LeClairRyan: Mistiming The End Of The Legal Monopoly

LeClairRyan: Mistiming The End Of The Legal Monopoly

With LeClairRyan’s dissolution a matter of public record, the battle to control the public narrative is officially underway. Rumors and explanations are proliferating, both publicly and behind closed doors, and many of them should probably be taken with a grain or three of salt. Businesses are complex, and their failures or successes are typically the confluence of dozens of decisions, strategies, and strokes of blind fate.

Two weeks ago, I listed a set of themes I thought would likely emerge in the wake of LeClairRyan’s meltdown. I’ve now had the opportunity to connect with former LeClairRyan partners to get a more crystalized view of what happened. Between this firsthand information and the ample public reporting on LeClairRyan’s demise, it appears that the firm’s leadership suffered from two fatal shortcomings: (i) an inability to make hard decisions, and (ii) a failure to monitor business fundamentals. I’ll do a more comprehensive piece about these points soon.

For now, I’d like to focus on one prediction I got wrong in a very unexpected way. Many law firms collapse due to a failure to anticipate market changes. And some of that was true at LeClairRyan, which evidently failed to monitor market trends in compensation, overhead reduction, and pricing. But ironically, part of LeClairRyan’s failure was the opposite of most firms — namely, anticipating an industry-wide sea change that never materialized.

The Big Bet

John Fitzpatrick, a former LeClairRyan partner with whom I spoke, explained that firm founder Gary LeClair bet big on the notion that the U.S. would follow in the footsteps of the U.K. in allowing outside, non-lawyer investment in legal services. This is consistent with recent Bloomberg Law reporting on the subject, which cites other former LeClairRyan partners who wished to remain anonymous.

Back in 2007, the United Kingdom adopted new rules loosening restrictions on the practice of law by non-attorneys. U.K. law firms can now, within certain restrictions, accept outside investment and share firm revenues and fees with non-attorneys. According to Fitzpatrick and the anonymous former partners cited in Bloomberg, LeClair built his firm’s strategy around the prediction that state bars in the U.S. would follow in the U.K.’s footsteps and loosen the unauthorized-practice-of-law and fee-sharing rules.

LeClair concocted an accounting and stock structure within the firm that allowed for the purchase of a preferred class of firm stock that paid an 8 percent return contingent on the firm making budget. In the short term, firm partners theoretically could invest, build up the firm’s capital reservoir, and have a comfortable long-term return on their investment. In the long term, once the rules governing firm investment loosened up, LeClairRyan would be instantly positioned to either accept massive waves of outside funds and grow itself into a superpower, or sell the firm and allow preferred shareholders to cash in. Sounds like a great plan, right?

But to quote famed business management guru Mike Tyson, everyone has a plan until they get punched in the mouth.

The U.K.-style loosening of firm ownership rules never made it across the pond. In the meantime, LeClair’s unique preferred stock structure exacerbated the firm’s other business problems. The partnership as a whole, with their common stock shares, were inherently at odds with the subset of partners holding preferred stock, since preferred stock got paid first before common stock once budget was met. Further, the preferred stock investments themselves evidently went to patching budget shortfalls, rather than growing the firm as they should have. Pair those with shrinking revenues and aggressive expansion costs, and you have a partnership class tearing itself apart at the seams.

The results speak for themselves. Gary LeClair gambled on a future that never came to pass, and the firm he founded is no more.

Nothing Ventured, Nothing Gained?

LeClair was wrong when it mattered, and it looks like he’s going to remain wrong for the foreseeable future. I wrote last year on the push by the California bar to change its version of the Unauthorized Practice of Law (UPL) and fee-sharing rules to follow a more U.K.-centric model allowing for outside investment. California doesn’t care much about opening up law firms to outside investment so much as it is trying to address a critical shortfall in available legal services to consumers. The average lawyer is vastly outside the price range of the average American, and many Californians cannot afford desperately needed legal services. Cracking up some of the bar’s traditional monopoly on those services would invite less-expensive, non-attorney service providers in to help these underserved populations.

The legal profession’s response to this proposal has been nothing short of a torrent of undying fury. Of the public comments received to date on the proposals to loosen the rules surrounding UPL in California, I count 14 in favor and 200 against. Only 1 out of 15 comments supported the changes. On loosening fee-sharing restrictions, it was 9 in favor, 48 against, a 5:1 margin against change. Absent bold action by the state bar in outright defiance of the will of its members, or intervention by a state legislature largely comprised of fellow lawyers, the legal monopoly in California will likely remain in place.

Skin In The Game

There are valid arguments against the U.K.-style loosening of the UPL and fee-sharing rules. Lawyers are traditionally entrusted with their clients’ most difficult, sensitive issues, and we’re governed by ethical rules and norms that ensure we keep our clients’ needs ahead of our own. Opening the market to non-attorneys without those safeguards could lead to abuse, especially among the poorest, who need those services the most. Are potentially unethical, predatory legal service providers better than no providers at all?

But let’s not kid ourselves: we lawyers have a deeply personal interest in keeping our monopoly in place, because it’s how we make our money. The market failure California is experiencing is exactly what one would expect a monopoly to create. Demand far exceeds the artificially restricted supply, and the bottom 90 percent are priced out while lawyers make out marvelously.

Also consider how the Big Four accounting firms are waiting in the wings, ready to pour infinite resources and personnel into a crack that might open up in our market. We’re facing financial headwinds as a profession even during an expanding market, and the bond yield curve just inverted; why would we give up one of the few structural advantages we have going in our favor? People don’t typically vote against their own paychecks. So long as lawyers remain in charge of their own UPL and fee-sharing rules, those rules are probably safe for another generation.

The Future Is When?

The legal monopoly is well protected, both at the state bar level and within state legislatures. It would take either a dramatic shift in bar leadership or a populist uprising in response to the serious shortfalls in the current supply of legal services to see those protections come to an end.

Gary LeClair bet wrong, but it remains to be seen whether it was the substance or timing of that bet that was off. The day may come when outside pressures grow substantial enough to push for a U.K.-style deregulation of the legal market. Or U.S. lawyers may stand firm in keeping our monopoly intact, for good and for bad.

Gary LeClair may yet prove to have been a prophet or a madman. Quite possibly, he’ll prove to have been both.

James Goodnow

James Goodnow is an attorneycommentator, and Above the Law columnist. He is a graduate of Harvard Law School and is the managing partner of NLJ 250 firm Fennemore Craig. He is the co-author of Motivating Millennials, which hit number one on Amazon in the business management new release category. As a practitioner, he and his colleagues created a tech-based plaintiffs’ practice and business model. You can connect with James on Twitter (@JamesGoodnow) or by emailing him at James@JamesGoodnow.com.

Published at Fri, 23 Aug 2019 14:02:29 +0000

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