INDIANA TECH: ANOTHER COSTLY LESSON IGNORED

I’ll have more to say about the election, but not today. Instead, let’s take a closer look at a story that got lost in the shuffle of presidential politics. It deserves more attention than it received.

Back in 2013, when Indiana Tech opened the state’s fifth law school, I wrote that the decision was the latest example of pervasive legal market dysfunction. As the number of applicants declined, marginal schools increasingly were admitting students who wouldn’t be able to pass the bar, much less get decent jobs requiring a JD. Schools such as Indiana Tech were continuing to inflate the growing lawyer bubble, which was also the title of my 2013 book. (Proving that some things never change, it came out in paperback earlier this year.)

The central contributor to that bubble remains in place. Specifically, the federal student loan program absolves marginal law schools of accountability for their graduates’ poor employment outcomes, while encouraging administrators to fill classrooms with tuition-paying bodies. The results are predictable: lower admission standards, lower bar passage rates, and burgeoning law student debt for degrees of dubious value from marginal schools.

Victims of a Doomed Experiment

Indiana Tech’s inaugural class of first-year students began their studies in August 2013. Two years later, the school failed in its first attempt to get ABA accreditation. Further proving the ABA’s failure to address the continuing crisis in legal education, it granted Indiana Tech provisional accreditation earlier this year. The school graduated its first twelve students in 2016; only one passed the bar exam. Another passed on appeal, and a third passed the bar in another state.

On October 31, 2016, the school’s 71 students received an unwelcome Halloween surprise. The board of trustees announced its unanimous vote to close forever on June 30, 2017.

Indiana Tech President Arthur Snyder’s statement said, “[F]or the foreseeable future, the law school will not be able to attract students in sufficient numbers for the school to remain viable.”

Here’s the thing. President Snyder’s observation was equally true in 2011 — when the school completed its feasibility study and announced the decision to move forward. But rather than confront obvious facts about the demand for legal education that were apparent to everyone else, President Snyder insisted in 2013:

“We have given this decision careful research and consideration, and we believe we can develop a school that will attract and retain talented individuals who will contribute to our region’s economic development.”

Thanks to President Snyder and Indiana Tech’s board of trustees, those individuals — students and faculty — now face a tough and uncertain road.

Seeking Answers

What could have motivated such an obviously bad decision to open a new law school in the teeth of a lawyer glut? The answer is pretty simple. Snyder is a business guy. He has an MBA in strategic management from Wilmington University and a doctorate in education (innovation and leadership) from Wilmington University. Before joining the academic world, he spent more than 20 years in the telecommunications industry, rising to the position of vice president for the Data Systems Division of AT&T.

For someone focused on a bottom line approach to running higher education, adding a law school probably seemed like a no-brainer. In a 2011 interview for the National Law Journal, Snyder explained his strategy. Noting that about half of Indiana residents who attended ABA-approved law schools were doing so out of state, he said, “There are potential students who desire a law school education who cannot get that education in this area….”

Capturing that segment of the market was a strange premise upon which to build the case for a new law school. Which Indiana students admitted to established out-of-state schools did he expect to jump to an unaccredited newcomer?

The Real Play For Dollars

Like most law schools that should have closed their doors long ago, Indiana Tech’s business strategy sought to exploit market dysfunction. If the school could attract a sufficient number of aspiring attorneys to Fort Wayne, student loan dollars for tuition would take care of everything else, including a spiffy new building:

“The Indiana Tech Law School contains eight state-of-the-art classrooms, a courtroom, several learning and relaxation spaces for students including lounges and an outdoors patio, a three-story library, and everything else our students need to make their time here a successful and rewarding experience.”

Would graduates obtain decent full-time long-term jobs requiring the Indiana Tech JD degrees costing them close to $100,000? That would never become President Snyder’s problem.

The Opposite of Leadership

After the ABA denied Indiana Tech provisional accreditation in 2015, the handwriting was on the wall. But Snyder doubled down on a bad bet. The school tried to bolster admissions with a loss leader: a one-year tuition scholarship to students who enrolled in the fall of 2015. Anyone who took that deal is now twisting in the wind.

Indiana Tech reportedly lost $20 million. But its failed business strategy, followed by gimmicks that could never save it, produced dozens of real-life human victims whose damage is immeasurable. Those people don’t count in calculating Indiana Tech’s profit-and-loss statement. Except as conduits for federal student loan dollars, it’s fair to ask if they ever counted at all.

In his 2011 interview about the then-planned new law school, President Snyder suggested that Indiana Tech law school could be the first to offer a joint JD and master in science degree in leadership. He thought it would be an especially good fit because the university already has several programs in leadership.

Sometimes the most important learning in life comes from careful observation of negative role models. Speaking of negative role models, as I said at the beginning, I’ll have more to say about the election results in the days and weeks to come.

LAW SCHOOLS AND THE NEW YORK TIMES

On June 17, Noam Scheiber’s article, “An Expensive Law Degree and No Place to Use It,” appeared in The New York Times. He focused on individual human tragedies resulting from the legal education bubble.

Four days later, Professor Steven Davidoff Solomon countered with his Times column, “Law School Still a Solid Investment, Despite Pay Discrepancies.” Notwithstanding the title, he’s moving in Scheiber’s direction.

Learning from Mistakes

Professor Solomon’s prior ventures into legal education haven’t gone particularly well. In November 2014, he wrote “[T]he decline in enrollment could lead to a shortage of lawyers five years from now.” Highlighting Thomas Jefferson School of Law as one of the marginal schools fighting to remain alive, Solomon suggested, “It may be tempting to shut them in these difficult times, but it can cost tens of millions to open a new one. Better to invest and cut back on expenses for a while and see what happens.”

Consistent with his area of expertise — financial and securities regulation — Professor Solomon was relying on the market to work. But in legal education, it never gets a chance. Bankruptcy laws and the federal student loan program insulate law schools from accountability for their graduates’ poor employment outcomes.

Waiting to “see what happens” became a triumph of hope over reality. For the Thomas Jefferson class of 2013, the full-time long-term JD-required employment rate nine months after graduation was 29 percent. For the class of 2014, it was 30 percent. Even with an additional month for the class of 2015 to find jobs, the ten-month FTLT-JD-required employment rate was 24 percent. But the school did win that nagging fraud case brought by a recent graduate.

In April 2015, Solomon’s column on legal education and the profession was so riddled with errors that I climbed out of a hospital bed to write a responsive post culminating in this question, “Whatever happened to The New York Times fact-checker?”

Almost There

With all of that carnage in the rearview mirror, Professor Solomon’s June 21 article assumes a more moderate tone. Most importantly, he acknowledges the different legal education markets that exist for new graduates: “[I]t is clear that it is harder out there for the lower-tier law schools and their graduates.”

Noting that some big firms announced starting salary increases to $180,000 for the class of 2016, he cautions, “Only the lucky 17 percent of graduates earn salaries this high. To be in this group, you needed to go to a top 10 school or graduate in the higher ranks of the top quartile of law schools. Things are harder for every other law graduate.”

Solomon also accepts the bimodal distribution of starting salaries that results from the different markets for law graduates: “[W]hile 17 percent of graduates earned median salary of $160,000 in 2014, about half had a median starting salary of $40,000 to $65,000.”

The article could and should have ended with this: “Either way, it is clear that it is harder out there for lower-tier law schools and their graduates.”

In Defense of Fellow Professors?

Four days before Solomon’s article, Noam Scheiber’s Times piece profiled once-hopeful students at Valparaiso University School of Law. They’d incurred massive debt for a JD degree, but couldn’t find jobs requiring one. Scheiber also quoted a professor who recently headed the school’s admissions committee: “If we could go back, I think we should have erred a little more on the side of turning people down.”

Immediately after the publication of Scheiber’s article, social media took over when a law professor complained in an open letter to Scheiber: “Have you seen this line of peer-reviewed research, which estimates the boost to earning from a law degree including the substantial proportion of law graduates who do not practice law?”

The cited “line of peer-reviewed research” consisted of one study, co-authored by that professor in 2013. When Scheiber invited the professor to identify any factual errors in his article, the professor provided six alleged mistakes. For anyone interested in diving into those weeds, Scheiber posted the six items and his response on his Facebook page, including this:

“It’s not worth reviewing the controversy about your work on law graduate earnings here, since the criticisms are well-established. But suffice it to say, I think it’s strange to respond to a claim that the economic prospects of people graduating after the recession have fundamentally changed relative to those who graduated before the recession with a study that only includes people who graduated prior to 2009.”

(UPDATE: On Friday, June 24, the professor responded to Scheiber’s response.)

Among the many other criticisms to which Scheiber refers is the 2013 study’s failure to consider differences among law schools in their graduates’ incomes. In other words, it ignored the actual law school markets.

Nearing the Finish Line

Professor Solomon’s latest article centers on the importance of recognizing those different markets. But he still cites the 2013 study for the proposition that “most law students earned a premium of hundreds of thousands of dollars over what they would have earned had they not gone to law school, even taking into account the debt they accrue.”

Even so, Solomon’s slow walk away from the 2013 study improves on his April 2015 column. There, he relied on it to suggest that an “acceleration in compensation results in a premium of $1 million for lawyers over their lifetime compared with those who did not go to law school.” Now he’s down to “hundreds of thousands of dollars” for “most law students.”

Professor Solomon teaches at a top school, UC-Berkeley. He knows that plenty of students at other schools have a tough road ahead. Solomon no longer refers to an overly broad $1 million lifetime premium. He has also added a qualifier (“most law students” — meaning a mere 51 percent) — to whatever he thinks the study proves about the economic benefit of a JD. In other words, he has rendered the 2013 study meaningless to anyone considering law school today.

So why does Professor Solomon continue to cite the study at all? Better not to ask. Accept progress wherever you find it.

 

THE TRUMP THREE-STEP

[NOTE: Here’s a link to my recent interview on Viewpoints – https://viewpointsradio.wordpress.com/2016/04/24/too-many-lawyers-not-enough-law-jobs/]

Donald Trump is laying mattresses for the release of his tax returns. His periodically besieged and perpetually angry campaign manager Corey Lewandowski told CBS News that the presumptive Republican nominee for President will provide his returns as soon as the Internal Revenue Service concludes an audit.

As another episode in the reality series that has become the presidential campaign, the interview is worth watching. It exemplifies the Trump approach: Confuse the issue, pivot from defense to offense, and identify a new villain or two. As the questions get tougher, allow the natural bully to escape just long enough to intimidate serious inquirers while invigorating core supporters who embrace anger.

Step #1: Confuse the Issue

The CBS News introduction to the Lewandowski interview starts with the enormous range in the estimates of Trump’s wealth. He now claims to be worth $10 billion. In 2014, he said it was $3.3 billion. Last year, Forbes put it at $125 million.

Lewandowski said that Trump’s income last year was $557 million: “By any standard, that’s success.” Then he repeated it for emphasis: “$557 million.”

At best, his assertion was disingenuous. As Fortune Magazine observed, $557 million were Trump’s gross revenues, not his net income. Surely, he would never tolerate someone running one of his businesses who didn’t understand the difference. Plenty of companies with revenues that were tremendous — hugely tremendous, Trump might say — have gone bankrupt. It’s the net that matters.

Lewandowski then talked about the value of the buildings that he says Trump owns. Among them: “a store on Fifth Avenue that’s worth more than Mitt Romney’s total net worth was…”

What is Trump’s actual ownership share of the properties identified with him? Does anyone really believe that he holds clear title to all of the structures that bear the Trump name? Sadly, the answer is yes — lots of people do. They don’t understand, for example, the difference between owning a hotel and licensing the right to let the real owners put the Trump brand on it — often in great big capital letters.

As for his actual properties, do they have mortgages? Fortune reports that while revenues from his businesses increased from 2015, he added debt — $300 million of new debt generating $47 million in interest expense. What is Trump’s real “net-net-net” number? Lewandowski and Trump aren’t saying.

Step #2: Pivot to Offense

How about Trump’s insistence in 2012 that Mitt Romney release his tax returns? Or Romney’s observation that Trump’s returns have something to hide?

“Mitt Romney is a failed presidential candidate,” Lewandowski replied. “And he hid from his wealth.” Then he did a riff on Romney’s eight-car garage in Malibu. (He got that wrong, too. Romney’s building plans involved a four-car garage with an elevator lift in La Jolla.)

If the issue is the continuing IRS audit, why not release tax returns for 2002 through 2008? Those audits are completed.

Lewandowski’s answer: “It’s like what Bernie Sanders said, there’s nothing to see from 2002 and 2003 and 2004. What you guys are interested in right now is what his tax rate is. His tax rate is as low as possible… So he can provide jobs for people in his corporation.”

Step #3: Identify New Villains

As the CBS interviewers pressed ahead, Lewandowski became increasingly angry.

“Every attorney he’s talked to, including people like Greta Van Susteren, has said, ‘As your legal counsel, if I were to be your counsel, I would never allow you to release those taxes until the routine IRS audit is done.'”

“Routine” kept popping out of Lewandowski’s mouth when he referred to the “audit.” It began to take on a “protest too much” aura. But his substantive point is silly. Trump is not just another wealthy private citizen for whom such advice might make sense. He’s running for President of the United States. Does he fear that the IRS is missing something that others will catch? If so, why should he care? If he’s worth more than $10 billion, he can afford whatever anyone finds, can’t he? Besides, if Lewandowski keeps his promise, Trump’s returns will be available “immediately” after the audit is over.

Then came the new villain:

“This is the fault of the IRS,” Lewandowski said with his first smile of the interview. “Have them go finish the audit.”

Behind the Distraction

What could the “something to hide” be? Charitable giving secrets? Maybe. In April, The Washington Post analyzed a list from the Trump campaign of his charitable contributions over the past five years and concluded, “Not a single one of those [4,844] donations was actually a personal gift of Trump’s own money.”

Instead, they were “free rounds of golf, given away by his courses for charity auctions and raffles,” “land conservation agreements to forego development rights on property Trump owns,” and gifts from the Donald J. Trump Foundation, “which didn’t receive a personal check from Trump from 2009 through 2014.”

But I don’t think the most sensitive items on Trump’s personal tax returns involve his charitable giving or lack thereof. I think it’s the tax breaks that benefit every commercial real estate developer: depreciation and carry-forward losses.

Winning “Bigly”

The tax code allows taxpayers to depreciate the cost of a commercial building over its assumed life of 39 years. Each year, one thirty-ninth of the cost gets deducted from income. When you deal in big buildings, even small ownership slices translate into big tax depreciation deductions. It doesn’t matter that most buildings last a lot longer than 39 years. Properly structured, depreciation and other deductions relating to the ownership of commercial property pass through to individual taxpayers. Throw in taxes and other deductions, and the amounts get even larger.

Likewise, if a taxpayer loses money on a business venture — and Trump has ample experience there as well — those losses also offset current income. If total deductions and losses in a year exceed income, they carry-forward to offset income in future years.

“He’s going to pay the smallest amount of taxes possible,” Lewandowski said in reframing the entire issue. “Every deduction possible. He fights for every single dollar. That’s the mindset you want to bring to the government.”

Don’t be surprised if Trump’s personal effective tax rate turns out to be surprisingly close to zero. It’s probably a lot lower than what most of his supporters pay. I guess that makes Trump a winner. It makes those supporters something else.

ABOUT THAT LAWYER SHORTAGE…

Facts are stubborn things — almost as stubborn as persistent academic predictions that boom times for attorneys are just around the corner.

Back in 2013, Professor Ted Seto at Loyola Law School-Los Angeles observed, “Unless something truly extraordinary has happened to non-cyclical demand, 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.”

In November 2014 after the Bureau of Labor Statistics proposed a new and deeply flawed methodology for measuring attorney employment, Professor Seto weighed in again: “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.” His school’s full-time long-term bar passage employment rate for the class of 2015 was 62 percent — slightly better than the overall mean and median for all law schools, which are just under 60 percent.

Likewise in 2014, Professor Rene Reich-Graefe at Western New England University School of Law used what he described as “hard data” to argue, “[C]urrent and future law students are standing at the threshold of the most robust legal market that ever existed in this country.” The Georgetown Journal of Legal Ethics published his dubious analysis leading to that prediction. Within ten months of graduation, only 43 percent of 2015 graduates from Professor Reich-Graefe’s school found full-time long-term jobs requiring bar passage.

Fact-sayers v. Self-interested Soothsayers

To his credit, Professor Jerry Organ at the University of St. Thomas School of Law has been fearless in challenging the relentless optimism of his academic colleagues. And he does it with the most persuasive of lawyerly approaches: using facts and evidence.

Analyzing the ABA’s recently released law school employment reports for all fully-accredited law schools, Professor Organ notes that the number of graduates dropped in 2015. But for the second straight year, so did the number of full-time long-term jobs requiring bar passage.

Professor Organ offers a number of explanations for this result: declining bar passage rates; regional factors that reduced hiring in Texas and elsewhere; the impact of technology. But whatever the reasons, he suggests, “[T]his employment outcomes data provides a cautionary tale.”

Proceeding Without Caution

“The fact that the employment market for law school graduates appears to have stagnated and even declined to some extent over the last two years,” Professor Organ continues, “may mean that risk averse potential law school applicants who focus on post-graduate employment opportunities when assessing whether to invest in a legal education may remain skittish about applying, such that this year’s good news on the applicant front may be somewhat short-lived.”

The “good news on the applicant front” to which Professor Organ refers is his projection that applications for the fall 2016 entering class are on track to increase for the first time since 2010. But he offers a cautionary note there as well. Law schools at the upper end “will see more enrollment growth and profile stability in comparison with law schools further down the rankings continuum.”

Perilous Predictions

Some prognostications are safer than others. Here’s mine: Faculty and administration at weak law schools will continue using the overall decline in the number of all applicants to persist in their misleading sales pitches that now is a “Great Time to Go to Any Law School.” They will discourage inquiry into more relevant facts.

But here they are: At the 90th percentile of all 204 ABA-accredited law schools, the full-time long-term bar passage-required employment rate for 2015 graduates was just under 80 percent. At the 75th percentile, it was 67 percent. But at the 25th percentile, it was 49 percent. And at the 10th percentile, it was only 39 percent.

It will always be a great time to go to some law schools. It will never be a great time to go to others.

THE LATEST BIG LAW FIRM STRATEGY: PERFECTING ERROR

NOTE: Amazon is running a promotion. The KINDLE version of my novel, The Partnership, is available as a free download from March 30 through April 3, 2016.

Two months ago in “Big Law Leaders Perpetuating Mistakes,” I outlined evidence of failure that most big law firm leaders ignore. Back in December 2011, I’d covered the topic in “Fed to Death” The recently released trade paperback version of my latest book, The Lawyer Bubble – A Profession in Crisis, includes an extensive new afterword that begins, “The more things change…”

The failure is a ubiquitous strategy: aggressive inorganic growth. In response to facts and data, big law firm leaders aren’t stepping back to take a long, hard look at the wisdom of the approach. Instead, they’re tinkering at the margins in the desperate attempt to turn a loser into a winner. To help them, outside consultants — perennial enablers of big law firms’ worst impulses — have developed reassuring and superficially appealing metrics. For anyone who forgot, numbers are the answer to everything.

Broken Promises

One measure of failure is empirical. Financially, many lateral partners aren’t delivering on their promises to bring big client billings with them. Even self-reporting managing partners admit that only about half of their lateral hires are above breakeven (however they measure it), and the percentage has been dropping steadily. In “How to Hire a Home-Run Lateral? Look at Their Stats,” MP McQueen of The American Lawyer writes that the “fix” is underway: more than 20 percent of Am Law 200 firms are now using techniques made famous by the book and movie “Moneyball.”

“Using performance-oriented data, firms try to create profiles of the types of lawyers they need to hire to help boost profits, then search for candidates who fit the profile,” McQueen reports. “They may also use the tools to estimate whether a certain candidate would help the firm’s bottom line.”

There’s an old computer programmer’s maxim: “Garbage in, garbage out.”

Useless Data

Unlike baseball’s immutable data about hits, runs, strikeouts, walks, and errors, assessing attorney talent is far more complicated and far less objective. Ask a prospective lateral partner about his or her billings. Those expecting an honest answer deserve what they get. Ask the partner whether billings actually reflect clients and work that will make the move to a new firm. Even the partner doesn’t know the answer to that one.

Group Dewey Consulting’s Eric Dewey, who is appropriately skeptical about using prescriptive analytics in this process, notes, “An attorney needs to bring roughly 70 percent of their book of business with them within 12 months just to break even.” He also observes that more than one-third bring with them less than 50 percent.

Of course, there’s nothing wrong with assessing the likely value that a strategically targeted lateral hire might bring to the firm. And there’s nothing wrong with using data to inform decisions. But that’s different from using flawed numerical results to justify growth for the sake of growth.

Becoming What You Eat

Beyond the numbers is an even more important reality. Partners who might contribute to a firm’s short-term bottom line may have a more important long-term cultural impact. It might even be devastating.

Dewey & LeBoeuf — no relation to Group Dewey Consulting — learned that lesson the hard way. During the years prior to its collapse, the firm hired dozens of lateral rainmakers. But as the firm was coming apart in early 2012, chairman Steven H. Davis was wasting his breath when he told fellow partners there wasn’t enough cash to pay all of them everything they thought they deserved: “I have the sense that we have lost our focus on our culture and what it means to be a Dewey & LeBoeuf partner.”

Half of the partners he was addressing had been lateral hires over the previous five years. Most of them had joined the firm because it promised them more money. They hadn’t lost their focus on culture. They had redefined it.

A DIRTY LITTLE SECRET

The Wall Street Journal’s front page headline tells only part of story: “Legal Fees Cross New Mark: $1500.” The February 9 article lists the range of partner hourly rates at some big firms: Proskauer Rose from $925 to $1475; Ropes & Gray from $895 to $1450; Kirkland & Ellis from $875 to $1445; and so on and so on and so on.

That’s great if you can get it, but most firms can’t. The 2016 Georgetown/Thomson Reuters Peer Monitor “State of the Legal Profession” tells a second part of the story: realization and collection rates have plummeted. How much a firm bills doesn’t matter; what it actually brings in the door does. In 2005, collections totaled 93 percent of standard rates. By the end of 2015, it was down to 83 percent.

The Music Stopped, Almost

Annual standard hourly rate increases have blunted the profit impact of declining collections, but trees stopped growing to the sky about ten years ago. Except in bankruptcy courts. That’s the third element of the story and the profession’s dirty little secret: one of the most lucrative big law practice areas has no client accountability for its fees. Even worse, the process facilitates pricing behavior that spills over into other practice areas.

Take the recent Journal article. Where did the reporters get the detailed hourly rates for the firms it identified? A note at the bottom of the chart reveals the answer: “Source: Bankruptcy court filings.” If managing partners exchanged their firms’ hourly rates privately, it would raise serious antitrust issues. But in bankruptcy, publicly filed fee petitions do all of that work for them.

It gets worse. In bankruptcy, no one forces attorneys into the discounting that produces the current 83 percent overall average collections rate. Remember the infamous “Churn that bill, baby” email involving DLA Piper a few years ago? That was a bankruptcy case. Traditional mechanisms of accountability are ineffective. Unlike a solvent corporate client, a company in trouble has little leverage in dealing with its outside counsel. Until it emerges from a Chapter 11 reorganization, the days of minimizing legal expenses to maximize shareholder value are suspended. If it winds up in Chapter 7 liquidation, those days are gone forever.

At the same, time, the lawyers handling the bankruptcy have little risk. They get paid ahead of everyone else. Lawyers for creditor committees are a theoretical check only. They, too, get paid first and the members of the exclusive club of big law firm attorneys reappear. Their roles may change — debtor’s counsel in one bankruptcy may be creditors’ attorney in another and the liquidating trustee’s lawyer in yet another. In none of those capacities is there any incentive to rock the long-term, “paid-in-full hourly rate” boat.

More Theoretical Accountability

The U.S. Trustee receives all attorneys’ fees petitions before courts approve them. The Trustee can object, but it doesn’t have sufficient resources to analyze detailed line item time and expense entries on the thousands of pages that firms submit. The Trustee issued new guidelines that became effective for cases filed after November 1, 2013. Perhaps they will make a difference. But in the end, they are still guidelines and the final decision on attorneys fees resides with the bankruptcy judge.

As hourly rates have increased to the $1500 level that the Journal highlights, courts have given their rubber stamps of approval to the trend. Rather than challenge the high rates that all firms charge, bankruptcy judges determine merely that they are “reasonable and customary” because, after all, comparable firms are charging them for comparable work. The circularity is as obvious as the resulting payday for the lawyers. Someday, media attention and popular outrage may force meaningful change that has yet to occur.

Worse Than It Seems

Considering the 83 percent collection rate in the context of the nearly 100 percent rate for bankruptcy lawyers yields an insight relevant to the fourth and final part of the larger big law firm story. In particular, the current 83 percent collection rate is deceptively high. If a firm’s average is 83 percent and its bankruptcy lawyers collect close to 100 percent, then firms with large bankruptcy practices have non-bankruptcy clients pushing some practice areas into deep concessions off standard rates.

Likewise, combining this fact with two conclusions from the Georgetown/Thomson Reuters Peer Monitor Report produces ominous implications for such firms:

— “Demand for law firm services…was essentially flat in 2015,” and

— Bankruptcy experienced the largest negative growth rate in demand by practice area.

Unless the country heads into a recession that few economists expect, the continuing reduction in bankruptcies will drive overall average collections dramatically lower. That’s bad news for big law firms with significant bankruptcy practices.

Back in 2011, an icon of the bankruptcy bar, the late Harvey Miller of Weil, Gotshal and Manges, defended his firm’s approach to legal fees: “The underlying principle is, if you can get it, get it.”

Miller isn’t around anymore, but his unfortunate credo for a noble profession survives — for now.

[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 and is now available for pre-order at Amazon and Barnes & Noble.]

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.