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Attorney advertising and the contingency fee cost paradox.

INTRODUCTION
I.   THE PRE-BATES WORLD
     A. Unmet Client Need
     B. Enter Legal Clinics: "A New Breed of Lawyer Born of
        Advertisements"
     C. The Bates Decision
II.  THE POST-BATES WORLD
     A. "Legal Clinics Have Come of Age"
     B. The Unexpected Ascent of the Personal Injury Advertiser
III. ADVERTISING AND PRICE: THEORY AND EVIDENCE
     A. Theories for Why Advertising Should or Shouldn't Reduce Prices
     B. Empirical Evidence from Other Contexts
     C. Studies on Advertising's Effect on Legal Services
IV.  THE PARADOX: PERSONAL INJURY ADVERTISERS APPEAR TO BUCK
     ECONOMIC PREDICTIONS
V.   CONFRONTING THE PARADOX
     A. Less Plausible Explanations
        1. Advertising personal injury lawyers are of higher quality?
        2. Referrals?
        3. Collusion?
        4. Smaller or riskier cases?
     B. More Plausible Explanations
        1. Ads emphasize quality rather than price
        2. Clients might mistakenly think advertisers are of higher
           quality
        3. Clients are uniquely insensitive to contingency fee
           percentages
           a. Possible, not certain
           b. Delayed, not immediate
           c. Deducted, not paid
CONCLUSION


INTRODUCTION

On June 27, 1977, in the landmark case Bates v. State Bar of Arizona, the Supreme Court invalidated state bans on attorney advertising as incompatible with the First Amendment. (1) In so doing, the Court made a critical judgment about attorney advertising's effect on attorney price. Responding to the Arizona State Bar's assertion that legal advertising would drive up the cost of legal services, the Court declared: "It is entirely possible that advertising will serve to reduce, not advance, the cost of legal services to the consumer." (2)

Prominent commentators were bolder in their predictions. Then-Solicitor General Robert H. Bork penned an amicus brief in the Bates case which bluntly proclaimed: "Prohibitions upon advertising indirectly increase prices...." (3) In an influential article published six years after the Bates decision, Geoffrey Hazard and his coauthors theorized: "For the consumer of standardizable services, the probable result of permitting lawyers to advertise will be lower priced services of better quality." (4) And a few years after that, in a now-frequently-cited dissent, Justice O'Connor referenced the Hazard piece and wrote that "[t]he best arguments in favor of rules permitting attorneys to advertise are founded in elementary economic principles." (5) "Restrictions on truthful advertising, which artificially interfere with the ability of suppliers to transmit price information to consumers," she continued, "presumably reduce the efficiency of the mechanisms of supply and demand," permitting suppliers to "maintain a price/quality ratio ... that is higher than would otherwise prevail." (6)

The theory that attorney advertising would reduce the cost of basic legal services made sense. And, as we will see, it was well supported. Throughout the 1970s and 1980s, academics published a host of studies confirming advertising's power to reduce consumer prices for a range of everyday items, from eyeglasses to gasoline. Moreover, within a few years of the Bates decision, prominent economists from the Federal Trade Commission (FTC) embarked on an ambitious effort to test advertising's price power, particularly in the legal services marketplace. After compiling attorney price information from approximately 3200 lawyers in seventeen cities, what these economists found was as promising as it was unsurprising: "Advertising of legal services, as is generally true for goods and other services, tends to lead to lower prices...." (7) Further more, "attorneys who advertised a specific service tended to provide that service to the public at a lower price than ... those attorneys who did not advertise." (8) The study's findings, in fact, were splashed across national newspapers and sent to state bar associations, and the authors explicitly presented their research as providing "convincing support for the proposition that greater flexibility to engage in ... advertising will be associated with lower prices for consumers of legal services." (9)

In the ensuing decades, the FTC's report and a follow-on study utilizing the same data have taken on a kind of talismanic significance. "Advertising by lawyers encourages competition, which results in lower prices," intones one recent--and representative--article. (10) Or, as Ronald Rotunda recently wrote:
   Some people incorrectly assume that legal advertising must raise
   the costs to the consumer, because someone must pay for the cost of
   the advertising. But we now know that advertising lowers
   prices.... This unhappy fact may explain why some lawyers have
   opposed televised lawyer commercials. Television commercials lead
   to price was, and no consumer of legal services has ever been
   wounded in a price war. (11)


Consumer groups have repeated such claims--and their consistent and vocal support for attorney advertising has largely hinged on their belief that lawyer ads stimulate price competition, lower fees, and thus expand legal access. (12) The FTC has consistently, and forcefully, said as much. (13) The American Bar Association (ABA), when liberalizing the Model Code's relatively conservative marketing constraints, explicitly credited "[e]mpirical studies of lawyer advertising" that "indicate that it reduces cost and increases consumer access." (14) Litigants have pointed to advertising's price power when successfully challenging state advertising restrictions. (15) And courts, not surprisingly, have accepted--and acted upon--advertising's competitive effect, relaxing restraints on attorney advertising because, as the Supreme Court of New Jersey put it, it is in the public interest to provide legal services at lower cost, and "attorney advertising is one of the best ways to foster price competition." (16)

But it is not that simple. Typically ignored in all this commentary is the fact that Bates itself involved a particular type of legal service provider. It involved a legal clinic--a law firm that handled routine matters, such as wills, uncontested divorces, name changes, and personal bankruptcies--for flat, transparent, and reasonable rates. (17) This was not coincidental. In the late 1970s and early 1980s, as we will see, low-cost legal clinics, such as Arizona's Bates & O'Steen, Cleveland's Hyatt Legal Services, California's Jacoby & Meyers, and Baltimore's Cawley & Schmidt were the biggest advertisers, by far. (18) In advertising's absence, clinics, with their razor-thin profit margins, had trouble generating the volume of clients necessary to stay afloat. After the Bates decision, however, legal clinics bloomed, and as they prospered, the price for routine legal services apparently plunged, just as advertising's advocates had hoped and the era's economic theory would predict. (19)

But some thirty-five years have now elapsed since the Bates decision. And in this time, the identity of attorney advertisers has changed considerably. Legal clinics, as they existed in the late 1970s and early 1980s, are history. Starting in the early 1990s, as we will see, most were downsized, dismantled, or so radically reorganized as to render them unrecognizable. (20) So who has taken clinics' place as the most aggressive attorney advertisers? That distinction, without question, belongs to the personal injury (PI) bar. Most personal injury attorneys, it appears, advertise, (21) and most of the biggest advertisers are personal injury lawyers. Indeed, PI lawyers are, and have long been, the dominant TV advertisers. (22) They are, and have long been, the dominant Yellow Pages advertisers. (23) And, according to the New York Times, of the top ten spenders on legal advertising (of all types), all are personal injury or plaintiff-related law firms. (24)

If advertising reduces fees (as many studies have found and most courts, consumer groups, the FTC, the ABA, and academics assume), and if personal injury lawyers are far and away the most aggressive advertisers (as data suggest), one might infer there's been a steep reduction in plaintiffs' lawyers' fees in recent years. But all available evidence is to the contrary. Indeed, evidence suggests that, over the past three decades, contingency fees, on a percentage basis, have not dropped, even while ad expenditures have soared--and tort recoveries have risen. (25) And the FTC study cited above, which is the best, most comprehensive, most sophisticated study of advertising and attorney fees ever conducted in the United States, made a strange--yet almost entirely overlooked--discovery. While it found that "attorneys who advertised a specific service tended to provide that service to the public at a lower price" than those attorneys who did not advertise, (26) it also found:
   The one area in which the results were different was personal
   injury. In the three cities with statistically significant
   results ..., attorneys who advertised personal injury services
   appeared to charge about a 3 percent higher contingent fee if the
   case was settled before trial than those who did not advertise
   personal injury services. (27)


Advertising personal injury lawyers thus seem to buck most economic predictions. It is an anomaly that has escaped attention in the scholarly literature. (28) And it is somewhat tricky to explain. But it is an anomaly that cries out for analysis and carries with it enormous consequences, for both the legality of attorney advertising and the delivery of legal services more generally.

This Article proceeds in five Parts. Drawing on scores of contemporaneous press and journal accounts, Parts I and II are largely historical. Specifically, Part I examines the socio-legal template on which the Supreme Court issued its opinion and emphasizes that Bates was a legal clinic case. Bates came along at a time when middle-class Americans' unmet legal need was fast becoming a pressing political issue. Legal clinics promised to expand legal access. And, by abolishing advertising restrictions, the Court in Bates sought to remove barriers to legal clinics' growth and expansion. Part II then considers the immediate post-Bates world, by studying first the rapid rise of legal clinics--"a new breed of lawyer born of advertisements" (29)--and then clinics' disintegration and personal injury advertising lawyers' unexpected ascent. Parts I and II trace the rise and fall of legal clinics because one cannot understand the price predictions made in Bates--and how contemporary personal injury advertising challenges those predictions--without understanding clinics' centrality.

After putting Bates, and legal advertising more generally, in context, Parts III and IV step back and shift focus from the historical to the theoretical and empirical. Part III recites the many reasons why attorney advertising was expected to reduce prices, and it reviews the many studies, involving a wide variety of products and services, which confirmed the theory worked. Part IV then puts the pieces together to reveal the contingency fee price paradox: though there is ample reason to believe advertising reduces the cost of certain legal services, there is scant evidence that it reduces contingency fees. To the contrary, though data are partial and fragmentary, it appears that PI advertisers might charge higher contingency fees, on a percentage basis, than their non-advertising counterparts.

Part V asks why. Drawing on research from the fields of cognitive psychology and behavioral economics and extrapolating from a recent study concerning the price effect of physician advertising, Part V considers less and more plausible explanations for why these advertisers' practices might not mesh with advertising predictions--while also contributing new insights to the long-observed but little-understood stickiness of contingency fee pricing in the personal injury marketplace. Finally, the Conclusion identifies four implications of the above analysis--and charts a possible path forward.

As we shall see, attorney advertising, born of Bates, is now a roughly two-billion-dollar-a-year business. (30) Indeed, I submit that Bates and its progeny have had a bigger practical impact on contemporary legal practice--and thus on the transmission of legal services--than any other line of cases in American history. (31) This jurisprudence, which has tended to relax advertising restrictions, is, as the Supreme Court has acknowledged, "based in part on certain empirical assumptions as to the benefits of advertising." (32) This Article challenges the empirical foundation on which the doctrine of attorney advertising now so firmly rests.

I. THE PRE-BATES WORLD

To understand the Bates decision and the price predictions made therein--and thereafter--one must understand the socio-legal template on which the opinion was issued. That, in turn, requires some understanding of the pre-Bates restrictions on attorney advertising and also an understanding of how the Bar's advertising restrictions were, by the mid-1970s, bumping up against broader societal and political forces agitating for change.

A. Unmet Client Need

The 1960s and 1970s marked a time when a number of substantive legal rights were created, and it also marked a time when there was sustained attention on the vindication of those rights--how to make counsel more readily available. (33) A watershed moment came in 1963, when the Supreme Court extended a right to counsel to indigent criminal defendants in Gideon v. Wainwright. (34) Then, in 1966, Rule 23 was amended and liberalized to make the class action device more readily available. (35) In 1971, the Supreme Court ruled in Boddie v. Connecticut that access to the courts could not be denied to litigants who could not afford court fees. (36) In 1972, in Argersinger v. Hamlin, the Court extended the Gideon rule to all facing incarceration. (37) And, in 1974, Congress formed the Legal Services Corporation (LSC), which was charged with providing "high quality legal assistance to those who would be otherwise unable to afford adequate legal counsel." (38)

As a result of the Court's opinions and the LSC's formation, some commentators of the era suggested (rightly or wrongly) that the legal needs of the poor were, at least momentarily, satisfied. (39) Concern thus shifted to the legal needs of the middle class, the group ABA President-Elect Robert Meserve had taken to referring to as "our forgotten clientele." (40)

The focus on middle-income clients was fueled by contemporaneous research of the day. In 1971, the ABA House of Delegates passed a resolution directing that a nationwide survey be conducted "to ascertain the extent to which the public recognizes the need for and uses legal services." (41) The ultimate survey, conducted by Barbara Curran from October 1973 to March 1974, indicated some incongruity between legal need and legal use. In general, less than a third of respondents who had recently experienced a legal problem consulted a lawyer. (42) And, for some types of problems (for example, issues of job discrimination, consumer matters, and wage collection), the percentage of problems taken to lawyers was lower still. (43)

In considering why some individuals' legal needs weren't being met, there were a few obvious culprits. Part of the problem, commentators of the era agreed, was minimum fee schedules. These schedules set minimum fees for particular legal services and, in so doing, artificially inflated service cost--and dampened client demand. (44) Made popular during the 1950s, minimum fee schedules had, by the early 1970s, become fairly ubiquitous; as of 1973, they were utilized by thirty-four states, more than 700 local bar associations, and the majority of practicing lawyers. (45) But in 1974, fee schedules were challenged on antitrust grounds, and on June 16, 1975, in Goldfarb v. Virginia State Bar, a unanimous Supreme Court relegated bar-imposed fee schedules to the dustbins of history. (46)

After Goldfarb abolished fee schedules, the concern about unmet legal need did not diminish, but it did shift: by the fall of 1975, perceived inadequacies in access seemed increasingly the result of informational problems. As Meserve's successor, ABA President James Fellers, declared, middle-income Americans still "don't know how to find a lawyer; they're afraid of lawyers [and] they think they cost too much." (47) Or, as Curran found in her major ABA study of legal need: a full 83% of respondents agreed with the statement "[a] lot of people do not go to lawyers because they have no way of knowing which lawyer is competent to handle their particular problems." (48) And if that was the problem, the Bar's long-established ban on attorney advertising, which restricted information about available lawyers and also, some said, jacked up the price of legal services by restricting price competition, seemed at least partly to blame. (49)

Like most professions during this period, attorneys were not permitted to advertise, limited by the Model Code provision which barred "any form of public communication that contains professionally self-laudatory statements calculated to attract lay clients." (50) There were, to be sure, a few gaps in the Bar's advertising ban, but they were narrowly drawn and zealously policed. The profession itself was permitted to engage in institutional advertising. (51) And an attorney wanting to grow his business could take a few feeble steps. He could attach a dignified sign to his door (although he could not indicate what kind of law he practiced). He could (starting in 1976) list himself in the Yellow Pages (and provide a few bare-bones facts). (52) And he could, for a fee, provide a brief biographical sketch in provider directories (often called "law lists") approved by the ABA, but these directories, many complained, were expensive to join, limited in information, and insufficient in reach. (53) There were also a few services that attempted to link lawyers and clients--namely, bar-sponsored referral networks, (54) prepaid legal service plans for individual subscribers, (55) and group legal service plans, established by unions, civil rights groups, and consumer cooperatives. (56) But, like the exceptions above, these prepaid plans and referral networks left much to be desired. (57)

Meanwhile, throughout the mid-1970s, the Bar's advertising ban was increasingly under attack--particularly from antitrust enforcers (who were active during the era) and leaders of the era's muscular consumer movement. (58) First, starting in the early 1970s, the FTC and the Antitrust Division of the Department of Justice embarked on a broad campaign to target anticompetitive practices throughout the professions, initiating eight major suits against professional groups between 1974 and 1977. (59) In the midst of this campaign, on June 25, 1976, the federal government filed a lawsuit specifically against the ABA, alleging that the Model Code's anti-advertising provisions violated the Sherman Act. (60)

At the same time, consumer groups managed to turn the Bar's ban--and the access to justice problem that they alleged it engendered--into a "political issue" generating widespread concern. (61) Indeed, the Los Angeles Times declared in 1973 that "the cost of legal services may be shaping up as the 'hot' consumer issue of the year." (62) Discontent was running so deep that, for a time, even governmental regulation over the long self-regulating legal profession seemed possible. For example, in 1974, consumer champion Mark Green testified in Senate hearings (which had been specifically convened to investigate whether the legal profession was "self-serving or serving the public") that, just like meatpackers in the early 1900s and automobile executives in the mid-1960s, the time had come to submit lawyers to regulatory scrutiny: "The thought will shock the legal old guard, just as it did self-confident meatpackers and auto executives in their days of innocence, but the likelihood for federal authority over the profession increases commensurate with the bar's failure to make itself more accessible to the public." (63) The same year, Sargent Shriver repeated a similar warning at an ABA gathering. (64) And, a year later, Senator John Tunney, fresh off chairing the Senate hearings investigating the legal profession, wrote: "[T]he organized bar should take the initiative to relax the restrictions on advertising for all lawyers. If this occurs, Federal and other governmental intervention should not be necessary." (65)

In sum, by the late 1970s, some saw the choice as between expanding access by permitting attorney advertising or, alternatively, submitting to pervasive governmental regulation. (66) The status quo was increasingly untenable.

B. Enter Legal Clinics: "A New Breed of Lawyer Born of Advertisements" (67)

It was against this backdrop that the Bates opinion was issued. And more important for our present purposes, it was to this world that legal clinics, a distinctive form of law firm that ABA President James Fellers declared offered the "greatest potential" to solve the profession's "most pressing" concern, first opened their doors. (68)

Invented on September 13, 1972, when Leonard Jacoby and Stephen Meyers, two idealistic young lawyers, first hung out a shingle in a small storefront in Van Nuys, California, legal clinics were viewed as a new and promising way to bridge the vexing legal service gap. (69) As the President of the Consumer Federation of California put it in 1973 when speaking at a Jacoby & Meyers press conference: "The largest sector of our society, the middle-income group ... is not being provided with the services it so badly needs. What this clinic provides is an effective legal delivery system to handle the day-to-day problems of the consumer." (70)

The clinics that took shape in the early 1970s were different from conventional law firms in many respects. (71) And, in their differences, they were tailor-made to serve the needs of their mostly middle-income clientele. (72) They were distinctive in their pricing, charging flat, transparent, and lower-than-average fees for basic legal services. In fact, according to contemporaneous press reports, clinics charged just "a fraction of what most general practitioners charge." (73) They were distinctive in their volume. Some clinics, in their heydays, served literally hundreds of thousands of clients annually. (74) They were distinctive in the kind of case they accepted, specializing in cases that were "inherently routine." (75) Legal clinic behemoth Hyatt Legal Services, for example, specialized in $45 wills, $275 divorces, and $350 bankruptcies. (76) They were distinctive in their accessibility. Attempting to "demystify" access to counsel, clinic founders located offices in shopping centers and strip malls, accepted credit cards, and added weekend and nighttime hours, making, in the words of Harper's Magazine, "the storefront office ... as approachable as the drugstore on the corner or the five-and-ten down the street." (77) They were distinctive in their routinization, relying on paraprofessionals, boilerplate forms, and cookie-cutter procedures. (78) In fact, Hyatt so thoroughly routinized its operations that it employed a 100-page training manual just for use of the telephone. (79) And clinics were--crucially and controversially--distinctive in their reliance on advertising. Advertising was seen as indispensable to gin up the volume of clients necessary, both for clinics to stay afloat (since profit margins were low, a high volume was needed) and to harness the economies of scale necessary to make legal clinics' assembly-line mode of production sustainable. (80) That dependence on advertising, however, ran smack up against the Bar's longstanding advertising ban--and out of this collision, the Bates case was born.

C. The Bates Decision

Neither coincidentally nor surprisingly, it was a legal clinic that ultimately challenged the Bar's advertising proscription. (81) Former attorneys with the Maricopa County Legal Aid Society, John Bates and Van O'Steen founded a legal clinic in Phoenix, Arizona in March 1974 that offered assistance with divorces, domestic relations matters, adoptions, individual bankruptcies, wills, probates, changes of name, and personal injury cases. (82) In so doing, the partners' stated aim was, in Van O'Steen's words, "to extend ... quality legal services at the most reasonable fees possible" to people who "traditionally had difficulty finding lawyers." (83)

But after two years of practice, the firm's business was flagging. Faced with dwindling revenue and a shrinking clientele, the partners decided that advertising was needed if their low-fee, high-volume clinic practice was to work. As O'Steen ultimately testified: "I don't mind confessing to you that this has not been a terribly profitable operation up to this point, but we think it can be made profitable ... and if that doesn't happen this clinic concept will not survive." (84) Thus, on February 22, 1976, Bates and O'Steen placed a block ad in the Arizona Republic. Headed by the words: "Do You Need a Lawyer? Legal Services at Very Reasonable Fees," the ad proceeded to enumerate the types of legal service they would provide and the fee they would charge for each service. Uncontested divorces were $175; adoptions were $225; individual bankruptcies were $250; and name changes were $95, plus filing fees and publication costs. (85) Though the ad was hardly flashy, it did run afoul of Arizona Disciplinary Rule 2-101(B), which provided, among its various prohibitions, that "[a] lawyer shall not publicize himself ... through newspaper ... advertisements," (86) and Bates and O'Steen were subsequently disciplined. Their case was litigated "with full realization," the State Bar's lawyers later explained, that it was a case of historic consequence. (87)

Of course, of historic consequence it was, though the Supreme Court may itself have underestimated the decision's sweep. With an eye on Bates and O'Steen's fledgling Arizona practice and with a nod to the need to expand legal access to middle-income Americans, the clinic context--and the justice gap clinics promised to help bridge--infused the Court's opinion. (88) The Court even went so far as to declare that its opinion would only affect that particular market niche: "The only services that lend themselves to advertising are the routine ones," the Court intoned, "the uncontested divorce, the simple adoption, the uncontested personal bankruptcy, [and] the change of name...." (89) Legal clinics, the Court implicitly yet fatefully predicted, would be the providers to advertise-and--the only providers to advertise--in the years ahead.

II. THE POST-BATES WORLD

A. "Legal Clinics Have Come of Age" (90)

For a time, the Court proved prescient. As soon as Bates came down, high-volume, low-cost legal clinics started to open up. In 1976, there were only about a dozen clinics operating in the United States. (91) Within six months of the Court's June 1977 decision, however, that number tripled. (92) Then, by 1979, there were an estimated 200 clinics in existence, not counting branch offices, and more clinics were opening for business almost daily. (93)

The era's two biggest clinics were Jacoby & Meyers (which, as noted, was founded in California in 1972), and Hyatt Legal Services, founded by Yale Law School graduate Joel Hyatt in 1977, on the heels of the Bates decision. (94) In the late 1970s and early 1980s, both clinics grew rapidly. By 1978, Jacoby & Meyers--ultimately dubbed the "General Motors of clinics"--had opened seventeen branch offices and was serving 30,000 clients per year. (95) The following year, the firm grew bigger, with plans to serve 50,000 individual clients. (96) And by 1983, Jacoby & Meyers had grown larger but had nevertheless been surpassed. Jacoby's chief competitor, Hyatt Legal Services, was, by 1983, serving 15,000 new clients per month. (97) Further, by 1986, Hyatt was the country's second biggest law firm, employing 674 attorneys, operating 200 offices in 21 states, and serving roughly 300,000 clients annually--and discussing plans for further expansion. (98)

Legal clinics thus flourished in the wake of the Bates opinion--fulfilling expectations. In fact, clinics not only opened as expected--they initially operated just as advertising's advocates had hoped. First, by most accounts, the legal clinics that opened in the 1970s and early 1980s did expand legal services to average Americans. (99) As clinic founder Joel Hyatt put it: "Most Americans don't have a lawyer, and they don't know how to find one. Using television advertising, I have developed a way to give these people access to legal services." (100)

So too, it appears that, once advertising was permitted and legal clinics expanded, the cost of routine legal services did drop). (101) In 1985, a report published by the Harvard Law School Program on the Legal Profession declared that "[1]egal clinics, both local and national, have reduced the cost of services significantly (perhaps 10 percent to 30 percent)." (102) And journals and newspapers of the late 1970s are replete with accounts supporting that assertion. Following Bates, the Washington Post reported, for example, that in New York, some lawyers' fees for uncontested divorces dropped from more than $750 to between $150 and $250. (103) In Chicago, the price of an uncontested divorce was cut roughly in half. (104) In Baltimore, the price of an uncontested divorce dropped further, from $344 to $75. (105) In Atlanta, there were reports of uncontested divorces offered for a mere $39. (106) And, in Florida, an uncontested divorce was briefly cheaper still. (107) Back in Arizona, meanwhile, Supreme Court petitioner Van O'Steen good-naturedly complained that increased competition brought about by advertising forced him to cut his fee for a contested divorce almost in half. (108)

Third, clinics' reliance on advertising also lived up to expectations. In the years after Bates, nearly all legal clinics (some 99%, according to one study) advertised, (109) and some clinics advertised heavily. Jacoby & Meyers and Hyatt Legal Services, for example, financed seven-figure ad campaigns. (110) Also as expected, clinics depended heavily on advertising for client generation; Baltimore's Cawley & Schmidt, for example, reportedly obtained a whopping 95% of its clients from advertising efforts. (111)

Just as important, the content of clinics' advertisements mostly conformed to expectations. The Bates Court had predicted that "advertising will permit the comparison of rates among competitors." (112) Others, too, assumed that advertising would enable clients to "compare various fees before making an appointment to see an attorney." (113) Fulfilling prophecy, clinics commonly (albeit not uniformly) advertised the price they would charge for particular services. An article appearing in the journal Juris Doctor in September 1977, noted, for example, that, in the three months since the Bates opinion, most attorney advertisers were "follow[ing] the Bates & O'Steen formula of listing a handful of relatively routine problems--uncontested divorces, wills, personal bankruptcies, name changes--and the fee charged." (114) Another article, appearing in 1979, provided: "So far the tone of the advertisements has been conservative. Typically they list the prices for services and note areas of practice; some merely announce that the lawyer or law firm exists." (115) Even in the late 1980s, Harvard's Gerry Singsen wrote: "Newspaper ads routinely list specific fees for divorces, bankruptcies, immigration work, and other personal legal services--fees usually well below the going rate in the general practice bar." (116)

Finally, in these early years, nonclinic lawyers (i.e., non-"routine" providers who were not expected to advertise) also stayed on script. (117) As mentioned previously, the Bates Court explicitly predicted that only purveyors of "routine" services, like uncontested divorces, simple adoptions, and name changes would advertise. (118) In so predicting, the Court was in good company. Chester Mitchell wrote in 1983, for example: "Certain legal work is very personalized or specific. Such work will not be advertised." (119) That same year, Geoffrey Hazard, Jr., Russell Pearce, and Jeffrey W. Stempel prominently agreed. Lawyer advertising, they opined, would be used only by attorneys providing "[s]tandardizable" services, those "matters such as uncontested divorces, simple wills, and routine collection litigation, each of which is best delivered through a routinized system of production." (120)

And critically, for a long time, the prediction held. Whether deterred by some state's outdated or vague guidelines that failed to define what advertising activity would trigger disciplinary action, (121) swayed by Bar leaders who assailed advertising as "shysterism," (122) or simply befuddled by how one might go about promoting one's services, (123) most nonclinic lawyers refrained from dipping a toe in the advertising stream just as the Court had predicted. To be sure, only days after the Bates decision, the Los Angeles Times carried a full page of lawyer advertisements. (124) But soon thereafter, interest in attorney advertisements ebbed. In 1978, only 3% of lawyers polled by the ABA Journal admitted advertising. (125) And one Texas lawyer's tale might shed light on lawyers' reluctance: after he spent $1,000 in newspaper ads he was reportedly forced to close his practice. "I was the only one advertising here and I caught hell," he said. (126) Indeed, the same 1978 ABA Journal poll noted above found that even personal solicitation was viewed more favorably. (127)

In short, if one were to freeze the frame around 1980 (as the FTC's study, which was conducted between December 1980 and March 1982, unwittingly did), the picture would look quite bright. (128) Legal clinics, which provided routine services to mostly middle-income clients, were the firms most apt to advertise. And by their advertising, new clients were reached, prices were displayed and thus compared, fees were apparently reduced, and the problem of unmet legal need was, it seems, ameliorated.

B. The Unexpected Ascent of the Personal Injury Advertiser

But time, of course, did not stand still. Instead, starting in the mid-1980s, resistance softened, and more attorneys started to join the advertising ranks. By 1983, 13% of lawyers had engaged in some kind of advertising. (129) By 1985, a full 24% of lawyers had done so. (130) By 1987, 32% had. (131) And, by the early 1990s, the majority of lawyers had acquiesced. (132) Indeed, by 1992, lawyers were spending $419 million on Yellow Pages advertising--significantly more than any other professional group or business category and, indeed, more than restaurants, florists, and chiropractors, combined. (133)

Thus, by the late 1980s and early 1990s, the quantity of attorney advertising was rapidly changing. Critically, the identity of attorney advertisers was also in flux. Starting in the late 1980s or early 1990s, clinics' position started to deteriorate and, in clinics' place, legions of personal injury lawyers took to the airwaves. By 1990, of the twenty firms with the highest television ad expenditures, eighteen concentrated on personal injury. (134) Similarly, a 1992 ABA study of Yellow Pages ads in six midsize cities found that the majority of advertisers (56%) concentrated on a "contingency fee field of practice." (135) The reversal has been so complete, in fact, that the legal clinic model so instrumental to the Court's analysis in Bates is, today, all but a memory. The fall of legal clinics and concomitant ascension of the personal injury bar is most vividly illustrated by tracing what has happened to the prominent clinics born of the Bates decision.

By the early 1990s, almost all the firms that joined together to found the American Legal Clinic Association, an organization established in 1977 to promote the spread of legal clinics across the country, had disbanded--as had the Association itself. (136) Around that time too, Hyatt Legal Services, which, recall, was once the second-biggest law firm in the United States, shuttered roughly 165 of its 180 field offices, pulled the plug on its multi-million-dollar television marketing campaign, and radically changed direction. Plagued by low profits, the firm all but abandoned the clinic concept to focus, instead, on providing prepaid legal plans for companies to offer their employees. (137)

Around that time, too, other clinic pioneers likewise changed direction. The course they've charted is revealing. In the mid-1990s, Jacoby & Meyers's founders split up, and the firm closed or spun off the vast majority of its 150 field offices, thinned its lawyer ranks, and altered its specialty. (138) Jacoby & Meyers decided to deemphasize routine legal services (wills, personal bankruptcies, and uncontested divorces), and turn instead to a "more lucrative" area of practice. By 1993, Jacoby & Meyers was, in Stephen Meyers's words, "the largest personal injury firm" in all the United States. (139) Thus, these days, the firm still advertises (spending $3.7 million in 2010, according to the New York Times), but a clinic it is not. (140) So too, Baltimore's once-vaunted Cawley & Schmidt, which at its height operated seventeen legal clinics across the mid-Atlantic and handled 1200 cases a month, also disbanded. (141) Now, William R. Schmidt reports on his new firm's website three prime areas of practice: personal injury, medical malpractice, and criminal defense. (142) Perhaps most telling of all, by the early 1990s, even Van O'Steen--the man whose legal clinic, newspaper ad, bar suspension, and court challenge sparked this legal revolution-had also changed his specialty. He, too, had joined the PI ranks. (143)

III. ADVERTISING AND PRICE: THEORY AND EVIDENCE

Parts I and II traced the delivery of legal services from the 1970s through the 1990s to highlight legal clinic's starring role. But Part II showed that, while clinics were central, they were also ephemeral. By 1994, as the National Law Journal declared, "the legal clinic movement [was] dead." (144) This Part continues to explore the factual template on which Bates was issued, but it does so by changing focus, from the historical to the theoretical and empirical. Specifically, Subpart A considers theoretical justifications for why permitting attorney advertising should or shouldn't reduce prices for legal services. Subpart B reviews empirical evidence studying the price effect of advertising in other contexts. Finally, Subpart C reviews the limited empirical evidence collected thus far on advertising and the price of legal services.

A. Theories for Why Advertising Should or Shouldn't Reduce Prices

At the time of the Bates opinion, commentators made any number of predictions-with various theoretical bases--concerning the anticipated price effect of attorney advertising. Some hypothesized that permitting attorney advertising would make prices go up. This prediction was typically premised on the fact that promotional activity costs money and the belief that the additional expense would be passed on to consumers. "The addition of advertising expense to a lawyer's budget can only increase the cost of delivering his services," one Bar leader declared. (145) In addition, some believed that attorney advertising would erect a new, additional barrier to entry, which "might deter or make it difficult, if not impossible, for some young lawyers without that capital to build up a practice." (146) This barrier, some argued, might increase prices by reducing attorney supply.

Most commentators, though, predicted that attorney advertising would have a procompetitive effect. For this, advertising's advocates rolled out a number of arguments.

First, advertising's proponents challenged the dismal predictions above. Disagreeing with the premise that the high cost of advertising would be passed on to clients, they contended that advertising was likely to be cheaper and more efficient than current means of client generation, such as country club memberships and community contacts. (147) Likewise, they rejected the prediction that permitting advertising would erect a new barrier to entry, maintaining instead that it would "make it easier for young lawyers right out of law school to break into practice," thus effectively increasing attorney supply. (148)

Second, advertising's proponents made price predictions based on the operation of legal clinics in particular. The syllogism went something like this: (1) legal clinics charged lower fees than traditional providers; (2) in order for legal clinics to succeed, while charging lower fees, they had to attract a large number of clients; and (3) attracting a large number of clients was impossible in the absence of attorney advertising. (149) Permitting advertising, then, facilitated clinic development and expansion and the sharp price reductions they'd bring.

Third, commentators made similar but more explicitly volume-based claims. Writing for the American Bar Foundation in 1979, Timothy Muris and Fred McChesney predicted, for example, that attorney advertising would increase client volume. That higher volume, Muris-McChesney continued, would facilitate broad cost savings as economies of scale could be harnessed in the production of legal services, via increased specialization, greater use of boilerplate forms, heavier reliance on technology, and additional delegation to paraprofessionals. (150) As the costs of providing legal services dropped, Muris-McChesney theorized, so would the prices charged clients. (151)

Finally, a number of advertising's supporters--including, most notably, the U.S. Solicitor General--advanced the "advertising-as-information" argument. And indeed, this was the argument ultimately accepted, and reiterated, by the Bates majority. Originating with George Stigler's seminal paper on the economics of information, the idea is that competition requires informed consumers. If consumers are not informed--which is likely where search is costly--consumers will not locate the purveyor with the lowest possible price, giving sellers some degree of monopolistic power. By reducing search costs, price advertising can stimulate more comparison shopping and generate more price competition and less price dispersion, to positive effect. (152) Espousing this model, the Solicitor General declared: "economic theory ... explains that an advertising prohibition increases the cost to consumers of discovering the lowest cost seller of acceptable quality; as a result, sellers obtain greater independence in setting prices and lack incentives to price competitively." (153) And implicitly embracing this model, the Supreme Court agreed: "The ban on advertising serves to increase the difficulty of discovering the lowest cost seller of acceptable ability. As a result, to this extent attorneys are isolated from competition, and the incentive to price competitively is reduced." (154)

B. Empirical Evidence from Other Contexts

Just as theorists advanced a number of hypotheses for why prices might drop as advertising restrictions were relaxed, starting in the early 1970s, empiricists conducted a number of studies, on a range of goods and services, which generally confirmed the theory worked. As marketing restrictions were lifted, prices fell. (155)

Lee Benham was the first modern researcher to study advertising's price effect, in a study published in 1972 and subsequently cited by the Bates majority. (156) Using data from a 1963 national survey, Benham traced advertising's effect on the price of ophthalmic goods and services. Classifying states as "restrictive" or "nonrestrictive" with regard to the permissibility of ophthalmic promotional activity, Benham found that prices were "substantially lower" in less restrictive states. (157) Price effects were, in fact, huge: strict restrictions increased the price of eyeglasses anywhere from 25% to 100%. (158) A few years later, in 1975, Benham (this time with coauthor Alexandra Benham) again evaluated the impact of professional regulation on the price of eyeglasses, utilizing a larger sample and deploying more precise measures of professional control. (159) Though the effect was less stark, results generally held. Eyeglasses were discounted 25% to 40% when laws were liberalized. (160)

In 1976, another researcher, John Cady, published a study probing advertising's effect on the price of prescription drugs, which was also cited by the Bates Court. (161) After collecting price data for ten prescriptions from over 1900 pharmacies in a number of states, Cady classified the originating states as either unregulated or regulated based on their formal marketing controls. He ultimately concluded that drug prices were roughly 5.2% higher in the latter; marketing restrictions were associated with a marginal increase in consumer price. (162)

A final pre-Bates study, conducted by Alex Maurizi, tried to assess the impact of city ordinances prohibiting on-premises advertising of retail gasoline prices. (163) This study appeared to find that the cities that prohibited on-premises advertising had lower average prices than those that permitted such advertising-but data problems may have explained the unexpected result. (164)

After Bates, researchers conducted roughly a dozen additional studies, with findings much the same. (165) For example, in 1978, Maurizi (this time with coauthor Thom Kelly) re-analyzed the effects of price posting in the retail gasoline industry, using a better dataset. On this second try, consistent with expectations, Maurizi found posting reduced prices. (166) Maurizi then partnered with Ruth Moore and Lawrence Shepard to extend the Benhams' work on eyeglasses. Maurizi, Moore, and Shepard analyzed price differences between advertising and non-advertising ophthalmologists, optometrists, and opticians in two counties in California and found that, while relatively few providers advertised outside the telephone book, those who did charged 17% less than those who didn't. (167) Then, in 1980, the FTC's Bureau of Economics got in the act, also testing advertising's effect on the price of optometric services--and also finding that eye exams and eyeglasses cost less in cities with fewer ad restrictions and that optometrists who advertised charged lower prices than their non-advertising counterparts. (168) Indeed, an advertiser in a city with the fewest restrictions charged only $64.73 for an eye exam and glasses, compared to the $94.73 charged by a non-advertiser in a highly restrictive city. (169) In 1986, researchers studied the ban on broadcast advertising of cigarettes--concluding that it increased cigarette prices. (170) Finally, in 2007, C. Robert Clark studied the price of breakfast cereal in Quebec, where advertising directed at persons under the age of thirteen is outlawed. Clark found that "the prices of children's cereals are higher in Quebec than the rest of Canada." (171)

Findings were not unanimous, however. (172) Most notably, in 1992, John Rizzo of Yale and Richard Zeckhauser of Harvard published an article studying the advertising behavior of primary care physicians. After compiling survey data from 1615 practitioners, and after controlling for selection effects, Rizzo and Zeckhauser found that, contrary to conventional wisdom, primary care physicians who had advertised during the five preceding years charged significantly higher prices than those who hadn't. (173) But that study was not published in a legal journal and, as far as I can tell, despite the FTC's past recognition that "advertising may have a comparable impact on" the legal and medical professions, the article's explosive implications--revisited in Part V--have never informed the attorney advertising debate. (174)

In sum, over the past four decades, a number of studies have examined the price effect of advertising, some predating and some postdating the Bates opinion. And those studies, surveying everything from breakfast cereal to gasoline and eye exams to cigarettes have, on the whole, powerfully supported advertising's competitive effect. With the exception of Rizzo-Zeckhauser's finding regarding primary physician services, the permissibility of advertising is generally associated with lower prices for goods and services; as advertising regulations fall, consumer prices tend to follow.

C. Studies on Advertising's Effect on Legal Services

Finally, in addition to the many studies cataloged above, two studies have specifically examined--and reached clear conclusions about--advertising's effect on the cost of legal services. (175) The first study was an ambitious effort published by the staff of the FTC in 1984, seven years after the Bates decision. (176) This FTC study leveraged the fact that states differed in their response to Bates. Some dragged their heels, adopting rigid regulations that basically limited the opinion to its facts (or, more dubiously, gave the opinion such a crabbed reading that even the block ad Bates and O'Steen published wouldn't pass muster), while others took a more laissez-faire approach, permitting all ads, save those that were false or misleading. (177) This variance created a natural laboratory to test advertising's early economic effect. To do so, between December 1980 and March 1982, FTC researchers identified seventeen cities, which were selected to provide a sample of the regulatory spectrum then in existence, and compiled attorney price information from approximately 3200 surveyed lawyers practicing therein. Surveyed lawyers were asked about the fees they would charge for four different routine legal services (reciprocal sample wills with and without a trust provision, an uncontested personal bankruptcy, and an uncontested divorce) and one non-routine service (a plaintiff personal injury case).

Analyzing this survey data, the FTC economists, as noted above, found it was generally true "that restrictions on advertising raise prices." (178) For all specialties, attorneys practicing in states with restrictive advertising rules reported, on average, higher prices than the fees charged by attorneys practicing in permissive states. (179) It was also typically true that attorneys who advertised a specific service reported providing that service at a lower price than their nonadvertising counterparts. (180) The exception, of course, was personal injury law. "In the three cities with statistically significant results," the FTC's economists found, "attorneys who advertised personal injury services appeared to charge about a 3 percent higher contingent fee if the case were settled before trial than those who did not advertise personal injury service." (181)

A second and final study was published a few years later, in 1987, by John Schroeter, Scott Smith, and Cox, using the FTC's original seventeen-city dataset but deploying different statistical tools and excluding personal injury practitioners. (182) Not surprisingly, the authors found that the data were "consistent with the hypothesis that advertising increases competition among sellers in a market." (183) "Thus," the authors concluded, "the trend over the past decade toward fewer restrictions on seller advertising in professional service markets would appear to be a very favorable one, at least as far as consumers are concerned." (184)
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Title Annotation:Introduction through III. Advertising and Price: Theory and Evidence, p. 633-666
Author:Engstrom, Nora Freeman
Publication:Stanford Law Review
Date:Apr 1, 2013
Words:7831
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