FALSE ADVERTISING POSING AS LEGAL SCHOLARSHIP

Sometimes everything you need to know about a piece of purported scholarly legal research appears in its opening lines. Take, for example, the first two sentences of “Keep Calm and Carry On” in current issue of The Georgetown Journal of Legal Ethics:

“Supposedly, there is a crisis in legal education. It appears to be touted mostly by those who are in the business of realizing monetary (or, at least, reputational) gain from providing cost-efficient coverage about matters of (rather) little importance.”

At this point, Professor Rene’ Reich-Graefe’s 15-page article offers the second of its 80 footnotes: “For example, in 2011, The New York Times Company reported annual revenues of $2,323,401,000. Of those, approximately 52.57% (or $1,221,497,000) were raised in advertising revenue…”

So it turns out that the New York Times, The Wall Street Journal, and every other media outlet reporting on the troubled world of American legal education have manufactured a crisis to sell advertising space. Never mind too many law school graduates for too few JD-required jobs, more than a decade of soaring law school tuition, and crippling student debt. Everyone just needs to calm down.

The argument

Professor Reich-Graefe offers what he calls “a brief exercise in some eclectic apologetics of the present state of legal education for those of us who refuse to become card-carrying members of the contemporary ‘Hysterias-R-Us’ legal lemming movement.” Starting with a Bureau of Labor Statistics report that “lawyer employment jobs in 2010 were at 728,200,” he observes that the United States has an additional 500,000 licensed attorneys and concludes:

“One may safely assume that, at present, a good number (though certainly not all) of those licensed lawyers are gainfully employed, too — mainly within the legal profession.”

Then Reich-Graefe posits trends that he says will favor the legal profession: “Over half of currently practicing lawyers in this country will retire over the next 15 to 20 years”; “U.S. population will increase by over 100 million people, i.e., by one third, until 2060, thus, increasing total demand for legal services”; “the two largest intergenerational wealth transfers in the history of mankind…will occur in the United States over the course of the next 30 to 40 years, thus, increasing total demand for legal services even further”; and “everything in the law, by definition, will continue to change…there will be more work for more lawyers.”

His analysis culminates in a breathless conclusion: “[R]ecent law school graduates and current and future law students are standing at the threshold of the most robust legal market that ever existed in this country — a legal market which will grow, exist for, and coincide with their entire professional career [sic].”

The critique

Others have already dissected Reich-Graefe’s statistical arguments in great detail. Suffice it to say that when law professors wander into the world of numbers, someone should subject their work to peer review before publishing it. But Professor Bill Henderson makes an equally important point: Even if Reich-Graefe’s analysis and assumptions are valid, his advice — “Keep Calm and Carry On” — is dangerous.

I would add this nuance: Reich-Graefe’s advice is more dangerous for some law schools than for others. The distinction matters because law schools don’t comprise a single market. That’s not a value judgment; it’s just true. At Professor Reich-Graefe’s school, Western New England University School of Law, only 37 percent of the graduating class of 2013 obtained full-time, long-term jobs requiring a JD. Compare that to graduate employment rates (and salaries) at top schools and then try to convince yourself that all schools serve the same market for new lawyers.

The dual market should have profound implications for any particular school’s mission, but so far it hasn’t. Tuition at some schools with dismal employment outcomes isn’t significantly less than some top schools where graduation practically assures JD-required employment at a six-figure salary.

Likewise, virtually all schools have ridden the wave of dramatic tuition increases. In 2005, full-time tuition and fees at Western New England was $27,000. This year, it’s $40,000.

Shame on us

Reich-Graefe makes many of us accomplices to his claimed conspiracy against facts and reason. Shame on me for writing The Lawyer BubbleShame on Richard Susskind for writing Tomorrow’s Lawyers. Shame on Bill Henderson for his favorable review of our books in the April 2014 issue of the Michigan Law Review. Shame on Brian Tamanaha, Paul Campos, Matt Leichter, and every other voice of concern for the future of the profession and those entering it.

Deeply vested interests would prefer to embrace a different message that has a noble heritage: “Keep Calm and Carry On” — as the British government urged its citizenry during World War II. But in this context, what does “carry on” mean?

“Carry on” how, exactly?

Recently on the Legal Whiteboard, Professor Jerry Organ at St. Thomas University School of Law answered that question: filling classrooms by abandoning law school admission standards. Ten years ago, the overall admission rate for applicants was 50 percent; today it’s almost 80 percent. That trend line accompanies a pernicious business model.

It’s still tough to get into top a law school; that segment of the market isn’t sacrificing student quality to fill seats. But most members of the other law school market are. They could proceed differently. They could view the current crisis as an opportunity for dramatic innovation. They could rethink their missions. They could offer prospective students new ways to assess realistically their potential roles as attorneys while providing a practical, financially viable path for graduates to get there.

Alternatively, they can keep calm and carry on. Then they can hope that on the current field of battle they’re not carried off — on their shields.

UGLINESS INSIDE THE AM LAW 100 – PART 2

Part I of this series considered the possibility that a key metric — average partner profits — has lost much of its value in describing anything meaningful about big law firms. In eat-what-you-kill firms, the explosive growth of top-to-bottom spreads within equity partnerships has skewed the distribution of income away from the bell-shaped curve that underpins the statistical validity of any average.

Part II considers the implications.

Searching for explanations beyond the obvious

In recent years, equity partners at the top of most big firms have engineered a massive redistribution of incomes in their favor. Why? The next time a senior partner talks about holding the line on equity partner headcount or reducing entry-level partner compensation as a way to strengthen the partnership, consider the source and scrutinize the claim.

One popular assertion is that the high end of the internal equity partner income gap attracts lateral partners. In fact, some firms boast about their large spreads because they hope it will entice laterals. But Professor William Henderson’s recent analysis demonstrates that lateral hiring typically doesn’t enhance a firm’s profits. Sometimes selective lateral hiring works. But infrequent success doesn’t make aggressive and indiscriminate lateral hiring to enhance top line revenues a wise business plan.

According to Citi’s 2012 Law Firm Leaders Survey, even law firm managing partners acknowledge that, financially, almost half of all lateral hires are no better than a break-even proposition. If leaders are willing to admit that an ongoing strategy has a failure rate approaching 50 percent, imagine how bad the reality must actually be. Even worse, the non-financial implications for the acquiring firm’s culture can be devastating — but there’s no metric for assessing those untoward consequences.

A related argument is that without the high end of the range, legacy partners will leave. Firm leaders should consider resisting such threats. Even if such partners aren’t bluffing, it may be wiser to let them go.

“We’re helping young attorneys and building a future”

Other supposed benefits to recruiting rainmakers at the high end of a firm’s internal partner income distribution are the supposedly new opportunities that they can provide to younger attorneys. But the 2013 Client Advisory from Citi Private Bank-Hildebrandt Consulting shows that lateral partner hiring comes at the expense of associate promotions from within. Homegrown talent is losing the equity partner race to outsiders.

In a similar attempt to spin another current trend as beneficial to young lawyers, some managing partners assert that lower equity partner compensation levels lower the bar for admission, making equity status easier to attain. Someone under consideration for promotion can more persuasively make the business case (i.e., that potential partner’s client billings) required for equity participation.

Such sophistry assumes that an economic test makes any sense for most young partners in today’s big firms. In fact, it never did. But now the prevailing model incentivizes senior partners to hoard billings, preserve their own positions, and build client silos — just in case they someday find themselves searching for a better deal elsewhere in the overheated lateral market.

Finally, senior leaders urge that current growth strategies will better position their firms for the future. Such appealing rhetoric is difficult to reconcile with many partners’ contradictory behavior: guarding client silos, pulling up the equity partner ladder, reducing entry level partner compensation, and making it increasingly difficult for home-grown talent ever to reach the rarified profit participation levels of today’s managing partners.

Broader implications of short-term greed

In his latest book, Tomorrow’s Lawyers, Richard Susskind wrote that most law firm leaders he meets “have only a few years left to serve and hope they can hold out until retirement… Operating as managers rather than leaders, they are more focused on short-term profitability than long-term strategic health.”

Viewed through that lens, the annual Am Law 100 rankings make greed respectable while masking insidious internal equity partner compensation gaps that benefit a relatively few. Annual increases in average partner profits imply the presence of sound leadership and a firm’s financial success. But an undisclosed metric — growing internal inequality — may actually portend failure.

Don’t take my word for it. Ask lawyers from what was once Dewey & LeBoeuf and a host of other recent fatalities. Their average partner profits looked pretty good — all the way to the end.