Jacoby & Meyers’ lawsuit challenges the legal establishment

Cite this Article
Larry Ribstein, Jacoby & Meyers’ lawsuit challenges the legal establishment, Truth on the Market (May 18, 2011), https://truthonthemarket.com/2011/05/18/jacoby-meyers-lawsuit-challenges-the-legal-establishment/

The WSJ writes that

Jacoby & Meyers Law Offices LLP, a pioneer of television legal advertising, filed lawsuits Wednesday challenging state laws in New York, New Jersey and Connecticut that prohibit nonattorneys from owning stakes in law firms.

The firm, which has more than 60 lawyers and specializes in personal-injury cases, claims that the restrictions have hurt its ability to raise capital to cover technology and expansion costs, and have hampered it in providing affordable legal services to its working-class clients.

The article suggests that allowing law firms to raise outside capital would level the playing field between small firms and larger firms which can raise money from their law partners.  That misses the point.  It’s not clear why outside capital makes sense for any conventional law firms, big or small.  To be sure, the law firms might like to have the money, e.g., to be able to buy out partners, as one Big Law lawyer points out in the article. But as I discuss in Death of Big Law, investors would have little reason to clamor to buy interests in law firms because these firms don’t really own anything worth investing in.

But a firm like J & M might be able to use outside to, for example, build its brand through advertising.  It’s more like Slater & Gordon, the Australian law firm that did a public offering a few years ago, than a conventional big corporate firm driven by rainmaking partners. 

The WSJ article briefly rehearses the arguments for and against restrictions on outside capital.  The argument for is that lawyers are in danger of being corrupted by the crass interests of outside investors.  If you’re still laughing I don’t think I need to tell you the argument against.  Hint:  successful businesses, including law firms, can’t profitably neglect their customers. As I said in Death of Big Law, “firms have a strong profit motive to preserve their reputations for fair and honest dealings with clients and others.”

The question is what J & M or anybody else can do about the outside capital ban.  Its managing partner tells the WSJ that the ban “unconstitutionally restricts interstate commerce by limiting attorneys’ ability to act like any other business in the United States.” He may be referring to the fact that J & M can’t operate as a national business if it’s subject to restrictive ethical rules in each state it operates in.  But this is essentially a choice of law rule that applies to many kinds of contracts, and it’s not unconstitional.  (See, generally, The Law Market.)

The real problem is with lawyer licensing, which is what gives professional rules like the ban on outside capital their bite.  An antitrust challenge might eventually work, but I doubt it. More potent in the long run is the combination of consumers rising up en masse against the high price of legal services and upstarts like J & M seeking to make money by challenging the satus quo.  As I say in Death of Big Law (footnote omitted):

Ethical rules are unstable to the extent that they pit the legal profession’s collective interest against individual lawyers’ self-interest. Those who incur the highest costs from these rules will take the lead in changing them. Change is particularly likely to come from smaller firms operating on the edges of conventional professional norms that seek to offer lower-cost services without costly large-firm baggage.

In any event, the end game here isn’t J & M.  As discussed in the Death of Big Law (footnote omitted)

Law may be just one of several lines of products or services sold directly to consumers. For example, chains like Wal-Mart or Tesco can sell wills and other legal advice along with tax services and eyeglasses. An established retailer can leverage its brand by extending the firm’s scope to embrace a different type of service. * ** Mass retailers can compete with small independent law offices because they have more established reputations and can cross-sell legal and other types of services.

I also note:

Instead of having to trust a worker cooperative with a tenuous future or a sole practitioner recommended by a relative or a subway advertisement, clients could rely on a large retailer’s reputation for service that supports all of its profit-making activities, including law practice.

In the longer run, law “practice” in general may be challenged by the sale of legal information products.  As Kobayashi and I discuss in Law’s Information Revolution, these products ultimately could provide more and better legal information to the masses at lower prices than in the current regulated regime. 

In other words, J & M’s legal challenge is only an early tremor in the looming earthquake in legal services. Read the articles linked above to get an idea of what’s coming down the pike.