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Lawyers as capitalists

The WSJ reports:

Clients are seeking ways to lower their legal costs, and more of them are asking law firms to share the risk of litigation, particularly in intellectual property cases, with contingency payment arrangements in which the clients pay no fees upfront. Under this arrangement, a law firm only gets paid if it wins.

As discussed in the article, GE handles its patent litigation this way, Cisco on the defense side. It’s all about responding to the market.

Another firm that had responded to client demand by turning to contingency fees:  Howrey.  Remember them?  Revenue and PPP dropped. Lawyers left. CEO Robert Ruyak is quoted in the WSJ article:  “What we found is that partners at major law firms have very little tolerance for change and very little tolerance for fluctuation in profits.”

Of course.  These partners are making undiversified investments in what is essentially a capital asset — litigation.  This is a rather bad business model.

As discussed in my and Kobayashi’s Law’s Information Revolution, there are better ways.  One of them is litigation hedge funds.  In general, we note:

Like drilling an oil well, litigation involves exploration, production, financing and valuation.  This model for using legal expertise would be a distinct departure from the current advice model because it would dispense with clients, even in their modified form as customers of legal information products.  Legal capitalists would find their profits in the capital markets rather than in selling advice or information to those engaging in transactions or litigation.

Many commentators fear that hedge funds will bring abuses and excessive litigation. But like it or not the capital markets are an important part of the future of law practice. Specialization of capital and labor is one of the key insights driving the modern economy.  The legal market will be joining this economy before long.

Filed under: lawyers, legal profession

Full post as published by Truth on the Market on March 10, 2011 (boomark / email).