Shrinking the Pie

It’s a tough time to be a recent graduate of, attending, or applying to law school. The job market stinks, law school is expensive, and everyone is eager to share the latest news. Kaplan Test Prep reported recently that “51% of law schools have cut the size of the entering class” due to the difficult job market. Whether this is bad news depends on where you sit. Reduced enrolment benefits current students and graduates seeking their first jobs while raising the bar (no pun intended) for prospective students.

It’s Between “Scalper” and “Scandal” in Black’s Law Dictionary*

It’s low-hanging fruit, I know, but I cannot pass up juxtaposing my post about the smartest people avoiding law school with this ABA Journal article about a law firm that got hooked by a first cousin to the Nigerian 419 scam:

Milavetz Gallop fell victim to the scam when someone claiming to be a 40-year-old Korean woman hurt in Minnesota told the firm she needed help securing a 400,000 legal settlement, report the Minneapolis Star Tribune and Courthouse News Service. The firm received a settlement check for the amount, received assurances it had cleared, and forwarded $396,500 to a Hong Kong bank for the client.

While this scam’s narrativemay not be as outlandish as “I am a government official/son of Mohammed Gaddafi/whatever and need your assistance transferring $27 million in assets from my country,” extraordinary skepticism is not required to recognize that this smells like week-old walleye. Variations on this scam have been Internet regulars for 15 years or more. From what I’ve read Wells Fargo is not blameless but still, I’d like to believe lawyers are a little savvier than this.

Another reason not to go straight to law school from college: you get life experience necessary to develop the common sense and good judgment to avoid falling for something like this.

*Not in mine, actually, which is the 5th Edition from 1979, but that’s where scam would be.

Parsing LSAT Stats

The latest indignity for those thinking of becoming lawyers: Are Smartest People Avoiding Law School? Stats Show Bigger Drop in High LSAT Applicants.

Are the wrong people losing interest in law school?

That’s the question posed by the Atlantic, which notes a 13.6 percent drop in applicants who scored highest on the Law School Admission Test, but only a 4.3 percent drop in applicants who scored the lowest.

The linked Atlantic article includes a chart of the year-to-date percentage changes in the those taking the for ranked by LSAT score, e.g. 140-144. The Atlantic characterizes the results:

The number of students applying who probably have no business going to law school has dropped the least. The number of students applying who probably should apply to law school has dropped the most . . .

[T]he smart kids got the memo. Law school is largely a losing game, and they’re not going to play, even though they can probably count on a better hand than most. Meanwhile, the number of laggards applying has barely budged.

Of course this means less competition at the top of the law school heap. Hmm . . . can more than 50% of law students land in the bottom half of their class?

The Bloom is Off the Law School Rose

This NYTimes headline is a grace note to yesterday’s post about being a lawyer: For 2nd Year, a Sharp Drop in Law School Entrance Tests.  The substance:

The Law School Admission Council reported that the LSAT was given 129,925 times in the 2011-12 academic year. That was well off the 155,050 of the year before and far from the peak of 171,514 in the year before that. In all, the number of test takers has fallen by nearly 25 percent in the last two years.

Is that all? As Mona Lisa Vito says in My Cousin Vinny, “No, dere’s more!”:

The decline reflects a spreading view that the legal market in the United States is in terrible shape and will have a hard time absorbing the roughly 45,000 students who are expected to graduate from law school in each of the next three years. And the problem may be deep and systemic.  Many lawyers and law professors have argued in recent years that the legal market will either stagnate or shrink as technology allows more low-end legal work to be handled overseas, and as corporations demand more cost-efficient fee arrangements from their firms.

I am not against becoming a lawyer. I am against becoming a lawyer without serious consideration of one’s prospects for a satisfying legal career.  Evidently others are concluding the same.

If You Are So Smart, Why Are You a Big-Firm Lawyer?

More cautionary news from the world Big Law. Dewey LeBoeuf–the mega-merger of venerable Dewey Ballentine and LeBoeuf Lamb–is in trouble:

Tens of millions of dollars in deferred compensation are owed to Dewey’s partners. Some have been told they are being paid a fraction of what they were promised. The firm is cutting 5 percent of its lawyers and 6 percent of its staff. Nineteen of its 300 partners have left Dewey since January, including heads of major practice areas. About a dozen more departures are expected.

Some of the blame goes to “financial missteps”–which is like saying heart stoppage was the cause of death. When was the last time a business failed because of wise financial decisions? The true problem is the profound change in the legal market, which

has yet to bounce back from a deep recession. Many of the lucrative practice areas that fueled growth during the market boom — securitizations, mergers and acquisitions and real estate — have failed to return to prefinancial crisis levels.

At the same time, expenses, which include the rising pay for young associates just out of law school, continue to accelerate. Further adding strain to firms’ finances are corporate clients who, operating in an uncertain environment, have become increasingly resistant to fee increases and are demanding discounts.

One recently published influential report on the state of the industry painted a grim picture.

“Since it is unlikely, based on overall economic conditions, that the demand for legal services will grow robustly for the foreseeable future, the legal industry will be forced to live with uncertainty for some time to come,” said the report, from Citi Private Bank and the Hildebrandt Institute.

Parse that second paragraph. “Rising pay for young associates just out of law school” and “corporate clients who . . . have become increasingly resistant to fee increases and are demanding discounts.” In other words, big law firms continue to pay big bucks to lure the highest-achieving law school graduates, while clients–those who pay the bills–demand discounts. One discount that the linked article does not mention is for hours billed by those high-paid young associates, who don’t actually know how to practice law. Some corporate clients refuse to pay anything for training young associates–they won’t allow them near their deals.  That’s an unsustainable business model, and partially explains the extraordinary attrition rate for those sought-after young associates:

Attrition of law firm associates has always been a blight on the profession. This attrition is financially painful as associates leave BigLaw in droves during their third or fourth years, at precisely the point when these associates become significant profit centers at the law firm. Attrition at these levels often reach the 60 – 80% level. The financial pain to law firms is compounded by the fact that law firms have by that point spent upwards of $500,000 to recruit and train each associate. In the current market, with clients by and large refusing to pay for the training of young associates, the financial burden to law firms caused by this attrition is further exacerbated.

Another explanation for associate attrition is inhospitable law-firm culture. Take a couple hundred Type-A young associates who are accustomed to thinking of themselves as the brightest bulbs in the chandelier, compensate them more than their objective worth (if they were worth what firms billed for their time clients wouldn’t refuse to pay for them), add mundane legal work–because in this climate that’s all that mid- and upper-level associates are willing to give them–and not even enough of that to keep everyone busy, require them to bill 2,000 hours a year, and shake vigorously. “Inhospitable” doesn’t begin to describe it.

And it’s not like young associates can honestly say if I can make it through this in a few years I’ll be skipping through fields of clover. A big firm lawyer without his or her own book of business will forever be feeding at someone else’s table.

At many large law firms, including Dewey, the compensation system has become a two-tiered structure where the highest-paid partners can make more than 12 times as much as the lowest-paid ones. On the high end are Dewey’s so-called rainmakers, the star partners who make millions of dollars a year executing corporate mergers and handling high-stakes business litigations. [The article mentions one partner with guaranteed annual income of $6 million.] On the low end are the majority of Dewey partners who are known as service partners. These lawyers are not responsible for client relationships. Instead, they handle more tedious legal tasks like drafting briefs and executing merger documents. They are paid at the bottom tier, about $450,000 a year . . .

$450k/year is top 1% money, but many lawyers realize the game isn’t worth the cost of the ticket. If they are smart or lucky they so realize before chaining themselves to a lifestyle that requires $450k/year. If not–misery loves company.

If Only Kaplan Had a Law-Practice Prep Course

Speaking yet again about obtaining practical benefits from one’s education . . . What They Don’t Teach Law Students: Lawyering in yesterday’s New York Times is required reading for anyone interested in law school, the state of the legal profession, teaching or the economics of higher education. That it reiterates the message of my partner’s op-ed piece cited in the previous post is just good luck. Some highlights:

Regarding the “historic” deterioration in the job market for lawyers:

The legal services market has shrunk for three consecutive years, according to the Bureau of Labor Statistics. Altogether, the top 250 firms — which hired 27 percent of graduates from the top 50 law schools last year — have lost nearly 10,000 jobs since 2008, according to an April survey by The National Law Journal.

NB: The top 50 law schools–which I assume means those rated such by U.S. News and World Report–placed 27 percent of last year’s graduates in the 250 largest U.S. law firms. This group includes the highest salaries. Some number of the remaining 73% of graduates opted for judicial clerkships, public sector jobs, or positions with NGO’s. Let’s say those three categories accounted for another 33% of graduates. The high end of their salaries may overlap the low end of the first group’s, but this second group’s mean salaries would be materially lower than the first group’s.  That leaves 40% of graduates. Some practice with small firms, some start solo practices, some join family businesses, some cry into their coffee over their decision to go to law school.  I’ve defined the second group’s size arbitrarily. It may be 40%; it may be 20%. Not every school sends 27% of its graduates to the top 250 firms. The breakdown of how many graduates go where would differ significantly from the top 10 and the bottom 10 of these 50 schools. The salary range will differ materially from the top 25 to the bottom 25 of the 250 firms. Some solo practitioners will earn more than fellow graduates who take established salaried positions. In other words, my assumptions are just guesses. My point, though, is not how many to include in each group but the distinctively different employment market for each. If you need to earn $100,000 year to meet your financial needs then you better wind up in upper portion of that 27%. If you did not finish in the top 10%, or 25%, or 40% of your undergraduate class, why will law school be different?

“[A]lmost all the cachet in legal academia goes to professors who produce law review articles, which gobbles up huge amounts of time and tuition money. The essential how-tos of daily practice are a subject that many in the faculty know nothing about — by design. One 2010 study of hiring at top-tier law schools since 2000 found that the median amount of practical experience was one year, and that nearly half of faculty members had never practiced law for a single day. If medical schools took the same approach, they’d be filled with professors who had never set foot in a hospital.”

Emphasis added. Editorial comment unnecessary. 

[T]here are few incentives for law professors to excel at teaching. It might earn them the admiration of students, but it won’t win them any professional goodies, like tenure, a higher salary, prestige or competing offers from better schools. For those, a professor must publish law review articles, the ticket to punch for any upwardly mobile scholar.

Amen, brother. This is not true only of law schools. My office whiteboard bears this quotation from a school administrator: “good teaching gets you nothing.” On a life scale it’s not nothing–you get the satisfaction of connecting with, inspiring, or changing the lives of specific students, thank you cards and Certificates of Appreciation, perhaps a box of Godiva chocolates–but institutionally you get nothing  more than a pat on the head and perhaps an extra bucket of oats.

A Plumber, an Electrician, and a Lawyer Walk Into a Bar . . .

Because the plumber was hired to replace the toilet, the electrician was hired to rewire the ice machine, and the lawyer had nothing else to do.

This provocative headline–For the Best Pay Relative to Education Cost, Choose Technical College over Law School, Analysts Say–led me a WSJ article titled What Hedge Funds Can Teach College Students. The lessons come from hedge fund manager Daniel Ades, who invests in portfolios of securitized college loans. Ades says he knows well the college loan market and its historic default rates (a robust 25-30%) but he is avoiding loans made to 2010 and 2011 college graduates “because we can’t quantify the risk.” Ades assumes 30-40% or more of these loans will default. The WSJ states “[t]his analysis translates into some surprising insights for students and policy makers. For example, in the current economy, it may make more sense to enter a technical college than to go to law school. Technical colleges “low cost relative to the higher wages they deliver” make their graduates better bets to pay their student loans.

Students should pick schools where the payoff from higher salaries upon graduation exceeds the cost of the education by the widest margin, especially when the job market contracts. By that arithmetic, technical colleges come out on top . . . Law school, on the other hand, can end up a sucker’s bet in periods of high unemployment, experts in student loan-backed bonds say.

[T]he U.S. has far more law schools than other professional schools, resulting in an excess supply of lawyers . . . In recessions, law school graduates have a harder time finding work than other graduates from professional programs and are more likely to default on their student loans.

Nevertheless, law students have been willing to take on even more debt for their degrees, borrowing a record $68,827 on average to attend public universities this year and $106,249 for private educations, according to the American Bar Association.

BigLaw Clients Push Back

The BigLaw business model continues stumble, according to The Wall Street Journal in What’s a First-Year Lawyer Worth?:

Law firms often treat the first two years of an attorney’s career as a sort of apprenticeship, albeit a well-paid one: the yearly salaries at many of the nation’s largest law firms start at $160,000. Traditionally, law firms have recouped costs of young attorneys by giving them simple jobs—research, proofreading or culling important documents from boxes of paperwork—and passing the costs along to clients in the form of hours billed at $200 or $300 a pop.

But many companies are now refusing to pay those kinds of bills. According to a September survey for The Wall Street Journal by the Association of Corporate Counsel, a bar association for in-house lawyers, more than 20% of the 366 in-house legal departments that responded are refusing to pay for the work of first- or second-year attorneys, in at least some matters. Almost half of the companies, which have annual revenues ranging from $25 million or less to more than $4 billion, said they put those policies in place during the past two years, and the trend appears to be growing.

Increasingly, companies send their simple jobs to contract lawyers, independent contractors who are far less expensive than young associates.

Another Frustrated Federal Judge

This week’s fruit of judicial frustration–and lesson to litigators–is  from Judge Sam Sparks of the U.S. District Court for the Western District of Texas. Judge Sparks ordered counsel to a “kindergarten party” at the federal courthouse in Austin to learn “many exciting and informative lessons” including “[a]n advanced seminar on not wasting the time of a busy federal judge and his staff because you are unable to practice law at the level of a first year law student.” The WSJ Law Blog reports today that Judge Sparks canceled the kindergarten party because the parties were able to settle. I’d settle too if the alternative was judicial core-reaming in open court.