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.