The United States, it has been said, is a nation of laws. It is also, perhaps not coincidentally, a nation of lawyers—nearly a million at last count, and growing at the rate of 40,000 a year. Law is big business, generating billions of dollars in revenue, and making many practitioners rich (and sometimes famous). Although much attention has been paid to the fees earned by plaintiffs’ lawyers in big class-action lawsuits against the tobacco and insurance industries, to name a few unlucky defendants, lawyers on the other side of the versus are just as rich, if not always as famous. According to The American Lawyer, partners at the hundred largest U.S. law firms averaged around $1.2 million in income last year, while partners at the top dozen firms earned about $2 million.
It’s not just the partners, however, who are rich. The starting salary for an associate at a large firm in New York and several other big cities is now $160,000 plus bonus, usually around $30,000. That associate can expect to earn about $250,000 before turning thirty years of age. Except perhaps for investment banking, few other professions in the United States enable someone so young and inexperienced to pocket so much cash.
Even so, it’s not easy money. These high salaries come with a huge personal and sometimes professional price. For one thing, the top billable rate for partners at some big firms is now crossing the $1,000 per hour mark. Even a junior-level associate bills at $300 per hour or more. For clients, this means big bills even for small matters. For lawyers, it means long hours, enormous stress, cutthroat competition and high rates of attrition. The current system serves no one’s interests except those of a few top-earning partners. For everyone else, the costs of doing legal business have become an impediment to financial, economic and, very often, personal growth.
The mega law firm is largely an American phenomenon. With the exception of Clifford Chance (which refuses to lay claim to any particular location as its headquarters), the 25 largest law firms in the world are headquartered in the United States, many of them in New York City. All of them have close to 1,000 attorneys or more, and the largest—Chicago-based Baker & McKenzie—has more than 3,000. Most continue to expand. It is not unusual for a big firm to hire as many as a hundred new associates every year.
In addition to recruiting new lawyers, firms have grown in recent years through mergers and acquisitions. DLA Piper Rudnick Gray Cary, as its name suggests, is a recent mash-up of several different national law firms. International behemoth Clifford Chance is the result of the merger of London’s Clifford Chance and venerable New York firm Rogers & Wells. Last year, San Francisco’s Orrick, Herrington & Sutcliffe tried, unsuccessfully, to merge with New York-based Dewey Ballantine. (Dewey recently successfully merged with LeBoeuf, Lamb, Greene & MacRae).
The motivation behind this phenomenal growth is threefold. For one thing, law firms believe they must grow or die. As Orrick chairman Ralph Baxter noted in an interview, law firms that cannot offer their clients “full-service” risk losing them. Like the big accounting firms, law firms desire to be all things to all corporate clients: from mergers and acquisitions to litigation to bankruptcy; from Beijing to Paris to Los Angeles. There is a belief among large law firms that clients prefer to handle all their legal services under one roof. They may be right: It is simpler (and perhaps more economical) to have one law firm handling all legal aspects of a company’s business than to chop it up and farm it out.
Big firms also covet the bragging rights that come from being the biggest, the farthest flung, the name on every client’s lips. The rapid rise and spectacular fall of San Francisco’s Brobeck, Phleger & Harrison has been attributed by some to the hubris of its managing partner, who wanted to be the biggest kid on the block. Size may not be everything, however. After all, Wachtell, Lipton, Rosen & Katz, one of the most prestigious law firms in the country, with profits of nearly $4 million per partner, is not even among the top fifty in size. Size, however, is one obvious and easily measured marker that firms can use to compare themselves to each other, and it is made more important by the fact that profits are a more closely guarded secret.
Finally, but hardly of least significance, because firms are pyramids in structure, growth can make the partners richer. Young lawyers on the bottom fuel the income of those on the top. The math is simple: A young lawyer who bills 2,000 hours at $300 an hour generates $600,000 in revenue, of which about $220,000 pays his salary and benefits; the remaining $380,000 is funneled up the chain to pay overhead and pad the partners’ pockets. Because costs are essentially fixed, the more hours non-partner attorneys bill, the more profits are generated for the partners. The more associates, the richer the partners—assuming that the associate bills enough hours to cover his or her own salary and costs.
There are limits to growth, of course. When there is not enough work to keep all the associates billing, law firms wither and die, or suddenly implode. A firm simply may not have enough work to justify hiring more associates, although overly optimistic projections (or hubris) often trump good sense, leading firms to grow when it might not be wise to do so. More important, there is a finite talent pool. While law firms have been growing, the number of graduates from the top law schools has remained fairly constant. As a result, firms have had to hire from deeper in the class at the elite schools and to recruit from schools they previously did not tap. In order to compete for the best students, they have also been forced to raise salaries to their current stratospheric heights.
There really is no such thing as a free lunch, however: Higher salaries mean heavier workloads. Although 1,500 hours a year was once considered a reasonable workload, young lawyers today typically “bill” at least 2,000 hours a year, and many bill 3,000.1 A “billable” hour is not the same thing as an hour worked. Clients may only be billed for legal work actually done. They may not be billed for time spent staring into space, eating lunch, going to the bathroom, talking to friends, or for firm management and training activities. Although estimates vary, it takes about one-and-a-half to two hours of working time to bill one hour. In other words, an attorney who bills forty hours a week is really working sixty to eighty hours. At the large firms, it is not unusual for lawyers to work 12 hours a day, six or seven days a week, and many lawyers routinely work around the clock when a big deal or litigation is ongoing.
There is also, ever hovering in the background, a constant, not so subtle pressure to bill that comes in the form of detailed monthly billing reports. These monthly reports are often matched against “billable targets” associates must achieve before they are eligible for bonuses, and they are compared with others in their class who are billing more or less time. These reports also include complicated codes that parse out billable tasks to filing, travel, even billing itself. Life in a big law firm is measured in six-minute increments.
Because young lawyers become more profitable as they age, law firms wish to keep associates in their employ as long as possible without having to make them partner—at which point they dilute profits for everyone else. This explains, in part, why the time it takes to make partner has increased from seven to as long as ten years. It also explains why law firms have fashioned two-tier partnership tracks, creating “of counsel” and “senior attorney” positions for those who have been passed over or will never make partner. There are also now “non-equity” partners, which essentially means partners who are not really partners but highly compensated employees. Some speculate that firms have not only a monetary incentive to create a variety of tiered structures, but also manipulate numbers for purposes of prestige: Profits per partner can be made to appear higher than they would otherwise be if all “partners” (equity and non-equity) were included in their reporting.
While these measures preserve profits for a select few, they have also made law firms more inhospitable work environments, entrenching a kind of class structure in what was formerly a collegial atmosphere. In the past, when a significantly higher percentage of associates could look forward to making partner, partners were more likely to view associates as future colleagues rather than as cogs in a money-making machine. There was an incentive to develop long-term relationships and to invest in an individual associate’s training, education or development. Now that most associates are gone within five years, and larger firms have spawned a more depersonalized professional culture, this incentive has largely disappeared.
As a result, young attorneys are leaving their jobs in droves despite their lucrative salaries. According to the National Association of Law Placement Foundation (NALP), big law firms lose nearly 40 percent of their associates within four years of hiring. After six years the attrition rate climbs to 60 percent. Some of these lawyers go to in-house jobs at corporations where the hours are not as demanding; others go to smaller firms, government or academia. Some leave the profession entirely.
It is rare to find a young lawyer at a big law firm today who is truly happy. Most consider these jobs a way station or resume-builder on their path to something better. In the last few years, law firms have instituted a variety of programs to retain associates, such as mini-sabbaticals and extended public-service opportunities. So far, however, such programs have failed to staunch the attrition numbers.
In theory, clients shouldn’t care whether young lawyers are happy. After all, hardly anyone wonders whether his accountant or his plumber is happy. But the source of associates’ unhappiness should concern clients who are paying the associates’ salary and are indirectly responsible for their misery. For one thing, a happy law firm is an efficient law firm. Work gets done without the sturm und drang that characterizes battling factions. More important, the constant pressure to make young lawyers work as many hours as possible not only has a negative effect on morale, but encourages waste, duplication of effort and possibly even fraud.
Though firms dispute the suggestion and would be subject to sanctions if it were ever proven true, the system encourages the padding of billable hours. This can take many forms, from the outright fraudulent to the merely questionable. With enormous pressures on associates to make their targets (else lose their bonuses, or even their jobs), and with partners financially dependent on their productivity, nearly everyone has a vested interest in billing as many hours as possible. As a result, partners at big law firms are continually looking for ways to make young lawyers very busy. Thus, it is quite common in big law firms to pump up litigation or deal-making into pulse-raising zero-sum propositions. Fortified by teams of associates and paralegals recruited for the battle, young associates are encouraged to scorch the earth, take no prisoners, and are otherwise goaded onward on by warlike metaphors. Few limits are placed on them in litigation, for example, where standard practice is to delay, obfuscate and wear down opposing counsel through an endless series of objections and motions. While this may bring plaintiffs to the table in order to settle a case, it also has the unsurprising effect of increasing legal fees.
Although it is difficult to prove, the intense pressure to bill hours may lead associates to inflate their time. Indeed, there are few checks on associate time-keeping. Law firms simply rely on their lawyers to report honestly how much time they have spent on any one matter. It would be nearly impossible to catch someone cheating, especially if the inflation were within the realm of reasonable (for example, three hours spent on a matter instead of two). Mistakes are also easily made, given the many different clients and cases an associate might work on during the day, and how easy it is to forget to write down a phone call, an e-mail or a quick conversation with a colleague. Many lawyers must reconstruct their time at the end of an exhausting day, or week. The potential for errors is great.
Again in theory, clients should act as a check on the greed of big firm partners. Most corporate clients, however, are far less price sensitive than the individual consumer, considering that the bills are not being paid out of their own pocket. Moreover, with millions, even billions, of dollars at stake, overpaying for legal services is usually the least of a large corporation’s worries. Although companies espouse fiscal restraint, when it comes time for a corporate manager to decide whether to follow his lawyer’s advice and pay for a certain course of action, or to reject that advice and risk the consequences, few will choose the latter. Just as a sick patient will do almost anything to get better if there is no insurance company to limit care and therapy choices, a corporate manager is almost always willing to open the company’s checkbook to pay legal fees.
Corporate clients also frequently lack insight into the nature of their legal problems. Mid-level managers are usually not attorneys and in-house counsel cannot be expected to have the same expertise as outside counsel—after all, that’s why outside counsel is hired in the first place. When outside counsel advises an in-house corporate lawyer that a certain motion must be made, or another attorney should be added to the team, it takes a sophisticated understanding of the issues to decline. More than that, since many in-house lawyers often hire their former colleagues, they have an inherent conflict of interest in supervising those attorneys in ways that limit them. As always, the simpler, less risky proposition is to spend the money and follow the advice. No one has ever been fired for hiring the most prestigious law firm money can buy.
Is all that work really worth it? From the perspective of the young associate, the answer is no. It amounts to long hours, often inconsiderate bosses and little stake in the future (associates have less than a 5 percent chance of making partner at most big firms). Most realize their mistake and get out early. For the client, however, it is more complicated. In a world in which adversaries employ scorched-earth tactics, the client who does not do likewise risks getting burned. There may also be incremental benefits to over-papering a deal or over-litigating a case. Greater due diligence may lead to more robust deals. More motions may cause an adversary to settle on more advantageous terms. It is difficult to measure the benefits of over-lawyering, but clearly many clients think the costs are worth it.
But who pays these costs? Well, dear reader, you do. This is no joke. Like all business expenses, costs are ultimately passed along to consumers in the form of higher prices. And therein lies the rub: While pro-business interests have done a good job convincing the public that frivolous lawsuits brought by unscrupulous plaintiffs’ lawyers are making American businesses uncompetitive, they are conspicuously silent about a far greater burden on American business: their own lawyers. Attorneys who practice in big law firms in which cases are habitually over-papered and over-lawyered end up costing consumers vastly more than the handful of media-hyped personal injury cases. With little public outcry against the hourly rates charged by big firms or the amount of time invested in cases, and with little supervision or oversight that might rein in costs, legal fees spent by corporations in run-of-the mill business disputes and transactions continue to climb. In short, businesses are being fleeced by their own lawyers, but seem not to care much about it because the public pays the bill, seemingly without complaint.
The public doesn’t complain because, for the most part, it has no idea what is going on. Few typical American citizens, and even few highly educated Americans, realize that these corporate law shenanigans account for the majority of what American courts actually do these days. They do not recognize that taxpayer upkeep of courtrooms—their construction, maintenance and staffing—amounts to a huge public subsidy to business. In dollar terms, this subsidy is not as outrageous an amount of money as that racked up by over-lawyering (also paid for by consumers), but as a matter of principle it is perhaps an even greater outrage.
There is a straightforward way out of this mess: cut young lawyer’s salaries. If big law firms reduced starting salaries by, say, 50 percent—to a still reasonable $80,000 or $90,000 per year—most young lawyers would refuse to work the long hours now demanded of them.2 The result would be less time to do the work, and less work done. Partners would start looking for ways to be more efficient and economical with the employees they have, and frivolous motions and over-papered deals would sharply decline. While some young lawyers might object, not least because they aim to pay back tuition debts as fast as possible, most would welcome the opportunity to have their lives restored to them.
This solution could work, but is it possible? Why would the partners in top law firms do anything to reduce their own incomes? Why would firms do anything to cause a loss of market share if the hours their firm is not billing are picked up by hungrier others? Besides, if top young lawyers really hate corporate law as much as all that, why don’t they go in greater numbers into public service jobs to begin with? Breaking our current dysfunctional patterns won’t be easy because, however perverse the incentives may be, debt-stricken young associates have nearly as many reasons as avaricious partners to earn as much as possible, regardless of consequences.
But if this modest proposal seems utopian, consider this: The first big law firm that publicly announces it will not permit its associates to bill more than 1,400 hours per year will receive a huge burst of publicity.3 The very top law students will line up to interview. Forced to focus only on essential matters, associates will actually enjoy their jobs. With more interesting work done in fewer hours, attrition rates will decline. By keeping their associates longer, firms might actually become more profitable. Young lawyers might be willing to trade a high salary now for a greater opportunity to make partner later and a larger share of the profits.
A salary cut is certainly in the broader public interest. As things stand, the public pays for lawyers’ high salaries, but gets nothing of value in return. On the contrary: The public pays for inefficiencies in the system in the form of higher transactional costs that are deliberately created by law firms with a vested interest in exploiting them. Unlike other forms of wage and price controls, cutting salaries will restore efficiencies to the system and more accurately reflect the true cost of legal services. The public will benefit through lower prices for goods and services, and fewer delays in a court system stretched thin by unnecessary business disputes. Certainly, this solution would be more likely to be implemented if more people, and particularly more businessmen, got a lot angrier about being fleeced by corporate lawyers on a regular basis.
Finally, lower salaries for lawyers will benefit clients not just because bills will be lower, but because they will get lawyers who care about their legal problems more than they care about finding ways to pad hours. It will be the lawyer, rather than the client, who will counsel restraint. With a renewed focus on the substance and merits of the legal issues at hand, clients may even decide to resolve their disputes without legal bloodshed. In this brave new world, anything would be possible.
Exact data on billable hours are difficult to come by and often unreliable. According to Findlaw.com, the average billable hours worked by an associate in New York City hovered around 2,000. Young lawyers I have interviewed also report that 2,000 is the magic minimum number firms expect. At this rate, according to Findlaw, associates earn about $70 per hour.
It is no coincidence that the rise in salaries has made it more difficult to convince law school graduates to work in the public sector, where salaries are lower. If big law firms paid the same as government or non-profit jobs, more law school graduates would choose a career seen by many as more interesting, more fulfilling and less stressful than corporate law.
While many law firms claim not to demand as much from their associates as other big law firms, most associates do not believe these claims, and rightly so. When I worked at a small law firm of forty lawyers, we worked as hard as our classmates at big firms. In order to convince associates the claims are real, law firms must impose a 1,400 hour cut-off, after which associates must take a vacation.