Attorney advertising and the contingency fee cost paradox.

• Author: Engstrom, Nora Freeman
• Position: Introduction through III. Advertising and Price: Theory and Evidence, p. 633-666

INTRODUCTION I. THE PRE-BATES WORLD A. Unmet Client Need B. Enter Legal Clinics: "A New Breed of Lawyer Born of Advertisements" C. The Bates Decision II. THE POST-BATES WORLD A. "Legal Clinics Have Come of Age" B. The Unexpected Ascent of the Personal Injury Advertiser III. ADVERTISING AND PRICE: THEORY AND EVIDENCE A. Theories for Why Advertising Should or Shouldn't Reduce Prices B. Empirical Evidence from Other Contexts C. Studies on Advertising's Effect on Legal Services IV. THE PARADOX: PERSONAL INJURY ADVERTISERS APPEAR TO BUCK ECONOMIC PREDICTIONS V. CONFRONTING THE PARADOX A. Less Plausible Explanations 1. Advertising personal injury lawyers are of higher quality? 2. Referrals? 3. Collusion? 4. Smaller or riskier cases? B. More Plausible Explanations 1. Ads emphasize quality rather than price 2. Clients might mistakenly think advertisers are of higher quality 3. Clients are uniquely insensitive to contingency fee percentages a. Possible, not certain b. Delayed, not immediate c. Deducted, not paid CONCLUSION INTRODUCTION

On June 27, 1977, in the landmark case Bates v. State Bar of Arizona, the Supreme Court invalidated state bans on attorney advertising as incompatible with the First Amendment. (1) In so doing, the Court made a critical judgment about attorney advertising's effect on attorney price. Responding to the Arizona State Bar's assertion that legal advertising would drive up the cost of legal services, the Court declared: "It is entirely possible that advertising will serve to reduce, not advance, the cost of legal services to the consumer." (2)

Prominent commentators were bolder in their predictions. Then-Solicitor General Robert H. Bork penned an amicus brief in the Bates case which bluntly proclaimed: "Prohibitions upon advertising indirectly increase prices...." (3) In an influential article published six years after the Bates decision, Geoffrey Hazard and his coauthors theorized: "For the consumer of standardizable services, the probable result of permitting lawyers to advertise will be lower priced services of better quality." (4) And a few years after that, in a now-frequently-cited dissent, Justice O'Connor referenced the Hazard piece and wrote that "[t]he best arguments in favor of rules permitting attorneys to advertise are founded in elementary economic principles." (5) "Restrictions on truthful advertising, which artificially interfere with the ability of suppliers to transmit price information to consumers," she continued, "presumably reduce the efficiency of the mechanisms of supply and demand," permitting suppliers to "maintain a price/quality ratio ... that is higher than would otherwise prevail." (6)

The theory that attorney advertising would reduce the cost of basic legal services made sense. And, as we will see, it was well supported. Throughout the 1970s and 1980s, academics published a host of studies confirming advertising's power to reduce consumer prices for a range of everyday items, from eyeglasses to gasoline. Moreover, within a few years of the Bates decision, prominent economists from the Federal Trade Commission (FTC) embarked on an ambitious effort to test advertising's price power, particularly in the legal services marketplace. After compiling attorney price information from approximately 3200 lawyers in seventeen cities, what these economists found was as promising as it was unsurprising: "Advertising of legal services, as is generally true for goods and other services, tends to lead to lower prices...." (7) Further more, "attorneys who advertised a specific service tended to provide that service to the public at a lower price than ... those attorneys who did not advertise." (8) The study's findings, in fact, were splashed across national newspapers and sent to state bar associations, and the authors explicitly presented their research as providing "convincing support for the proposition that greater flexibility to engage in ... advertising will be associated with lower prices for consumers of legal services." (9)

In the ensuing decades, the FTC's report and a follow-on study utilizing the same data have taken on a kind of talismanic significance. "Advertising by lawyers encourages competition, which results in lower prices," intones one recent--and representative--article. (10) Or, as Ronald Rotunda recently wrote:

Some people incorrectly assume that legal advertising must raise the costs to the consumer, because someone must pay for the cost of the advertising. But we now know that advertising lowers prices.... This unhappy fact may explain why some lawyers have opposed televised lawyer commercials. Television commercials lead to price was, and no consumer of legal services has ever been wounded in a price war. (11) Consumer groups have repeated such claims--and their consistent and vocal support for attorney advertising has largely hinged on their belief that lawyer ads stimulate price competition, lower fees, and thus expand legal access. (12) The FTC has consistently, and forcefully, said as much. (13) The American Bar Association (ABA), when liberalizing the Model Code's relatively conservative marketing constraints, explicitly credited "[e]mpirical studies of lawyer advertising" that "indicate that it reduces cost and increases consumer access." (14) Litigants have pointed to advertising's price power when successfully challenging state advertising restrictions. (15) And courts, not surprisingly, have accepted--and acted upon--advertising's competitive effect, relaxing restraints on attorney advertising because, as the Supreme Court of New Jersey put it, it is in the public interest to provide legal services at lower cost, and "attorney advertising is one of the best ways to foster price competition." (16)

But it is not that simple. Typically ignored in all this commentary is the fact that Bates itself involved a particular type of legal service provider. It involved a legal clinic--a law firm that handled routine matters, such as wills, uncontested divorces, name changes, and personal bankruptcies--for flat, transparent, and reasonable rates. (17) This was not coincidental. In the late 1970s and early 1980s, as we will see, low-cost legal clinics, such as Arizona's Bates & O'Steen, Cleveland's Hyatt Legal Services, California's Jacoby & Meyers, and Baltimore's Cawley & Schmidt were the biggest advertisers, by far. (18) In advertising's absence, clinics, with their razor-thin profit margins, had trouble generating the volume of clients necessary to stay afloat. After the Bates decision, however, legal clinics bloomed, and as they prospered, the price for routine legal services apparently plunged, just as advertising's advocates had hoped and the era's economic theory would predict. (19)

But some thirty-five years have now elapsed since the Bates decision. And in this time, the identity of attorney advertisers has changed considerably. Legal clinics, as they existed in the late 1970s and early 1980s, are history. Starting in the early 1990s, as we will see, most were downsized, dismantled, or so radically reorganized as to render them unrecognizable. (20) So who has taken clinics' place as the most aggressive attorney advertisers? That distinction, without question, belongs to the personal injury (PI) bar. Most personal injury attorneys, it appears, advertise, (21) and most of the biggest advertisers are personal injury lawyers. Indeed, PI lawyers are, and have long been, the dominant TV advertisers. (22) They are, and have long been, the dominant Yellow Pages advertisers. (23) And, according to the New York Times, of the top ten spenders on legal advertising (of all types), all are personal injury or plaintiff-related law firms. (24)

If advertising reduces fees (as many studies have found and most courts, consumer groups, the FTC, the ABA, and academics assume), and if personal injury lawyers are far and away the most aggressive advertisers (as data suggest), one might infer there's been a steep reduction in plaintiffs' lawyers' fees in recent years. But all available evidence is to the contrary. Indeed, evidence suggests that, over the past three decades, contingency fees, on a percentage basis, have not dropped, even while ad expenditures have soared--and tort recoveries have risen. (25) And the FTC study cited above, which is the best, most comprehensive, most sophisticated study of advertising and attorney fees ever conducted in the United States, made a strange--yet almost entirely overlooked--discovery. While it found that "attorneys who advertised a specific service tended to provide that service to the public at a lower price" than those attorneys who did not advertise, (26) it also found:

The one area in which the results were different was personal injury. In the three cities with statistically significant results ..., attorneys who advertised personal injury services appeared to charge about a 3 percent higher contingent fee if the case was settled before trial than those who did not advertise personal injury services. (27) Advertising personal injury lawyers thus seem to buck most economic predictions. It is an anomaly that has escaped attention in the scholarly literature. (28) And it is somewhat tricky to explain. But it is an anomaly that cries out for analysis and carries with it enormous consequences, for both the legality of attorney advertising and the delivery of legal services more generally.

This Article proceeds in five Parts. Drawing on scores of contemporaneous press and journal accounts, Parts I and II are largely historical. Specifically, Part I examines the socio-legal template on which the Supreme Court issued its opinion and emphasizes that Bates was a legal clinic case. Bates came along at a time when middle-class Americans' unmet legal need was fast becoming a pressing political issue. Legal clinics promised to expand legal access. And, by abolishing advertising restrictions, the Court in Bates sought to...