May 25, 2018 / 4:20 PM / 2 months ago

Breakingviews - Holding: $1,745-an-hour lawyers due for disruption

NEW YORK (Reuters Breakingviews) - With $1,745-an-hour friends, who needs enemies? Law firm Kirkland & Ellis billed that astronomical amount in the Toys R Us bankruptcy. On Monday it added injury to insult by scoring a U.S. Supreme Court victory against workers’ right to save money by joining together in lawsuits. Even much cheaper firms, though, are often beyond Americans’ means. Ending attorneys’ monopoly on the legal business could bring more affordable justice.

People walk outside the U.S. Supreme Court in Washington December 3, 2013. REUTERS/Jonathan Ernst

Top lawyers’ hourly fees blew past $1,000 years ago, but the maximum Kirkland rate impressed even the most voracious legal eagles. Corporate liquidations and reorganizations are notoriously costly and complex, especially for outfits like the failed toy retailer, with a slew of separate entities around the world. Total fees and expenses for lawyers, bankers and consultants in Lehman Brothers’ 2008 bankruptcy – the nation’s largest – exceeded $1 billion, and Toys R Us, which filed for Chapter 11 in September 2017, expects to shell out as much as $350 million, according to documents released earlier this month. Yet $1,745-an-hour is one-quarter more than the average highest rate charged in 10 of last year’s biggest bankruptcies, a New York Times analysis found.

Legal fees have been rising by leaps and bounds in other types of cases too. The average hourly billing rate for U.S. law-firm partners increased over the past two decades from $120 to almost $600, and from $80 to more than $400 for associates – about three times faster than inflation. The average partner billing rate at one of the nation’s largest firms, Cleveland-based Jones Day, is $950 an hour, according to ALM Media.

Many aggrieved Americans have been able to bear these types of onerous charges in part by banding together in lawsuits known as class actions. Individual claims that are too small to pursue alone can become worthwhile when bundled with enough similar complaints. Billion-dollar settlements against the likes of Volkswagen, General Motors and numerous banks have compensated thousands of victims because attorneys were willing to cover litigation expenses up front in exchange for a slice of the eye-popping payouts later.

Now even that method of footing legal bills is beginning to disappear. The primary culprit: agreements to resolve disputes individually in private arbitration rather than en masse in open court. Mandatory arbitration that precludes the possibility of class actions has fast become the dispute-resolution tool of choice for American employers, banks, smartphone providers and even law firms. Workers and consumers forced to agree to the procedure have challenged it fiercely in court but with a conspicuous lack of success.

Their latest defeat came on Monday in the Supreme Court. Employees of three companies – including accounting giant EY – had argued that an arbitration agreement and class-action ban they were forced to sign violated their right to engage in “concerted activities” under the National Labor Relations Act. Federal appeals courts in San Francisco and Chicago agreed with them, but one in New Orleans disagreed. The justices ruled 5-4 that another law – the Federal Arbitration Act – overrode the NLRA and requires enforcement of this arbitration agreement, as it does virtually all others. The lawyer who argued the case on behalf of the companies: Paul Clement of Kirkland & Ellis.

The shrinking options for obtaining affordable legal representation have prompted more than a few schemes to fill the void. There are do-it-yourself shops like LegalZoom, which for almost two decades has been providing online business-formation documents, trademark applications and the like with instructions to match. Technology-oriented attorney networks like Rimon and rent-a-lawyer services including De Novo Legal have chugged along on lower-end business. California and other states have encouraged sales of legal insurance, but it hasn’t really caught on, due to relatively high premiums and general lack of appeal to consumers.

The fundamental reason for this dearth of alternatives to overpriced lawyers is, of course, stiff resistance to competition. The legal profession is essentially a cartel with high barriers to entry, parallel pricing and other restrictions. In anything close to a free market, the huge demand from middle-class Americans would attract a flood of attorneys eager to fill their needs with reasonable fees. A solution – and competition – may be starting to emerge.

In 2012, Washington state created “licensed legal technicians,” people qualified to provide basic legal services that were once restricted to attorneys. Predictable pushback from lawyers has so far limited the technicians’ duties to drafting wills and similar matters, but the concept is popular enough to have prompted plans for expanding it to other tasks, and Massachusetts and Utah are considering starting their own programs.

The idea may have received its biggest boost earlier this month when one of the nation’s most influential legal figures – U.S. District Judge Jed Rakoff – called upon the Federal Bar Council, an enormously prestigious group of lawyers in New York, to help create a corps of licensed legal practitioners. Rakoff envisioned these practitioners, after suitable training, drafting wills and contracts, offering advice on consumer disputes, appearing in housing court and family court – doing for a reasonable price exactly the kinds of legal work that millions of ordinary Americans demand.

The judge admitted that putting the proposal into practice might be “a tall order,” but coming from him, in one of the nation’s legal meccas, it carried unusual weight. At the very least, $1,745-an-hour lawyers are now on clear notice that their business model is due for disruption.

Breakingviews

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