Legal Services

SIC 8111

Companies in this industry

Industry report:

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.

Industry Snapshot

The legal service industry is the second-largest professional service industry in the nation, behind health services. At the beginning of the twenty-first century, the industry collected almost $110 billion in annual revenue. The legal services industry employed more than 1.1 million people, with about one-third of the workforce consisting of practicing attorneys.

The economic recession at the end of the first decade of the 2000s hit the legal industry hard but did not stifle 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 altered. Two-tiered partnerships were being put in place, and fewer full partnerships were being offered. Many firms announced layoffs and cutbacks, and some closed their doors. As a result, the level of job security and job satisfaction, especially among midlevel management, was very low.

There were an estimated 319,749 establishments headed by members of the bar in 2008. Primarily engaged in offering legal advice or services, these firms were staffed by more than 1.1 million legal professionals boasting more than $109.9 billion in annual revenues. Firms classified generally as legal services represented 108,445 firms, or 34 percent of the market, generating more than $26.8 billion in revenues. General practice attorneys accounted for 40 percent of the industry in terms of number of firms, averaged five employees, and generated $38.4 billion. General law offices accounted for 14 percent of the industry, averaged nine employees, and generated $31 billion in revenues. Accounting for much smaller portions of the industry were specialty lawyers and law offices, such as criminal law, bankruptcy law, corporate law, divorce and family law, malpractice and negligence law, immigration law, labor and employment law, and real estate law.

In 2009 the National Law Journal reported that the total number of attorneys working at the 250 largest law firms was 133,723 in 2008, compared to 128,213 attorneys in 2007. Although these firms grew 4.3 percent year-on-year, overall growth slowed from the previous year's level of 5.6. percent. However, growth generally hovered around 4 to 5 percent during most of the first decade of the 2000s after reaching 8.3 percent in 2001. By 2010, the total number of attorneys working at the 250 largest law firms fell to 126,293.

Organization and Structure

An attorney, also known as a lawyer, is an agent, or 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.... We are the trouble-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 a college degree, graduation from an American Bar Association (ABA) accredited law school, residency requirements, and successful completion of the bar examination. In the early years of the first decade of the 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, in the early twenty-first century 46 states required that applicants pass the multi-state bar exam (MBE) as part of the admission process.

Lawyers are admitted to the bar for life, but misconduct can bring suspension or disbarment, as well as other appropriate punishment. Generally, 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 leader in the early years of the first decade of the 2000s among such reviewers, with more than 600,000 students having taken its course.

Categories of Legal Service.
The 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 that was 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, writing "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 obvious truth." 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 twenty-first century, public defenders were strained by overwhelming caseloads, 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 (e.g., lawsuits resulting from negligence). 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 at all three levels of government: local, state, and federal. Government attorneys are primarily engaged in legal problems concerning government service, such as the Bureau of Consumer Protection, Human Relations Commission, or Department of Environmental Resources, or government-regulated industries, such as the 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. For example, at the beginning of the first decade of the 2000s, Tulane University School of Law 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 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. The two basic types of private attorney are individual or sole practitioners and group practitioners or law firms. Group practices fall into the three primary categories of 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 four out of five (80 percent) attorneys worked in private practice with law firms and another 10 percent worked in corporate law departments, accounting for approximately 90 percent working in private practice. The remainder was divided between government, judiciary, and academia.

Economic Structure.
Most of the fees garnered by lawyers and law firms are collected through direct billing of legal fees. The four fee arrangements generally used within the industry are contingent fees, hourly rates, retainers, and fixed fees.

Contingent Fees.
A large percentage of civil case fee arrangements are structured so 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 a settlement, with the industry standard hovering around 30 to 35 percent of the amount of the settlement.

Contingent fee arrangements 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, whatever the outcome. There are two basic contingent fee arrangements: expenses off the top and expenses after the fee is deducted.

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 that will be 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, such as $100 for preparation of a deed, regardless of the length of time it takes the attorney to complete the task.

Background and Development

A number of contemporary issues regarding internal firm structure, external competition, and diversified growth affected the legal industry in the United States.

Career Progression.
Fueled by increased competition among law firms, the traditional "partnership track" was 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. Furthermore, employers 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 one-to-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 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 began to look overseas for 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 continue to handle issues like 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, were expected to 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. Law firms faced dual pressures of the need for increased responsiveness to client needs and demands counterbalanced by the need to generate revenue. Furthermore, increased size created an additional impediment to effective management because firms with 200 or more partners cannot run a firm as a democracy. The trend moved toward creating a new position of executive director, who functions as a chief operating officer. This individual typically has minimal legal responsibility and may not even be a lawyer. Non-lawyers may be established as partners at even the most prestigious law firms.

In addition to professional management, law firms are, and are expected to continue adopting other accoutrements 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, such as tax and litigation, within the profession.

External Competition Issues.
Lawyers faced 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 offered legal services in such areas as will and living trust preparation and child-support arrangements. Concerns expressed by the ABA regarding the ancillary businesses included 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 indicated that full-service law firms allowed attorneys to better serve their clients. Furthermore, proponents of ancillary businesses indicated that professional diversification was practiced by accounting firms that do tax law and banks that engage in estate planning. Diversification, supporters argued, allowed law firms to remain competitive.

According to the National Law Journal's annual survey of the 250 largest law firms in the country, firms grew 3.7 percent between October 2001 and September 2002, down from an 8.2 percent increase the previous year. Another trend, likely prompted by the nation's slumping economy during the early years of the first decade of the 2000s, was toward fewer partners with an increase in senior counselors or nonequity partners, whose partnership status did not provide a share of the firm's overall profits. Twelve U.S.-based firms employed more than 1,000 lawyers, and 8 of the 10 fastest-growing firms increased in size through acquisitions and mergers. During the 15-years 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 years of the first decade of the 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 12.8 percent, and between 1997 and 2001, some 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, but the MDP system was in well established in Europe, where accounting giant Arthur Andersen was also Europe's biggest law firm.

The industry reported 104,818 general practice attorney/law firms in 2005, employing 413,373 legal professionals with more than $43.1 billion in annual receipts. Another significant sector was general practice law offices with 33,262 firms, 413,373 employees, and $42.4 million in annual revenues. There were 2,454 criminal law firms employing 8,019 legal professionals and generating $537.6 million in annual receipts. Real estate law firms represented 2,156 firms staffed by 10,469 legal professionals with $775 million in sales. A number of legal professionals were also involved in divorce and family law. In all, 2,028 firms generated $449.3 million for 2005. While administrative and government law firms numbered 417 and 5,813 employees, their earnings stood at more than $2.2 billion. Malpractice and negligence law firms operated out of 663 locations with over $2.8 billion in annual receipts, while corporate partnership and business law firms constituted 1,471 firms and more than $1.7 billion in revenues.

According to the National Law Journal's annual survey of the 250 largest law firms in the country, the firms grew 4.4 percent between October 2004 through September 2005, compared to 1.5 percent the previous year. In another survey of these firms, the National Law Journal reported an increase in attorneys' billing rates, with associates and partners earning unprecedented hourly fees.

Meanwhile, global expansion continued, increasing 23 percent in 2005 to 12,942 attorneys from 10,493 in 2004. Mergers led the majority of expansion, such as the merger of U.S. based Piper Rudnick Gray Cary and DLA in London with 1,350 attorneys. Another deal was Kirkpatrick & Lockhart's merger with the London firm of Nicholson Graham, involving 135 attorneys.

During the end of the first decade of the 2000s, the law industry was spending much of its time reacting to the global economic recession that caused concern among law firms and resulted in thousands of job layoffs, deferments, and even firm closings. Although not all firms were hurting, and some experienced increased revenues in 2008, all were making adjustments to account for loss of traditional sources of revenue, especially in the corporate and real estate segments. In addition, as corporations tightened their budgets, they were more apt to seek solutions to legal disputes outside the court system, reducing the number of litigation cases.

As a result, morale was low, especially among midlevel associates in larger firms, whose perks were cut and whose job security became uncertain. According to a survey by American Lawyer, more than 50 percent of midlevel associates saw a drop in workload during 2008, and some were given pay cuts to boost the sagging profits of the firm's partners. Other firms found ways to keep their employees busy and offered incentives for its junior lawyers to go work for nonprofit endeavors for a period.

Despite the recessive economy and uncertain times, according to the National Law Journal's survey of the nation's 250 largest law firms, more than 70 percent of firms raised their rate per billable hour in 2008. The average billing rate for 2008 was $363 per hour. At the highest end of the scale was the law firm White & Case, which reported a partner billable rate of $1,260 per hour and an average partner billing rate of $747 per hour. Dorsey & Whitney also broke the $1,000 barrier with a high-end partner rate of $1,180 and an average partner rate of $505. These two firms also charged the most for their associates' time. White & Case billed a high of $920 per hour, with an average associate rate of $456 per hour, and Dorsey & Whitney charged as much as $820 per hour for associates, and an average of $301 per hour.

Current Conditions

According to legal consultants, Hildebrandt Baker Robbins, U.S. law firms completed four mergers in the first quarter of 2010 and 10 mergers during the second quarter of 2010, which suggested a rebound in activity. In contrast, U.S. law firms completed 42 mergers during the first half of 2009. The most notable merger that occurred during the second quarter of 2010 was the "cross-border" merger of Hogan & Hartson's with United Kingdom's Lovells, forming Hogan Lovells U.S. LLP in May 2010 with well over 1,000 attorneys each. Other significant mergers in the second quarter were McElroy, Deutsch, Mulvaney & Carpenter with Pepe & Hazard, followed by the joining of Jones, Walker, Waechter, Poitevent, Carrere & Denegre with Walston Wells & Birchall.

Hildebrandt Baker Robbins also monitored office openings throughout the world and reported that 55 law offices opened during the second quarter of 2010, 30 of which were located in the United States. Among the 55 openings, 65 percent were not the direct result of merging firms. There were three offices opened each in California, Connecticut, Florida, New York, and Texas. Other key locations with a total of four office openings in the second quarter of 2010 included Washington, D.C., and New Jersey.

According to the 2012 Real Rate Report, lawyer's rates never declined throughout the economic recession at the end of the first decade of the 2000s. From 2007 to 2008 rates increased 8.2 percent before a moderate 2.3 percent increase in 2009 that was followed by a 5.1 percent increase for 2011, averaging about $530 per hour. Law firms located in prime metropolitan areas like Boston, Chicago, Los Angeles, San Francisco, and Washington, D.C., typically included an extra $161 to the lawyer's hourly rate. The most exclusive market was New York, where rates were even higher.

The American Lawyer reported that according to a survey of the 100 largest law firms in the nation, the total number of lawyers reached 86,272, an increase of 3.3 percent year-over-year in 2011, marking the end of massive layoffs during the economic recession. For example, Los Angeles based-Quinn Emanuel Urquhart & Sullivan added 190 lawyers during 2011. The total number of firms that increased their revenues grew from 58 in 2010 to 83 in 2011. On average, the 100 largest law firm's gross revenue grew 5.3 percent.

The Law School Admission Council announced the price of the Law School Admission Test (LSAT) was going up from $139 to $160 effective June 11, 2012. The 15 percent increase was the result of the lack of LSAT candidates. Daniel Bernstein, president of the Law School Admissions Council told the National Law Journal in April 2012, "It is now time for us to correct our fees in light of new volume realities...." The total number of tests peaked during the 2009-10 year to 171,514 before declining nearly 19 percent during the 2010-11 rounds of tests administered, and another 16 percent for the 2011-12 rounds of tests.

Industry Leaders

Skadden, Arps, Slate, Meagher & Flom LLP, of New York, New York, had over 1,994 lawyers and 440 equity partners in some 25 offices around the world. Founded in 1948, the firm retained its top spot in 2008 with $2.2 billion in revenues. With 3,626 lawyers and 711 equity partners, Baker & McKenzie, located in Chicago, Illinois, assumed the second spot in 2008 with $2.19 billion in revenues, a nearly 20 percent increase from the previous year. New York-based Latham & Watkins fell to number three, reporting $1.92 billion in revenues. The firm had 2,102 lawyers and 436 equity partners. Ranked in fourth and fifth places since 2007 were Jones Days, of Cleveland, Ohio, with 2,348 lawyers and 772 equity partners and $1.54 billion in revenues, and Sidley Austin, of Chicago, Illinois, with 1,702 lawyers and 332 equity partners and $1.49 billion in revenues.

Baker & McKenzie remained in the top spot in both 2010 and 2011. With 3,805 lawyers and 714 equity partners, the firm reported gross revenues totaling $2.26 billion in 2011, an increase of 7.7 percent over 2010. DLA Piper took over second place from Skadden, Arps, Slate, Meagher & Flom LLP in 2011 with 3,746 lawyers and 459 equity partners, the firm posted $2.24 billion in gross revenues in 2011. Skadden, Arps, Slate, Meagher & Flom LLP moved to third place with 1,832 lawyers and 414 equity partners who generated gross revenues of $2.16 billion in 2011. Latham & Watkins followed closely with 2,014 lawyers and 446 equity partners and gross revenues of $2.15 billion. Kirkland & Ellis moved from the sixth spot to the fifth in 2011 with 1,442 lawyers and 305 equity partners with gross revenues totaling $1.75 billion in 2011.

Workforce

According to the U.S. Bureau of Labor Statistics (BLS), the legal services industry accounted for 1.1 million jobs in 2008. Although the total number of lawyers counted by the BLS in the United States was more than 761,000, about 362,530 of these were involved directed in legal services. These lawyers had a mean annual salary of $131,650. There were 187,360 paralegals and legal assistants earning an average annual income of $47,360. Office and administrative support positions accounted for more than 42 percent of industry jobs. Legal secretaries numbered 223,600 and earned an average annual salary of $412,590.

About 27 percent of lawyers were self-employed, either in solo practice or as partners in a law firm. Job growth among law professions was expected to grow about as fast as the average through 2016. This growth was expected to be based on increased demands for particular types of law, including health care, intellectual property, venture capital, energy, elder, antitrust, and environmental law. Job competition was expected to continue to be intense for the highest paying entry-level jobs as the number of graduates from law schools remained high.

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