The nirvana fallacy in law firm regulation debates.

• Author: Chambliss, Elizabeth
• Position: Professional Challenges in Large Firm Practices

"[L]awyers can no longer look back a generation for their managerial models." (1)

Most commentators would agree that large law firms have outgrown collegial management and self-regulation. With hundreds--and, in some firms, thousands--of lawyers, (2) multiple national and international offices, (3) an increasing number of mergers, (4) and significant lateral mobility, (5) partners no longer can rely on social ties and informal, face-to-face interaction for making decisions, conveying firm policy, or monitoring the quality of lawyers' work. In the words of one managing partner: "In 1980, we all knew each other and we knew each other's spouses and we had dinners on Saturday night. That was just a different world." (6) Today, most large law firms are more or less bureaucratically managed, (7) with extensive internal hierarchy (8) and specialized, full-time managers. (9)

Lawyers generally have been slow to recognize the benefits of bureaucratic management, and traditionally have resisted and lamented the move toward more bureaucratic forms. (10) Although partners want their firms to prosper in an increasingly competitive market, many decry the strategies necessary to increase profitability and continue to express nostalgia for an historic collegial ideal. (11) Thus, many lawyers view the infrastructure of bureaucratic management--that is, formal policies and procedures and specialized managerial personnel--as necessarily impeding or distracting from some "purer" form of collegial interaction and culture. (12)

Such thinking significantly inhibits the profession's approach to lawyer regulation. Despite the many thousands of lawyers who work in large law firms, (13) and the broader institutional influence of large firm practice, (14) the profession has yet to come up with a regulatory strategy aimed at large, bureaucratic firms, (15) or even to agree that it needs one. Instead, many lawyers, regulators, and scholars continue to 'look back a generation' for their regulatory models, evaluating proposals aimed at large law firms against a nostalgic, collegial ideal. (16)

For instance, most of the debate about law firm discipline has revolved around its likely effect on individual accountability and compliance with ethical rules. Proponents of law firm discipline view it as a means of promoting individual accountability, by promoting the development of centralized monitoring and structural controls within firms. (17) Opponents of law firm discipline, however, argue that extending supervisory liability to firms will undermine individual accountability, viewing the centralization of management as per se problematic. (18)

In this volume, Professor Margaret Raymond raises similar concerns about the role of compliance specialists in large law firms. (19) Proponents of specialists, myself included, argue that the creation of specialized management positions, such as ethics advisor and law firm general counsel, will promote individual accountability by promoting ethical awareness and monitoring within firms. (20) Professor Raymond, however, cautions that the designation of a specialist to handle ethical and regulatory matters may lead other lawyers to relax--or relinquish--individual responsibility. (21)

This article questions the empirical basis for such concerns. I argue that the fear that centralized management controls will undermine individual accountability rests on an implicit comparison to a nostalgic, collegial ideal, in which all partners engage in firm management and collective self-regulation. Since no large law firm can live up to this ideal, such a comparison inevitably leads to a critique of the proposed regulation. Economists refer to this type of comparison--between an idealized apple and an imperfect orange-as the "nirvana fallacy." (22)

The proper comparison, I argue, is between actual, more or less bureaucratic law firms, with and without the proposed controls. This type of comparison requires close attention to current conditions in law firms and lawyers' attitudes and behavior in different regulatory contexts. To the extent that such data are available, they suggest that some forms of centralized management, such as the appointment of compliance specialists, may significantly improve individual accountability and compliance with professional rules.

Part I reviews the recent debate about law firm discipline and shows how opponents of law firm discipline implicitly compare it with a collegial ideal. Part II examines Professor Raymond's concerns about the professionalization of ethics and shows how she, too, relies in part on an implicit collegial ideal. Part III reviews what little we know about the effects of law firm regulation on individual accountability and compliance. I conclude by defining some questions for future empirical research.

1. LAW FIRM DISCIPLINE

   Professor Ted Schneyer was the first to call for "professional discipline" for law firms in a 1991 article by the same title. (23) Professor Schneyer called for the imposition of an entity duty of supervision under Rule 5.1(a), (24) which currently imposes supervisory duties only on individual lawyers. (25) He argued that the possibility of sanctions against firms is necessary in the large firm context in order to encourage partners to invest in firm management and the creation of bureaucratic controls, such as ethics and conflicts committees. (26) He referred to such controls collectively as the "ethical infrastructure" of the firm:

   [A] law firm's organization, policies, and operating procedures

   constitute an "ethical infrastructure" that cuts across particular

   lawyers and tasks.... Given the ... importance of a law firm's ethical infrastructure and the diffuse responsibility for creating and maintaining that infrastructure, a disciplinary regime that targets only individual lawyers in an era of large law firms is no longer sufficient. Sanctions against firms are needed as well. (27)

   Professor Schneyer's article prompted proposals for law firm discipline in several jurisdictions, (28) but only two--New York and New Jersey--have imposed supervisory liability on firms. (29) The American Bar Association Commission on Evaluation of the Rules of Professional Conduct, more commonly known as the Ethics 2000 Commission, included a proposal for law firm discipline as part of its initial recommendations for changes to the Model Rules, (30) but voted 6-5 to withdraw the proposal in response to opposition. (31) The proposed rule would have added "the law firm" to the list of those with supervisory responsibility under Rule 5.1(a). The proposed rule stated:

   A partner in a law firm, a lawyer who individually or together

   with other lawyers possesses comparable managerial authority in a law firm, and the law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct. (32)

   Commentators have criticized law firm discipline on a number of grounds, (33) but the key argument leading to the withdrawal of the Ethics 2000 Commission proposal was the concern that entity liability would undermine individual accountability. As the Commission explained:

    The Commission initially proposed to extend the duties in [Rule] 5.1 ... to law firms as well as individual lawyers. However, it became persuaded that any possible benefit from being able to extend disciplinary liability firm-wide was small when compared to the possible cost of allowing responsible partners

   and supervisors to escape personal accountability. (34)

   It is not clear by what mechanism the Commission expected this trade-off to occur. Its language--"allowing responsible partners ... to escape" (35)--suggests that the Commission was concerned about enforcement; that the availability of the firm as a target would lead disciplinary authorities to relax enforcement against individual lawyers. (36) But this concern makes little sense given the historic absence of enforcement against individual lawyers. Both proponents and opponents of law firm discipline agree that Rule 5.1(a) has been a disciplinary "dead letter." (37)

   The Commission also may have been concerned about shirking; that extending supervisory liability to firms would encourage individual partners to shirk their own supervisory duties. (38) But this concern, too, rests on faulty assumptions. First, it assumes that partners' investment in supervision is influenced primarily by disciplinary rules, rather than the firm's management structure, compensation system, or firm leaders' expectations. This is a problematic assumption by both sides in the law firm discipline debate, to which I return in Part III.

   The concern about shirking also assumes that lawyers cannot read disciplinary rules, since extending supervisory liability to firms would not eliminate individual liability. (39) For instance, Professor Julie O'Sullivan argues that, against a history of non-enforcement against individual lawyers, adding entity liability would signal that "enforcement authorities are basically throwing in the towel as far as individual cases against large firm lawyers are concerned." (40) But if there was no enforcement to begin with, what towel is there to be thrown?

   Most importantly, for the present argument, the concern about shirking assumes that, currently, most partners comply with the demands of Rule 5.1(a); that is, that partners "make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct." (41) For instance, Professor O'Sullivan argues that law firm discipline would lead "non-management lawyers" to reduce their investment in building an "ethical superstructure" in the firm (42)--as if non-management lawyers currently make such an investment.

   None of these assumptions is supported by the data on law firm management...