The price of law: how the market for lawyers distorts the justice system.

• Date: 01 February 2000
• Author: Hadfield, Gillian K.

Q. How many lawyers does it take to screw in a light bulb?

A. How many can you afford?(1)

1. INTRODUCTION

   Bill Clinton's legal bills in connection with the Lewinsky scandal topped $10 million;(2) the bill for Ken Starr's investigation of the President exceeded $50 million.(3) The cost to the eight families portrayed in the bestseller A Civil Action for Their tort suit against a manufacturing company accused of dumping hazardous chemicals into the water supply was $4.8 million (paid from a settlement of about $8 million); the cost for the defense exceeded $7 million.(4) Lawyers who represented the three states in the nationwide suit by state attorneys general against tobacco companies to recoup smoking-related health care costs were awarded $8.2 billion in legal fees, averaging in some cases over half a billion dollars per lawyer.(5) Total revenues to legal service providers in the U.S. now reach over $125 billion annually, having grown at a rate that far outstrips the growth in the economy generally in the past few decades.(6)

   These astronomical and seemingly exceptional figures betray a more widespread reality: legal process has become extraordinarily expensive, for all matters. The legal fees for a Canadian judge successfully suing a satirical magazine for $75,000 in damages were $20,000; the magazine's fees $40.000.(7) Fees for a personal injury action by a young model who miscarried at four months and suffered a facial scar due to a slip in a grocery store were $11.7 million of a $30 million damage award; disbursements for costs and expenses alone topped $750,000.(8) Divorce litigation routinely costs those few who can afford it hundreds of thousands of dollars; for most litigants, it commands what wealth they do have.(9)

   Why do lawyers cost so much? Surprisingly, we have few insights into this basic question. Conventional popular culture has one suggestion: lawyers are an avaricious lot who will bleed you dry.(10) Conventional economics has another: legal training is expensive.(11) And conventional professional wisdom has another: lawyers enjoy a state-granted monopoly over which they control entry for the purposes of protecting the public. None of these is particularly compelling. While each seems to hold some grain of truth, each also raises more questions than it answers. How is it that the profession has come to be dominated by vice? Why is law so complicated that legal training is so expensive? Is the public better off with inexpensive low quality legal advice or high quality legal advice it cannot afford?

   The profession has long been both uneasy and defensive about its relationship to the market. Concerns about the commercialization of law practice date back almost as far as the profession itself,(12) and certainly characterize the modern bar. The profession is entrusted with guardianship of the justice system, and so imbued with the qualities of public service, but it also primarily distributes its goods via commercial, private markets. This dual role causes internal conflict in the profession. The American Bar Association's ("ABA") 1986 Commission on Professionalism, for example, saw the fundamental question of professionalism to be, "Has our profession abandoned principle for profit, professionalism for commercialism?"(13)

   The relative inattention to the basic question of the economic causes of the high cost of legal services may, paradoxically, be precisely attributable to the fact that the relationship between the lawyers and the market is at the heart of modern conceptions of professionalism. As defined by the ABA's Commission on the Profession, for example, the attributes of a "profession" are primarily found in its relation to the market:

   The profession receives special privileges from the state. Its practice requires substantial intellectual training. Clients must trust the professional because their lack of training prevents them from evaluating his or her work. The client's trust presupposes that the practitioner's self-interest is over-balanced by devotion to serving both the client's interest and the public good. The profession is self-regulating.(14) By making the relationship between legal practice and the market constitutive of the "profession," definitions such as these cast that relationship as a matter of professional ethics, not economics. Seen in this light, the high cost of legal services is a problem of virtue, not incentives: the very concept of professionalism requires that a disregard of economic incentives be a moral duty for the professional. Lawyers charge high fees only to the extent that they fail at their professional obligation to the public interest. Conversely, fees charged by ethical attorneys are not "high."

   The claim of "professionalism" in the relationship between the practice of law and the market is actually a series of linked normative claims derived from the basic fact of legal complexity. Law requires substantial intellectual training. It is therefore in the public interest that law be practiced only by those with such training. Only those with training can judge the capacity of others to practice and the quality of practice delivered to clients, and therefore entry into practice and regulation of practice is delegated to those with training. Set apart from the control of both the state and the market, the obligation then falls to the profession not to take advantage of the absence of external controls: to put public and client interest ahead of self-interest. The profession is first conceptualized and then justified as a practice apart from the market economy.

   But the practice of law is not apart from the economy. The concept of a profession may set the practice apart as a normative ideal, but the structuring of the profession is still the structuring of a market. As the question, "Has the profession abandoned principle for profit?" suggests, it is not at all evident that practitioners, even highly ethical professionals, resist market incentives in any systematic way. The question then is, if practitioners are behaving as market actors, what kind of market is this? Is it competitive, in the sense that its prices reflect costs and competitive returns to an efficient use of resources such as training and human capital? Or are there systematic features of this market that lead to noncompetitive prices or that otherwise raise the cost of legal services to levels that should trigger concern?

   In this Article, I explore the economics of the market for lawyers and demonstrate its various noncompetitive features. Lawyers in fact face a string of powerful marker incentives to charge fees above those that would emerge in a competitive market. As is typical of noncompetitive markets, the legal market results in prices being determined by the value placed on them by consumers, not the cost of providing the service. The allocation of lawyers' efforts are thereby skewed to those who place high monetary value on legal services and are able to pay these large sums: generally, commercial clients. The most troubling feature of these market incentives is not merely that the fees lawyers charge are high. It is that they are high because the market is fundamentally characterized by a bidding competition between commercial actors and individuals for access to scarce legal resources. This is a competition commercial actors (more generally, organizations drawing on aggregations of wealth) overwhelmingly win because of the great disparity in resources between commercial/organizational entities and individuals. Legal fees are high precisely because legal resources are, as a result of free market forces, pulled disproportionately into the commercial sphere, and individuals are largely priced out of the market. Only those individuals with claims on the resources of commercial entities (i.e., tort damages for injuries caused by corporate actors or products) and access to contingency fee arrangements can compete for legal services.

   The distribution of legal services produced by the market for lawyers is thus quite disturbing: organized as a self-regulating profession with guardianship of the public justice system, a system that lies at the heart of democratic social structure, the profession is propelled by market forces to devote itself disproportionately to the management of the economic relationships of commerce and not the management of just relations among individuals and the state.

   In Part II, I sketch an empirical overview of the profession, focusing on the data demonstrating a sharp cleavage in the profession between lawyers serving corporate clients and those serving individual clients, and a disproportionate allocation of lawyers to the corporate sphere. In Part III, I catalogue the imperfections in the market for lawyers that lead the market to substantial departures from competitive price and allocation. Based on this catalogue, I identify the three basic elements supporting the structure of the market for lawyers. These are: the complexity of law, the monopoly the state has over coercive dispute resolution, and the unified nature of the profession. Each of these elements suggests an approach to policy reform to improve the accessibility of the justice system, and the analysis as a whole raises deep philosophical questions about the nature of law and legal reasoning. In Part IV, I briefly suggest some of the questions and solutions we need to explore to bring the legal system better into line with our aspirations for justice.

2. EMPIRICAL EVIDENCE

   A. The Cost of Lawyers and Legal Services

   Average hourly rates for lawyers in the U.S. in 1998 were $180; large-firm partners averaged $250 an hour with the top ten percent earning over $385 an hour. The average lawyer billed over 7 hours a day.(15) At these rates, and including expenses which are billed separately (such as the cost of experts, paralegals, filing fees, court costs, transcript fees, photocopying...