servicer of federally guaranteed and private, credit-based loans, funding more than $18 billion of education loans since 2001.”

Enough said.

Forfeiting The Right To Be Heard

The fact that, as one 2014-2015 Task Force witness said, legal education may be the “canary in the coal mine” on issues relating to student debt and financing higher education generally is no excuse for the profession to refrain from offering potential solutions.

For that reason, at its upcoming August 3-4 meeting in Chicago, the ABA House of Delegates could reject the Task Force Report. It could then reconstitute the Task Force membership with individuals willing to deliver the tough message that the profession needs. It could direct the newly constituted group to develop meaningful proposals that tie law student loan availability to individual law school outcomes. My recent article in the American Bankruptcy Institute Law Review, “Bankruptcy and Bad Behavior,” offers one idea that would force law schools to put some financial skin in the game; others have suggested plans warranting serious consideration.

The ABA describes its mission as “committed to doing what only a national association of attorneys can do: serving our members, improving the legal profession, eliminating bias and enhancing diversity, and advancing the rule of law throughout the United States and around the world.”

In a single vote rejecting the 2014-2015 Task Force Report on the Financing of Legal Education, the House of Delegates could match those lofty words with action.

On this vitally important issue, the ABA leadership has caused many attorneys and the general public to become cynical about the organization’s motives. The House of Delegates has a unique opportunity to prove that the ABA is not just the vehicle whereby an insular, self-interested group seeks to preserve the present at the expense of the future. The House of Delegates can be part of the solution, or it can remain part of the problem.

Which path will it choose? The whole legal world is watching.

WHEN SUPPORTING A CAUSE UNDERMINES IT

Lee Siegel and The New York Times probably thought they were aiding a vital cause when the Times published Siegel’s June 6 op-ed, “Why I Defaulted on My Student Loans.” The underlying issue is important. Many of today’s young people bear the burden of huge educational debt in an economy that has not afforded the kinds of opportunities available to their baby-boomer parents, including Siegel.

Here’s the problem: Siegel did more harm than good. He made himself a poster child for the kind of moral hazard that first led policymakers to render student loans non-dischargeable in bankruptcy more than 40 years ago. It was a mistake then, and it’s a mistake now. But Siegel is exactly the wrong spokesperson for the issue.

Lee Siegel’s Pitch

According to his op-ed, Siegel financed his education with student loans, the first of which he obtained 40 years ago. But when his family’s financial hardship left him unable to pay the full cost of tuition at “a private liberal arts college,” he “transferred to a state college in New Jersey, closer to home.” Eventually, he defaulted on his student loans.

“Years later,” he writes, “I found myself confronted with a choice that too many people have had to and will have to face. I could give up what had become my vocation (in my case, being a writer) and take a job that I didn’t want in order to repay the huge debt I had accumulated in college and graduate school. Or I could take what I had been led to believe was both the morally and legally reprehensible step of defaulting on my student loans, which was the only way I could survive without wasting my life in a job that had nothing to do with my particular usefulness to society.”

He urges others to follow his example: default.

Who is Lee Siegel?

Here’s what Siegel and the Times didn’t reveal.

Notwithstanding his transfer to a New Jersey state college, he obtained three degrees from Columbia University — a B.A., an M.A., and a master’s of philosophy. According to the HarperCollins Speakers Bureau website, he’s “an acclaimed social and cultural critic.” The mere fact that he appears on that site means that you should expect to pay big bucks for the privilege of hearing him speak. He has written four books and his essays have appeared in The Atlantic Monthly, The New Yorker, Time, Newsweek, The New York Times, and The Wall Street Journal.

In other words, he has an elite education that led to a lucrative career. He is exactly the wrong person to be the face of the student loan crisis — which is very real.

The Problem with Siegel’s Support

Siegel has now made himself a powerful anecdote for those on the wrong side of the fight for reform in financing higher education. Forty years ago, similar ammunition — anecdotes about individuals exploiting moral hazard — led to bad policy when student debt first became non-dischargeable in bankruptcy.

In the early years of the student loan program, the Department of Health, Education & Welfare brought a supposed “loophole” to the attention of the 1973 Congressional Commission on Bankruptcy Laws. Concerned about tarnishing the image of the new program, the Department didn’t want new college graduates embarking on lucrative careers to default on loans that had made their education possible

But there was no hard, numerical evidence suggesting a serious problem. Rather, media hype over a few news reports of “deadbeat” student debtors took on a life of their own. In 1976, Congress yielded to public hysteria and made student loans non-dischargeable in bankruptcy unless a borrower had been in default for at least five years or could prove “undue hardship.”

In 1990, it extended the default period to seven years. In 1997, the Bankruptcy Reform Commission still had found no evidence supporting claims of systemic abuse, but Congress decided nevertheless that only “undue hardship” would make educational debt dischargeable. That placed it in the same category as child support, alimony, court restitution orders, criminal fines, and certain taxes. In 2005, it extended non-dischargeability to private loans as well.

The Enduring Power of a Big Lie

Unfortunately, the anecdotes and unsubstantiated lore about supposed abuses that led to the current rule persist to this day. In a lead editorial on July 25, 2012, The Wall Street Journal perpetuated the falsehood that “[a]fter a surge in former students declaring bankruptcy to avoid repaying their loans, Congress acted to protect lenders beginning in 1977.” 

There was no such surge. It was “more myth and media hype” than reality. Now, Siegel has provided fuel for a new round of obfuscation to displace facts.

“Thirty years after getting my last [student loan],” Siegel writes, “the Department of Education is still pursuing the unpaid balance.” I hope they catch him.

NOTE: The special ebook sale of my first book, Crossing Hoffa – A Teamster’s Story continues: http://discussions.mnhs.org/10000books/true-crime-e-book-sale/. It’s the true crime saga of my father’s two-year tangle with Jimmy Hoffa from 1959 to 1961.

The Chicago Tribune honored it as one of the “Best Books of the Year.” You can get it at Amazon, bn.com, Google, iTunes, and Kobo.

CRAVATH GETS IT RIGHT, AGAIN

 

biglaw-450The focus of The American Lawyer story about Richard Levin’s departure after eight years at Cravath, Swaine & Moore understates the most important point: Levin is a living example of things that his former firm, Cravath, does right. I can count at least three.

#1: Top Priority — Client Service

Cravath hired Levin, a top bankruptcy lawyer, from Skadden, Arps, Slate, Meagher & Flom on July 1, 2007. At the time, Cravath didn’t have a bankruptcy/restructuring practice. But at the beginning of the downturn that would become the Great Recession, its clients were drawn increasingly into bankruptcy proceedings.

Explaining the firm’s unusual decision to hire Levin as a lateral partner, the firm’s then-deputy presiding partner C. Allen Parker told the New York Times that “the firm was seeking to serve its clients when they found themselves as creditors. Many of Cravath’s clients have landed on creditors’ committees in prominent bankruptcy cases, he said, and the firm has helped them find another firm as bankruptcy counsel.”

In other words, Cravath sought to satisfy specific client needs, not simply recruit a lateral partner who promised to bring a book of business to the firm. The Times article continued, “While Mr. Parker does not foreclose the chance of representing debtors — which is often considered the more lucrative side of the bankruptcy practice — for now, it is an effort to serve clients who are pulled into the cases.”

#2: Mandatory Retirement Age

It seems obvious that Levin’s upcoming birthday motivated his departure to Jenner & Block. Less apparent is the wisdom behind Cravath’s mandatory retirement rule. As The American Lawyer article about his move observes:

“[A]t 64, Levin is now approaching Cravath’s mandatory retirement age. And he says he’s not ready to stop working. ’65 is the new 50,’ Levin says. ‘I’d be bored. I love what I do [and] I want to keep doing it.'”

Well, 65 is not the new 50 — and I say that from the perspective of someone who just celebrated his 61st birthday. More importantly, sophisticated clients understand that a law firm’s mandatory retirement age benefits them in the long run because it makes that firm stronger. When aging senior partners preside over an eat-what-you-kill big law compensation system, their only financial incentive is to hang on to client billings for as long as possible. It creates a bad situation that is getting worse.

Recent proof comes from the 2015 Altman Weil “Law Firms in Transition” survey responses of 320 law firm managing partners or chairs representing almost half of the Am Law 200 and NLJ 350. I’ll have more to say about other results in future posts, but for this entry, one of the authors, Eric Seeger, offered this especially pertinent conclusion about aging baby boomers:

“That group of very senior partners aren’t retiring,” he explains.

Seeger went on to explain that even if they were, younger partners are not prepared to assume client responsibilities. Why? Because older partners don’t want that to happen. According to the Altman Weil survey, only 31 percent of law firm leaders said their firms had a formal succession planning process.

At Cravath, mandatory retirement works with the firm’s lock-step compensation structure to encourage much different behavior. Aging partners confront an end date that provides them with an incentive to train junior attorneys so they can assume client responsibilities and assure an orderly intergenerational transition of the firm’s relationships. Hoarding clients and billings produces no personal financial benefit to a Cravath partner.

In contrast, hoarding is a central cultural component of eat-what-you-kill firms. Individual partners guard clients jealously, as if they held proprietary interests in them. Internal partnership fights over billing credit get ugly because a partner’s current compensation depends on the allocations. Partners have learned that the easiest way to avoid those fights is to keep their clients in silos away from other partners. For clients, it can mean never meeting the lawyer in the firm who could be most qualified to handle a particular matter. If they understood the magnitude of the problem, most clients would be astonished and outraged.

#3: Strategic Thinking

With respect to Richard Levin’s practice area, the most recent Georgetown/Thomson Reuters Peer Monitor Report notes that in 2014 big firm bankruptcy practices suffered a bigger drop in demand than any other area. Lawyers who had billed long hours to big ticket bankruptcy matters have now been repurposed for corporate, transactional, and even general litigation tasks. Don’t be surprised as firms announce layoffs.

Cravath’s timing may have been fortuitous. It hired Levin at the outset of the Great Recession — just as a big boom time for bankruptcy/restructuring lawyers began. Likewise, Levin departs as that entire segment of the profession now languishes. I think Cravath’s leaders are too smart to think that they can time the various segments of the legal market. But the firm’s strategic approach to its principal mission — client service — caused it to do the right things for the right reasons.

The harder they work at that mission, the luckier they get.

ANOTHER COLOSSAL LATERAL MISTAKE

Lateral hires are risky. Even managing partners responding to the Hildebrandt/Citi 2015 Client Advisory’s confidential survey admitted that only about half of their lateral partners are break-even at best — and the respondents had unrestrained discretion to decide what qualified as “break-even.” As Ed Newberry, co-global managing partner of Squire Patton Boggs told Forbes, “[L]ateral acquisitions, which many firms are aggressively pursuing now … is a very dangerous strategy because laterals are extremely expensive and have a very low success rate….”

Beyond the financial perils, wise firm leaders understand that some lateral partners can have an even greater destructive impact on a firm’s culture. In late 2014, former American Lawyer editor-in-chief Aric Press interviewed Latham’s outgoing chairman Bob Dell, who was retiring after a remarkably successful 20-year run at the top of his firm. Dell explained that he walked away from prospective lateral partners who were not a good cultural fit because they stumbled over Latham’s way of doing things.

Press wrote: “Culture, in Dell’s view, is not a code word for soft or emotional skills. ‘We think we have a high-performance culture,’ he says. ‘We work at that. That’s not soft.'”

Under the Radar and Under the Rug

Most lateral hiring mistakes attract little public attention. Firm leaders have no reason to highlight their errors in judgment. Fellow partners are reluctant to tell their emperors any unpleasant truth. If, as the adage goes, doctors bury their mistakes and lawyers settle theirs, then managing partners pretend that their mistakes never happened and then challenge anyone to prove them wrong. The resulting silence within most partnerships is deafening.

Every once in a while, a lateral hire becomes such a spectacular failure that even the press takes note. When that happens, the leaders of the affected law firm have nowhere to hide. Which takes us to James Woolery, about whom I first wrote five years ago.

Without mentioning Woolery specifically, I discussed a May 28, 2010 Wall Street Journal article naming him was one of several Cravath, Swaine & Moore partners in their late-30s and early-40s taking “a more pro-active approach, building new relationships and handling much of the work that historically would have been taken on by partners in their 50s.”

“We’re more aggressive than we used to be,” 41-year-old Cravath partner James Woolery told the Journal. “This is not your grandfather’s Cravath.”

A Serial Lateral

Six months later, it wasn’t Woolery’s Cravath, either. He’d already left to co-head J.P. Morgan Chase’s North American mergers and acquisitions group.

In 2013, only two years after accepting the Chase job, Woolery moved again. With much fanfare, he negotiated a three-year deal guaranteeing him at least eight million dollars annually to join Cadwalader, Wickersham & Taft. How was the cultural fit? The firm’s chairman, Chris White, described him as “the epitome of the Cadwalader lawyer” who deserved the lucrative pay package that made him the firm’s highest paid partner. A new title created especially for Woolery — deputy chairman — also made clear that he was White’s heir apparent.

To no one’s surprise, in 2014 Cadwalader announced that Woolery would take over as chairman in early 2015. As he prepared to assume the reins of leadership, the firm took a dramatic slide. The current issue of The American Lawyer reports that Cadwalader posted the worst 2014 financial results of any New York firm. Woolery’s guarantee deal looked pretty good as his firm’s average partner profits dropped by more than 15 percent. The firm’s profit margin — 26 percent — placed it 87th among Am Law 100 firms.

On January 19, 2015, the firm’s managing partner, Patrick Quinn, convened a conference call with all Cadwalader partners to convey a stunning one-two punch: Woolery would not become chairman, and he was leaving the firm to start a hedge fund. Woolery was not on the call to explain himself.

Unpleasant Press

No law firm wants this kind of attention. No client wants its outside firm to project uncertainty and instability at the top. No one inside the firm wants to hear about someone who has now been “thrust into the role of designated chairman of the firm,” as The American Lawyer described Patrick Quinn.

Woolery is gone, and so is Chris White, the former Cadwalader chairman who sold fellow partners on Woolery and his stunning guaranteed compensation package. White, age 63, left the firm in November to become co-CEO of Phoenix House, the nation’s largest non-profit addiction rehabilitation center.

Meanwhile, newly designated Cadwalader chairman Quinn says that the firm has no plans to change its strategy, including its reliance on lateral partner hiring. Maybe Chris White can use his new job to help Quinn and other managing partners shake their addiction to laterals. Apparently, first-hand experience with failure isn’t enough.

THINKING BEYOND THE AM LAW 100 RANKINGS

It’s Am Law 100 time. Every year as May 1 approaches, all eyes turn to Big Law’s definitive rankings — The American Lawyer equivalent of the Sports Illustrated swimsuit issue. But behind those numbers, what do law firm leaders think about their institutions and fellow partners?

The 2015 Citibank/Hildebrandt Client Advisory contains some interesting answers to that question. Media summaries of those annual survey results tend to focus on macro trends and numbers. Will demand for legal services increase in the coming months? Are billable hours up? Will equity partner profits continue to rise? Will clients accept hourly rate increases? Or will client discounts reduce realizations?

Those are important topics, but some of the survey’s best nuggets deserve more attention than they get. So as big law firm partners everywhere pore over the annual Am Law 100 numbers, here are five buried treasures from this year’s Citibank/Hildebrandt Client Advisory that will get lost in the obsession over Am Law’s short-term growth and profits metrics. They may reveal more about the state of Big Law than any ranking system can.

Chickens Come Home To Roost

1. “While excess capacity remains an issue, we are hearing from a good number of firms that mid-level associates are in short supply.”

My comment: After 2009, most firms reduced dramatically summer programs and new associate hiring to preserve short-term equity partner profits. That was a shortsighted failure to invest in the future, and it’s still pervasive. See #4 and #5 below.

The Growth Trap

2. “Many [law firm mergers] have tended to be mergers of strong firms with weaker firms, or mergers of firms that are pursuing growth for growth’s sake. On this latter trend, it is our view that these mergers are generally ill-conceived. In our experience, combining separate firm revenues does not necessarily translate into better profit results and long-term success.”

My comment: Regardless of who says it (or how often), many managing partners just don’t believe it.

The Lateral Hiring Ruse

3. “For all the popularity of growth through laterals, the success rate of a firm’s lateral strategy can be quite low. For the past few years, we have asked leaders of large firms to quantify the rate of success of the laterals they hired over the past five years. Each year, the proportion of laterals who they would describe as being above ‘break even’, by their own definition, has fallen. In 2014, the number was just 54 percent of laterals who had joined their firms during 2009-2013.” [Emphasis added]

My comment: Think about that one. The survey allows managing partners to use their own personal, subjective, and undisclosed definition of “success.” Even with that unrestricted discretion to make themselves look good, firm leaders still admit that almost half of their lateral hiring decisions over the past five years have been failures — and that they’re track record has been getting worse! That’s stunning.

Pulling Up The Ladder

4. “We are now seeing [permanent non-partner track associates and other lower cost lawyers] appear among some of the most elite firms. When we ask these firms whether they are concerned that expanding their lawyer base beyond partner-track associates will hurt their brand, their response is simply that this is what their clients, and the market in general demands.”

My comment: At best such managing partner responses are disingenuous; at worst they are lies. Clients aren’t demanding non-partner track attorneys; they’re demanding more value from their outside lawyers. Thoughtful clients understand the importance of motivating the next generation’s best and brightest lawyers with meaningful long-term career opportunities.

Permanent dead-end tracks undermine that objective. So does the continuing trend in many firms to increase overall attorney headcount while keeping the total number of equity partners flat or declining. But rather than accept responsibility for the underlying greed that continues to propel equity partner profits higher, law firm leaders try to blame clients and “the market.” For the truth, they should consult a mirror.

The Real Problem

5. “Leaders of successful firms also talk about getting their partners to adopt a more long-term, ‘investment’ mindset. In an industry where the profits are typically paid out in a short time to partners, rather than being retained for longer term investment, this can be a challenge.”

My comment: Thinking beyond current year profits is the challenge facing the leadership of every big firm. Succeeding at that mission is also the key assumption underlying the Client Advisory’s optimistic conclusion:

“It is clear to us that law firms have the capacity and the talent to adapt to the needs of their clients, and meet the challenges of the future — contrary to those who continually forecast their death.”

I’m not among those forecasting the death of all big firms. In fact, I don’t know anyone who is. That would be silly. But as in 2013 and 2014, some large firms will fail or disappear into “survival mergers.” As that happens, everyone will see that having what the Client Advisory describes as “the capacity and talent to adapt” to the profession’s dramatic transformation is not the same as actually adapting. The difference will separate the winners from the losers.

A NEW YORK TIMES COLUMN MISFIRES

My unwelcome diagnosis and resulting detour into our dysfunctional medical system diverted my attention from scrutinizing commentators who make dubious assertions about the current state of the legal profession.

Well, I’m back for this one. At first, I thought that Professor Steven Davidoff Solomon’s article in the April 1 edition of the New York Times, “Despite Forecasts of Doom, Signs of Life in the Legal Industry,” was an April Fool’s joke. But the expected punch line at the end of his essay never appeared.

To keep this post a manageable length, here’s a list of points that Solomon got wrong in his enthusiastic account of why the legal industry is on the rise. As a professor of law at Berkeley, he should know better.

  1. “The top global law firms ranked in the annual AmLaw 100 survey experienced a 4.3 percent increase in revenue in 2013 and a 5.4 percent increase in profit.”

That’s true. But it doesn’t support his argument that new law graduates will face a rosy job market. Increased revenue and profits do not translate into increased hiring of new associates. In most big firms, profit increases are the result of headcount reductions at the equity partner level – which have been accelerating for years.

  1. “Bigger firms are hiring.”

Sure, but nowhere near the numbers prior to Great Recession levels. More importantly, big firms comprise only about 15 percent of the profession and hire almost exclusively from the very top law schools. Meanwhile, overall employment in the legal services sector is still tens of thousands of jobs below its 2007 high. Even as recently December 2014, the number of legal services jobs had fallen from the end of 2013.

  1. “Above the Law, a website for lawyers, recently reported a rising trend for lateral moves for lawyers in New York.”

Apples and oranges. The lateral partner hiring market — another big law firm phenomenon that has nothing to do with most lawyers — is completely irrelevant to job prospects for new entry-level law school graduates. Even during the depths of the Great Recession, the former was hot. The latter continues to languish.

  1. “Last year, 93.2 percent of the 645 students of the Georgetown Law class of 2013 were employed.”

That number includes: 83 law school-funded positions, 12 part-time and/or short-term jobs, and 51 jobs not requiring a JD. Georgetown’s full-time, long-term, non-law school-funded JD-required employment rate for 2013 graduates was 72.4 percent – and Georgetown is a top law school. The overall average for all law schools was 56 percent.

  1. “[Michael Simkovic and Frank McIntyre found that a JD degree] results in a premium of $1 million for lawyers over their lifetime compared with those who did not go to law school.”

Simkovic acknowledges that their calculated median after-tax, after-tuition lifetime JD premium is $330,000. More fundamentally, the flaws in this study are well known to anyone who has followed that debate over the past two years. See, e.g., Matt Leichter’s two-part post beginning at https://lawschooltuitionbubble.wordpress.com/2013/09/09/economic-value-paper-a-mistrial-at-best/, or the summary of my reservations about the study here: https://thelawyerbubble.com/2013/09/03/once-more-on-the-million-dollar-jd-degree/. Most significantly, it ignores the fact that the market for law school graduates is really two markets — not unitary. Graduates from top schools have far better prospects than others. But the study admittedly takes no account of such differences.

  1. “[The American Bar Foundation’s After the JD] study found that as of 2012, lawyers had high levels of job satisfaction and employment as well as high salaries.”

It also found that by 2012, 24 percent of the 3,000 graduates still responding to the study questionnaire are no longer practicing law. The study’s single class of 2013 originally included more than 5,000 — so no one knows what the non-respondents are doing.

“These are the golden age graduates,” said American Bar Foundation faculty fellow Ronit Dinovitzer [one of the study’s authors], “and even among the golden age graduates, 24 percent are not practicing law.”

7.  “Law schools have tremendous survival tendencies. I have a bet with Jordan Weissmann at Slate that not a single law school will close.”

Yes. Those “survival tendencies” are called unlimited federal student loans for which law schools have no accountability with respect to their students employment outcomes. If Solomon wins that bet, it will be because a dysfunctional market keeps alive schools that should have closed long ago.

Whatever happened to the News York Times fact-checker?

2015: THE YEAR THAT THE LAW SCHOOL CRISIS ENDED (OR NOT) — CONCLUSION

My prior two installments in this series predicted that in 2015 many deans and law professors would declare the crisis in legal education over. In particular, two changes that have nothing to do with the actual demand for lawyers — one from the ABA and one from the Bureau of Labor Statistics — could fuel false optimism about the job environment for new law graduates.

Realistic projections about the future should start with a clear-eyed vision of the present. To assist in that endeavor, the Georgetown Law Center for the Study of the Legal Profession and Thomson Reuters Peer Monitor recently released their always useful annual “Report on the State of the Legal Market.”

The Importance of the Report

The Report does not reach every segment of the profession. For example, government lawyers, legal aid societies, in-house legal staffs, and sole practitioners are among several groups that the Georgetown/Peer Monitor survey does not include. But it samples a sufficiently broad range of firms to capture important overall trends. In particular, it compiles results from 149 law firms, including 51 from the Am Law 100, 46 from the Am Law 2nd 100, and 52 others. It includes Big Law, but it also includes a slice of not-so-big law.

The principal audience for the Georgetown/Peer Monitor Report is law firm leaders. The Report’s advice is sound and, to my regular readers, familiar. Rethink business models away from reliance on internally destructive short-term metrics (billable hours, fee growth, leverage). Focus on the client’s return on investment rather than the law firm’s. Don’t expect a reprise of equity partner profit increases that occurred from 2004 through 2007 (cumulative rate of 25.6 percent). Beware of disrupters threatening the market power that many firms have enjoyed over some legal services.

For years, law firm leaders have heard these and similar cautions. For years, most leaders have been ignoring them. For example, last year at this time, the Georgetown/Peer Monitor Report urged law firm leaders to shun a “growth for growth’s sake” strategy. Given the frenzy of big firm merger and lateral partner acquisition activity that dominated 2014, that message fell on deaf ears.

The Demand for Lawyers

The 2015 Report’s analysis of business demand for law firm services is relevant to any new law graduate seeking to enter that job market. Some law schools might prefer the magical thought that aggregate population studies (or dubious changes in BLS methodology projecting future lawyer employment) should assure all graduates from all law schools of a rewarding JD-required career. But that’s a big mistake for the schools and their students.

For legal jobs that are still the most difficult to obtain — employment in law firms — the news is sobering. While demand growth for the year ending in November 2014 was “a clear improvement over last year (when demand growth was negative), it does not represent a significant improvement in the overall pattern for the past five years.”

In other words, the economy has recovered, but the law firm job market remains challenging. “Indeed,” the Report continues, “since the collapse in demand in 2009 (when growth hit a negative 5.1 percent level), demand growth in the market has remained essentially flat to slightly negative.”

Past As Prologue?

The Report notes that business spending on legal services from 2004 to 2014 grew from about $159.4 billion to $168.7 billion — “a modest improvement over a ten-year period. But if expressed in inflation-adjusted dollars, the same spending fell from $159.4 to $118.3 billion, a precipitous drop of 25.8 percent.”

What does that mean for future law graduates? The Report resists taking sides in the ongoing debate over whether the demand for law firm services generally will rebound to anything approaching pre-recession levels. It doesn’t have to because, the Report concludes, “it is increasingly clear that the buying habits of business clients have shifted in a couple of significant ways that have adversely impacted the demand for law firm services.”

One of the two shifts that the Report identifies doesn’t necessarily mean less employment for lawyers generally. Specifically, companies are moving work from outside counsel to in-house legal staffs. That should not produce a net reduction in lawyer jobs, unless in-house lawyers become more productive than their outside law firm counterparts.

The second trend is bad news for law graduates: “[T]here has also been a clear — though still somewhat modest — shift of work by business clients to non-law firm vendors.” In 2012, non-law firm vendors accounted for 3.9 percent of legal department budgets; it grew to 7.1 percent in 2014.

Beware of Optimistic Projections

The Georgetown/Peer Monitor Report is a reminder that the recent past can provide important clues about what lies ahead. For lawyers seeking to work in firms serving corporate clients, it sure doesn’t look like a lawyer shortage is imminent.

So what will be the real-life source of added demand sufficient to create market equilibrium, much less a true lawyer shortage? Anyone predicting such a surge has an obligation to answer that question. As the Report suggests, general claims about population growth or the “ebb and flow” of the business cycle won’t cut it. Along with the rest of the economy, the profession has suffered through the 2008-2009 “ebb.” The economy has returned to “flow” — but the overall demand for lawyers hasn’t.

Here are two more suggestions for those predicting a big upswing from recent trends in the demand for attorneys. Limit yourselves to the segment of the population that can actually afford to hire a lawyer and is likely to do so. Then take a close look at individual law school employment results to identify the graduates whom clients actually want to hire.

2015: THE YEAR THAT THE LAW SCHOOL CRISIS ENDED (OR NOT) — PART II

Part I of this series addressed the ABA rule change that will allow 2014 law graduates until March 15 — an extra month from prior years — to find jobs before their schools have to report those graduates’ employment results to the ABA (and U.S. News). That change will almost certainly produce higher overall employment rates. But relying on any alleged trend that results solely from an underlying change in the rules of the game — such as extending the reporting period from nine months to ten — would be a mistake.

This post considers a second rule change. It comes from the U.S. Department of Labor, and it’s a whopper.

The Government Makes Things Worse

The Bureau of Labor Statistics recently adopted a new statistical methodology for projecting the nation’s legal employment needs. Just about everyone agrees that, by any measure and for many years, the economy has been producing far more new lawyers than JD-required jobs. But the new BLS methodology declares that any oversupply of attorneys has evaporated. In fact, applying the new methodology retroactively to previous years would lead to the conclusion that the obvious glut of new lawyers never existed at all!

Using its earlier methodology, the Bureau has been revising downward its predictions of new lawyer jobs. In 2008, it projected a net additional 98,500 legal jobs through 2018. In 2012, it dropped that number to 73,600 through 2022. Taking into account retirements, deaths, and other attrition, the BLS separately projected that the profession could absorb about 20,000 new graduates annually for the next ten years. Most knowledgeable observers of the changing market for new lawyers have concurred with that ballpark assessment. Unfortunately, schools have been producing about twice that number (40,000).

Remarkably, the BLS’s new approach more than doubles the number of anticipated new legal jobs over the next 10 years. Rather than annual absorption of about 20,000 new lawyers through 2022, the Bureau now projects room for more than 41,000 a year. Overnight, demand caught up with what had been a chronic oversupply of attorneys.

In Defiance Of Sound Statistical Analysis And Common Sense

There are numerous technical and analytical flaws in the BLS’s new methodology. (See, e.g., Matt Leichter’s recent post, “2016 Grads Shouldn’t Take Comfort in New Jobs Projection Approach.”) Beyond those are common sense tests that the new methodology fails. For example, since 2011 the ABA-required data have revealed a persistent FTLT JD-required employment rate of 55 percent for new graduates. That’s not far from the projections that the BLS’s old methodology produced for a long time.

The BLS’s new approach amounts to saying that, somehow, all of those unemployed graduates must have been finding law jobs after all. As the old joke goes, endless digging in a roomful of manure was worth the effort; there was indeed a pony to be found – with the help of a little regression analysis.

Another common sense test considers actual employment numbers. For example, legal sector employment (including non-lawyers) through December 2014 was 1.133 million — about the same as a year ago and down more than 40,000 from 2006. Although the economy generally has recovered from the Great Recession, total employment in the legal sector is still far below pre-recession levels. If the BLS’s proposed approach were valid, it would suggest a remarkable attrition rate, raise serious questions about the state of the profession, and cause many prelaw students to wonder whether law school was the right choice.

The Bad Beat Goes On

Meanwhile, weak law schools that will benefit most from the ABA and BLS changes remain unaccountable for their graduates’ poor employment outcomes as they lower admission standards to fill classrooms. Median law school debt at graduation currently exceeds $120,000, and some of the schools with the worst employment outcomes burden students with the highest levels of debt. But there’s no financial risk to those schools because the federal government backs the loans and they’re not dischargeable in bankruptcy.

The escape hatch is small. If income-based repayment programs survive austerity demands of the Republican-controlled Congress – a big if – then students who persevere through 20 years of IBR will get a large tax bill because forgiven debt will count as income to them in the year it’s forgiven. The shortfall between the amount IBR students actually pay and the amount they owe will come from the federal purse.

Voila! The Crisis Is Over

Sometime in 2015, the synergy between the new ABA-rules allowing law schools to report 10-month employment data (discussed in Part I of this series) and the new BLS methodology projecting 41,000 new lawyer jobs annually will produce a law school chorus declaring that the crisis in legal education is over, at least in a macroeconomic sense. Indeed, the hype has already begun. Discussing the new BLS approach, Loyola University – Los Angeles School of Law professor Ted Seto observed: “If the new BLS projections are accurate, we should see demand and supply in relative equilibrium in 2015 and a significant excess of demand over supply beginning in 2016.”

The operative word is “if.” As noted in Part I, Seto’s similarly conditional prediction in 2013 didn’t come to pass. Meanwhile, only about half of his school’s 2013 graduating class secured full-time long-term JD-required employment within nine months of receiving their degrees. Average law school debt for the 82 percent of Loyola-LA law graduates who incurred debt was $141,765 — placing it 22nd (of 183) among schools whose students graduate with the most law school debt.

Here’s the real kicker. The vast disparity in individual law school employment outcomes makes broad macroeconomic declarations about opportunities for law graduates disingenuous anyway. It’s no surprise that the loudest voices come from schools where many graduates have great difficulty find any JD-required job.

But even at the macro level, anyone concerned about the fate of marginal law students, exploding student debt, or the future of a noble profession should look beyond any distracting noise about the supposed end of the legal education crisis. At least for now, the real question should be whether anything has really changed — other than the rules of the game.

2015: THE YEAR THAT THE LAW SCHOOL CRISIS ENDED (OR NOT) — PART I

Remember that you read it here first: In 2015, many law school deans and professors will declare that the law school crisis is over. After five years of handwringing, relatively minor curriculum changes at most schools, and no improvement whatsoever in the mechanism for funding legal education, the storm has passed. All is well. What a relief.

The building blocks for this house of cards start with first-year law school enrollment that is now below 38,000 – a level not seen since the mid-1970s when there were 53 fewer law schools. The recent drop in the absolute number of future attorneys seems impressive, but without the context of the demand for lawyers, it’s meaningless in assessing proximity to market equilibrium, which remains far away.

The Search for Demand

To boost the projected demand side of the equation, the rhetoric of illusory equilibrium often turns to the “degrees-awarded-per-capita” argument that Professor Ted Seto of Loyola Law School – Los Angeles floated in June 2013. His premise: “Demand for legal services…probably increases as population increases.”

“Unless something truly extraordinary has happened to non-cyclical demand,” Seto continued, “a degrees-awarded-per-capita analysis suggests that beginning in fall 2015 and intensifying into 2016 employers are likely to experience an undersupply of law grads, provided that the economic recovery continues.”

If only wishing could make it so. The economic recovery did, indeed, continue, but the hoped for increase in attorney demand was nowhere to be found. When Seto posted his analysis, total legal services employment (including non-lawyers) at the end of May 2013 was 1,133,800. At the end of November 2014, it was 1,133,700.

Follow That Dream

Professor Rene Reich-Graefe of Western New England University School of Law relied on a similar per capita approach (among other dubious arguments) to assert that today’s students are about to enter “the most robust legal market that ever existed in this country.” His students sure hope he’s right. Only 49 out of 133 members of the Western New England Law class of 2013 — 37 percent — obtained full-time long-term JD-required jobs within nine months of graduation.

It’s easy to hypothesize that population growth should increase the demand for everything, including attorneys. But it’s more precise to say that population growth is relevant to the demand for attorneys only insofar as such growth occurs among those who can actually afford a lawyer. (The degrees-per-capita argument also ignores the profound ways that technological change has reduced the demand for lawyers across many segments of the profession.)

The ABA and the U. S. Department of Labor’s Bureau Labor Statistics have added two new factors that will feed false optimism in 2015. This post considers the ABA’s unfortunate action. Part II will cover the BLS’s contribution to continuing confusion.

The ABA Misfires Again

Since it began requiring law schools to report detailed employment outcomes for their most recent graduates, the overall full-time long-term JD-required employment rate has hovered around 55 percent (excluding law school-funded jobs). For a long time, the cutoff date for schools to report their most recent graduates’ employment status to the ABA (and U.S. News) has been February 15 following the year of graduation.

Starting with the class of 2014, law schools will get an additional month during which their graduates can try to find jobs before schools have to report class-wide employment results. When the employment status cutoff date moves from February 15 to March 15, the reported FTLT JD-required employment rate will go up. Comparisons with prior year outcomes (nine months after graduation) will be disingenuous, but law deans and professors touting an upswing in the legal job market will make them. Market equilibrium, they will proclaim, has made its way to legal education.

The stated reason for the ABA change was that the February 15 cutoff had an unfair impact on schools whose graduates took the bar exam in states reporting results late in the fall, especially New York and California. Schools in those states, the argument went, suffered lower employment rates solely because their graduates couldn’t secure jobs until they had passed the bar. Another month would help their job numbers.

In July 2013, Professor Deborah Merritt offered powerful objections to the ABA’s proposed change: The evidence does not support the principal reason for the change; moving the cutoff date would impair the ability to make yearly comparisons at a time when the profession is undergoing dramatic transformation; prospective students would not have the most recent employment information as they decide where to send their tuition deposits in April; the change would further diminish public trust in law schools and the ABA. The new March 15 cutoff passed by a 10-to-9 vote.

Watch For Obfuscation

In a few months when the new 10-month employment figures for the class of 2014 show “improvement” over the prior year’s nine-month results, think apples-to-oranges as you contemplate whose interests the ABA is really serving. Consider, too, whether any macroeconomic projections of attorney demand are even probative when there is a huge variation in employment opportunities across law schools.

At 33 law schools (including Western New England School of Law), fewer than 40 percent of 2013 graduates found full-time long-term employment requiring a JD. At most of those schools, the vast majority of students incurred staggering six-figure debt for their degrees. (At Western New England, it was $120,677 for the class of 2013.)

In the some corners of the profession, federal student loan dollars are subsidizing an ugly business.

THE BINGHAM CASE STUDY — PART I

“For the first time since I’ve been in this job, we have all the pieces we need to do our job.”

That was former Bingham McCutchen chairman Jay Zimmerman’s penultimate line in the September 2011 Harvard Law School Case Study of his firm.

Oops.

Harvard Law School Professor Ashish Nanda and a research fellow developed the study for classroom use. According to the abstract, it’s a textbook example of successful management. It demonstrates how a firm could evolve “from a ‘middle-of-the-downtown pack’ Boston law firm in the early 1990s to a preeminent international law firm by 2010.”

Oops, again.

Familiar Plaudits

At the time of Nanda’s study, the profession had already witnessed a string of recent big firm failures. He should have taken a closer look at them. In fact, only seven months before publication of the Harvard Study, Howrey LLP was in the highly publicized death throes of what was a preview Bingham’s unfortunate fate.

Bingham’s Zimmerman and Howrey’s last chairman, Robert Ruyak, had several things in common, including accolades for their leadership. Just as Nanda highlighted Zimmerman’s tenure in his study, two years before Howrey’s collapse, Legal Times honored Ruyak as one of the profession’s Visionaries. Along similar lines, less than a month after publication of the Harvard study, Dewey & LeBeouf’s unraveling began as partners learned in October 2011 that the firm was not meeting its revenue projections for the year. But Dewey chairman Steven Davis continued to receive leadership awards.

Perhaps such public acclaim for a senior partner is the big firm equivalent of the Sports Illustrated curse. Being on the cover of that magazine seems to assure disaster down the road. (According to one analyst, the SI curse isn’t the worst in sports history. That distinction belongs to the Chicago Cubs and the Billy Goat hex. But hey, anyone can have a bad century.)

Underlying Behavior

The Lawyer Bubble investigates Howrey, Dewey, and other recent failures of large law firms. The purpose is not to identify what distinguishes them from each other, but to expose common themes that contributed to their demise. With the next printing of the book, I’m going to add an afterword that includes Bingham.

If Nanda had considered those larger themes, he might have viewed Bingham’s evolution much differently from the conclusions set forth in his study. He certainly would have backed away from what he thought was the key development proving Bingham’s success, namely, aggressive growth through law firm mergers and lateral hiring. He might even have considered that such a strategy could contribute to Bingham’s subsequent failure — which it did.

To find those recent precedents, he need not have looked very far. Similar trends undermined Howrey, Dewey, and others dating back to Finley Kumble in 1988. As a profession, we don’t seem to learn much from our mistakes.

The MBA Mentality Strikes Again

What caused Professor Nanda to line up with those who had missed the fault lines that had undone similar firms embracing the “bigger is always better” approach? One answer could be that he’s not a lawyer.

Nanda has a Ph.D in economics from Harvard Business School, where he taught for 13 years before becoming a professor of practice, faculty director of executive education, and research director at the program on the legal profession at Harvard Law School. Before getting his doctorate, he spent five years at the Tata group of companies as an administrative services officer. He co-authored a case book on “Professional Services” and advises law firms and corporate inside counsel.

It’s obvious that Nanda is intelligent. But it seems equally clear that his business orientation focused him on the enticing short-term metrics that have become ubiquitous measures of success. They can also be traps for the unwary.

In Part II of this series, I’ll review some of those traps. Nanda fell into them. As a consequence, he missed clues that should have led him to pause before joining the Bingham cheerleading squad.

Meanwhile, through December 6, Amazon is offering a special deal on my novel, The Partnership: It’s FREE as an ebook download. I’m currently negotiating a sale of the film rights to the book.

LAW & FOOTBALL: RANKINGS DOUBLETHINK

For many people, the holiday season means an intense focus on college football. This year, a 12-person committee develops weekly team rankings. They will culminate in playoffs that produce head-to-head competition for the national championship in January.

A recent comment from the chairman of that committee, Jeff Long, is reminiscent of something U.S. News rankings czar Robert Morse said about his ranking system last year. Both remarks reveal how those responsible for rankings methodology rationalize distance between themselves and the behavior they incentivize.

Nobody Wants Credit?

Explaining why undefeated Florida State dropped from second to third in the November 11 rankings, Long told ESPN that making distinctions among the top teams was difficult. He explained that the relevant factors include a team’s “body of work, their strength of schedule.” Teams that defeat other strong teams get a higher rank than those beating weaker opponents. So even though Oregon has suffered a loss this year, its three victories against top-25 opponents jumped it ahead of undefeated FSU, which had only two such wins. Long repeated his explanation on November 19: “Strength of schedule is an important factor….”

Whether Oregon should be ahead of FSU isn’t the point. Long’s response to a follow-up question on November 11 is the eye-catcher: Was the committee sending a message to teams that they should schedule games against tougher opponents?

“We don’t think it’s our job to send messages,” he said. “We believe the rankings will do that.”

But who develops the criteria underlying the rankings? Long’s committee. The logic circle is complete.

Agency Moment Lost: Students

In his November 14 column for the New York Times, David Brooks writes more broadly about “The Agency Moment.” It occurs when an individual accepts complete responsibility for his or her decisions. Some people never experience it.

Rankings can provide opportunities for agency moments. For example, some prelaw students avoid serious inquiry into an important question: which law school might be the best fit for their individual circumstances? Instead, I’ve heard undergraduates say they’ll attend the best law school that accepts them, and U.S. News rankings will make that determination.

If they were talking about choosing from law schools in different groups, that would make some sense. There’s a reason that Harvard doesn’t lose students to Boston University. But too many students take the rankings too far. If the choice is between school number 22 and the one ranked number 23, they’re picking number 22, period. That’s idiotic.

In abandoning independent judgment, such students (and their parents) cede one of life’s most important decisions to Robert Morse, the non-lawyer master of the rankings methodology. It’s also an agency moment lost.

Agency Moment Lost: Deans, Administrators, and Alumni

Likewise, deans who let U.S. News dictate their management decisions say they’re just responding to incentives. As long as university administrators, alumni, and prospective students view the rankings as meaningful, they have to act accordingly. Any complaint — and there are many — should go to the person who develops the rankings methodology.

All roads of responsibility lead back to U.S. News’ Robert Morse, they say. But following that trail leads to another lost agency moment. In March 2013, Lee Pacchia of Bloomberg asked Morse if he took any responsibility for what’s ailing legal education today:

“No…U.S. News isn’t the ABA. U.S. News doesn’t regulate the reporting requirements. No….”

Agency Moment Lost: Methodology Masters

Morse went on to say that U.S. News was not responsible for the cost of law school, either. Pacchia didn’t ask him why the methodology rewards a school that increases expenditures without regard to the beneficial impact on student experiences or employment outcomes. Or how schools game the system by aggressively recruiting transfer students whose tuition adds revenue at minimal cost and whose lower LSAT scores don’t count in the school’s ranking methodology. (Vivia Chen recently reported on the dramatic increase in incoming transfer students at some schools.)

Cassius was only half-right. The fault lies not in our stars; but it doesn’t lie anywhere else, either!

The many ways that U.S. News rankings methodology has distorted law school deans’ decision-making is the subject of Part I of my book, The Lawyer Bubble – A Profession in Crisis. Part II investigates the analogous behavior of law firm leaders who rely on metrics that maximize short-term Am Law rankings in running their businesses (e.g., billings, billable hours, hourly rates, and leverage ratios).

Aggregate Rankings v. Individual Outcomes

In the end, “sending a message” through a rankings methodology is only one part of an agency equation. The message itself doesn’t require the recipient to engage in any particular behavior. That’s still a choice, although incentive structures can limit perceived options and create first-mover dilemmas.

Importantly, individual outcomes don’t always conform to rankings-based predictions. Successful participants still have to play — and win — each game. That doesn’t always happen. Just ask Mississippi State — ranked number one in the college football playoff sweepstakes after week 12, but then losing to Alabama on November 15. Or even better, look at number 18 ranked Notre Dame, losing on the same day to unranked Northwestern.

Maybe that’s the real lesson for college coaches, prelaw students, law school deans, and law firm leaders. Rather than rely on rankings and pander to the methodology behind them, focus on winning the game.

INFILAW AND THE ABA

After a setback last summer, Inflilaw has flown under the radar in its quest to acquire the Charleston School of Law. Since July 2013, the private equity owners of Infilaw  — a consortium of three for-profit law schools (Florida Coastal, Charlotte, and Arizona Summit (formerly the Phoenix School of Law)) — have been trying to add Charleston to their portfolio.  (For more on Infilaw, see Paul Campos’ recent article in The Atlantic.)

The persistence of Infilaw’s effort alone says something about the situation: There’s money to be made in legal education. Venture capitalists specialize in finding opportunities for above average investment returns. It doesn’t matter to them that the main source of that money is federal student loans. Nor do they care if the vast majority of students who obtain those loans to attend marginal schools are unable find JD-required employment. If there’s a market failure to exploit for profit, they’re on it.

On November 6, 2014, the ABA Accreditation Committee issued its recommendation of acquiescence — yes, that’s what it’s called — in connection with Infilaw’s proposed acquisition. It found that the desired change in control “will not detract from [Charleston School of Law’s] ability to remain in compliance” with ABA accreditation standards.

The Deal

The ABA recommendation identifies key aspects of the proposed acquisition, but then ignores their implications. For example, under the Asset Purchase Agreement, Infilaw would acquire most of the school’s assets, but it makes no promise of post-acquisition employment for any existing employees. None. Only on the “eve of closing” will Infilaw disclose the faculty members it wants to keep. Nevertheless, the ABA is willing to accept on faith that this pig in a poke — whatever it turns out to be — won’t “detract from the school’s ability” to retain its accreditation.

Under a separate Administrative and Consulting Services Agreement, Infilaw will receive “substantial consideration” to provide “non-academic, administrative, and consulting services” to the law school. Those services probably account for these troubling lines in the ABA committee’s recommendation:

“Infilaw contemplates that…the legal market permitting, it will increase the size of entering classes to approximately 250, or ‘pre-downturn levels.’…The law school will have access to and benefit from the collective knowledge of Infilaw and its three existing law schools with respect to student recruiting and enrollment.”

The Market?

What does “the legal market permitting” mean? Charleston enrolled 145 full-time students for its expected graduating class of 2017. Returning to “pre-downturn” levels would increase that number by 75 percent. Such near-term growth in demand for the school’s new lawyers is a pipe dream. The recent Bureau of Labor Statistics report on legal sector employment confirms painful reality: Over the past year, the number of all legal jobs — not just lawyers — is actually 1,300 lower than a year ago.

But “access to and benefit from” Infilaw’s existing three schools “with respect to student recruiting and enrollment” means law school behavior that has little to do with actual “legal market” employment conditions for new graduates. Rather, as I’ve discussed previously, the current operation of the Inflilaw business model makes the future of Charleston as an Infilaw holding apparent.

A Race To…The Bottom?

The Infilaw model depends on federal student loans to produce revenue streams that create profits for investors. As the demand for lawyers languished during the Great Recession, Infilaw schools increased enrollment and tuition.

Meanwhile, North Carolina bar passage rates for first-time takers graduating from Infilaw’s Charlotte School of Law dropped from 87 percent in July 2010 to 58 percent in July 2013. The school placed seventh (out of seven NC schools) in its July 2014 bar passage rate: 56 percentFlorida Coastal’s first-time rate dropped from 75 percent in July 2012 to 67 percent in July 2013. Its first-time Florida bar passage rate in July 2014 was 58 percent (10th out of 11 Florida schools). Arizona Summit’s first-time bar pass rate in its home state for July 2014 was 55 percent (third out of three Arizona schools).

Overall, only 35 percent of 2013 graduates from Infilaw schools found full-time long-term JD-required employment. By comparison, 53 percent of Charleston School of Law  graduates from the class of 2013 secured full-time long-term JD-required jobs — just below the national average for all law schools.

A Statistic On The Rise

At Florida Coastal, average student loan debt for 2014 graduates was $175,274. The other two Infilaw schools haven’t updated their websites to provide 2014 information. For 2013 graduates of Arizona Summit, average student law school debt was $184,825. At Charlotte, it was $155,697, plus another $20,000 in private student loans. (Average law school debt for Charleston graduates in 2013 was also too high ($146,595). But its 2013 employment outcomes were much better than any Infilaw school.)

Infliaw isn’t home free in its quest. After a closed session of the Accreditation Committee on December 5 in Puerto Rico, the recommendation will go to the ABA’s Council of the Section on Legal Education and Admissions. Then the South Carolina Commission on Higher Education has to approve the deal. Last summer, a committee of that commission voted 3-to-1 against, prompting Infilaw to withdraw its application while promising a return bout that will probably occur in early 2015.

The ABA

People sometimes ask where the ABA has been in the ongoing search for solutions to the current crisis involving law schools whose graduates are incurring staggering debt for JD degrees of dubious value. The answer is becoming clearer.

It’s “acquiescing.”

But wait. The ABA has done one more thing. It has convened a special Task Force on the Financing of Legal Education to recommend fixes for a dysfunctional legal education market. Former Detroit Mayor Dennis W. Archer, the chairman of Infilaw’s National Policy Board, is still chairman of that Task Force. In 2003-2004, he was president of the ABA.

BULLET DODGED? OR REDIRECTED TOWARD YOU?

For the past six months, Thomas Jefferson School of Law in San Diego seemed poised to become the first ABA-accredited law school to fail since the Great Recession began. For anyone paying attention to employment trends in the legal sector, the passage of six years without a law school closing somewhere is itself remarkable. It also says much about market dysfunction in legal education.

In his November 5 column in the New York TimesUniversity of California-Berkeley law professor Steven Davidoff Solomon has a different view. Solomon argues that recent enrollment declines prove that a functioning market has corrected itself: “[T]he bottom is almost here for law schools. This is how economics works: Markets tend to overshoot on the way up, and down.”

Solomon urges that the proper course is to keep marginal law schools such as Thomas Jefferson alive for a while “and see what happens.” I disagree.

Take Thomas Jefferson, Please

As I’ve discussed previously, in 2008 the school issued bonds for a new building. When the specter of default loomed large in early 2014, the question was whether some accommodation with bondholders would keep the school alive. Solomon suggests that creditors made the only deal possible and the school is the ultimate winner. He gives little attention to the real losers in this latest example of a legal education market that is not working: Thomas Jefferson’s students, the legal profession, and taxpayers.

In retrospect, the restructuring agreement between the school and its bondholders reveals that a deal was always likely. That’s because both sides could use other people’s money to make it, as they have since 2008.

According to published reports, interest on the taxable portion of the 2008 bond issuance was 11 percent. Tax-exempt bondholders earned more than 7 percent interest. Thanks to federally-backed student tuition loans, taxpayers then subsidized the school’s revenue streams that provided quarterly interest and principal payments to those bondholders.

Outcomes? Irrelevant In This Market

Last year, Thomas Jefferson accepted 80 percent of applicants. According to its latest required ABA disclosures, first-year attrition was over 30 percent. The school’s California bar passage rate for first-time takers in February and July 2012 was 54 percent, compared to the state average of 71 percent.

Solomon cites the school’s other dismal statistics, but ignores their implications. For example, Thomas Jefferson’s low bar passage rate made no difference to most of its graduates because the full-time long-term bar passage-employment rate for the class of 2013 was 29 percent, as it was for the class of 2012.

Meanwhile, its perennially high tuition (currently $44,900 a year) put Thomas Jefferson #1 on the U.S. News list of schools whose students incurred the greatest law school indebtedness: $180,665 for the class of 2013. According to National Jurist, the school generates 95 percent of its income from tuition.

It’s Alive

This invites an obvious question: How did the school survive so long and what is prolonging its life?

First, owing to unemployed recent graduates with massive student loans, bondholders received handsome quarterly payments for more than five years — much of it tax-exempt interest. The disconnect between student outcomes and the easy availability for federal loans blocked a true market response to a deteriorating situation. Bondholders should also give an appreciative nod to federal taxpayers who are guaranteeing those loans and will foot the bill for graduates entering income-based loan forgiveness programs.

Second, headlines touted Thomas Jefferson’s new deal as “slashing debt” by $87 million, but bondholders now own the law school building and will reportedly receive a market rate rent from the school — $5 million a year. Future student loans unrelated to student outcomes will provide those funds.

Third, the school issued $40 million in new bonds that will pay the current bondholders two percent interest. Student loan debt will make those payments possible.

Net-net, win-win, lose-lose

The bottom line benefit for Thomas Jefferson is immediate relief from its current cash crunch. Instead of $12 million in principal and interest payments annually, the school will pay $6 million in rent and bond interest — funded by students who borrow to obtain a Thomas Jefferson law degree of dubious value.

“I think the whole deal is a reflection of the fact that the bondholders were very desirous for us to succeed,” [Thomas Jefferson Dean Thomas] Guernsey said.

Actually, it reflects the bondholders’ ability to tap into the proceeds of future federal student loans as they cut a deal with a wounded adversary. Instead of cash flow corresponding to bond interest rates of 7 and 11 percent, bondholders will receive about half that amount, along with an office building and the tax advantages that come with ownership (e.g., depreciation deductions). Think of it as refinancing your home mortgage, except the bank gets to keep your house.

Erroneous Assumptions Produce Dubious Strategies

“This restructuring is a major step toward achieving our goals,” said Thomas Guernsey, dean of Thomas Jefferson. “It puts the school on a solid financial footing.”

Throwing furniture into the fireplace to keep the house warm is not a viable long-run survival strategy. Consider future students and their willingness to borrow as the “furniture” and you have a picture of the Thomas Jefferson School of Law’s business plan.

Meanwhile, Solomon echoes the hopes of law school faculty and administrators everywhere when he says, “[T]he decline in enrollment could lead to a shortage of lawyers five years from now.”

In assuming a unitary market demand for lawyers, he conflates the separate and distinct submarkets for law school graduates. His resulting leap of faith is that a rising tide — even if it arrives — will lift Thomas Jefferson’s boat and the debt-ridden graduates adrift in it. It won’t.