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February 24, 2009

don’t forget those Minimum Fee Schedules [ALF #3]

Filed under: lawyer news or ethics,viewpoint — David Giacalone @ 10:17 pm

.. Click for the video of ALF’s “Risky Business” spoof ..  .. [or, Heidi’s R-rated version]

note: this is #3 in our final week’s ALF Series on American Legal Fees; click for #1 and #2; and #4

While I was in law school, bar association Minimum Fee Schedules went from being commonplace, apple-pie, “old-time rock-n-roll” in the legal profession, to being Risky Business in violation of antitrust law.  The fee schedules were lists of recommended minimum prices for common legal services.   Through disciplinary actions and ethics opinions, bar associations made it clear that a pattern of charging less than the minimum fee constituted misconduct.  See, for example, this NY Bar ethics opinion from 1964; a 1961 Colorado Bar opinion; and the Virginia Bar opinion discussed by the Supreme Court at Fn 1. in Goldfarb.  The president of the New York Bar Association had himself requested the 1964 opinion concerning departures from the minimum fee schedule, and his so-called ethics committee agreed with him that:

“[T]o let it be known, by whatever means, that a lawyer will customarily charge for his services less than the recommended fees set forth In a duly adopted schedule is not in accordance with Canon 12 and is unethical as a form of solicitation and advertising.”

At the end of my 2L year, the Supreme Court’s decision in Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975), closed the book on those quaint little non-compete clauses, holding that the Fairfax County Bar Association’s minimum fee schedule was price-fixing in violation of §1 of the Sherman Act.  Until then, bar groups had gone around saying they could do whatever they wanted regarding fees, because there was a blanket “learned profession” exemption to the antitrust laws, and that they also had State Action immunity for conduct permitted by state courts in overseeing the legal profession.  However, as the case Goldfarb syllabus explains.

“The schedule and its enforcement mechanism constitute price-fixing, since the record shows that the schedule, rather than being purely advisory, operated as a fixed, rigid price floor. The fee schedule was enforced through the prospect of professional discipline by the State Bar, by reason of attorneys’ desire to comply with announced professional norms, and by the assurance that other lawyers would not compete by underbidding. . . .

“. . . It is not enough that the anticompetitive conduct is ‘prompted’ by state action; to be exempt, such conduct must be compelled by direction of the State acting as a sovereign. Here the State Bar, by providing that deviation from the minimum fees may lead to disciplinary action, has voluntarily joined in what is essentially a private anticompetitive activity, and hence cannot claim it is beyond the Sherman Act’s reach.”

While in law school, we discussed the fee schedules a little bit in my Professional Responsibility class in 1974 (where my famous Harvard Law professor believed lawyers should not be allowed to advertise), and much more in my antitrust classes. [Thereafter, for more than a decade at the Federal Trade Commission, my law practice was focused on the anticompetitive practices of learned professions like medicine and law.]

I’m bringing up this topic now, before we close shop here at f/k/a, because I’m afraid far too many members of the legal profession (and virtually all of the public) have forgotten this chapter of lawyer history and lessons to be drawn from it and its aftermath.   A lot of lawyers reading this weblog have suggested the f/k/a Gang is far too suspicious of bar associations and lawyers when it comes to fees and competition.  But, I want the “don’t be such a cynic” crowd to remember the Minimum Fee Schedules and what they say about our profession.  For me, history (including rather recent history at that) clearly shows:

  • lawyers almost always feel underpaid and entitled to higher fees
  • lawyers hate competition, especially price competition and related advertising, and will use peer pressure and ploys like an appeal to the “dignity of the profession” to stifle rivalry
  • lawyers will exploit any pricing mechanism (turning it into a racket) — and will always find new ways to increase fees when one method of billing becomes disfavored

You might protest that there must be a good, client-centered motive behind the adoption of Minimum Fee Schedules. Surely, as conspiring doctors often claimed (unsuccessfully) during antitrust investigations over the past three decades, it was done to assure that services were of a high quality and consumers protected from slipshod work.   Well, I think the experience of the Wisconsin Bar was typical, and folks there were nice enough to compose a history “History of the Organized Bar in Wisconsin“, which includes an entire Fee Schedule chapter. Chapter Nineteen begins like this (emphasis added):

For a hundred years after statehood Wisconsin lawyers were inadequately compensated. . . . [M]ost of the lawyers who became well off did so through side ventures. Much of the fault lay in a haphazard system of charges for service.”

The discussion goes on to tell about early efforts at devising fee schedules.  It started with a “Fee Bill” in 1844, signed by a dozen lawyers in Milwaukee County.  Then, after many forms and revisions, by 1959:

“The American Bar Association’s committee on Economics of Law Practice hammered hard at the economic plight of the profession and what could be done about it. The post-war lawyers were keenly aware of the poor economics of the profession. The stage was set for an event that had far reaching impact on the lawyers’ pocketbooks.

“The fee schedule was extensively revised in September 1959. . . . [T]he Executive Committee voted to publish and distribute to all 6,000 members a “Minnesota Type” fee schedule book. . . .  Binders were procured, the schedule printed, and it was shipped to all lawyers and judges by Feb. 1, 1960.

The new schedule of minimum fees hit the Bar like a welcome rain on parched fields. Partly because of the attractive binder and the ease with which the schedule could be used, within six months the recommended fees became accepted statewide as the reasonable and customary minimum charges for lawyers’ services. The fee book urged the members to recognize that an average charge of $18 per billable hour was necessary if the lawyer wished to net, before taxes, but after payment of overhead costs, about $14,500 per year.

The impact of this new schedule was estimated to have raised the lawyers’ incomes by 25 percent to 50 percent within three years. Coupled with new law office management techniques, the lawyers were well on their way out of the financial morass that they had suffered through for 100 years.”

Chapter 19 then discussed the demise of the Fee Schedule due to antitrust scrutiny:

“While the fee schedule was never designed to be other than a guide to fair charges, and only minimum charges at that, an opinion by the Ethics Committee to the effect that continued, flagrant, and publicized fee cutting was in effect a form of advertising and as such a violation of the Canons of Professional Conduct, undoubtedly led many to fear sanctions if they cut fees. The State Bar did formally change the name of the schedule from one of minimum fees to a “customary fee guide” in June 1972, but this came too late to save the schedule.

“Although republished and clearly designated as a fee guide, and not mandatory or compulsory, this did not satisfy the federal officials that the anti-trust implications of fixed fees had been eliminated. The anti-trust division of the U.S. Department of Justice “opened a file” on the State Bar late in 1972, and notified the Executive Director that suit would be commenced to force discontinuance of the fee schedule. . . . Within the year, acting under similar pressure, almost every state bar had repealed its fee schedule.”

Was the Wisconsin Bar suddenly plunged into a blood-bath of discounting and rate cuts?  Of course not, we’re talking lawyers.  Instead, from the perspective of the organized bar, “This repeal had an unanticipated favorable result.” To wit,

“What happened was that there had been massive shift to keeping time records and charging based on time. This shift was largely due to the revision of the schedule. This not only produced greater income but fairer fees to the clients.”

Even better, once the Goldberg decision (with its huge monetary penalties), “clinched the doom of all fee schedules, mandatory or advisory,” lawyers across the State were soon encouraged to raised their hourly fees:

“Following the abolition of the fee schedule, the Wisconsin Supreme Court gave the bar something even better. In a case involving fees for criminal defense, the court recognized in its opinion that a fee of $45 an hour was entirely proper as being the prevailing average rate. Coupled with the bar’s shift to time records and hourly charges, this pronouncement of the court was a welcome reinforcement to the fees being charged.

“In retrospect, the adoption of fee schedules by the bar association were, in light of the times and conditions, both essential and useful. The sad state of the bar economics in the early 1950s, fraught with non-businesslike practices and lack of record keeping, made the publication of the fee schedule book in 1960 timely and helpful. . . .  By the time the anti-trust attack was mounted, the fee schedule had accomplished its purpose, and undoubtedly had outlived its usefulness.”

In concluding the chapter, WisBar pats itself on the back and exclaims: “The economics of the bar had turned around and the State Bar was instrumental in bringing it about.”

Is the era of income-raising Fee Schedules and its melding into the epoch of higher-still “prevailing hourly rates” just ancient history, irrelevant in the enlightened 3rd Millennium?  I doubt it.  Almost every observer of the legal profession seems to believe it is significantly more commercialized and profits-driven than it was in the pre-Goldberg era. Clearly, more and more lawyers have no problem declaring publicly that they deserve to become very rich, to charge what the market will bear, and to leave none of the client’s money on the table.  And, they are aided and abetted by marketing experts who tell them they are under-valuing their services and need to manipulate images and perceptions to reap premium fees.

Despite market forces that in any other industry would bring vigorous price competition (i.e., an over-supply of providers and dwindling number of buyers able or willing to afford their services; consumers better educated and more assertive than ever of their rights in the marketplace; and technological advances that reduce the labor needed to produce their product and allow buyers to do much themselves or use less-costly providers), we see bar members advising each other not to give discounts (e.g., here and there), and we see no marketing based on price (except for those who try to stand out by charging more than their rivals).   And, we continue to see bar associations acting like guilds.  For example:

  • As mentioned in a post earlier today, the Ohio Bar modernized its ethics rules in 2007, by moving its ban on advertising discounts from the body of its rules to the comment section.  See Comment to Ohio Bar Rule 7.1, and our post “we need more low-fee lawyers (even in Ohio)” (March 22, 2006).
  • Meanwhile, the American Bar Association revamped its rules on legal fees in its Ethics 2000 project, to deny injured consumers protection against unreasonably high “standard contingency fees.”  (See my 2002 Open Letter to the FTC)
  • The President of the New York State Bar Association proposed far stricter advertising rules in 2006, saying he wanted to limit lawyer advertising “to the fullest extent permitted, within the limitations of the First Amendment.”  See our prior post. And the Bar Association passed it, seeking to preserve lawyer dignity.
  • Faced with nonlawyer suppliers of services such as real estate closings, and fearing that giving consumers more choices would drive down prices, the Massachusetts Bar rejected the advice of the U.S. Justice Department and the Federal Trade Commission and voted for the broadest definition of “the practice of law” — and therefore of the “unauthorized practice of law” — in the nation.  See our post “bar & guild.”

There’s no reason to think the legal profession has changed its stripes or its priorities.  No reason to think lawyers will compete for clients on price.  Therefore, please don’t forget that, for over a century and until forced to stop, the self-regulating organized American Bar decided to mandate minimum fee schedules when its members felt underpaid.  And, it did it under the hypocrite’s banner of professional responsibility and ethical obligations.

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