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Are Ethics Rules What's Killing Biglaw?

Over the past few months, we've seen a stream of stories -- like this one -- on how the the economy is driving law firms to stop billing by the hour because clients can no longer afford it. Even Evan Chesler, head partner at Cravath, Swaine & Moore, has called for an end to the practice.

But is it the billable hour that's killing law firms, or other factors? Commenting on a recent Wall Street Journal piece, "Recession Batters Law Firms," Professor Larry Ribstein of Ideoblog argues that the bar's archaic ethics rules are contributing to the demise of Biglaw.

Ribstein outlines the factors that contributed to the demise of Heller Ehrman (though as I noted here, the circumstances surrounding the downfall of other firms is remarkably similar). First, like most firms, Heller's main assets were senior partners who jumped ship when Heller's economic problems started. Second, Heller wasn't able to find any suitable merger partners because it ran into conflicts of interest with viable suitors. Finally, Heller couldn't come up with the cash to pay down the bank loan that it takes out at the beginning of each year to cover its costs. With the banks bearing down, the shareholders voted to dissolve the firm.

Ribstein suggests that these events might have been avoided but for archaic conflict of interest rules, intended to ensure that the law remains a profession rather than a business. For example, if bar rules did not bar non-compete agreements, lawyers could not have walked away from Heller with its most profitable clients. And if not for rigid restrictions on client conflicts, Heller might have found rescue through a merger. Finally, if nonlawyer owners could invest in law firms, Heller might have had access to a permanent source of capital to stay afloat and would not have had to rely on bank loans alone.

So should the profession change longstanding ethics rules to save Biglaw? Ribstein says that bar rules "are not in clients' long run interests," but I disagree. The ban on non-compete agreements preserves the client's unfettered right to choose a lawyer, even where granting a client the choice may cause firms to lose clients. Meanwhile, though Ribstein says that conflicts rules don't matter to clients, the facts suggest otherwise -- increasingly, clients are suing firms for breaching conflicts rules. If conflicts didn't matter to clients, then why the lawsuits? As for allowing nonlawyers to invest in firms, here, we'll have the benefit of learning from the U.K.'s experience under the Legal Services Act of 2007, which allows the practice. At the same time, I also have to wonder why law firms must rely so heavily on loans to keep their businesses running. Perhaps timely collection of client fees would help cash flow as much as outside investment.

Ultimately, the bar rules are a red herring. Every business faces constraints -- from antitrust laws to SEC enforcement -- but good businesses figure out how to thrive even in the face of these constraints. If some large firms can't find a way to profit under existing ethics rules (even as many smaller and mid-sized firms still can), the solution isn't to change the rules, but to change Biglaw.

Posted by Carolyn Elefant on January 27, 2009 at 11:09 AM | Permalink | Comments (1)

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