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.

UPDATE ON THE BATTLE FOR CHARLESTON

Call it an eleventh-hour reprieve. Or maybe it’s just a break before the executioner arrives. On Thursday, June 5, the South Carolina Commission on Higher Education was going to decide on InfiLaw’s application for a license to own and operate the for-profit Charleston School of Law. But a day before the scheduled vote, InfiLaw suspended its application.

As I wrote last week, InfiLaw owns and operates three for-profit law schools (Arizona Summit, Charlotte, and Florida Coastal). Its owner is Sterling Partners, a Chicago-based private equity firm that lists InfiLaw as a holding in its “education portfolio.” In July 2013, InfiLaw agreed to buy the Charleston School of Law. On May 19, the Committee on Academic Affairs and Licensing voted 3-to-1 against recommending InfiLaw’s license request. Then things got interesting.

On May 23 — four days after the Committee’s rejection and just before the Memorial Day weekend — state representative John Richard C. King wrote to the South Carolina Attorney General’s office. He sought an advisory opinion that, if provided, would essentially require the Commission on Higher Education to approve InfiLaw’s application, notwithstanding the earlier Committee rejection. Representative King is also a first-year student at the InfiLaw school in Charlotte, North Carolina.

Only a week after King’s request, the AG’s office issued a detailed 10-page single-spaced legal opinion that gave InfiLaw what it wanted. The final sentence warns: “Any licensing decision based upon criteria outside the law would, of course, be subject to judicial review and possible reversal.”

State senator John Courson immediately suggested that InfiLaw suspend its request temporarily because the AG’s opinion “needs to be vetted” and Governor Nikki Haley needs to fill vacant seats on the Commission before it discusses the issue.

Senator Courson hasn’t revealed publicly where he stands on the merits of InfiLaw’s proposed acquisition. But when legislators want a governor to fill vacant committee seats before taking a final vote on a matter of interest to them, there’s usually a reason. As InfliLaw’s statement accompanying the suspension of its application declares: “We are committed to this acquisition and intend to renew our application in due course.” Close observers might get the uneasy feeling that they’re watching sausage being made.

Meanwhile, no one is discussing the more important point that transcends the Charleston situation. Typically, private equity investors seek opportunities that will provide them with above average returns. That’s not a criticism; it’s their business. However, if for-profit legal education generates returns that are appealing to private equity investors, non-dischargeable federal student loans are the reason. In a glutted market for lawyers, that’s a remarkably unfortunate outcome.

THE BATTLE FOR CHARLESTON

On the heels of my post about two struggling law schools, the New York Times published Professor Steven R. Davidoff’s discussion about one of them. Davidoff argues that critics of InfiLaw’s proposed acquisition of for-profit Charleston Law School are missing a key point: Why is it any worse for the private equity firm that owns InfiLaw to operate Charleston School of Law than, say, the current owners who have already taken millions of dollars out of the school?

In fact, he implies, if the school winds up affiliating with the state-run College of Charleston, why would that be preferable? Profit is profit; what difference does it make who gets it?

Here’s Davidoff’s money quote: “Lost among the dispute is the fact that a lower-tier law school like Charleston — whoever owns it — can not only produce capable graduates but help students start careers they couldn’t have without a law degree.”

Really?

As I’ve reported previously, even the dismal market for new attorneys hasn’t slowed the growth of InfliLaw’s three law schools (Arizona Summit, Charlotte, and Florida Coastal) — from a combined 679 graduates in 2011 to 1,191 in 2013. According to the ABA, only 36 percent of the InfiLaw classes of 2013 (including all three of its law schools) obtained full-time, long term JD-required employment.

Disaggregation doesn’t make things look any better for the company, unless you’re one of its private equity owners. For example, Davidoff cites Florida Coastal’s improvement in the percentage of graduates who pass the bar — from 58.2 percent to 76.4 percent as evidence of InfiLaw’s “track record of improving schools.” He’s responding to a “fear about the acquisition — that a private equity firm will lower standards.”

Davidoff doesn’t cite a source for his 76.4 percent number. According to Florida Coastal’s website, only 67.4 percent of first-time takers passed the bar in July 2013 — down from 75.2 percent for the July 2012 test. For February 2014, 72.9 percent of first-time takers passed — down from 79.3 percent in February 2013.

But that’s a minor issue compared to the overriding problem: only 35 percent of 2013 graduates obtained full-time, long-term jobs requiring that degree. The rest are not starting “careers that they wouldn’t have without a law degree.”

Debt

Maybe most InfiLaw graduates aren’t getting full-time, long-term law jobs, but they’re acquiring a lot of educational debt. Annual tuition and fees at all three InfiLaw schools exceed $40,000. At Arizona Summit, median federal law student debt between July 1, 2012 and June 30, 2013 was $184,825. At Florida Coastal, it was $162,549. The Charlotte Law School median was $155,697, plus another $20,018 in private loans.

Davidoff’s defense of InfiLaw ignores the combination of big debt and poor employment outcomes that afflict most of its recent graduates.

His concluding thoughts make a valid point: “Instead of arguing about who will profit from them, Charleston’s students may instead want to ask who will give South Carolina’s residents the best opportunity to succeed as lawyers at an acceptable price.”

Based on its track record to date, the answer isn’t InfiLaw. And I would reframe the question: Why should anyone profit at all when non-dischargeable student loans are the source of those profits?

The new ABA Task Force on the Financing of Legal Education has an unprecedented opportunity to straighten out this mess and take the profession to a better place. But with the chairman of InfiLaw’s National Policy Board (Dennis Archer) chairing that committee, don’t hold your breath waiting for that to happen.