Is Law A Gateway To Business?

Is Law A Gateway To Business?

It may be tempting to view law as a gateway into business. Indeed, law does touch almost every aspect of running a business. But that does not necessarily mean that attending law school or working as a lawyer is the best way to actually transfer over to a business role.

In many lines of work, the core substantive business, financial, and economic decisions are made by others, who may have greater expertise in the subject area of their job task. In some fields, those decisions are made by individuals with greater quantitative skills – for example, in statistics or economics.   For certain businesses, your main training needs to be in what the business does on a day to day basis – especially for small businesses; successful business owners often had previously gained experience in a similar business.

Lawyers In A Support Role

For many businesses, attorneys fulfill more of a skilled support role rather than learning or performing the core functions of the business. The lawyer may help in the incorporation of the business or he may review contracts with suppliers, lenders, shareholders, and others. Yet the substantive terms of these contracts are business decisions. Whether a business owner trusts a supplier or can work successfully with a partner is a question he, not the lawyer, ultimately needs to answer. Likewise, a lawyer handling employment issues will review employment agreements. He may advise clients on wage, hour, and safety rules, and to avoid prohibited discrimination (e.g. race, gender, etc). Decision on how many people to hire, who to hire, how much to pay, and how to arrange job tasks are ultimately business decisions.

Example: Real Estate Attorney: Realtors and developers know business trends: how to spot properties that are desirable for customers, what parts of town are growing, familiarity with business growth and development cycles, ability to connect with buyers and sellers to elicit more information on what types of properties may meet their needs. The lawyers and paralegals do the mostly ministerial task of completing the sale – reviewing the purchase contract, checking for any liens or easements that unduly restrict the property’s use, reviewing mortgage terms, and other tasks that facilitate the deal.

Example: Private Equity Attorney: Private equity lawyers do the necessary paperwork to form the private equity funds, allow investors to contribute cash to the fund, and buy and sell the fund’s investments. Other business people decide what companies the fund invests in, on what terms it will accept cash infusions from investors, and when to buy or sell the investments. These people also bear the risk and make the profits should the fund succeed.

In summary, lawyers do learn quite a bit about their business clients. But, for a person planning to go into business, a more direct route may be a better use of their time and money.

Legal Barriers for Going From Law to Business

Most entrepreneurs enter fields they have previously worked in. They typically benefit from the knowledge and connections they have acquired; they are often competing to some extent with previous employers,

Business To Business Limitations

Sometimes these entrepreneurs face limitations from non-competes and confidentiality restrictions they may have agreed to in their prior employment; the extent to which these restrictions affect future activities depends on the area of business, state law, and judicial attitudes towards loyalty versus employee mobility and entrepreneurship. Most states generally encourage free competition, including between former employees and bosses, so “switching sides” is by itself not a problem. States therefore require non-competes to be grounded in a legitimate business objective beyond loyalty to the former boss.

Some economists believe this “leakage” of specialized skills and knowledge that occurs when employees go to new jobs also results in net economic benefits. The belief is that employee mobility and implicit knowledge transfer allow businesses to more easily hire employees with the specialized training they need. New approaches to problems are more likely from employees who build off intuitions and familiarity with analogous problems encountered elsewhere. Successful companies are often started based on ideas that came from experience their founders had during prior employment.

Law To Business Limitations

Is Law A Gateway To BusinessLawyers in theory face stronger loyalty bonds to their clients and former clients than typical non-lawyer employment relationships at the same level. Even a low-level lawyer working for a powerful client, like a recent law school graduate working at a firm handling large corporate clients, is deemed to have a fiduciary responsibility to these clients, while low-level business employees typically do not have similar obligations to their employers. Lawyers are excluded from working on the “same or similar matter” that they worked on for a former client, even if there is no confidential information. MRPC 1.9. Matters in some fields like corporate bankruptcy may last years, and different cases for other clients could still be substantially related to the earlier work. For current clients, they are even restricted from working on anything adverse to the client, even if it completely unrelated to their work for that client. MRPC 1.7. No similar restriction exists with non-lawyer independent consultants, unless both parties agree by contract.

After the representation ends, lawyers may in theory be excluded from using a wider range of information learned under from former clients than typical non-lawyer employees, at least under the literal reading of the rules regulating lawyer conduct. MRPC 1.6, 1.9. Lawyers also are subject to rules imputing these conflicts to all lawyers in their firm. MRPC 1.10. Non-compete agreements in business arise only where the employee agreed to the condition. They generally only apply where there is confidential information, and only to the employees with the proprietary knowledge, not anyone working in the same organization.

An example, confidentiality is supposed to apply to a lawyer even when discussing business with a prospective client, possible limiting the lawyer from other business even if he doesn’t take this prospective client’s case. When discussing prospective business relations, confidentiality does not in most places attach automatically; businesses may choose to sign confidentiality agreements before discussing a proposal, or avoid volunteering sensitive information at the early stages of negotiation. Either way, a person will have to consider these issues before any binding restrictions arise. MRPC 1.18.

Another example: a lot of small business ventures will partner together several individuals who each contribute some type of knowledge, skill, or experience. For a lawyer who wishes to contribute his legal services in exchange for equity interest, extra conflicts of interest and liability issues can arise, making this option less desirable. Some state bar associations frown on such relationships, and may require the lawyer to explain to the other partners the disadvantages of such a situation before making an agreement. That setup puts the lawyer at a disadvantage in these negotiations, as his obligations to clients force him to work against his own interest in the negotiation, while the other parties do not. There may be cases where these arrangements are mutually beneficial to all parties involved, for example, a company with low cash reserves may prefer to pay its lawyer in equity rather than precious cash.  Therefore, these arrangements are allowed, but can pose difficulties.

So, at least in theory, a lawyer who becomes an entrepreneur or business employee may face more obstacles in making use of his expertise than an employee of comparable skill coming from a business capacity.

The best lawyers are sought for their skill, judgment, and knowledge that help them add value beyond the clerical task of looking up black-letter law. To some extent, these advanced capabilities are a combination of the lawyer’s previous experiences with prior clients’ cases, including confidential aspects of those cases.  For example, a lawyer who comes up with a novel approach to a settlement in litigation, or who can best negotiate a business transaction that maximizes the benefits to both sides will be someone who has experience in that particular type of business. He may combine knowledge learned in various prior cases to come up with a new idea that makes the deal economically beneficial. So far though, the legal community has not really addressed the idea that some leakage of knowledge is beneficial, even though it may already occur to some extent in subsequent representations of similar clients or similar types of cases.

Is Going to Law School Helpful?

In law school, you study law, not business. You mainly learn to “think like a lawyer.”

What You Learn:  You learn to spot legal issues and potential legal claims others might bring against you. That is a very useful skill. But you don’t really learn how to quantify those risks like you might in a business environment. Many decisions involve trade-offs, and without at least some estimate of the risk, it is hard to make decisions.

Much of law school consists or reading cases, and discussing what counter arguments you might advance were you litigating that case, or what you would decide were you the judge. But those skills are not as helpful in running a business as they are in litigation.

What You Don’t Learn: What would be helpful is knowing how often people actually sue under some theory of liability. Knowing who has the burden of proof, or how easy it is to prove something is important. Statistical information on how many cases were brought and how they settled is even more useful. Yet law school doesn’t emphasize empirical research. Most professors and students don’t have a background in statistics, and accurate empirical data on these legal concerns is hard to come by because the terms of settlements in civil litigation are often kept private.

There is not too much focus on learning or memorizing laws. You don’t gain that much substantive knowledge of laws and regulations that may impact a particular type of business. Lawyers gain that knowledge after law school in practice. For training lawyers, that approach may make sense. But for a person in business, that means they can just as easily learn the relevant law and rules without going to law school. They can read the legal literature directly, or read secondary publications that focus on what is relevant for a person in their type of business and their position.

Law Courses Most Relevant To Business

Several courses in law school are relevant to business. Contracts, and Commercial Transactions; Other courses may be relevant, depending on the type of business. Torts, products liability, and employment discrimination are all relevant to businesses that make products, perform services, or are significant employers. Yet even there, a business law course designed for non-lawyers will be more direct and useful – less emphasis on cases and more on practical knowledge of the relevant law. Many business law courses contain an overview of contracts, commercial law, intellectual property (copyrights, patents, trademarks), employment, and tort law.

How Do Law School Graduates Fair in Business?

One may wonder how recipients of law degrees fair in business. There are certainly some individuals with law degrees in high-power non-legal business jobs like investment banking. However, indicate that a larger portion of JD’s go into business straight out of law school from poorly-ranked law schools than from better ones. That trend may indicate that many of these “business” jobs are not very lucrative and don’t use much learned in law school – like waiting tables or selling insurance – rather than investment banking or internet start-ups. The survey to the right shows how the portion of graduates directly entering business is inversely related to how well the law school is ranked.

Does “Thinking Like A Lawyer” help in business?

Law is reactionary – questions of law are framed in terms of “What does the law say?”, rather than “What policy or business objective are we trying to accomplish?”

A transactional or “corporate” lawyer has an incentive to be very risk averse. If he advises client to do something, and later problems result, then the attorney may be blamed, fired, or even sued for malpractice. Therefore, if there is any significant possibility of liability or other risk, the attorney will better off advising the client not to do something. Of course, there may be legitimate business or even socially beneficial reasons for the action, despite the possibility of liability. While it is important to be aware of potential problems and to minimize the chance they will happen, be overly risk averse can cause someone to avoid good opportunities. That type of thinking is not conducive to entrepreneurship and business growth.

A litigator will be most familiar with the cases brought to his attention, and will be less aware of similar situations that never developed into a dispute, or where the dispute was resolved prior to reaching the lawyer. A former litigator now working in another capacity may therefore overestimate the likelihood that disputes and litigation will result. For example, a lawyer doing medical malpractice may not be aware of medical mistakes or unsuccessful surgeries where the patient decided not to sue or the injury to the patient was temporary and minimal. Research shows that only a single-digit percentage of possible malpractice actually results in any type of claim or settlement. But because the litigator overestimates the likelihood of litigation, he would encourage the doctor to practice defensive medicine, like ordering unnecessary tests.

On the other hand, spotting issues and concerns before they arise is a useful skill. Knowing how to be persuasive is also useful. But these problem-solving skills are by no means exclusive to law school or the legal profession, so a person does not necessary need to go to law school just to learn to learn these skills.

Being entrepreneurial as a Lawyer

Lawyers are constrained by many professional ethic” rules from engaging in practices that are considered helpful to professional success in other service businesses. In most states, lawyers cannot solicit business in person – from friends or acquaintances, for example. Advertising is limited – client testimonials, music, jingles, and other standard advertising techniques are prohibited or discouraged. In some states, lawyers must seek approval from state bar regulators prior to running or changing any advertisement, including pages on their professional web sites. Lawyers typically cannot pay referral fees to others for bringing in business. These rules restrict the ability of lawyers, especially new ones, to seek new clients in ways that other professions consider standard. In addition, conflicts and confidentiality rules may keep an attorney who left a firm from making use of specialized legal expertise.

Summary

Attending law school and becoming an attorney is not the most direct path into business. Lawyers generally provide legal services, not run businesses. Core substantive business decisions are made by people with expertise or experience in that line of work. Law school teaches students to “think like a lawyer.” It teaches students to spot issues before they arise; this skill is helpful, but by no means is this skill exclusive to the legal profession – it can be obtained in other ways. To the extent that substantive knowledge of the relevant law is helpful in business, this information can more quickly obtained from sources designed for that purpose. It should be noted that many former lawyers turned businessmen share this view.

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