We the people: Why legal systems should be built from the bottom up

It is one of the most powerful three-letter words in the English language, with its implications for liberty, justice and order.

But law at its most fundamental is an instrument that simply enables people to proceed with their lives, resolving many day-to-day disputes from property to divorce, employment to violence.

Yet more than four billion people around the world remain excluded from what we have come to refer to as the “rule of law”, which today represents a complex system administered from the top down, through formal institutions.

For instance, this includes an estimated one billion who do not even have basic rights to their own homes, some which they have lived in for decades, because of barriers such as complicated bureaucracy administered by centralized institutions. And without land titles or deeds, these same people are restricted from accessing other basic legal services, not to mention credit markets.

Most of these marginalized people live in developing countries, where established institutions do not have the resources to successfully implement modern law as we know it.

And so rather than providing adequate resources for ordinary people to access simple means to resolve their differences, the rule of law instead becomes an obstruction, holding back families, businesses, and even countries. The result is a legal system that is too unwieldly, too expensive, and too obscure – not to mention the additional problem of post-colonial legal systems being imposed from afar. As such, it is not fit for purpose to achieve its basic objectives.

But does it have to be this way? The short answer is no.

The first step to building better law is to peel away a fundamental fallacy: that the building of legal systems is a task that should be left to legal experts, who implement a one-size-fits-all set of institutions. That’s wrong. Law and legal systems have to be built on the ground with the people who need them and with laser-focus on the ends not the means.

When we try to implement “best practice” laws and institutions from developed countries – however well-intentioned – we risk doing more harm than good. Legal systems imposed by outsiders or elites can destroy longstanding local ways.  But such local ways developed precisely because they worked for the people who needed them.  Building anything new has to start there—even when the goal is change to better promote economic or social development.

This is the way all successful legal systems, even radically new ones, have been built.

One of the most recent examples has emerged out of Nigeria, where a new network for alternative dispute resolution has been developed based on indigenous practices as opposed to the British system that inspired the formal legal system.

The imported formal framework meant more than half of Nigerians did not understand the legal process and around half could not obtain legal counsel or advice.

But now the Lagos Multi-Door Courthouse offers a greater range of resolutions and hears cases quicker than conventional courts, which are beset by congestion. This has been accompanied by campaigns to raise awareness among lawyers and the public of the advantages of dispute resolution over litigation.

Initial success came in resolving disputes that involved small sums of money but where the cost of litigation was prohibitive, such as disputes between landlords and tenants.

The results speak for themselves: within 15 years, the network has achieved an impressive 65 per cent settlement rate.

Building new systems on the basis of existing ones is not a novel idea, as I explain in Rules for a Flat World. In fact, citizen-led legal systems that were deeply embedded in existing informal norms was how law began.

In ancient Athens, for example, the first democratic regimes sustained a thriving civilization without requiring the full suite of centralized lawyer-led legal infrastructure that we urge on the developing world.

When the Athenians resolved to establish democracy, they established laws and courts but the legal process itself was the responsibility of private individuals. The judges were fellow citizens, sitting in juries that numbered hundreds, even thousands. Formal laws were invoked but the court was open to arguments that ordinary people understood. This made the new legal system an extension of the rich set of social norms the Athenians had long known and supported, even as it moved the society along the path from control by elites to democracy.

As a result, the rule of law depended on the cooperation and participation of the masses, not the minority. It embedded law in the daily lives of Athenians, not abstract ideas and remote institutions.

A reliable system for resolving ordinary daily disputes—in families, between neighbors, between business partners—is one of the most basic needs of any society.  As any product designer knows, you can’t design something that is useful for people if you don’t understand and respond to what real users need and can use.  So even when the aim is change—towards greater economic productivity or social equality and fairness—the starting point has to be where a community is, not what foreign experts decide “law” must look like.

The sooner we understand this lesson, the sooner we can make progress in helping the four billion living at the base of the global economic pyramid move towards more effective rule of law and the economic and social progress law brings.

Originally published by Thomson Reuters Foundation on thisisplace.org

Markets for health, markets for law

David Brooks has a piece today in the NYT today asking whether markets work for health care.  He looks at data about what economists have found about the impact of competition in health care services.  I won’t weigh in on the final answer in the health economics literature–which is pretty vast.  (I don’t think it’s right to say “proponents of market-based health care rely less on theory and more on data”–there are plenty of proponents of market-based health care who know nothing more about why they like the idea beyond theory. I also don’t think it’s right to say most progressives say markets don’t work–citing to Arrow’s seminal 1963 article on the economics of health care.  Arrow–who was my PhD advisor–is deeply progressive but certainly thinks markets work–the story here is about how much, when, and with what kind of institutional structure markets can do better than public provision. )  But I do want to point out that we’re not even having this conversation about how well markets work for law. I would but I can’t weigh in on what the data show about the value of markets in law because we nobody is studying that systematically.

My pitch in Rules for a Flat World is about the need for a more vibrant, bottom-up, and market-based approach to producing legal infrastructure–ranging from legal services to legal/regulatory rules and procedures themselves.  My argument is based mostly on theory: we can’t innovate the basic platform of rules we need to manage complex human interactions and drive progress in both economic and social terms if we rely, as we currently do, almost exclusively on top-down public provision and highly closed legal markets, and almost exclusively on complex text-based rules that require expensive interpretation and generate expensive and slow adjudication to resolve disputes.  That production technology is simply not up to the task of responding to the speed, complexity and intangibility of a digitized, globalized economy.  The reason I pitch for finding ways to get more of our rules and legal processes developed by non-government entities–both for-profit companies and non-profit community organizations–is to harness what markets offer:  a distributed and decentralized mechanism for processing massive amounts of information and identifying when, where, and how doing things differently might work to produce value.  Market incentives–which I understand broadly to mean not only profit motives but also the incentive to achieve private non-profit goals–pull resources into the problem of innovating better ways of doing things.  We need more (properly regulated) markets involved in producing legal infrastructure because markets are a better technology for directing resources to complex problems.

I do my best in the book to provide empirical evidence to back up these theory-based claims.  And the “show me the evidence” response is one I’ve heard a lot in the decade I’ve been working on these issues and to which I’m acutely sensitive.  I would love to be able to review that literature.  But the the data either don’t exist or haven’t been assembled and shared for analysis by researchers, the researchers aren’t being trained, there’s next to no funding available (as I mention in the book, the NSF budget for law is about $6 million–one-tenth of one percent of total NSF funds; medical research is a multi-billion dollar endeavor), and the studies aren’t being done.   There is no “public health” or “epidemiology” equivalent in law.  There are next to no economists analyzing the health of our legal markets.

The irony is that much of the debate in health care economics is about the relative impact of different rules governing the markets in health care–it’s about the legal infrastructure of health care.  Although Brooks’ piece ostensibly compares a market-based to a non-market-based approach, in fact even single-payer systems are heavily market-based.Both pre- and post-Obamacare, there are lots of markets involved governed by lots of legal rules and regulations. Where’s the data on how well markets for producing and implementing those rules would work?

 

80-20 lives: Only 20% of hours worked by solo and small firm practitioners results in money in the bank

It looks worse than I thought for the economics of small firm practitioners.

John Mayer, Executive Director of CALI and developer of A2J software available to courts, legal aid organizations and others to develop user-friendly interfaces for self-represented litigants, has pointed me to a report released recently by CLIO, provider of practice-management software for smaller firms.  The data are drawn from actual billing by 40,000 paid-users of CLIO’s software.  These are solo and small firms (12 or fewer lawyers). On average they are younger/less experienced lawyers than is true of the profession as a whole–still a third of the lawyers in the sample have more than 15 years experience.  Around 40% work from an office, 30% from home, remainder in communal or “other” locations.  Somewhat more women than ABA averages: 41% (2015) versus 36% (2005).

The report provides concrete data on that elusive number:  average billing rates.  This sample shows nationwide average of $232, ranging from a high of $281 in DC to a low of $129 in Iowa.  Highest rates for these small practitioners is in bankruptcy, tax, corporate and real estate ($260-$275); lowest is in criminal ($148), insurance ($200) and family ($202).  Since I usually use $200 as my ballpark figure for small firm practitioners, particularly when talking about access to justice, it’s not a bad assumption (although these data allow a more nuanced back-of-the-envelope calculation–if there is such a thing–by state and practice area).

The really stunning news is CLIO’s identification of a devastating funnel for small law firm economics.  Their data show that on average lawyers in this sample only engage in billable work 2.2 hours a day.  That’s about a quarter of a regular 8-hour work day.  Granted, some of the folks in this sample may only want to work part-time, but that’s still a pretty staggering figure–even the half-timers are only doing billable work half the time.

It gets worse.  Of those 2.2 hours spent on billable work, only 1.8 is actually billed to a client–nearly 20% is written off before the bills are assembled.  Then:  only about 85% of billed hours are actually collected.  (This figure is consistent with data from larger corporate law firms.)  That equates to collecting on 1.5 hours a day.

For lawyers aspiring to full-time practice (8 hours a day) that means they are actually bringing in money for only 20% of the hours they work.

This speaks volumes about the inefficiency of small law firm practice.

 

The 80% tax on legal help

I’m a fan of back-of-the-envelope calculations to get a grip on the dimensions of a problem.  So here’s one that shows how badly legal professional rules inflate the cost of legal help for ordinary people.  (You can get the full story behind this calculation here and the explanation for why changing the rules to get rid of the legal professional tax doesn’t mean abandoning client protection and quality here.)

The starting point is the average hourly cost of legal help for individuals and small businesses (as opposed to corporations).  We don’t really know what this number is because nobody collects systematic data on this.  Surveys of lawyers done by bar associations (see e.g. Michigan, Texas)show medians for solo and small firm lawyers in the $200-$250+ range.  A 2013-2014 survey of consumer lawyers nationally found a median hourly rate of $350.  I usually use a conservative guesstimate of $200 an hour.

Suppose lawyers charging $200 were taking that rate home as a full-time salary:  40 hours a week, 48 weeks a year.  That would yield almost $400,000 year.  Of course, it’s not possible for someone who is running a solo or small firm law practice to bill and collect for every hour worked.  Plus some of that money has to go to the cost of running the practice:  office, assistants, technology, etc.  And that’s going to be the point.

What do solo and small firm practitioners, those who serve ordinary individuals and (very) small businesses end up taking home?  Again, there are no systematic data available.  I’ve done another back-of-the-envelope calculation to guesstimate this:  the bottom 40% of law firms arranged by revenues in the U.S. Census had average revenues of about $135,000 and average payroll of about $45,000.  That leaves them with $90,000 out of which to pay all other expenses; what’s left is their take-home pay.  That sounds like it produces take-home of about $60-70,000.  That’s consistent with the After the JD study Wave 3 which shows a median income for solo practitioners of about $50,000.  Let’s use a guesstimate of $65,000.

Now a bit of math:  the effective rate for a full-time lawyer who takes home $65,000 is about $35 an hour.

So a lawyer who is charging people $200 an hour is actually getting paid about $35 an hour for all the hours he or she works.  What is in that $200 rate?  Hours that the attorney doesn’t have any client work to do.  Hours that the attorney spends running the business, billing clients, trying to collect payment from clients.  Hours billed that are never collected.  Office rent.  Insurance.  Technology and equipment.  Time spent at conferences and networking events to find clients.  Advertising and creating content on a website or newsletter or legal publication to generate clients.

Now suppose that this same lawyer were able to work for a business that supplies legal services to the public–a LegalZoom or RocketLawyer or Avvo.  And imagine that in this job the lawyer just does law: the company does everything else.  Pays the overhead. Builds the website.  Finds the clients.  Pays for the insurance. Figures out how to price the work and get paid.  Let’s ballpark the cost of this overhead at 15% of the total–$5 per hour.

That means the company can charge the client $40 an hour and pay the lawyer $35. The lawyer earns the same salary.  But the cost to the customer falls by 80%.  That’s the 80% legal professional tax.

That 80% markup is the cost of the legal professional rules that prohibit the lawyer from taking a job with a company that provides legal services to the public.  The rules that prohibit the “corporate practice of law” or any “fee-sharing” (otherwise known as profit- and revenue-sharing) with anyone who is not a lawyer–like investors or business managers or software engineers.  A small-scale practice–which is where we find the lawyers who provide services to individuals and small businesses–is hugely inefficient.  Lawyers don’t benefit from that inefficient scale.  But clients pay for it–and mostly, can’t pay for it and so can’t access services.

That’s the irony:  Lots of lawyers are actually willing to provide their legal help to the market in exchange for an average of about $35 an hour.  That deal could be struck with the millions of people who need some legal help and who could pay that price (but not $200 an hour) if the rules let lawyers work for and with the non-lawyer professionals and investors who can get us to the scale and technology needed to generate large-scale access.

 

 

 

 

Why legal aid and pro bono can never solve the access to justice problem

This week I sat through the umpteenth meeting with mostly lawyers and legal activists talking about legal empowerment: how to get more people access to reasonable legal help so they can understand and navigate our complex legal world. This one was at the Open Society Foundations in New York, George Soros’ foundation dedicated to many things but especially the cause of legal empowerment for the marginalized and disenfranchised around the world. OSF has decided to bring some of this agenda home to the U.S. and is exploring ways to do that. There were lots of super smart and dedicated people around the table–all with a shared commitment to making legal help more available to those with little access. But again I found myself frustrated by the fact that even the people who are most focused on this problem continue to believe that it can be fixed through some combination of more legal aid, greater public funding for courts, and volunteer/pro bono efforts.

I’ve been coming to meetings like this for several years with a few back-of-the-envelope calculations to try to convey just how unrealistic it is for lawyers to focus only on legal aid/public funding and pro bono as a solution to the access to justice crisis. I first presented these numbers at a conference at Harvard Law School in 2012 and then again at a hearing of the New York access to justice task force; I took some comfort in learning that then-Chief Judge Jonathan Lippman of New York got the picture and took steps to allow (unpaid) non-lawyer navigators to help the 98% of tenants facing eviction without a lawyer in New York courts.  I’ve presented them in multiple hearings for the California State Bar and at the ABA.  And lots of other places.  They usually shock people. But they’re still not widely appreciated.  So here are the numbers again, along with the hope that at some point they sink in and those who really care about access to justice will focus on how to make the markets for legal help work better and not just how to get more funding for courts and legal aid and how to get more volunteers and pro bono lawyers in touch with those in need.  We need all those things of course and those solutions are essential for the truly indigent.  But the scale of the access problem is huge–it affects 80-90% of the population.  Legal aid and pro bono are only a drop in that big bucket.

62%

That’s the straight-line average of the percentage of households with at least one legal problem identified by legal needs surveys conducted at the state level.  (See here for a summary of these surveys.)

3

That’s the average number of problems that a household with at least one problem identifies in those surveys.

125 million

That’s the number of households in the U.S.

232.5 million

That’s what you get when you multiply the first three numbers together:  the total number of legal problems in the U.S. at any point in time.

$46.5 billion

That’s what it would cost to provide one hour of legal help at $200 an hour on each legal problem to all the households struggling with something.  The $200 an hour figure is a conservative estimate of the rate charged by solo and small firm practitioners in the U.S. — there are few systematic surveys nationally and state-based surveys are somewhat unreliable and spotty.  The average rate charged by consumer lawyers nationally is $361.  A Florida state survey found a median of $255 in a sample 75% of which consisted of lawyers in firms of 10 or less.  A Michigan survey shows a median of about $225 in firms of less than 10.  As I tell audiences, if you think the rate at which you could get 232.5 million hours of legal work is $150 or even $100 feel free to cut that $46.5 billion number in half.  That still leaves you with about $25 billion–which is 20 times the total current expenditure on civil legal aid in the U.S.  The entire budget for the U.S. Legal Services Corporation is about $500 million–and that is clearly under threat in the current political climate.

180 hours

That’s how many pro bono hours every single one of the 1.3 million of licensed lawyers in the U.S. would have to supply in order to give just one hour of help to every household in need on each legal problem they face.  Average pro bono hours by U.S. attorneys is currently about 55 hours, with a median of 30.

There are other services available to people needing legal help–court-based online and in person self-help centers,  services provided by non-profit organizations authorized to help in immigration cases, etc.–but the bottom line is:  the size of the demand for legal help is massive.  And it can never, ever, be met with public funding or pro bono alone.

What do we need to do?  Change the rules of professional behavior to allow lawyers to work for (well-regulated) corporations and organizations that supply legal services to this market and to enter into profit- and revenue-sharing arrangements with non-lawyers to generate investment, innovation and incentives to figure out how to deliver more help at higher quality and lower cost.