Legal services - History of Business in the U.S.
Definition: Advice, representation, and other services provided by lawyers and other legal professionals, including drafting official legal documents and filing them with courts of law
Significance: The United States is a nation of laws, and from its inception, the legal profession has been at the heart of its government, culture, and economy. Lawyers have been essential to the orderly operation of American business. With the proliferation of lawyers, opportunities for lawsuits, and large damage awards, the provision of legal services has become a huge industry.
In colonial America, the legal profession was small, fluid, and somewhat mistrusted. Lawyers were few, because in the wide-open spaces of the American frontier, farmers, soldiers, and merchants were needed, not legal technicians. The norms of the profession were flexible: Almost anyone with a command of legal terminology could begin a legal practice. Lawyers were often mistrusted, because they were associated with the established order deriving from the English crown, increasingly at odds with the colonies. However, the approach of independence saw major changes in the legal profession. Recourse to the law became a protection against English tyranny.
With the development of an economic infrastructure in the colonies, lawyers were necessary to draft contracts for merchants, probate wills and estates, register land titles, and construct accurate pleadings. A system of apprenticeship and the printing of legal treatises, especially Commentaries on the Laws of England (1765-1769) by Sir William Blackstone, enhanced the prestige of the legal profession. Commercial lawyers such as Alexander Hamilton rose to prominence. Property law—the centerpiece of civil law in an agricultural society— shifted from a static view of rigid inheritances and fixed estates to the free alienability and exchange of land. The conception of the corporation— favored under the law as a “legal person”— shifted from that of a public body to a private, commercial enterprise.
In the beginning of the nineteenth century, the federal and state governments created legal franchises and monopolies to promote banks, canals, ferries, mills, and railroads. Alexis de Tocqueville described lawyers as the American aristocracy, indicating their role in shaping the new economic order. Although the bulk of legal services throughout American history would be provided by unheralded solo practitioners, famous lawyers such as Lemuel Shaw and DanielWebster earned tens of thousands of dollars in legal fees representing American businesses and corporations.
The Gilded Age
During the middle of the nineteenth century, the political and legal crisis over slavery and southern secession overwhelmed both the nation and the legal profession, and questions of business receded in importance. In the decades after the U.S. Civil War—a period often called the Gilded Age—the United States underwent a period of enormous economic growth and industrialization. Lawyers who represented the great American commercial and manufacturing enterprises garnered prestige and wealth. The legal profession itself was transformed, as were the other learned professions such as medicine, teaching, and engineering. Admission to the practice of law was made more rigorous, professional standards and canons were adopted, and jurists searched for scientific principles to undergird legal doctrine.
During the 1870’s the first true law schools—as opposed to legal departments of undergraduate colleges—were established. With the implementation of the case method at Harvard Law School by Dean Christopher Langdell, law students were given a common mode of training, useful for dealing with complex commercial issues. Bar associations were organized in most states to raise professional standards and to create business opportunities for lawyers. The American Bar Association (ABA) was established in 1878 and would soon become one of the more powerful professional organizations in the country. The composition of the legal profession was transformed as well. It was increasingly seen as a path of upward mobility for children of the middle classes. Although barriers of all sorts remained, there was greater ethnic, even racial diversity, in the legal profession, reflecting the waves of immigration of late nineteenth century America. Women, mostly barred from voting and politics, found occasional opportunities in law.
For a century, leading lawyers had been assisting the growth and influence of business corporations. In the beginning of the twentieth century, elite lawyers organized themselves into their own corporations, acquiring the size, diversity, and legal advantages necessary to dominate the profession and take a leading role in the financial world. The symbol and innovator of this trend was the New York City law firmof Cravath.With the arrival of Paul Cravath to a New York law partnership in 1899, the characteristics of the modern Wall Street law firm were swiftly established: steady growth in the number of law partners; specialization of the firm into departments so as to serve the increasingly complex legal needs of businesses and wealthy clients; billing of hefty retainers and hourly fees; and the recruitment, training, and forming of the best graduates of top law schools. A lawyer such as Elihu Root, distinguished in public life and respected for his legal expertise, was able to earn $100,000 in 1900 practicing law on Wall Street.
New Deals for Lawyers
The decades from the 1920’s to the 1950’s were characterized by economic boom and bust, marked by depression, war, and a growing pulse of prosperity. The leaders of the legal profession took on the mission of bringing order to turbulent economic times. In public life, lawyers were instrumental in devising, enacting, and administering New Deal legislation and regulations. In private law, the most notable achievement was the Uniform Commercial Code (UCC) completed in 1950. The UCC was a complete revision and codification of the laws concerning commercial transaction and payments that underlie the American economy: buying and selling goods, securing credit, negotiating instruments, and regulating consumer transactions.
During the 1960’s, the practice of law would become ever more diverse, if not stratified. The corporate law firms found their services in great demand, in part due to the revolution in tort (injury) law, with new causes of action for product liability, professional malpractice, mass torts, and environmental wrongs. To attract top-performing graduates, Cravath and other firms began paying first-year associates as much as $15,000 per year, a princely sum at the time. For the middle class, traditionally served by smaller or individual practice lawyers, companies such as Pre-Paid Legal Services and Hyatt Legal Services began offering lower-cost legal representation.
The Civil Rights movement, the social upheavals of the 1960’s, and the Great Society legislation spurred new legal services for the poor, elderly, minorities, and disadvantaged. Legal aid societies had existed for centuries; during the 1960’s, they were transformed into active agents of social change. Staffed with more lawyers, with a renewed sense of mission, and better funded, legal aid societies were busy defending the indigent and the criminally accused, accorded more procedural and constitutional rights under the U.S. Supreme Court presided over by Chief Justice Earl Warren. As a reflection of their prominence, various legal aid societies were consolidated into the congressionally funded Legal Services Corporation in 1974. A new kind of law firmcame into prominence as well—the public interest law firm, often paid from the enhanced fees created by Congress to encourage civil rights lawsuits.
By the end of the twentieth century, the legal profession, which always took a major role in assisting business, had become a big business itself. There were now more than a million lawyers in the United States. One major corporate law firm had grown to an astronomical 3,117 lawyers. Already in 1977, the U.S. Supreme Court, in a majority opinion written by Associate Justice Harry Blackmun in Bates v. State Bar of Arizona, had struck down the traditional ban on lawyer advertising as unconstitutional. New lawsuits proliferated at dizzying speed.
A paradigm shift had taken place in the law. At the nation’s origin, questions of property dominated legal practice and jurisprudence. Contract law rose to prominence in the nineteenth and early twentieth centuries, reflecting the free-market, commercial transformation of the American economy. At the end of the twentieth century, however, the tort action would become the paradigmatic lawsuit, dominating the courts and the headlines. By 2002, the direct cost of the U.S. tort system was approaching 2 percent of the gross domestic product (GDP). Advocates of this new phenomenon argued that it meant greater access to justice for all Americans and a fairer and safer America; critics argued that it meant the enrichment of lawyers at the expense of society.
Lawyers had reached the status of celebrities and entrepreneurs, with opportunities for money making that rivaled the richest capitalists. Elite lawyers had always received handsome hourly wages for their representation, but two new methods of compensation opened unlimited chances at wealth for personal injury lawyers. The contingency fee allowed for plaintiffs’ attorneys to collect at least one-third of their clients’ awards. As juries awarded record damages, lawyers walked away with milliondollar prizes. Even more lucrative was the classaction lawsuit. Originally created during the 1970’s as a tool to favor consumers, the class-action lawsuit allowed lawyers to assemble thousands of plaintiffs for even the smallest alleged wrong, arrange an outof-court settlement with the defendant’s lawyers, and walk away with a fortune, while individual plaintiffs were often left with a pittance.
In securities class-action litigation, shareholders could feel doubly punished—first, by the decline in the share price of a given security and second, by the class-action suit brought in their name against their own company. The firm of Milberg Weiss brought 149 shareholder class actions in the year 2000 alone. Lawyer Richard Scruggs made an estimated $400 million to $1 billion from the tobacco settlement of 1998, part of the estimated $15 billion that private lawyers collected from this litigation; an article in the March, 2007, issue of the ABA Journal described the big winners of the settlement as the tobacco companies, state treasuries, and lawyers. In an April, 2002, report, the White House Council of Economic Advisors estimated that the United States was paying an excessive “litigation tax” of over $136 billion. The political controversy over tort reform revolved around the question of whether all of this represented justice for hitherto unrepresented victims or a threat to American prosperity.
In the years between the world wars, revenues from the federal income tax grew steadily, from $35 million in 1913 to $4 billion in 1920 to $20 billion by 1941. Nevertheless, the income tax was insignificant in the lives of most citizens. As late as 1939, only 6 percent of Americans were liable for any income tax at all. Thus, tax-preparation services consisted mostly of accountants, lawyers, and other agents advising the extremely wealthy on how to reduce their tax burden. This would change with World War II and the postwar years, as the personal income tax came to loom large in the lives of average Americans.
In 1939, there were only 3.9 million payers of the federal income tax. By war end in 1945, the number of taxpayers had risen to 42.6 million and tax collection to $35.1 billion. Over 74 percent of Americans were now liable for federal income tax. For most middle-income payers, tax planning was not necessarily the first priority. Rather, people clamored for help in preparing the complex array of Internal Revenue Service tax forms. Henry Bloch, a student at Harvard Business School, realized the opportunity this represented. In 1946, Bloch and his two brothers Leon and Richard opened a bookkeeping service in Kansas City, Missouri, with an emphasis on tax management for small businesses. In 1955, they incorporated the company under the name H&R Block, offering services exclusively in income tax preparation. Business boomed as has all tax preparation in the postwar years.
By 1979, 55.8 percent of individual tax returns would be prepared by professional tax preparers. Corporations were subjected to ever more extensive and expensive federal taxes as well. These were handled mostly by certified public accountants, with the “big eight” accounting firmsdominating tax preparation for the largest companies.With the Internal Revenue Code reaching ever greater complexity with each congressional session, tax preparation services remain a growth industry in the United States.
Aaron, Henry J., and Joel Slemrod, eds. The Crisis in Tax Administration. Washington, D.C.: Brookings Institution Press, 2004. Collection of essays on questions of tax policy and implementation, including a chapter on tax preparers.
Bloomfield, Maxwell. American Lawyers in a Changing Society, 1776-1876. Cambridge: Harvard University Press, 1999. Demonstrates the dramatic changes in nineteenth century legal services through profiles of major figures in the law.
Brownlee, W. Elliot. Federal Taxation in America. 2d ed. Cambridge: Cambridge University Press, 2004. A concise, much-cited history of federal taxation.
Friedman, Lawrence. A History of American Law. 3d ed. New York: Simon & Schuster, 2005. Seminal, brilliantly written history of American law and the legal profession, from a social perspective.
Goulden, Joseph. The Money Lawyers: The No-Holds- Barred World of Today’s Richest and Most Powerful Lawyers. New York: St. Martin’s Press, 2006. Journalistic account “super-lawyers,” those garnering billions of dollars in damage awards.
Horowitz, Morton. The Transformation of American Law, 1780-1860. Cambridge, Mass.: Harvard University Press, 2006. An influential book emphasizing the legal contributions to the growth of nineteenth century capitalism, although perhaps overestimating the transformation of law in service to the wealthy classes.
Speiser, Stuart. Lawyers and the American Dream. New York: M. Evans, 2005.Afavorable, autobiographical account of modern tort law.
See also: bankruptcy law; Business crimes; copyright law; U.S. Department of Justice; Merger and corporate reorganization industry; Patent law; Service industries.