Seemingly unrelated, the WSJ’s discussion of antitrust claims challenging below-cost pricing (Antitrust Busters with Gavels, 4/26/2013) and the Internet tabloid Above the Law’s discussion of increased use of “suicide pricing” by Biglaw (Buying In: Suicide Pricing, 4/16/2013), have at least one thing in common; in each instance, the consequence of the irrationally low pricing is that the consumer gets screwed. At least antitrust laws recognize the problem as a matter of public policy and provide a remedy where this occurs in covered marketplace activities. With respect to legal services, there is no such remedy – caveat emptor, let the legal services buyer beware.
How these antitrust claims and below cost lawyer fees are connected after the break.
Above the Law argues that Biglaw has embraced the practice of so-called “suicide pricing,” or pricing services well below the cost of producing these services, in a desperate effort to maintain market share. “How bad has it gotten,” asks the “anonymous partner” authoring the post? His answer:
Pretty bad. I have heard reports of work being offered for free. As in no charge. I have never gone down that road and would find another line of work if I felt I needed to. But it is happening, and it is insidious.
Law firm management guru Ed Reeser’s additional gloss in his April 16 newsletter:
More prevalent are the growing examples of “suicide pricing,” or offering rates so low that they are almost certain to result in massive write-downs or an unprofitable engagement.
The core problem with this pricing approach is that “[n]o self-respecting client should ever want to have their lawyers working for free” (Above the Law). The firms engaged in this practice are going to react by cutting services to the bone, directing the work to the lowest common denominator lawyers who generally reside at the low end of their firm’s food chain (saving the more skilled, productive lawyers for the firm’s higher revenue projects), and ultimately penalize any and all of the unfortunate souls who end up responsibile for the horribly low realization on time spent. Even assuming skilled and experienced lawyers were assigned the case, under the circumstances, morale is low and the incentive to identify and deliver the service sought by the client is even lower. The lawyer’s suicide pricing murders client service. (Ed Reeser deserves origination credit on this turn of phrase -- his insight, though, was that suicide pricing by the firm is murder to the folks who have to provide legal services under this structure.)
Turning to the WSJ discussion of antitrust law, the focus is on lower court decisions undermining Supreme Court authority holding that low prices alone do not satisfy antitrust requirements. Instead, under what is called the price-cost test, a plaintiff must prove “that the [defendant's] prices are below an appropriate measure of [the defendant's] costs.” Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993).
Professors Crane and Sokol, writing for WSJ, argue that protecting consumers requires reversal of the lower court rulings because “aggressive price-cutting is exactly the sort of behavior that antitrust law should encourage, because it helps consumers.” Penalizing cost cutting that does not drop prices below cost of production hurts “consumers [who] might have benefited from low prices.”
However, where prices are set so low that they do not cover costs there is a legally cognizable antitrust claim. Why? From the economic perspective touted by professors Crane and Sokol, there is a legitimate basis for finding this superdiscounted prices injures competition and harms consumers.
The common thread, then, is that suicide pricing by lawyers and below-cost pricing by competitors each harm consumers of the respective services.
Of course, the two discussions just clearly diverge in terms of the remedies available to consumers. Antitrust laws promote competition and consumer interests by allowing the government to bring criminal charges as well as private rights of action to parties facing below-cost pricing by a competitor. In contrast, there is no equivalent protection afforded the consumer (client) whose legal services suffer as a result of the suicide pricing by their law firm. (You might reply, "but what about malpractice claims based on ethical violations of the duties of competence and loyalty?" Good luck trying to make this case, let alone pay another set of lawyers to try to do so after the fact. Practically speaking, such claims pose little risk to lawyers and consequently do not deter client-detrimental pricing.)