Incentives favour franchisee attorneys defecting from their clients’ interests

The good grasp of the academic disciple of Law and Economics is necessary in understanding franchising.

Economics is (almost) all about incentives: A highly unified profession, serving a highly centralized, tightly disciplined franchisor-dominant industry  would lead the observer to predict very high levels of attorney-generated opportunism (self-interest + deceit) at the expense of their clients: individuals and groups of franchisees. The rational lawyer defects because that decision makes the best of a highly imperfect information situation.  The new franchisee bar member quickly realizes that economic survival depends on his or her obedience as a gatekeeper for the “team”, in stark contrast to a Canadian justice system that is more and more sympathetic to franchisee arguments.

Hadfield is required reading for franchisees considering contracting for such high-risk legal services (credence goods).

The Price of Law: How the Market for Lawyers Distorts the Justice System

Gillian Hadfield
USC Law School and Department of Economics
October 1999
Michigan Law Review, Vol. 98, No. 4, 2000

Abstract:
This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees–which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly–the familiar monopoly established by artificial barriers to entry, the “natural” monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state’s monopoly over coercive dispute resolution.

The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients–with justice interests at stake–into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market.

The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations.

The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments–one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices.

The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system. [my emphasis]

Number of Pages in PDF File: 84

Accepted Paper Series

Download from SSRN here.

 

There’s room at the top they’re telling you still

But first you must learn how to smile as you kill

Working Class Hero, John Lennon

As soon as you’re born they make you feel small
By giving you no time instead of it all
Till the pain is so big you feel nothing at all
A working class hero is something to be

They hurt you at home and they hit you at school
They hate you if you’re clever and they despise a fool
Till you’re so fucking crazy you can’t follow their rules
A working class hero is something to be

When they’ve tortured and scared you for twenty-odd years
Then they expect you to pick a career
When you can’t really function you’re so full of fear
A working class hero is something to be

Keep you doped with religion and sex and TV
And you think you’re so clever and classless and free
But you’re still fucking peasants as far as I can see
A working class hero is something to be

There’s room at the top they’re telling you still
But first you must learn how to smile as you kill
If you want to be like the folks on the hill

A working class hero is something to be
If you want to be a hero well just follow me

A unified Canadian franchisee bar?

Good news for those that control which lawsuits go forward.

Lawyers in Love, Jackson Browne, 1983

Am I the only one who hears the screams
And the strangled cries of lawyers in love?

The franchise bar works to reduce legal claims for franchisors

The 2nd Trap for the Trusting is sprung in the “franchisees’” attorney office.

Perfectly good franchisee claims are misdirected, thwarted and sabotaged if they raise disturbing questions.

Remember the hazards of credence good providers?

• There is a defense against that defense.

[Monty Python, Meaning of Life]

When a Canadian franchisee confesses, Whom does the lawyer really serve?

Every year the Franchise Times magazine publishes a Legal Eagles™ listing.

Who are they and Whom do they Serve?

2011 Canadian Legal Eagles™

• Joseph Adler, Hoffer Adler LLP, Toronto, ON, Franchisors
• Jennifer Dolman, Osler, Hoskin & Harcourt LLP, Toronto, ON, Franchisors
• Paul Jones, Jones and Co., Toronto, ON, Both
• Edward “Ned” Levitt, Aird & Berlis LLP, Toronto, ON, Franchisors
• Leonard Polsky, Gowling Lafleur Henderson LLP, Vancouver, BC, Franchisors
• John Rogers, Davis LLP, Toronto, ON, Both
• John Sotos, Sotos LLP, Toronto, ON, Both
• Stéphane Teasdale, Fraser Milner (FMC) LLP, Montreal, QC, Franchisors
• Larry Weinberg,  Cassels Brock & Blackwell LLP, Toronto, ON, Franchisors
• Frank Zaid, Osler, Hoskin & Harcourt LLP, Toronto, ON, Franchisors

Better choose who you talk to because until you pay them, retention letter, etc. there is no solicitor:client relationship [read: confidentiality].

Remember:

1. Bay Street rent isn’t paid for by 1/2 freebie chats (defending the offending franchisor…maybe),
2. 95% of all legal work (and almost 100% of repeat business) is paid for by franchisors or their supporters,
3. no lawyer confesses to only doing franchisee work, and
4. how 100% of them belong to the franchisor-only trade association, the Canadian Franchise Association (see Lawyers section).

Be cautious of who you confide in because there is an overwhelming bias against franchisees’ interests.

[Franchise Times, click for pdf, p. 15]

A family-shared MBA

Some of my best teachers have shown up in the role of an attorney.

I was talking to a franchisee the other day who was thinking of buying a ringside seat to the Big Show.

When you’re in the right lineup, the lessons learned will last many generations.

[Sherman's Lagoon]

Fear mongering begins in Ontario Wishart Act proposed change

Some professionals hold fast to their word.

They continue to practice with integrity, dignity, grace and humour, often under extreme conditions.

If faced with insurmountable economic hardships, they choose to leave a field rather than sell-out their principles.

Bev Cline writing for the Globe and Mail attributes the following excerpt to a Sotos LLP partner:

Another concern is that franchisors will essentially be asked “to crystal ball gaze” into the future in creating the educational document, says Allan Dick, a franchise lawyer at Sotos LLP in Toronto. “Currently a franchisor has to disclose, through the disclosure document [as mandated by the Arthur Wishart Act], everything that is material to the opportunity,” says Dick. The disclosure document, he points out, “is not a ‘general’ document; it’s a very specific document for a specific opportunity for a specific franchise.”

So, in terms of the proposed educational document, Dick asks: “If the franchisee is relying on a franchisor who is being forced [in the educational document] to crystal-ball-gaze into the future, to provide information that the franchisor could not know, will this benefit the prospective franchisee?”

The point is that prospective franchisees’ immediate interest and goal is to “look for the best opportunity they can find to be successful in business,” says Dick.

The implied threat to politicians, always sensitive to job loss or creation, is in the last sentence.

In addition, if franchisors are held liable for predicting business prospects in an unrealistic way, says Dick, they may be reluctant to enter into certain markets in the first place.

In WikidFranchise, Risk #17 is 95 per cent of legal fees are paid by franchisors. The full article: before and after I had “Wiki-ed” it (eg. told a story through a case study risk analysis).

Who are you going to trust?

– Thanks to This Isn’t Happiness

Want to Sue? Get an independent 2nd opinion

Wise in medicine. Critical in franchise law.

Independent consultants ensure their honesty from pre-trial evaluation (before 1st interview) to settlement.

Any CDN lawyer who can’t work with me is saying a lot about themselves.

Don’t trust in non-verifiable monopoly services.

TEST: How’s your one franchisor: one franchisee relationship working for you?

Would it be better to have no legislation? That’s a no-brainer.

The public hearings that led to the Ontario Wishart Act (Franchise Disclosure), 2000 started on March 6, 2000.

1. The first expert witness was Ms. Susan Kezios from the American Franchisee Association (her testimony, above to right).
2. Mr. John Sotos was the next of the five expert witness (40 in total :: 4 days :: 4 cities) was a Toronto attorney called (his full testimony, left).

Mr. Tony Martin, a politician from Sault Ste. Marie  asked Mr. Sotos a question:

Mr Martin: Would it be better to have no legislation than to put a piece of legislation in that gives people a false sense of security, given some of the statistics?

Mr Sotos: That obviously is a no-brainer. The purpose of legislation is remedial, it’s to correct a problem. If the legislation doesn’t achieve that, then I think it’s misplaced.

“That obviously is a no-brainer.”

• summum ius summa iniuria -  The more law, the less justice

The case for repealing disclosure laws

Any law exists because those most able to compete for it goes to the political process and wins.

This is how the Ontario franchsie law went in 2000. I was there.

Everyone’s interests were served very well, except the powerless: mom-and-pop franchise investors.

Sure a few attorneys were made multi-millionaires (continue to blackball, block and betray sincere advocates), the franchise bar has reached record numbers (God love those disclosure document revisions!) while the 2nd-worst-chumps, the false protagonists (the franchisors) got  a short-term sales bump but their reputation continues to nose dive.

On any legitimate public policy level, the Arthur Wishart Act is a complete and total failure.

But as a way to launder mom-and-pop life savings via dim-witted franchisors?

Priceless to the true champions of tyranny (the franchise bar legal elite).