This industry consists of establishments that are headed by members of the bar and are primarily engaged in offering legal advice and/or services. Such establishments include attorneys, counselors at law, law offices, lawyers, legal aid services, legal services, patent solicitors' offices, and referees in bankruptcy.
541110 (Offices of Lawyers)
The legal service industry is the second largest professional service industry in the nation, second only to health services. At the beginning of the twenty-first century, the industry collected more than $132 billion in annual revenue—more than five times the annual revenue collected by advertising firms, almost three times the revenue collected by accounting and auditing firms, and approximately one-third less than the amount of revenue generated by the automobile industry. The legal services industry employed more than one million people, with nearly half of the workforce consisting of practicing attorneys.
The economic recession of the early 2000s slowed the growth of the legal industry but did not squelch it completely. Multi-lawyer practices adjusted to the slow economy primarily by cutting back on the number of vested partners in firms. Rather than stepping into a firm right out of law school and immediately onto the fast track to partnership, young lawyers were finding the traditional process by which they would come to share in the wealth of the firm's business stymied. Two-tiered partnerships were being put in place and fewer full partnerships were being offered. Despite the changes, however, job placement following law school was 90 percent in 2001, but—reflecting another trend to use legal skills in new fields—only 58 percent of law graduates were employed by law firms.
An attorney, also known as a lawyer, is an agent, that is, a person appointed to act on behalf of another. As indicated by noted attorney Karl Llewllyn in the ABA Journal in 1942, "the essence of our craftsmanship lies in skills and wisdom; in practical, effective, persuasive, inventive skills for getting things done. …Wearethetrouble-shooters." The right to assume this agency relationship is granted by state statutes dictating admission to the state bar. Admission to the bar confers the authority or license to practice law. Requirements for admission usually include three years of college, graduation from an American Bar Association (ABA) accredited law school, residency requirements, and successful completion of the bar examination. In the early 2000s, some states such as California had varying practices regarding study requirements and allowed apprenticeships in lieu of academic study. In addition, some states relied entirely upon their own bar examinations while others used a "multistate" examination. Attorneys admitted to the bar in one state might not practice in another without permission of the other state's authority. Practicing law without proper accreditation is a punishable and sometimes criminal offense. While there has never been a nationwide bar exam, 46 states required in the early 2000s that applicants pass the multi-state bar exam (MBE) as part of the admission process.
Lawyers are admitted to the bar for life; however, misconduct can bring suspension or disbarment as well as other appropriate punishment. As a general axiom, any conduct that would have prevented admission to the bar also would be sufficient to suspend or disbar an attorney. The general criterion is whether the attorney is deemed fit for the confidence and trust required in the attorney-client relationship.
The bar review industry is an extremely concentrated and competitive industry wherein five firms control most of the market. The five major players in the industry—Bar/Bri, PMBR, SMH, Barpassers, and Reed—aggressively pursue the limited market of 58,000 annual exam takers, which generates $50 million in revenues. Founded in 1967, Bar/Bri was the early 2000s leader among such reviewers, with more than 600,000 students having taken its course.
Categories of Legal Service. Four broad categories of legal service providers in the United States, each having subcategories of their own, are public legal assistance, government, nonprofit, and private.
Public Legal Assistance. According to the Sixth Amendment to the U.S. Constitution and affirmed by the landmark Supreme Court case Gideon v. Wainwright, all individuals are entitled to legal services regardless of ability to pay. Due to the high cost of legal counsel, public legal assistance programs have been established for people who cannot afford legal services.
In 1963, Clarence Earl Gideon, an uneducated gambler and petty thief, insisted on his right to legal counsel. The Supreme Court and Justice Hugo Black upheld this right: "Any person hauled into court who is too poor to hire a lawyer cannot be assured a fair trial unless counsel is provided for him…. This seems to us to be an obvioustruth." The courts have expanded the ruling in Gideon to apply to all criminal cases, which has led to the establishment of two types of public legal offices: public defenders and legal aid offices.
Public defenders represent criminal defendants. A criminal case is distinguished from a civil case by two primary elements. First, in a civil suit, someone has sustained a loss or harm as the result of some act (or failure to act) by another. The individual filing the act is seeking compensation (either monetary or performance) rather than seeking punishment, as in a criminal case. Second, an individual party usually files against another in a civil case; a criminal case is filed by the state against an individual. In the early 2000s, the state of public defense was enormously strained by caseloads that overwhelmed defense attorneys, as well as a paucity of funds. Legal aid offices represented the civil counterpart of public defenders. These organizations represented those who could not afford legal counsel in civil matters such as tort litigation (i.e. lawsuits resulting from negligence, etc.). Eligibility guidelines for access to public legal services varied depending on location, family size, and household income.
Government Lawyers. Supported by tax dollars, hundreds of attorneys work for the government at each of the three levels: local, state, and federal. Government attorneys are primarily engaged in legal problems concerning government service (e.g., Bureau of Consumer Protection, Human Relations Commission, or Department of Environmental Resources) or government-regulated industries (e.g. Public Utilities Commission).
Nonprofit Organizations. These types of organizations provide free representation to individual cases that relate to the organization's unique interests. Special interest organizations such as the Environmental Defense Fund, the National Association for the Advancement of Colored People (NAACP), and the American Civil Liberties Union (ACLU) are engaged in the provision of legal services.
In addition to career nonprofit lawyers, charitable legal services or pro bono work is becoming increasingly prevalent as a mandatory part of legal education. Several law schools have public service requirements for graduating students. As of the early 2000s, Tulane University School of Law, for example, required that graduating students perform at least 20 hours of public service law. Beginning with the class of 1996, Columbia University School of Law required its students to complete 40 hours of pro bono work over a period of two years. At other schools, nonprofit work was voluntary—New York University's entering class pledged to perform 95 hours of community service work apiece during the students' three-year tenure. In addition, more than 50 law schools had initiated programs to ease the debt burden of graduates who go into nonprofit practice.
Private Lawyers. The most prevalent form of legal service provider is the private attorney. There are two basic types of private attorney: individual or sole practitioners and group practitioners or law firms. Group practices fall into three primary categories: informal arrangements in which two or more lawyers share office space and support services, partnerships, and legal corporations. Partnerships and legal corporations are designated as law firms. An ABA survey indicated that practices with five or fewer attorneys represent 25 percent of the industry. Approximately 31 percent of lawyers engage in practice as partners or as associates of law firms with 20 or more practitioners. Law firms range in size from two practitioners to large, multidivisional firms engaging more than 100 associates. Large corporations employ an additional category of private lawyers as house counsel.
A survey of ABA membership indicated that 4 out of 5 (80 percent) attorneys worked in private practice with law firms and another 10 percent worked in corporate law departments. Thus, approximately 90 percent worked in private practice. The remainder was divided between government, judiciary, and academia.
Economic Structure. Most of the $132 billion annually collected by lawyers and law firms is collected through direct billing of legal fees. There are four fee arrangements generally used within the industry: contingent fees, hourly rates, retainers, and fixed fees.
Contingent Fees. A large percentage of civil case fee arrangements are structured so that attorneys are only compensated if they are successful in obtaining a settlement on their client's behalf. The fee usually is a percentage of the amount of the settlement. Some contingent fees can range as high as 60 percent of an eventual settlement, with the industry standard hovering around 30 to 35 percent of the amount of the settlement.
Contingent fee arrangements also require the client to cover the expenses accrued in filing a complaint, engaging in discovery, and either negotiating a settlement or trying the case in court. These expenses are the responsibility of the client, whatever the outcome. There are two basic contingent fee arrangements: expenses off the top and expenses after the deduction of fee.
Hourly Rates. An hourly rate is assessed based on the amount of time attorneys invest in a case. However, trends within the industry toward increased client accountability have led to modifications in the traditional practice of "billable hours." Consulting firms that advise both law firms and clients about billing practices have become more common. These firms have assisted law firms in assessing their service provision costs and investments and allocating these costs to clients in the form of equitable fee setting. Fee-consulting firms also have been able to save clients from 10 to 30 percent on their legal bills.
Retainers. A retainer is an advance payment estimated to cover the cost of legal services. Retainers are based on an estimate of the time spent by the lawyer, the complexity of the legal issues in question, and the potential amount of money involved in the action.
Fixed Fees. Fixed fees usually are assessed for simple legal tasks, such as deed preparation, no contest divorce, and consumer bankruptcy. Fixed fees are those in which the client pays in advance a fixed amount for a certain legal service—for example, $100 for preparation of a deed—regardless of the length of time it takes the attorney to complete the task.
The legal industry in the United States is facing a number of contemporary issues regarding internal firm structure, external competition, and diversified growth.
Career Progression. Fueled by increased competition between law firms, the traditional "partnership track" is changing within the industry. Previously, there was an unspoken promise among major law firms that a summer job between the second and third year of law school was a practical guarantee of a permanent position after graduation, with a relatively safe period of tenure as an associate for at least one year and up to five years. Those attorneys completing the five years as an associate usually were offered a partnership position. However, the partnership path has become more arduous, with the apprenticeship period prior to "making partner" lasting 10 years or longer. Further, employers simply have rejected many candidates with partnership potential.
To keep revenues ahead of costs, law firms have had to increase the ratio of associates to partners from a oneto-one ratio to five partners for every six associates, according to an ABA Journal report.
This change in the dynamics of legal career progression has led to two internal innovations within the industry. The first is an increased use of paralegals to do the work now assigned to associates. The second strategy is to develop a new position, the "career attorney." Law firms offer those individuals who have little or no chance of making partner a higher salary than other associates make for staying with the firm.
Firm Size. Another structural innovation to maintain competitiveness is the increased use of branch offices and acquisitions. According to a report in the ABA Journal, 30 percent of the lawyers in the nation's 250 largest firms practice in branch offices. The ABA Journal noted that "branches have become a major weapon in many law firm's arsenal to fight for new business and increased market share." Many large U.S. law firms are looking overseas to international opportunities as well. As Ward Bower, a consultant with the Philadelphia office of Altman, Weil and Pensa, said, "The costs of overseas expansion are very heavy, so the downside can be great, but so is the potential."
Small firms will continue to handle issues such as landlord-tenant disputes, traffic violations, and a variety of criminal matters that have been the traditional province of the small firm. However, increased competition from legal chains such as Hyatt Legal Services, coupled with spiraling overhead costs, will force the small or solo practitioners to be better organized and more efficient.
Professional Management. The trend toward increased size in law firms has led to an increasing need for professional management. The law firm is faced with dual pressures: the need for increased responsiveness to client needs and demands counterbalanced by the need to generate revenue. Furthermore, increased size is creating an additional impediment to effective management; firms with 200 or more partners cannot run a firm as a democracy. The trend is toward creating a new position, an executive director, who will function as a chief operating officer. This individual will have minimal legal responsibility and perhaps will not even be a lawyer. In fact, nonlawyers may be established as partners at even the most prestigious law firms.
In addition to professional management, law firms are (and will continue) adopting other accouterments of more traditional business organizations. These include practice managers (similar to product managers) who augment service delivery and expedite performance appraisal in diverse sub-disciplines (e.g. tax, litigation, etc.) within the profession.
External Competition Issues. Lawyers are facing increased competitive pressure from paralegal firms offering low-cost legal services. Independent paralegals increased from approximately 200 individuals in 1985 to an estimated 6,000 in the mid-1990s. These nonlawyer practitioners are offering legal services in such areas as will and living trust preparation and child-support arrangements. Concerns expressed by the ABA regarding the ancillary businesses include creating a danger of loss of confidentiality and conflict of interest and distracting lawyers from their duties of law practice and their professional responsibilities. In contrast, members of the legal community indicate that full-service law firms allow attorneys the opportunity to better serve their clients. Furthermore, proponents of ancillary businesses indicate that professional diversification already is practiced by accounting firms that do tax law and banks that engage in estate planning. Diversification, supporters argue, allows law firms to remain competitive.
According to the National Law Journal's annual survey of the 250 largest law firms in the country, the firms grew just 3.7 percent between October 2001 through September 2002, down from a 8.2 percent increase the previous year. Considering the overall economy, most in the industry view any growth—albeit small—as a positive sign. Another trend, likely prompted by the nation's slumping economy, was toward fewer partners but an increase in senior counselors or nonequity partners—those with partnership status who are not provided a share of the firm's overall profits. Twelve U.S. based firms employed more than 1,000 lawyers, and eight of the 10 fastest-growing firms were grown through acquisitions and mergers. During the 15-year span from 1987 to 2001 the number of total lawyers in the nation's top 250 firms grew 85 percent, from 58,533 to 108,361.
In the early 2000s, continued global expansion was also on the increase. United Kingdom-based Clifford Chance, the world's largest law firm, expanded its presence in the United States by acquiring a group of California firms, adding to its New York operations. While the British moved in, the U.S. legal industry continued to move out, expanding around the world. The number of lawyers working abroad grew by 12.8 percent, and between 1997 and 2001, 70 firms opened branches in London, a common first stop in international expansion. From 1987 to 2001, in the nation's largest 250 firms, the number of lawyers practicing abroad increased six-fold, from 1,401 to 9,573.
The increasing presence of multi-disciplinary practices (MDPs) remained on the horizon for the legal industry, which would introduce the significant financial power of the world's largest accounting firms into competition with traditional law firms. As of early 2003, accounting firm lawyers were not allowed to practice law in the United States; however, the MDP system was already in full swing in Europe, where accounting giant Arthur Andersen was also Europe's biggest law firm.
The legal industry is highly atomistic, with the top 10 law firms accounting for only 3.5 percent of total industry revenues. Baker & McKenzie of Chicago, the largest firm in the nation with nearly 3,300 lawyers and $1.6 billion in revenues in 2002, was the leading firm (in terms of revenue) in the industry, but it controlled only 0.5 percent of the market. Skadden, Arps, Slate, Meagher & Flom, in New York, another industry leader, had 652 lawyers and $440 million in revenues. Although only 4.5 percent of the nation's attorneys worked for the largest 100 law firms, those firms took in 16 percent of the industry's revenue.
Chicago's Baker & McKenzie firm built its position in the industry in a different fashion. The firm engaged in legal practice for more than a century. The growth of the firm primarily was attributed to expertise and growth in international law, with a substantial portion of the firm's almost 1,600 lawyers located in overseas branch offices. The firm had 66 offices in 36 countries, including the People's Republic of China (Beijing, Guangzhou, and Shanghai), Russia (Moscow), and Saudi Arabia (Riyadh). In 2002 the firm opened branches in Shanghai and Vienna and, in 2003, in Bologna and Antwerp.
According to the National Law Journal, Skadden, Arps, Slate, Meagher & Flom of New York tied with Jones, Day, Reavis & Pogue of Cleveland for second place in the industry, based on number of lawyers, both with 1,822 full-time (and full-time-equivalent) attorneys on staff. Skadden, Arps' ascension to the top of the profession primarily was a function of the diligence and expertise of partner Joseph Flom. Flom joined the five-lawyer firm in 1948 after graduating from Harvard law School. He developed an expertise in helping shareholders challenge the management of their companies. In 1974 Flom successfully represented International Nickel Corporation (INCO) and won control of a target company, ESB Inc., in a takeover attempt that was to set the tone for the merger and acquisition activity prevalent in the 1980s. In 1975 Flom represented Chicago's Marshall Field's and saved it from a takeover attempt by Carter Hawley Hale. Flom employed a unique strategy—he encouraged Marshall Field's to begin building stores in towns where Carter Hawley Hale already had outlets. The strategy created such complicated antitrust implications that Carter simply dropped the takeover attempt.
By the mid-1980s, Skadden, Arps was a part of many major deals. According to Kim Eisler's book Shark Tank, Flom's instinct for acquisition and defense skills were so expertly developed that many active players in the mergers and acquisitions market paid Flom a retainer to ensure that a potential raider could not use his skill against them.
According to the U.S. Department of Labor Bureau of Labor Statistics, the legal services industry accounted for 1,043,680 jobs in 2001. Occupations specifically legal in nature (i.e., lawyers, law clerks, paralegals, etc.) totaled 496,710. The mean annual salary for a lawyer was $95,250; a paralegal, $37,940; and a law clerk, $30,880. Office and administrative support positions accounted for the majority of the remainder of the legal workforce.
Wages in the industry continued to rise at a rate above that set by most other industries. In the early 1990s the average beginning lawyer earned $36,600 per year, and top graduates from top law schools started out at around $80,000 per year. Since then, the economic climate induced law firms to take a more conservative approach to hiring. Despite this "soft" market for law school graduates, average starting salaries continued to accelerate. In the mid-1990s, graduates from prestigious law schools, such as Yale University, Columbia University, New York University, and Georgetown University Law Center, received average starting salaries in excess of $70,000. This demand for higher salaries was fueled in part by rising tuition costs at major law schools and heavy student loan burdens faced by recent graduates. Average associate salaries for young New York attorneys exceeded $82,000.
Lawyers on salary received increases as they assumed greater responsibility. Lawyers starting their own practice might need to work part time in other occupations during the first years to supplement their income. Their incomes usually grew as their practices develop.
Lawyers who were partners in law firms generally earned more than those who practiced alone, although a majority of associates and others polled considered partnership to be a less necessary step toward career advancement. According to the National Association for Law Placement, only about half of all associates (56 percent) perceived partnership as an incentive for their careers in private practice.
The field of law made a difference, too. Several areas of the legal profession were currently regarded as "hot" practice areas. These included bankruptcy and corporate reorganization, environmental law, alternative dispute resolution, and technology law. Environmental and technology practices were expected to remain strong practice areas. These areas were fueled by growing concerns and increasing legislation in regards to the environment and ubiquitous high-technology issues such as computer fraud and electronic funds transfer. In addition, firms operating in the increasingly competitive pharmaceutical and biotechnology businesses were seeking to protect their innovations through patents, accelerating the demand for patent attorneys and attorneys with technical training. Patent lawyers generally were among the highest paid attorneys. Finally, the litigious nature of modern U.S. society was expected to ensure a continued emphasis on legal mediation and arbitration.
In support services, paralegal work represented the area with the greatest employment potential. Law firms, rather than pay top salaries to law school graduates, were using increasing numbers of paralegals to do routine work traditionally performed by new associates.
Although there was a marked fall-off in merger and acquisition and real estate practice, New York remained the strongest job market, according to the National Association for Law Placement. The next largest legal job market was Washington, D.C.
The practice of law has and will continue to become increasingly automated. Law office automation was becoming a necessity for improving office productivity and efficiency, for maintaining cost controls and competitiveness, and for meeting minimum standards of professional practice.
The evolution of the personal computer and the phenomenal growth of the Internet beginning in 1998 represent the primary focal points of automation and instant communication in the legal industry. "On-line" databases made available through vendor services such as Lexis/Nexis or Westlaw allowed the practitioner to expedite research. The Lexis/Nexis service featured both legal reference sources and news publications, from The American Lawyer to USA Today to transcripts of CNN and the PBS Lehrer Report. A report issued by the ABA Legal Technology Research Center in Chicago predicted that individual law firms would create their own in-house databases to draw on their past work and handle new matters more expeditiously. Furthermore, firms would create "expert" software that allowed the entire firm to tap into a specialist's knowledge.
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Sachs, Andrea. "Legal Advice and Care: It's Not a Lawyer Joke." Time, 30 October 2000.
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U.S. Department of Labor. Bureau of Labor Statistics. 2001 National Industry-Specific Occupational Employment and Wage Estimates, 2001. Available from http://www.bls.gov .
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