The following is a transcript of Episode 31 of Championing Justice. You can listen to the full episode here, or watch it on YouTube.
Darl:
Welcome to the Championing Justice podcast. My name is Darl Champion. I am the owner of The Champion Firm. We're a personal injury law firm just outside of Atlanta, Georgia.
Today we have Brendan Ballou on our podcast. Brendan is a former federal prosecutor who served as special counsel for private equity in the Justice Department's antitrust division. He's the author of one of my favorite books, Plunder: Private Equity's Plan to Pillage America. But Brendan currently serves as CEO of the Public Integrity Project.
He's also authored a book that might be the subject of a future podcast. It's called When Companies Run the Courts: How Forced Arbitration Became America's Secret Justice System.
Brendan is a frequent guest on CNN, MSNBC, and has been featured in the New York Times, The Atlantic, Slate, Politico, and other national publications. Welcome to the podcast, Brendan.
Brendan:
Thanks so much for having me.
Darl:
Well, today we are going to be talking about private equity and specifically it's sort of creep into professional services industries, particularly law firms.
The reason that I wanted to have Brendan on, and I think it's very timely is, one, I was reading his book, Plunder, which covers in-depth private equity's foray into a variety of industries, the sort of private equity playbook and how it essentially strips these businesses down to removes a lot of employees, removes a lot of essential features of the business and plunders it basically.
So I think we're going to see a lot of that in legal and that's been a hot topic lately because we are seeing this spread across the country of private equity into law firms.
But before we talk about that, just what is private equity? A lot of people hear the term and may not really know what it means.
Brendan:
Oh, I'm so glad that you asked that because it is a term that most people have heard of and you kind of want to seem smart and feel like you know exactly what it is and yet nobody really explains what private equity is. And I should say it's something that I didn't really know what private equity was until I was pretty far along researching that book.
So the basic idea of private equity, very simple: Private equity firms use a little bit of their own money, some investor money, and a lot of borrowed money to buy up businesses. And then they try to make financial or operational changes to those businesses with the goal of selling them for a profit a few years later.
So it's a very simple idea, but the magic trick of private equity is what's called a leveraged buyout. The magic trick is that all that borrowed money that they use to buy up the business... it isn't the private equity firm that's responsible for paying it back.
In fact, it's the company they buy that's responsible for paying it back, which is like getting to use somebody else's credit card. If the deal goes well, the private equity firm benefits. If the deal goes poorly, well, it's the company they bought that's responsible for paying back the debt. And that is the sort of fundamental problem that you have with private equity and why it so often leads to bad consequences.
Darl:
One of the things, and I'll just use a brief example of a private equity experience I had. We looked at a building a few years ago. It was a commercial building and it was part of a private equity firm's portfolio and they had bought it a few years earlier. And what these firms do is they'll buy the property because of the value of the lease on the building.
First of all, they did not maintain the property at all. The landscaping was horrible. They did nothing to maintain it. The building was falling apart. It needed a new roof. And then not only that, they wanted a million dollars more than they paid for it two years earlier.
And it's like, "Wait a second, guys, you didn't do any improvements, you didn't do this." That to me is kind of like the hallmark of private equity. It's buy something, don't really do anything to improve it for the long term, sort of focus on short term profitability, and then try and sell it in three to five years. Is that what you see with the private equity playbook?
Brendan:
Yeah, no, I think it's a great example and it illustrates a lot of the problems that you have with private equity. And I should be clear, when we're critiquing private equity, we're not really critiquing the people in it. I think a lot of times the criticism head towards the folks in private equity are the problem. I don't think that's right. It's the business model and the legal incentives that we've created for that business model that are problem.
And so one of the problems that you have with private equity, it was embedded in what you just said was they were trying to sell this property one or two or three years after they bought it. And if you only own a company or a property for a short period of time, it changes how you treat it. I always say, if I was going to try to maximize the value of my home over 20 years, I would redo the kitchen.
If I was trying to maximize the value over two days, I would burn it down and try to collect the insurance money. And that something in the middle is happening with that property that you just talked about, which is you said that they didn't do any repairs on the roofs or handle any of the landscaping and so forth. There's a very straightforward reason for that, which is if they were trying to flip the property after just a year or two, they get immediate and very quantifiable savings from doing cost-cutting.
If you do fewer repairs, you see an immediate amount of savings, but the long-term costs are harder to calculate. You don't know when there's going to be a roof collapse, even though the odds of that increase if you never do repairs and so forth. And so with a short-term perspective, you have a strong incentive to make cuts in the short term, even if it hurts the business in the long term because that helps you as a private equity firm.
Darl:
Absolutely. And one of the things that I noted in your book is a lot of these firms that will buy a business, the business might own the building that they're in or the property they're in and it's kind of a signature move of private equity to sell the property, private equity pockets the money. They get an immediate return on their investment and then they lease it back to the business owner who's now paying rent at a much higher rate than if they own the property.
And I think that's a good example of this kind of short-term profit seeking versus long-term growth. And I mean, candidly, it's a problem across society now with everything. And I feel like everything now, you can order something on Amazon and it's your house the next morning, you can order groceries and they show up at your house instantly. It seems like there's this kind of constant desire to flip things and make money quickly and private equity seems to fit into that.
Brendan:
Yeah. Well, it's not that I think human nature fundamentally changed in the last decade or two. It's that the legal incentives that we have around it facilitated different kind of behaviors. So what I mean by that is one of the reasons why private equity firms are able to get quick flip profits with little consequence is, this is a legal podcast, private equity firms are very good at insulating themselves from legal liability for the consequences of their actions.
And so what that means is if they take steps in their company that could cause long-term harm, you run a nursing home and you slash staffing and somebody could die there, or you run a construction operation and cut down on safety procedures and so forth. If something bad happens, if a resident dies, if an employee is injured, if a customer is harmed, those people can generally sue the portfolio company that the private equity firm bought.
It's very hard to sue the private equity firm itself. That is just a legal creation that we've had over the last couple decades. And it's a heads I win tails you lose sort of situation where the private equity firm benefits if things go well and can walk away legally, financially if things don't.
Darl:
Yeah. I was getting angry reading your book because it's shocking the stuff that these folks get away with and I think it's also just kind of a big middle finger to the middle class and to the working class folks who are working in these businesses. And these owners, the CEOs, the people at the private equity firm sort of walk away with these golden parachutes and the workers sometimes are promised severance and they don't really get it or they get kind of peanuts compared to them.
But you mentioned nursing homes. Before we get into the legal space and kind of what's happening with private equity with law firms, what's been the trend over the last decade or so with whether it's dental services, veterinarian services, nursing homes, because I think whatever is happening in those other industries is probably a preview of what's going to happen with law firms.
Brendan:
Yeah. Well, private equity firms have been attracted to all of those industries. You mentioned nursing homes, dentistry practices, veterinary clinics, all of them are getting rolled up by the private equity industry for a number of different reasons.
One is, especially in the nursing home context, think about how private equity firms finance their acquisitions with all this debt. So they need industries that are bringing in a lot of cash every day that can service the debt. And so nursing homes are a great example of that because the residents are often paying for their stay with Medicare or Medicaid money, which comes in every month. So private equity firms have been very attracted to nursing homes.
They've also been attracted to dentistry practices, medical practices, veterinary clinics and so forth because these are things that can be quickly rolled up. You can buy a lot of dentistry practices in the tri-state area or whatever it happens to be, consolidate the operations, potentially have cost cutting initiatives, but then crucially, you then have market power that you can use to raise prices and lower the quality care.
The one area that's really similar in all these to what's happening in the legal industry is the medical industry has what are called corporate practice and medicine laws. These laws nominally prohibit non-medical professionals, non-doctors and so forth from owning medical practices. And the reason that they do that is doctors and nurses and everyone else have a Hippocratic oath that requires them professionally to put the interests of their patients ahead of their interests in making money and they can be sanctioned professionally if they fail to do that.
So what you've got is these laws that nominally try to keep medical practices in the hands of medical professionals, private equity firms have found increasingly sophisticated ways to circumvent that with what are called a friendly physician model and so forth and doing the same thing in the dentistry industry, in the veterinary industry and so forth.
And so what you're seeing in sort of industry after industry is private equity firms circumventing the very laws that were meant to keep industry control by professionals and now handing that control over to private equity firms.
Darl:
So one of the terms that I've heard a lot of lately in this private equity investments and law firms are these MSO structures, managed service organizations. Is that unique to legal or are there other industries where they've used that type of structure?
Brendan:
Yeah. So they're really porting over the model that they perfected in the medical industry. So what you have is, I referenced the friendly physician model. So what you do is you have a medical practice, dentistry practice, whatever it happens to be, owned by a physician in name only functionally.
So the physician is named as the owner, but they don't have the ability to hire or fire people, set budgets, issue stock, sell the company and so forth. So an owner and name only. And instead they then contract with an MSO—managed services organization—that nominally just provides back office support, but it is in fact running the business.
So making all of these strategic decisions, setting the budgets, hiring and fire people and crucially even making medical decisions at various points, setting up procedures for how certain cases are going to be handled, deciding whether or not certain operations are going to be recommended or not, pushing sales quotas on doctors and so forth.
And so the MSO functionally runs these practices while not being the technical owner. That's what we've seen happen in the medical industry. And as you said, we're starting to see that happen in the legal profession.
I would just caution people: Do you feel like healthcare in America is doing particularly well right now and do you want the same forces that are shaping American healthcare to shape our legal profession?
Darl:
That's a great example. And one of the examples I give when I'm posting on social media and trying to differentiate our business from others is when you go to the doctor, you want to see a doctor. You don't want to feel like it's a cattle call. You don't want to feel like the nurse is the only one you're seeing, they're not giving you attention.
And look, mid-level providers like nurse practitioners and physician's assistants have a role, but you go to the doctor to see the doctor. And so when you hire a law firm, you hire a lawyer. But before I get too far into that rant because I think it kind of dovetails with the problem of private equity and what we're going to see, these MSOs, how do they get paid? Because one of the things that we have in every state are these rules and it's in the ABA model rules that you can't share fees with non-lawyers.
And so what I'm thinking of is like, okay, why is private equity putting up all this money unless they're getting a cut of the fee or a percentage of revenue? How do you structure an agreement? Is it they're getting cost plus, let's say the agreement says we're going to get cost plus 25% of whatever our cost is. How are they structuring this and how do they make money?
Brendan:
Yeah. And I confess that we don't yet know, or at least I don't yet know for the legal profession how the standard's developed. But in the healthcare industry, that's exactly how it's developed, which is nominally the MSO is a back office supplier of the sort of administrative supplies and so forth that the doctors don't want to have to deal with. In fact, it's functionally getting the revenue of the business. So they are getting all of the upside.
So it's exactly undermining the ownership model that we are trying to have with corporate practice medicine rules. I imagine that private equity firms are trying to do the same thing with legal practices and working very hard to try to circumvent the ABA model rules to make sure that they are getting not just a flat fee, but also the financial upside of the actual practice.
Darl:
Absolutely. And I think when we talk about plaintiff's personal injury firms, we're contingency fee-based. And so when you have a large case that resolves, that's a large source of revenue and it's often unpredictable.
So that doesn't really fit with a flat fee MSO model. So in my mind, again, we don't know yet because one, it's so new and two, I mean, these are private deals. They don't have to produce this unless there's some sort of litigation around it. And then I would imagine they'd want some sort of confidentiality order or whatever entered in the case and nobody ever gets to see it, but there's got to be some connection to revenue.
And that's where I think one of the big problems is just from an ethical standpoint is really smart lawyers at really big law firms that are charging a lot of money or crafting these agreements with magic words at its core, at its substance, this is private ownership, non-lawyer ownership of law firms.
Brendan:
Yeah, that's exactly right. And that's what they're trying to accomplish here. And I think as a profession, we need to be pushing back on this. I mean, the good thing is we're all lawyers so we can litigate this stuff and hopefully do it faster than the medical profession did and try to protect the integrity of the legal profession.
What I think we saw when we were looking at documents around corporate practice medicine laws or contracts was a real effort to stay within the letter of the law while obviously violating that spirit that you would have these once again, friendly physicians that would be listed as the owner, would own 100% of the stock of the company and yet would have a separate contract that says, "I agree that I can never sell the stock or make decisions or I will defer to so and so about decisions about when to issue new stock and so forth." I imagine something similar is going to be tried here in the legal profession.
Darl:
Yeah. And when I've had discussions with people about it, there's a lot of uncertainty or lack of clarity for a lot of lawyers on what exactly is going on. So everybody heard about what happened in Arizona and I think Utah has a similar structure where they're called ABS's, alternative business structures.
Private equity could be involved in that, but that's very different than the MSO structure. The alternative business structure is the non-law... I mean, just straight up involved in the ownership of the law firm and they have to comply with certain rules and there's all this, it's very regulated. And so a lot of lawyers I think see that and they say, "Oh, well, private equity's coming in now because regulations have changed."
They haven't changed in the vast majority of states and that's one of the questions I have is the laws that exist in states are the same laws that existed five years ago, 10 years ago, 15 years ago. Why now? Why is private equity now kind of reaching into the legal industry, especially on these consumer-focused practices like personal injury, when they could have done it years ago?
Brendan:
Yeah. I think it's honestly that they learned from what was going on in the medical industry and sort of perfected the friendly physician model and realized that they could port it over to other professional practices. So I think you saw private equity getting interested in individual medical practices quite a while ago and then they started branching off into related industries like dentistry, like veterinary clinics and so forth.
And so obviously the mind then turns to what are other professional fields that have these same laws that we can apply our lessons for circumventing them. I think law came up next. I also say, I think they were able to do this or are encouraged to do this in the legal industry because they were so successful at doing it in the medical industry. It's the exact same situation there.
There are 37 states with corporate practice and medicine laws and the fact that they are almost never enforced I think was a sign to private equity, not only can we succeed in the medical industry, but we can succeed in other professional industries too. And I think that's what pushed them towards the law.
Darl:
One of the most disappointing things as an adult is nobody's in charge. A lot of laws are just not enforced kind of unrelated to the private equity thing.
There's rules on the illegal solicitation of clients and that is a major problem. We call them runners. I was on a state bar committee here in Georgia to try and enforce these rules or it wasn't really our job to enforce them, it was to make recommendations to the state bar on how they could better enforce them. There's laws on the books that make it a misdemeanor for the first offense. It was literally just changed about a month ago to make it a felony with up to, I think a $200,000 fine, but nobody's prosecuting the offenses. Nobody's doing that. And that's the concern I have with these state bars is they're not going to do anything. And even if there's legislation that's passed, nobody's going to do anything about it.
It's like, what's the enforcement mechanism? So one of the things that I've been pushing for in Georgia, and some states have adopted this, is give lawyers a private right of action to sue to enforce the anti-solicitation rules. Do you think something like that could be appropriate for enforcing the sort of non-lawyer ownership rules for law firms and allow that to maybe lead to discovery and find these things out and what's going on under the hood?
Brendan:
Yeah, no, I think that would be great. And that is exactly the challenge that you had in the medical industry is you did have corporate practice medicine laws on the books in 37 states, but almost none of them had a private right of action. So the people that are being directly harmed by this, patients, doctors and so forth didn't have an obvious way to solve this.
Now you can kind of try to pull yourself up by your bootstraps a little bit legally. We can get in the weeds here because this is a legal podcast. You can try to essentially create a cause of action by seeking a declaratory judgment or something like that, but different states are going to have different levels of appetite for doing that sort of thing and it doesn't necessarily get you damages. So there's not necessarily a strong incentive to do that.
So I definitely think a private right of action is going to be really, really helpful for enforcing this stuff because the problem that you have is a lot of the professional organizations that are supposed to police this stuff get captured. This is starting to change, but in the medical industry, there was not historically a lot of appetite by professional medical organizations to challenge the corporate practice medicine and law because those were the behemoths of the industry.
And I think we risk the same thing here. Are bar associations going to be particularly brave in standing up to violations of corporate practices of law if the biggest law firms in America are the ones that are violating these regulations?
Darl:
Yeah. Well, coming back to the MSO structure, my understanding, and again, it's going to vary by industry, but what's happened in the medical industry is going to be a good kind of precursor for what's going to happen in the law firm space. But the MSO essentially houses your administrative functions, your paralegals might work in there, your hiring HR is within that, your marketing.
And then the sort of division is the law firm over here are just the attorneys and they're just practicing law and the MSO supports them and then there's this kind of contract between the two. Is that going to be what happens in the legal space?
Brendan:
Well, I mean, the challenge that you've got is as soon as somebody's invested money in a business, they're going to want to have say in how that business is run. And that's going to get into the substance of medical practice or the practice of law very quickly.
When we're looking at this at medicine, and I keep going back to medicine because I think it's where law is headed, you would see the private equity firms setting up, "Here's how we handle patient intake at an emergency room. Here is the triage process. Here are our procedures for emergencies. Here are the supplies that we're going to let you buy or not buy, including cheap needles that break off in your arm and stuff like that."
So I suspect that even if the legal MSO says that they nominally only handle sort of administrative billing, paralegal hiring and so forth, very quickly they're going to have opinions about how you're going to practice law, what kind of cases you're going to take on, what sort of tactics you're going to use or not use, whether those are acceptable or not acceptable. As soon as you're letting a private equity firm into your business, they're going to treat your business like they've treated every other business.
Darl:
Right. And one of the things on a contingency fee practice is we have to not only work on the case as the attorney and maybe they could say, "Well, the attorney can work on whatever they want to work on, but we need the money. We need the case expenses."
Some of our medical malpractice cases are six figures in expenses. If somebody who's controlling, are we going to lend the money for the case expenses on this says no, the lawyer can't pursue the case. But one thing that I am interested in, and I was thinking about this the other day, some states are pushing to change the laws related to private equity ownership and investment in law firms. To me, some of it sort of already just restates what is the law, just clear. And making it clear it applies to it.
Some of it is creating new rules. But if you get these private equity deals and there's a contract in place and then the legislature tries to create a law that now means that contract is invalid, are we going to run into contracts clause issues under the Constitution where private equity's challenging that and saying, "Well, I beat you to it. I got this contract signed before the law was passed."
Brendan:
Yeah, that's an interesting question I hadn't thought about. They'll undoubtedly raise that argument. I don't know.
Let's say you contract to murder somebody and the legislature outlaws murder, you sort of imagine that there's not going to be a sort of privity of contract sort of issue. But I mean, that's a silly example, but no doubt the private equity firms are going to raise that, but fingers crossed courts would not be particularly sympathetic to that.
Darl:
Well, good, good. I've been worried about that because that's part of what I've been wondering is part of the race to do this influence to some degree by getting in before the legislature gets involved.
But I mean, even aside from the contracts clause issue, if you make it so messy and you have these large maybe institutional investors and other people, maybe they have influence over legislation and to say, "Well, hey, I've got these laws benefit me as written now. Don't pass this new law."
Brendan:
Yeah, no, I think that's exactly the danger because you'll understandably have lawyers that are interested in this. If you want an equity investment in your business, people need money to build their practice and so forth. Private equity looks awfully attractive.
I think one of the reasons why the legal industry has remained relatively small, why you still have small practitioners in a way that you don't, for instance, in management consulting or something like that is we do really have limits in what the ownership structure can be. I think that's for the good of the profession and for the good of clients, but there are a lot of people that want the legal profession to become like McKinsey or BCG or whatever it happens to be.
Darl:
Yeah. And one of the things that was in the news recently was Morgan & Morgan, which is the largest personal injury law firm in America. It's advertises on every billboard. They're in I think 49, maybe 50 states now, but they're everywhere.
Their annual revenue is a few billion dollars and I think this was a strategic leak on their part, kind of let it out that they're just in discussions with JP Morgan, I think it was JP Morgan, about some sort of private equity deal and potentially an IPO down the road.
Brendan:
Incredible.
Darl:
I mean, I guess it's not private equity at that point if it's publicly owned, but that seems nuts to me. I mean, think about qualifying a jury in a civil case, everybody that has an interest in the case. How do you do that?
Brendan:
Yeah. I hadn't thought of it. Yeah. Anybody with an index fund might have a conflict of interest. Yeah.
Darl:
Yeah. I mean, it's absolutely crazy, but I want to talk to you about some of the dangers that I see and kind of what some of my predictions have been in the personal injury space to kind of have a discussion about the impact we think we're going to see.
So one of the things I noticed in an article was there was a partner at, I think it was Holland & Knight that does a lot of these PE deals for law firms and said, "PE sees personal injury firms as marketing firms." And I think that's a big problem with our industry right now is that too many firms are essentially marketing firms and don't focus on the operations and the service.
But my prediction is that we are going to see private equity come in and try to gain market share. They're going to flood the TV, airways, radio, billboards with money to try and generate cases and gain market share. We're going to see what has happened with Morgan & Morgan, which is it's become an arms race.
There was a study about how marketing costs have increased significantly and marketing spend has increased significantly when Morgan & Morgan moves into a market. Well, we're going to see that across the board. So I think what we're going to see is cost to acquire cases go up.
The law firms to deal with that are going to cut on the operation side, which is going to mean probably more AI doing more of the stuff. We're already seeing some of this AI intake, AI case managers using AI agents for various things. Attorneys are going to have way more cases because it's more expensive to get the cases and ultimately there's no unique differentiator then. I mean, every law firm, you're essentially, your brand is the fancy label on a generic product.
I think we're going to see a lot of firms collapse, a lot of the midsize firms, because then it's really an eyeballs game. How many eyes are on your ads? And we're going to see mass consolidation and we're going to see the sort of growth of these mega firms with not as many small options for consumers. Is that off base? Is that something similar that we've seen in other industries like medicine?
Brendan:
Yeah, no, I think that's exactly what we're seeing. And I think that's a story broader than private equity. It's about consolidation generally in the enforcement of our antitrust laws. There was a time in our country's history where control of 4% of Los Angeles' grocery stores was enough to enjoin them from further acquisitions.
Now you have mergers to monopoly that are being allowed by courts. So I think we're unfortunately living in a world right now where the law has really embraced the idea of massive consolidation across industries. And I think that's a real shame for a hundred different reasons, one of which is you don't want when you have smaller practitioners, solo practitioners, small practices and so forth, the wealth that you get from your practice stays in the community.
When you have massive consolidation of firms, the money is going to the large owners in major cities on the coasts and so forth. You're sucking wealth out of places that used to keep that locally. I think that's one problem.
The other is an almost sort of democratic problem, which is: Do you really want a handful of businesses to control an industry? Because that gives them enormous power in lobbying state and federal governments. And I don't think we necessarily want a handful of gigantic law firms shaping how the law is practiced in America and shaping how our legislators regulate the industry because they're not going to have the same incentives that small practitioners have.
Darl:
One of the things you noted in your book is how private equity sort of engages in self-dealing among their own companies they own.
I can't remember if I read this somewhere or heard it, so it may not be true, but I remember something about Red Lobster was like they had some sort of deal with the private equity firm owned the shrimp company that was providing the shrimp for the endless shrimp. I don't know if that was true, but how is this going to work out when private equity in the portfolio, the one company that maybe a handful of companies they own are getting sued by these other companies that they own and it's sort of like this recycling of money within it and everybody's just making money.
Brendan:
Yeah. Well, this is sort of the intersection of the two things that I was writing about private equity and forced arbitration. I remember a hedge fund bought up an arbitration provider in the National Arbitration Forum and Forum primarily arbitrated consumer credit disputes. Investigators realized the consumers had a two and a thousand percent chance of winning. The credit card companies won 99.9.8% of the time. So it was a completely rigged system.
Well, it turns out it was rigged because the same hedge fund that owned the forum also owned the debt collection company that was bringing all of its cases before the arbitration forum. So you had this system where the owner of the arbitration forum benefited financially when the forum ruled in one direction.
And you can sort of imagine similar things going on here, which is private equity firms investing across industries and having favorable deals and incentives to pursue some cases, not pursue others and so forth.
We've seen these sorts of things happen. Japan in the 1990s, Korea has these sort of multi-industry conglomerates and it rarely ends particularly well. Japan's now in its third decade of a recession and I don't think we particularly want the same thing to happen here in the US.
Darl:
Right, right. What are some of the things that have happened in other service industries that you think will happen in the legal space in terms of what essentially the PE playbook is? How is it going to try and structure the businesses? How is it going to affect the customer experience? How is it going to affect all of that? Any parallels to other industries?
Brendan:
Yeah, a couple of things. So for lawyers, I think it's going to be the commodification of our services. So doctors are crying out about private equity ownership in their industry. Literally, job postings will say that the practice is not private equity owned because the reputation is so poor because they'll set quotas, they will set incentives to refer people to certain practices or to push certain services that may or may not be actually medically necessary. They'll cut supplies and so forth. I mentioned the sort of horrifying example of needles that'll break off in people's bodies and so forth.
I think we'll see the legal equivalent of that, which is increasingly structured control over the actual practice of law. It may only be a matter of time before we have those software that measures how often our mouse is moving on our monitors to make sure that we're working all the time and so forth I think is probably in our future.
The other is, and sadly, I think we see this already happen in big law is real favoritism among clients. I have heard stories of businesses or individual clients getting dropped by big law firms because their interests conflicted with those of the larger private equity clients.
And so you can imagine a private equity firm if it is also invested in certain businesses say, "We're not going to take on this case because it conflicts with our investment elsewhere." Or much worse, take on the case and then do a crummy job of it and say, "We're not going to prosecute this particularly strongly because we don't want to lose money in some other investment."
So it really runs the risk of destroying the kind of complete adversity that you want with a law firm and makes us a much more conflicted in every sense of the world kind of representation.
Darl:
Does service, does the customer experience get better and client experience get better when private equity comes in?
Brendan:
Of course not. Yeah.
Darl:
Yeah, but why not? Why not, Brendan? I mean, everybody says, "Well, they want to make money. Of course they're going to want to do this." Why does that not translate to being good for consumers?
Brendan:
Yeah. Ultimately, it's about the incentive system. So if the firm is only going to own the practice for a few years, they don't really have an incentive to treat their customers particularly well.
The long-term gain of treating your customers well, treating your customers in a way that they're going to come back for five or 10 or 15 years pales in comparison to the short-term benefit of cutting staffing and cutting quality care. Once again, because those immediate cuts are immediately quantifiable. You know exactly how much money you save and you can show to your co-investors, look, we cut costs and increase profits 30% in 12 months or whatever it happens to be.
You don't have to tell the story of, "And the customers that we've been servicing are never going to come back to us," because that's a problem for a future owner that you cannot quantify and that you cannot fully disclose to a future buyer. So this is not one of those things where if you harm the business, it ultimately gets captured in the lower sales price. The uncertainty of the future harm means that you can sell the business even if you are causing this sort of long-term damage.
Darl:
I think it's particularly going to be problematic in the personal injury space because there is such a lag between when we get a case and when it resolves and often it's in the best interest of the client for it to take longer because then the offer goes up while the insurance company's lowballing you.
One of the things I wanted to touch on, and you mentioned this kind of consolidation and how it can actually be bad for consumer prices. I've engaged in a number of discussions on LinkedIn with folks who are private equity proponents who say, "Well, it's going to cut costs to the consumers because it increases competition." And I'm like, "That's the most ridiculous thing ever."
First of all, drive through any major metro. There are personal injury billboards everywhere. There's not a shortage of competition, number one.
But number two, what you're going to have in my view is an increase of cost to acquire clients because it's going to be focused more on advertising. And when the costs go up for the law firm, they don't cut the cost for the client. That's the second point.
And the third thing is they're never going to cut costs for the sake of benefiting the consumer. They're going to focus on whatever the market will bear. And if the market for the longest time has supported a third to 40%, they're going to charge that. Am I right about that?
Brendan:
Well, yeah, exactly. And I mean, the goal of a private equity roll up is to develop market power so that you can raise prices. For better or worse, one of the advantages of the personal injury industry right now is it's highly distributed. Individual practices are genuinely competing with each other.
Nobody can really control the market such that they can charge a vastly higher contingency fee or so forth. That changes when you have on business controlling 30%, 40%, 60%, 80% of a given market. And that's the goal of the private equity roll up. Once you have these bigger businesses, Econ 101 is going to apply, which is that with market power, they're going to charge higher prices.
And so any sort of efficiency that you have through consolidation is undercut by the market power that happens as a result of that consolidation and the fact that they can then raise prices or depress quality care without consequence because consumers literally don't have an alternative.
Darl:
I've heard of the term conscious capitalism. Is there such a thing as conscious private equity? Are there private equity firms out there who have recognized, "Hey, this is an inevitability, private equity's everywhere, but we're going to try and do things differently." Does that exist?
Brendan:
It's a great question. And I've met plenty of people in private equity who are diligent human beings, not trying to destroy the world or anything like that and in various ways trying to do things by the book. The problem is that the book is pretty screwy right now, which is we have a bunch of legal incentives that encourage short-term investments, that encourage these leverage buyouts where you're buying the business with the debt, that encourage insulation from liability.
And as long as you have those incentives, no matter what a person's intentions are, the basic economic incentives are going to push you towards a short-term extractive strategy. So until we make private equity firms more responsible for their own actions, it's unlikely that a person, no matter how well intentioned, is going to be able to have a sort of conscious private equity practice.
Darl:
Wow. Well, Brendan, before we wrap up, can you tell us as lawyers, what can we do about this? What can we do about private equity coming into the legal space, whether it's legislation, civil actions, what can we do?
Brendan:
Well, I think the first thing is don't sell your practice to a private equity firm. I think a lot of people, when they retire, they need to figure out a way to cash out the business and so forth.
There are alternatives to private equity and you should take it seriously, especially if you want your practice to survive past you. I've seen so many founders sell a practice or sell a business to a private equity firm that then mismanages the business and just drives it into the ground. I don't think that's what you want for you.
I think what we need to be doing is getting our bar associations to take this seriously, to be issuing statements, to be sort of raising the salience of this issue. And then if we need to, we need to be going to the legislature and either passing new legislation or creating, as you said, private rights of action for the legislation that already exists.
We, for better or worse, have the ability to protect our own rights, which is not something that people in other professions do. We know how to bring a lawsuit. So in that sense, I am hopeful that what has happened to American medicine will not necessarily happen to American law.
Darl:
I hope so. I hope so. Well, Brendan, before we sign off, tell us a little bit about the Public Integrity Project and how our listeners can learn more about it and support the great work that y'all are doing.
Brendan:
Well, thank you. Yeah. So the Public Integrity Project is a nonprofit law firm that we founded that sues over public corruption. So we sued over the administration's recent $1.8 billion anti-weaponization fund. We just yesterday received an injunction to force the acting attorney general to fully disclose the Epstein files. We're suing over some seemingly corrupt mergers that are going on.
So if you are concerned about the scope of corruption in America right now, whatever your political leaning, we are trying to raise the cost of corruption and you can learn more about our work and support it at publicintegrityproject.org.
Darl:
Awesome. Thanks, Brendan. And I've read about the organization. I made a contribution as well because I was really motivated when I was reading about the great work y'all are doing. So thank you for being in the trenches and fighting the good fight.
Brendan:
Thank you for having me.
Darl:
All right. Thank you.
And for our listeners, thank you for tuning in to this episode of the Championing Justice podcast. Please follow us on Spotify, Apple Podcasts, and YouTube so you can see our latest episodes when they go live.