The rule of law is essential to the flourishing of liberal democracy and capitalism. Yet, it is now under pressure in the United States, and corporate law firms are in the eye of the storm. Over the last few weeks, President Donald Trump has issued executive orders against several prominent law firms that represented his political adversaries and promoted diversity, equity, and inclusion (DEI) initiatives. Some of these law firms have caved into the administration’s demands to end such practices and provide pro bono services to the government, whereas others are fighting back. To discuss the financial reasons why some firms have capitulated while others have held out, and what the consequences are for the survival of the rule of law, Bethany and Luigi speak to John Morley, Augustus E. Lines Professor of Law at Yale University and an expert on the economics of law. Are Trump’s orders unconstitutional, and if so, why have so many law firms reached a deal with him? How have changes to law firms’ business models left them particularly vulnerable to a moment like this? Why are some firms more vulnerable to political attacks than others? Together, the three discuss the firms’ reciprocal agreements with the administration, the possibilities for a collective-action response, and how this moment may profoundly reshape the future of law, democracy, and capitalism in America.
The rule of law is essential to the flourishing of liberal democracy and capitalism. Yet, it is now under pressure in the United States, and corporate law firms are in the eye of the storm. Over the last few weeks, President Donald Trump has issued executive orders against several prominent law firms that represented his political adversaries and promoted diversity, equity, and inclusion (DEI) initiatives. Some of these law firms have caved into the administration’s demands to end such practices and provide pro bono services to the government, whereas others are fighting back.
To discuss the financial reasons why some firms have capitulated while others have held out, and what the consequences are for the survival of the rule of law, Bethany and Luigi speak to John Morley, Augustus E. Lines Professor of Law at Yale University and an expert on the economics of law. Are Trump’s orders unconstitutional, and if so, why have so many law firms reached a deal with him? How have changes to law firms’ business models left them particularly vulnerable to a moment like this? Why are some firms more vulnerable to political attacks than others? Together, the three discuss the firms’ reciprocal agreements with the administration, the possibilities for a collective-action response, and how this moment may profoundly reshape the future of law, democracy, and capitalism in America.
Show Notes:
Watch a recording of the panel “Antitrust and the 1st Amendment” from the 2025 Stigler Center Antitrust and Competition Conference, featuring Greg Day, Eleanor Fox, and Matt Stoller, and moderated by Maciej Bernatt. The panel highlights how antitrust may stand in the way of collective action, competitive markets, and free speech.
John Morley: Everything has a price, including dignity, and at some point, the lawyers at Paul Weiss and other law firms will say: “Our dignity is not worth the firm. We would rather see the firm go down than do these outrageous things.”
Bethany: I’m Bethany McLean.
Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t.
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Luigi: A necessary condition for a capitalist system to develop and thrive is the presence of the so-called rule of law.
Bethany: It’s universally recognized as the foundation not only of any economic development, but also of our freedom. The conservative Austrian economist Ludwig von Mises claims that it is “the rule of law alone which hinders the rulers from turning themselves into the worst gangsters.”
Luigi: An independent judiciary is the first pillar of a rule-of-law system. The second one is a free legal profession. Robert Gordon, a professor of law and legal history at Yale, elegantly summarizes the role of lawyers: “Lawyers are to be independent, yet loyal to clients. Strenuous advocates for clients’ positions, yet also supportive of aims of some degree of social solidarity. Bearers of universal, cosmopolitan norms, but builders of nations and national cultures. Resisters of predatory states, but not subverters of legitimate state authority. Governors of self-regulating autonomous professional bodies, but not unduly self-interested.”
Bethany: Wow. According to that, the ideal lawyer is a pretty perfect person.
As everyone knows, unless you have been living in a cave for the last two months—which actually might have been a really nice place to have spent the last two months—this issue about the independence of law and how the law market works is in the eye of the storm right now, where an attack on the independence of lawyers has come from the government.
In the past two months, President Trump has issued executive orders against several prominent law firms, including Paul Weiss, Perkins Coie, WilmerHale, Jenner & Block, and Skadden Arps. These firms were accused of representing Trump’s political adversaries and promoting DEI initiatives.
The executive orders aim to supposedly do a number of things: revoke security clearances for firm employees, ban firm personnel from entering federal buildings, terminate existing federal contracts with these firms, and discourage other companies from engaging with them.
Paul Weiss, most famously, opted to settle, by committing $40 million in pro bono services that are aligned with Trump administration goals. Paul Weiss also agreed to cease DEI initiatives. Eight other law firms have followed in Paul Weiss’s steps.
On the other hand, Perkins Coie, WilmerHale, and Jenner & Block chose to challenge the executive orders in court, arguing constitutional violations. Federal judges have issued temporary restraining orders blocking enforcements of these orders against the firms.
Luigi: To discuss the relationship between the economics of law firms and the survival of the rule of law, we invited John Morley, the Augustus E. Lines Professor of Law at Yale Law School. Among other things, he’s a leading expert on the economics of law firms.
Bethany: In general, lawyers seem to be challenged to give a simple and straightforward answer. Yet almost every lawyer seems to have a pretty unqualified opinion on this issue, which is that the executive orders against the various law firms that have been issued by President Trump are unconstitutional. Is that true?
John Morley: I think so. I’m not an expert on constitutional law, but it’s hard to imagine that if attacking your political opponents for the substance of their views with the force of law without proving that they’ve done something wrong in court . . . If that’s not unconstitutional, it’s hard for me to say what is.
Luigi: If the answer is so straightforward, and law firms can immediately obtain restraining orders, like Perkins Coie and Jenner & Block were able to do, why did so many law firms reach a deal with President Trump?
John Morley: There are a lot of answers to that question. Let’s just start with what Jenner & Block and Perkins Coie and the other firms that have obtained orders accomplished. They got stays on elements of the orders but not necessarily others.
For example, if my memory serves me correctly, I don’t think that Perkins Coie was able to stay the order withdrawing the security clearances of the firm’s lawyers. So, they’re still going to suffer a bit.
Also, the Trump administration was threatening to refuse to approve actions or to do business with the firm’s clients. That’s not really something for which you can get an order. If the Trump administration says, for example, that because McDonnell Douglas works with Perkins Coie, that the Trump administration is never going to approve a McDonnell Douglas acquisition under antitrust laws or that it’s going to withdraw business from McDonnell Douglas, that’s not something that the court order can really help either McDonnell Douglas or Perkins Coie with.
Bethany: Have you ever seen anything like this before? Is it completely unprecedented both across history and across other countries? Or are there echoes of this in American history or elsewhere that you would point to, to try to make sense of this moment?
John Morley: I can’t think of a parallel in American history. I think some of the president’s defenders have, at times, suggested that Democratic presidents have occasionally criticized lawyers who attacked them.
Certainly, the Biden administration was critical of and occasionally even prosecuted lawyers who worked with Donald Trump in the 2020 election claims, people who worked with the president to argue that the election was falsely stolen from him.
But that seems to me to be not similar to what’s happening here. What’s happening here is quite different. In particular, the way that he’s attacking firms as institutions, as distinct from individual lawyers, the way that he’s doing it without demonstrating any actual wrongdoing, even the fact that he’s going after firms for things that their partners did in the past or that past partners did, when they weren’t even partners at the firm—it’s stunning. It’s without parallel in American history, as far as I know.
It’s one thing for the government to threaten punishment. It’s another thing for the government to say, “We’re no longer going to buy services from you.”
To be clear, the nature of the threat here was multilayered. As I said, one was that the government wouldn’t do work with those law firms, which is fine. The government could choose not to work with law firms it doesn’t like.
Another is that it was not going to work with their clients. Then another is that it was going to use the power of the government to withhold regulatory approval that was needed by the clients. Withholding regulatory approval feels like a government action. Not buying services from a particular client does not.
That said, look, we are all, in the year 2025, reliant in some fashion on the government subsidy or patronage. We have roads in front of our houses. My children go to public school. I work for a university that receives funding from the government. All of our companies are patronized by the government in one way or another.
What I think the Trump administration has discovered is that as the reach of the government has grown and its commercial footprint has expanded, it’s gained extraordinary leverage over all of us, and the law has yet to catch up entirely with the power that that’s conferred.
It seems nuts to me that the government can say, “We’re going to no longer work with your company because you didn’t support the party of the president.” And yet that’s what’s being held out here, and it’s kind of hard to explain what’s wrong with that.
Bethany: Is there a strange irony at work here in that one of the Trump administration’s positions has obviously been that the government is too big, and yet the Trump administration is using, in your analysis, that very size and power of the government in order to accomplish its ends?
John Morley: Yes, I think that’s right. Here we’re, on the one hand, saying the government has too large a footprint. On the other hand, we’re using the very width of that footprint to stomp on our enemies.
I might also say that the government has long been subject to procedures in contracting and procurement that are designed to avoid precisely these possibilities. When the government buys services or products from any kind of vendor, there’s constant risk that either the vendors will use the political process to gain favor for themselves, or the government will use the vendor and procurement process to gain political support from the vendors.
There’s risk of conflicts on both sides, and so there’s elaborate contracting. There’s elaborate administrative procedure that’s set up around procurement to avoid precisely this kind of weaponization of the procurement process, and I think it’s very unfortunate that it’s not happened here.
To your point, Bethany, one of the things that the Trump administration seems especially contemptuous of is the procedural regularity that’s required of a government and not of a private company. We see that with Elon Musk, who shows up and wields the proverbial chainsaw—literally and figuratively—and he acts as if this is just, like, something terrible and weak and flawed about the government that we require procedures that wouldn’t be present in Tesla. But there are good reasons for the procedures, and among them is so that the president doesn’t weaponize the economic footprint of the government for political and private gain.
Luigi: It feels kind of ironic because when you read about the history of constitutional governments, the fight is precisely how to restrict the absolute power of the monarch, in every possible shape or form. I thought that battle had been won. Now, it seems that we’re going back.
I was talking with my brother, who lives in Italy, and he was completely shocked. He said: “This stuff might happen in Italy, but at least people do it with shame. They hide. They don’t want to say openly that they’re doing it because they know that this is wrong.”
What is shocking with Trump is that not only does he do it, but he does it with gusto and with a sense of entitlement, and nobody seems to stop him, even the reasonable people that might be around him.
John Morley: I think that’s right. In some sense, the very brazenness of it is what gives him license to do it. I think what it also illustrates is a deep feature of legal rules, however, which is that no rule, whether contractual or statutory or judicial, can ever comprehensively govern the space it attempts to govern. All rules require a degree of cooperation and collaboration and goodwill on the part of those that it intends to govern and those that it intends to administer.
I think a really nice example of this is that sometimes, labor unions, rather than going on strike, will implement what they call a work-to-rule action where the unionized workers work only according to the written rules that govern their jobs. When they do that, the whole thing breaks down. The factory can’t work because the rules can’t be written with sufficient detail and with sufficient flexibility to govern every aspect of the workers’ behavior.
What the Trump administration seems to have discovered here is that there are guardrails that are set up on the president of the United States in the Constitution, in Congress, in statutes, in the courts, but they all presuppose a degree of goodwill and collaboration and decency on the part of the president. And if he’s not willing, ultimately, to internalize the legitimacy of the rules that govern him, there’s not that much that the courts are going to be able to do.
Bethany: That is really interesting. One of the things we’ve talked about on the podcast in the past is the business model of Big Law. How would you characterize the changes in the business model of Big Law, and have those changes made law firms particularly vulnerable to this moment in time, in the sense that the biggest law firms have become less and less professional-services providers and more and more businesses?
John Morley: For me, the central feature about law firms that makes them interesting is the fact that they’re owned by their workers. Their stock, instead of being held by investors, is held by the partners who practice law at the firms.
I think that what we might call the corporatization or the commercialization of law firms has put a lot of strain on the quirks of that business model. One of the things that’s placed the greatest strain is the growing frequency of lateral partner movement. When a law firm gets put under pressure by something like one of these executive orders, the partners will begin to flee en masse, creating the risk that the firm might crumble in a spiraling cycle of withdrawal.
Luigi: In a lot of knowledge-based firms, there is a similar problem, maybe not with the clients, but with the knowledge. This problem is addressed through noncompete clauses. Why don’t lawyers have noncompete clauses?
John Morley: Because the law prohibits it. Professional ethics rules in law firms prohibit lawyers from signing noncompete and guarded leave and similar agreements. These are professional ethics regulations that are binding upon lawyers and enforceable by professional organizations.
If a lawyer signed an agreement of the kind you’re describing, Luigi, the lawyer could get disbarred, or the firm could be subject to sanction, or it might simply not be legally enforceable.
Luigi: I’m a little bit confused because on the one hand, I see the problem of the resistance to illegal orders as a collective-action problem, which is difficult to resolve. But then you tell me that, basically, the lawyers association is a monopoly managing the law, and they can impose norms and disbar people who deviate, which seems like the perfect mechanism to fix the collective-action problem.
The American Bar Association could get together and say, “Whoever caves in this situation that we think is unethical from the point of view of law should be disbarred from the legal profession.” Problem solved. Why don’t they do that?
John Morley: That’s a great question. I wonder if people are beginning to think about it. I think it would not be crazy for the bar association, say, to bring a lawsuit trying to enjoin any more of these future orders.
I think it’s challenging for a few reasons. One is that it just takes time. It’s a large, politically complex organization. Another is that the regulation occurs at the state level. Even if you can get the New York Bar Association to agree with you, you aren’t necessarily going to get the one in, say, Alabama or Georgia to agree with you.
Also, the interests of the industry are somewhat heterogeneous. Some firms are much more vulnerable to these executive orders than others, and it may well be that some firms have a kind of schadenfreude at witnessing each other’s suffering. For the same reasons that collective action is difficult in the market, it’s also difficult in this organization.
I’ll also say that not every firm has been willing to play this game. I know that there are firms out there, and I commend them, that have made a deliberate decision not to accept or negotiate with partners who want to move laterally from firms that have chosen to fight the Trump administration.
Bethany: Oh, that’s the nicest thing we’ve heard in this conversation.
Luigi: Have they gone public, so if we look for them, can we find them, or is this a secret?
John Morley: I’ve talked to general counsel who are big consumers of legal services who’ve communicated this.
Bethany: Let’s go to that and talk about why some firms are more vulnerable than others. What introduces that vulnerability?
John Morley: There are many answers, and we could probably spend the rest of our time here identifying them all. But one key answer that I’ve identified before is that transactional lawyers who do contracts and regulatory work and similar things where you have two parties dealing with each other are much more likely to leave a firm than litigators who do lawsuits.
There’s lots of reasons for that. One is that transactional matters tend to have a briefer lifespan and, therefore, quicker turnover. A corporate merger will be completed in a month or two. A lawsuit might last for five years. That means it’s easier to take a fresh start without leaving a bunch of resources behind at your old firm.
Also, transactional lawyers tend to be more cohesive as groups. They’re more specialized. They need to work together, and so, when one of them moves, the others will move with him, which again means that the moving partner leaves less behind. Transactional lawyers also tend to have bigger profiles in their industries. They’re stars, which means that their departures can do more damage to their firms.
On the point about stars, some firms are more explicitly oriented around stars than others. At Paul Weiss, Brad Karp made an explicit policy, which he told everyone about for years, of hiring megastars who could keep other lawyers at the firm busy. That’s great if they stay and generate a lot of business. It’s terrible if they leave because now, the firm has a bunch of fixed costs and much less revenue to cover them.
Luigi: I think you are very polite and precise in your description. I will add an extra element that if you’re a transactional lawyer, you are half a lawyer and half a lobbyist, and as with all lobbyists, they need access to power.
They are much more blackmailable in the sense that you can overturn an adverse judicial order, but you cannot overturn lack of sympathy from the government. If you need to have sympathy from the government, you end up basically compromising in order just to maintain your business. I think that, to me, is the problem, but what I was arguing was not—
John Morley: Can I say a word about that?
Luigi: Yeah, please.
John Morley: I think that’s absolutely right. I might put it more gently and just say the transaction lawyers depend more strongly on the goodwill of the government. When you’re litigating with the government, you’re already in an adversarial posture, and you have a judge there to look out for your interests.
By contrast, when you’re seeking regulatory approval for a drug, you can sue if it doesn’t go well, but that’s much harder than just getting approval at the outset. It’s hard for a judge to second-guess that kind of decision because there’s a lot of discretion involved.
Also, what about listing securities with the SEC? Sometimes the actions of government officials aren’t reviewable by a court at all. So, you’re absolutely right. Transaction lawyers depend much more heavily on the goodwill of the government, and they’re therefore much more exposed to this kind of pressure.
Luigi: A friend of mine who is Brazilian told me that the motto of the Brazilian Bar Association is without lawyers, there is no justice, which is a little bit self-serving, but it’s true.
The problem is that we have lawyers who are basically what I call lobbyists, and there are lawyers who are litigators. To make sure that justice is served, we need the litigators to be independent. We don’t really care about the lobbyists. But if they are in the same firm, they might both be compromised, and we might end up not having defense for something that we need defended.
If I am in a fight against the government, and all the law firms have signed a plea agreement to go along with the Trump administration, how do I get my rights protected?
John Morley: That’s the strategy of the Trump administration. There’s a lot I could say about that. One observation is that none of these firms have signed an agreement to go along with the Trump administration. They committed to provide some free legal services to causes that were relatively apolitical and mutually agreeable.
This is not the same thing as agreeing with the Trump administration or refusing to defend people when attacked by the Trump administration. Still, I think that arguably the end goal of the president here is to weaken the possibility that law firms might resist him and, in so doing, help other people to resist him.
One possible future for the legal industry is a kind of bifurcation between those who fight the government and those who don’t. We’ve already seen this kind of bifurcation with regards to big banks. Big banks generate a lot of work for law firms. They’re great clients to have. But they’re also very thin-skinned clients. They hate to be sued. They basically demand, “If you want to work for us, you can never work against us.”
So, the world divides into those law firms that work for big banks and those law firms that sue them. We could see a similar kind of bifurcation with regards to litigation with the government. Indeed, if we look around at which firms are resisting the Trump administration and which are not, the firms that are resisting are all litigation-focused. It’s no accident that Williams & Connolly, in particular, is resisting because Williams & Connolly’s bread and butter is litigating against the government.
Luigi: Can you be more specific? Can you tell us what, exactly, Paul Weiss and Skadden Arps, et cetera, agreed to? To what extent is what they agreed to against, at least in a large sense, the ethics of the lawyer? To what extent is it not a big deal?
John Morley: There’s a disagreement about what they agreed to. President Trump believes one thing; Brad Karp and the other firm chairs believe another. I tend to believe the characterizations of Brad Karp and the other firm chairs.
What they agreed to was really not that much. They agreed to provide free legal services to clients and causes that were mutually agreeable to both the firms and the president. The two biggest examples I can think of were the prevention of antisemitism and the protection of the legal interests of military veterans.
That, to me, seems pretty anodyne, in part because these firms were already doing tremendous amounts of pro bono work. Paul Weiss committed, if my memory serves, to doing something like $40 million or maybe $60 million of pro bono legal services over a period of years. Paul Weiss is already doing something like $150 million of free legal services every year. Indeed, that’s part of why it got targeted by the Trump administration, because it has a reputation for serving progressive legal causes on a charitable basis.
Bethany: What does Trump think? What do you think Trump thinks they agreed to, when you say that there’s a difference?
John Morley: Trump thinks they agreed to provide free legal services to the government for causes that Trump personally supports, in particular his trade war. He thinks that they’ve agreed to defend the administration in litigation over its policies. I have a very hard time believing that they ever agreed to that.
Luigi: Actually, I don’t see the big difference because once you accept the principle that the government can tell you what kind of pro bono work you do, then the step of saying you will do the pro bono work for the government is not that big of a step.
Plus, we know that Trump will come up with other requests. Now that you’ve established the principle that you’re compromising, what prevents you from compromising further? It’s a slippery slope the next time around.
If President Trump says, “You have to do pro bono work in defending my trade deals,” are they going to say no? All the arguments you’ve made so far would still apply. Then if they say, “Actually, we want your firm to stop defending,” for example, “illegal immigrants or stop defending pro-Palestinian causes or stop defending whatever,” the argument you’ve pushed so far would still apply. Is there a red line, or is there going to be a slippery slope in which, pretty soon, they’re going to do everything Trump says?
John Morley: I think you’re right, Luigi, to say that there’s no really sharp distinction. I think, however, that everything has a price, including dignity, and at some point, the lawyers at Paul Weiss and other law firms will say: “Our dignity is not worth the firm. We would rather see the firm go down than do these outrageous things.”
I promise you, I have no inside knowledge of this, none whatsoever, but I’m just telling you, as a person who’s observed this industry for a long time, there is no way any of these firms are going to represent the government in trade negotiations on a pro bono basis. They’re just not going to do it. They would rather litigate. They would rather watch the firms die than do something like that.
Bethany: Where do you think we go from here? Does this become a moment that is a big deal simply because of the unprecedented nature of it, but the reverberations are not profound? Or does this become something that does have very profound reverberations for the shape and status of Big Law going forward?
John Morley: I think it’s a huge moment. I think a norm has been violated. When you breach norms, not just laws but norms, it’s really hard to unbreach them, to reinstate the social deference to the taboo once it’s been broken.
For that reason, I think this whole situation is heartbreaking. I also think that it’s inevitable that law firms are going to be afraid of what will happen if they resist the government. We can talk a lot about the courage or cowardliness of firms that have already been targeted, but it seems very likely to me that firms that have not yet been targeted are thinking very carefully about what they do so that they won’t be targeted in the future.
Is that cowardliness? Is it prudence? I think it’s probably a mix of both. I think the sad thing is that the president of the United States has become such a tyrant that he’s putting people in the position where they have to make these hard choices.
Luigi: It’s funny, but Mao Zedong would say, “You hit one to educate 100,” and it seems that Trump actually follows closely the Mao Zedong kind of maxim.
John Morley: You were asking me earlier, Luigi, what exactly did the law firms agree to? And I think one answer is what I told you earlier. Another answer is it doesn’t really matter because what Trump is really trying to accomplish here is a kind of theater of obedience. What he wants is to humiliate these law firms and diminish their social standing.
The analogy I kept coming back to, as I thought about this over the last few weeks, is it’s like the Cultural Revolution in the 1960s in China, when Mao and his supporters would haul out university professors and beat them, and the point was just to denigrate their standing.
The fact that we’re having conversations in which we criticize these law firms is the point. That’s exactly what Trump wants us to do. He wants to humiliate these people so that he can diminish the respect they command.
Bethany: That’s really interesting in the sense that, in a weird way, as much as we would think that we would be doing the “right thing” by criticizing the firms that have caved to Trump, through that perspective, we are actually playing into his hands by doing so.
John Morley: Exactly, and this is a classic tool of despotic governments. You don’t have to send a dissident to Siberia. You just have to humiliate him. You have to make him seem weak and lacking in courage, and that undermines his following much more effectively than making him into a martyr.
It would have been way better to embarrass Alexei Navalny with some scandal, or to demonstrate that he’s really not as strong of an opponent as you’d like, than to send him to a death camp in Siberia, because then he becomes a martyr.
Bethany: Does this begin to accelerate any changes away from the Big Law model? You could make an argument that the Big Law model . . . I don’t know if it was becoming unsustainable, but the rapid growth in profits per partner that have driven so much of the economics to lawyers over the last few decades . . . Are we at a tipping point for Big Law that this case, that these actions, may somehow accelerate where the world of law looks very different or is structured differently in 10 years?
John Morley: I do think it’s possible that the industry fragments a little bit between those that attack the government and those that don’t. I think that litigating against the government will become a bit of a specialty, just like litigating against big banks.
To be clear, when I say litigating against the government, I don’t mean routine disputes about securities regulation. I mean politically fraught contests that might upset the Trump administration. More of that business will go to smaller, litigation-focused firms, and partners who specialize in that kind of business will move to those firms.
Will it lead to an overall weakening of the industry? I don’t know. I think that there are grander forces at work. I’ll tell you what will lead to a weakening of the industry. If the tariffs succeed in weakening deal volume, that will bring profits down far more rapidly than these executive orders.
Luigi: The Supreme Court of Arizona has approved the KPMG application for an alternative business structure providing legal services. It’s basically a nonlawyer owning a law firm. Do you think that this has contributed, to Bethany’s point, to change in the industry, and how would a corporation running law behave differently than a law firm in a situation like this?
John Morley: I think these are fascinating developments, and let me say, other countries are already ahead of us. In the UK, a very large percentage of the consumer legal-services market is now served by investor-owned corporations, both private equity and sometimes publicly listed.
Let’s talk about how an investor-owned firm might have responded differently here. When an investor-owned firm experiences financial distress, it tends to be a little more robust in the face of that stress for two reasons, which are closely related. One is that the investors can’t leave. The people who contributed equity gave money, and now they can’t pull it out unilaterally. The board can declare a dividend, but they can’t leave one by one, in a spiraling cycle like the partners of the law firm.
Also, if the firm’s distress becomes profound enough, the firm can reorganize its debts in bankruptcy and give the equity to creditors and retain its operating assets. You can’t do that with a law firm. If Paul Weiss were to go bankrupt, you couldn’t take the equity of the lawyers and give it to the firm’s creditors because then the lawyers would just leave. They’re being paid in equity. If you don’t give them equity, they’re not going to stay.
There has never been a large, partner-owned law firm in the United States that’s ever reorganized its debts in bankruptcy and survived. However, one of the largest investor-owned law firms in the United Kingdom and Australia, a firm called Slater & Gordon, did exactly that. It suffered financial distress because of a bad acquisition. It reorganized its debts. And it continues to work, just like Delta Airlines and Chrysler and many other industrial companies that have gone bankrupt.
Bethany: At the risk of needing to reduce this to a simple good or bad, it’s funny, I think my instinct would have been that this kind of corporatization of law firms was bad, bad, bad, just reflexively, I don’t know why, bad. But it actually sounds like, from what you’re saying, that there would be some real positives to this movement, and it might give law firms more flexibility and strength going forward.
John Morley: Investor ownership has many advantages. Worker ownership has many advantages. And they both have many disadvantages. It’s an optimization problem, and it depends on whose interests you most care about.
Let me say, if what you care about is the interests of middle-class and low-income people who need legal services, there’s a powerful argument to be made that investor ownership would be a huge boon to them. There ought to be an H&R Block of legal services that can help you with your will and your divorce and your basic tort case. But there’s not. An H&R Block is really only possible with an investor-owned format because you need money to build a brand.
Also, law firms have real difficulty making long-term investments because of the turnover in the partnership. This is what I call a problem of generational conflict. Suppose, for example, that a law firm were to invest a bunch of money building out a national network of storefronts to serve people’s divorces and wills like H&R Block. As a result, it had to spend a bunch of money doing this.
Then the partners who spent all that money then retired, and the profits were enjoyed by the partners who were promoted after them in the next five to 10 years. That’s just not going to work. The partners of today won’t make that investment for the future. Investor ownership is powerfully associated with long-term investment, and I think it really could be a boon, particularly in the consumer legal-services market, if it were to be possible.
Bethany: His points about a more capitalist, shareholder-owned, investor-owned structure for law firms might actually have some real advantages. It did make me think differently in two ways than I had thought coming into this conversation.
One is that I guess I would have thought—and I don’t like to see this reflexive ideology in myself, but it’s there sometimes—that the corporatization of law was inherently a bad thing, that it would have meant: “Oh, law, too. It’s going the way of the corporation. It’s no longer a partnership. How terrible. Everything is this bottom-line, capital-driven structure.”
I wouldn’t have thought, “Actually, maybe that’s better.” So, I thought it was really interesting that after talking to him, I thought: “Hmm. Maybe that actually is better. There are a lot of things in favor of this argument that are very substantive.”
The other thing that I thought was really profound was this idea that by being very critical and shaming the firms that have chosen to settle, we are actually playing into Trump’s hands. I thought that was interesting, too, because I think all of our first inclinations, certainly mine, are to be harshly critical of a firm that chose to settle because shouldn’t we all fight? But that, of course, is doing exactly what Trump wants, and we might be better off in this moment if we didn’t let these things divide us further.
Luigi: Say it again, why do you think that shaming the firms that settle is bad?
Bethany: His point was that this is how dictators work. They shame their opponents and take away their prestige and the support they have by dint of reputation. The more we all play into this and refuse to have sympathy for a firm put in the position that Paul Weiss was put in, the more we also create shame. I thought that was interesting. I’m not sure I’m there, but I thought it was a really interesting alternative way to think about this and important to keep in mind.
Luigi: Because I always think about Italian history, one of the characteristics of the fascist aggressors in the years leading to Mussolini’s dictatorship was to force-feed their opponents castor oil, massive quantities of castor oil. That is a huge laxative. That’s a major humiliation.
It’s such a cruel punishment because on the one hand, if you’re not beaten up, you don’t see the person hit all over—at the time, there was no TV but there was the newspaper, the pictures. On the other hand, you really break the dignity of the human being.
The thing that I got kind of passionate about reading this is that when we talk about the rule of law in general, we emphasize judicial independence a lot, but after that, there is also this issue of the lawyers’ independence. If there are no lawyers, there is no justice. They are an essential ingredient of a program of rule of law.
I did a literature search and found one article from another Yale professor that I cite here, Robert Gordon, that discusses this issue, but that’s the only one, basically. And this is 15 years old. I looked at recent articles. There doesn’t seem to be a full appreciation of to what extent the private incentives deliver the social optimum, in my language, in the market for lawyers.
You want the lawyers to have the incentives to defend the things that need to be defended and not defend the things that don’t need to be defended. In criminal cases, you want them to defend everything. But in the commercial cases, you don’t want them to litigate things that shouldn’t be litigated. You don’t want frivolous suits.
Bethany: Well, I think we have a system of tons and tons of frivolous suits because that’s exactly—
Luigi: I’m not saying that this is the world we live in. I’m saying from a first-principles point of view, if I had to say, “What is the ideal?”
Bethany: OK.
Luigi: The ideal is a system where lawyers have incentives to represent all the causes that are criminal, because you want everybody to be protected, and to represent all the nonfrivolous causes in commercial law.
Bethany: But who gets to decide what’s frivolous and what isn’t?
Luigi: Of course, of course. Hold on. I think you’re absolutely right.
But then you start thinking about the fact that there are a lot of institutions in the law market that go in that direction. For example, public defenders are paid because in the criminal system, we don’t have enough incentives to defend poor people. We have contingency fees, which exist in the United States but not everywhere, as a way, again, to help protect the people who don’t have the money to put up front.
We have the class-action system that helps aggregate the interests of a lot of people because otherwise, lawyers would not defend them. And we have a lot of pro bono work, which by the way, is at the center of all this debate. The lawyers feel collectively that you need to defend some people who cannot be defended. That’s the reason why we have a pro bono system.
I think that collectively, there is this attempt, and of course, no system is perfect, and you have frivolous suits, et cetera, but in principle, you would like to have a system that achieves these goals. However, the fact that this didn’t immediately click for you—you’re generally fast in getting things—is in part because I explained it poorly, but in part because it’s not the way most people think.
Honestly, this came to me this morning as I was analyzing this episode. I expected a Law and Economics paper that would say exactly what I told you, because this is straight law and economics. It’s nothing fancy. But I couldn’t find it. That, to me, is the surprising and intriguing thing. If you want private incentives to function well, you need to give private incentives to lawyers to actually do the right thing, because lawyers are an essential component of our rule of law, which is a fundamental brick in our capitalist system.
Bethany: Yeah, I guess from what I see of the legal system, it somehow manages through norms to get to an approximation of the sort of system you’re describing. But it doesn’t do so through straight profit incentives. It does so through odd reputational incentives that are very particular to the field of law.
What I mean by that, just for a few examples, is that it’s a pretty well-established and highly prestigious career route to spend time working as an assistant U.S. attorney in the Department of Justice. Then you go to a big law firm and get paid a lot of money.
People might criticize that as a revolving door, but that does have the effect of getting incredibly talented, smart people to spend a chunk of their life working really, really hard on behalf of the government in a way that they wouldn’t do otherwise. By the way, their incentive is to win those cases because nobody goes to a big law firm having lost all their cases at the DOJ and then catapulting into a prominent position at a big law firm.
That’s one way in which it is simply a code of the way this system works, not a system of incentives. I think another way is this idea that there is this public-service component to law, so that it is inculcated in the culture of all these firms that one does pro bono work. So, that’s part of it as well. There’s no real system of incentives to make you do that or spend your time on it. It’s just part of what makes you a valuable member of the legal community.
Luigi: I completely agree. But in a sense, that’s the beauty of it, that the profession overall understood that there were some deficiencies and tried to fix them with some sort of social incentives. After all, one of the greatest innovations, in my view, was the academic system of reputation. This is why people kill each other to publish a paper first because you don’t make money most of the time, unless you’re in some advanced science. But think about it, in philosophy or in law, or even in economics, you don’t get money to write papers; you get reputation.
We have a system of reputation that the more cited you are, the more important you are. So, I’m very sympathetic to the fact that the incentives are not just the monetary incentives. It is the ecosystem that works well.
The problem I see here is this ecosystem has not been prepared for something like this. This is like a tsunami hitting an ecosystem that maybe was not perfect, but it was working OK, and now what is going to happen?
Bethany: Well, I think that begs the question, could an ecosystem be prepared for something like this? I mean, could it and should it be? Or is it the behavior that’s the problem?
In other words, if the ecosystem could be prepared for behavior like this, then you almost normalize the behavior like this as something that is within the realm of the possible. Whereas I think part of our argument, or part of what we’ve heard, is that it shouldn’t be within the realm of the possible.
Luigi: But what I found really interesting is, of course, this behavior is extreme, but John himself admitted that, for example, banks already do that. Banks don’t hire you as a law firm if, in the past, you have gone after the bank. This is really pretty big retaliation.
A lot of the pressure that we observed before was maybe a little bit more subdued. But this episode made me rethink, do law firms have different sets of values, or were they just going along? They are so fast in undoing all this DEI, were they just catering to some pressure, maybe from the government, to do that, or were they really passionate about it?
Bethany: From what I know, they weren’t catering to government pressure. They were catering to pressure from clients who said, “We will hire the law firm who has X representation on the team, and we won’t hire you if you don’t have X representation on the team.” That existed up until an existential threat to a company, which some lawsuits are.
Luigi: To some extent, that makes it even worse. They catered before under pressure from the clients without any existential threat.
Bethany: I think what John said actually made this point. It’s not the same thing to have a private business choosing which law firms it will do business with versus having the government make that decision. You can’t equate the two.
You can’t say because the big banks have always done it this way . . . And they have, by the way. The biggest firms have explicit lists of law firms they will do business with which are approved. If you are on that list, and you get some of that business, you are not allowed to take on other cases. There are always conflicts checks for big cases and clients who will say that if you’re working for this person, then you will not get our business.
I don’t love it when it comes to the big banks, but that’s their right. They’re private companies. They don’t have to do business with you. It’s very different than saying that the government gets to exercise that same power.
Luigi: I completely agree with you, but I’m coming from more of an antitrust perspective, and there is a big part of the antitrust literature that says, oh, you shouldn’t be worried about size per se. There must only be consumer welfare as a standard, whatever it says.
Here, actually, size matters quite a bit because if I am a large private-equity conglomerate, I control a lot of business, and I decide that, Bethany, I don’t like you and your law firm, you get in trouble pretty quickly.
If now, there are three of us, and we control the market, that’s called a monopoly. I have to say that I’m Brandeisian here, that size is a threat to economic liberty.
Now, of course, the government is this on steroids, so I’m not trying to equate it. The government is much larger and has the ability to hit you contemporaneously from multiple points of view because they can use the commercial side, and they could use the power of the government to exclude you from federal business, et cetera, that no private party could do.
However, it is a bit of a slippery slope, and we arrived here by tolerating this over time. And now, of course, it is excessive. Of course, it is beyond the pale or whatever, but it is not unprecedented completely.
Bethany: It’s interesting. I’m not sure whether I’d agree with you because there are breaks. Even if it is a slippery slope, there can be a break after which you plunge off the precipice, and the thing that comes next is not on the slippery slope. I don’t think this is at the end of the slippery slope. I think this is off the precipice.