Use of Lawyers
Small-business owners use lawyers to perform a variety of tasks on their behalf. The execution of these tasks is often expensive and frequently considered by owners to be a dead-weight loss. However, the legal system, particularly in its capacity to protect property rights, is critical to small businesses in a market economy. That significance makes people knowledgeable of the legal system’s rules and procedures, that is to say, lawyers, essential to its functioning regardless of occasional abuses, perceived and actual. Many small-business owners complain that lawyers govern every aspect of business these days. While exaggerated, there is little doubt that legal considerations once thought remote can now be central to business decisions. As a result, this issue of the National Small Business Poll focuses on the small business Use of Lawyers.
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Seeking Legal Help
The legal profession has generated considerable negative publicity for itself over the past several years, at least from the small-business owner perspective, due to numerous and seemingly frivolous law suits filed. Yet, a healthy majority of small-business owners (including legal practices, most of which are small) respect the profession. Twenty-eight (28) percent have a great deal of trust and confidence in lawyers and the legal profession (Q#1). Another 41 percent have some. A non-trivial number disagree, however. Nineteen (19) percent have only a little trust and confidence in lawyers and the legal profession while 12 percent have none at all. It is difficult to assess these results. Since we lack a benchmark against which to measure current small-business owner views of lawyers, it is not clear whether these numbers are favorable or unfavorable, improving, or digressing. However, 69 percent are favorably disposed compared to 31 percent who are not.
Whatever the degree of confidence and trust in lawyers, 67 percent of small employers sought legal advice from or consulted with a lawyer in the last year (Q#2). Owners of the largest small firms, that is to say, those employing 20 to 250 people, were 17 percentage points more likely to do so than owners of the smallest, that is to say, those employing 5 to 9 people. Moreover, 35 percent of those who did not use a lawyer in the last year used one in the last three years (Q#2c). That means about 79 percent of all small employers have sought legal advice/help within the last three years. Only a modest positive relationship exists between those who have recently engaged lawyers and those who have trust and confidence in them.
The median number of consultations in the last year was three with 42 percent having just one or two (Q#2a). Owners of the smallest businesses consulted with a lawyer between two and three times (median) compared to owners of the largest who consulted them between five and six times (median). However, 14 percent consulted with their lawyer 11 or more times, suggesting the presence of important on-going legal issues.
The median amount of legal costs including filing fees and other associated costs incurred in the last 12 months among those who used a lawyer was between $4,000 and $5,000. The median figure conceals large differences, however. Seventeen (17) percent incurred expenses of less than $1,000 compared to 10 percent who incurred expenses of $25,000 or more (Q#2b). The 12-month period in which these costs were incurred appears to be atypically high. While 66 percent report their legal expenses about normal for the year, 26 percent report them unusually high (Q#2b1). Four percent say that they are unusually low.
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On-Going Legal Relationships
Seventy-eight (78) percent of small employers (employing between 5 and 250 people) maintain an on-going relationship with a lawyer or law firm, to the point where the firm/individual can be referred to as “my lawyer” (Q#3). In 58 percent of cases, “my lawyer” is a firm; in 40 percent of cases, it is an individual who may or may not be associated with a multi-lawyer practice (Q#3a). There are again substantial differences by employee-size of firm. Owners of largest small businesses are 10 percentage points more likely to have “my lawyer” than are owners of the smallest ones. Of those who have “my lawyer,” owners of the largest are 17 percentage points more likely to have a firm (68%) rather than an individual compared to owners of the smallest (51%).
Relationships between small employers and their lawyers appear quite stable over time. Just 13 percent have changed their principal lawyer/law firm in the last three years (Q#3b). The most frequently cited reason for change was the need for expertise (33%) (Q#3b1). The perceived lack of legal competence (21%) was the second most frequently cited reason followed by availability when needed (12%) and attorney died/moved away/retired (9%). Other reasons were mentioned infrequently. The distribution of reasons for switching should be viewed with caution, however. The question had just 75 respondents which creates a large margin for error. Still, the primary reason for change appears to focus on legal capacity rather than associated issues such as price, availability or style.
The most frequent topic of these consultations was contracts. Twenty-one (21) percent recalled that contracts was the subject of the most recent consultation (Q#4). Debtor/creditor issues and debt collection was the primary topic for 16 percent, followed by real estate (14%), liability (14%) and employment (9%).
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Types of Legal Documents Required
While lawyers often represent small-business owners in disputes (addressed later in text), much of the work they do for small-business owners is more routine. Providing advice and preparing documents are just two examples. Fifty-five (55) percent of those who have an on-going relationship with a lawyer indicate that the lawyer prepared a legal document other than a tax return for them in the last year (Q#6). Only a non-mutually exclusive 2 percent had their lawyer prepare their last tax return (Q#5). (Ninety-two (92) percent say the return was prepared by an accountant and 6 percent by someone else.) Completing and filing tax returns are clearly not an important function for most lawyers who deal with small-business matters.
The most common type of action taken by a lawyer on behalf of a small-business owner/client was a simple letter. Seventy (70) percent of those who had a legal document prepared for them in the last year asked a lawyer to prepare (and presumably send) a letter (Q#6aF). That means about two in five (38%) small employers having an on-going relationship with a lawyer/law firm had a lawyer write at least one letter for him/her in the last year. The purpose of the lawyer’s involvement in this act of notification is to imply or explicitly state that legal action may (will) be forthcoming should the recipient not respond favorably. Or, it could be to document some point or fact(s). Hence, the task is frequent.
The second most frequent type of document prepared is a contract. Fifty-eight (58) percent of those having a document prepared by a lawyer requested that one or more contracts be prepared (Q#6aA). That figure represents about one in three (31%) small employers having an on-going relationship with a lawyer/law firm.
Documents surrounding potential or actual law suits were prepared in 44 percent of instances where small-business owners sought to have legal documents prepared in the last year (Q#6aE). These documents could have been prepared either to file or potentially file suit, or to respond to a suit or a potential suit. Twenty-four (24) percent of the population with a legal relationship had such documents prepared in the last year. As will be shown subsequently, about 27 percent over the last three years, or 9 percent a year, were involved in legal disputes. About 40 percent of those who request such documents, therefore, apparently avoid legal disputes for which the documents are presumably prepared.
Small-business owners often form a second or a third business while operating the original. They will also incorporate segments of an operating business to separate the liability of one portion from that of another. An example is a construction firm whose owner may incorporate different projects. Thus, 38 percent of those seeking a legal document prepared over the last year or less than 21 percent with a relationship wanted one or more incorporation documents prepared (Q#6aB).
Other legal documents are less frequently requested. Twenty-five (25) percent or 14 percent of small employers having a relationship with a lawyer/law firm wanted a will or other estate planning document in the last year (Q#6aC). Most of these are likely changes to existing documents. Seventeen (17) percent or about 9 percent with a relationship wanted paperwork prepared for an administrative hearing of some type, for example, a zoning change (Q#6aD). Less frequent were needs for a written employment policy (15%) (Q#6aH) or a written consumer credit policy (4%) (Q#6aG).
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Lawyers in Disputes
One of the most important functions of lawyers is to assist and support their clients in legal disputes. The survey did not define “legal dispute,” but allowed the interviewer to tell an inquiring respondent that a dispute means potential law suits, threats of suits or actual suits. Forty-one (41) percent of small-business owners with an on-going relationship with a lawyer engaged one to assist them in a legal dispute within the last three years (Q#7). That number represents about 27 percent of all small businesses employing 5 to 250 people, but does not include those in a suit without such an on-going relationship. The median number of different business disputes handled in the last three years was between one and two. However, 10 percent of the 41 percent were involved in six or more (Q#7a). Since these are different business disputes, the 10 percent did not simply involve a single dispute with six or more parties.
Those who were involved in at least one dispute in the last three years were asked several specific points about the dispute most recently resolved. The following focuses on that one, most recently resolved dispute.
Disputes create uncertainty for business owners and generate legal expenses. Both create problems for small-business owners. Moreover, resolving disputes takes time which simply draws out uncertainty and cost. The median time it took to resolve the most recently settled dispute for small-business owners was between four and five months. However, 30 percent of those disputes lasted more than one year; 16 percent lasted more than two (Q#8). Lengthy disposition of disputes can be a serious issue. If a lengthy disposition is associated with large financial consequences, and the larger the consequences the more likely the dispute will take more time to resolve, the more difficult it is for a business owner to make major decisions, such as on investment and growth. The result can cause delay or even abandonment of business plans, with negative consequences not related to the issues of the dispute.
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a. Dispute Resolution
Most disputes are settled informally out-of-court. Fifty-three (53) percent of the most recently resolved disputes reached an agreement in this manner (Q#8a). However, if out-of-court is broadened to include more formal arbitration/mediation, the total being settled out-of-court is 75 percent (22% arbitration/mediation) of disputes. In addition, 14 percent who had one recently resolved were uncertain whether their dispute was settled informally out-of-court, through arbitration/mediation, or in-court. It is likely that those who went to court would have remembered, perhaps less so if they had been involved in arbitration/mediation. The “don’t knows” are, therefore, likely to have been out-of-court resolutions of one variety of another. That leaves just 12 percent settled in-court.
Insurance considerations are alleged to often play a role in keeping cases out-of-court. The rationale from the insurance company is that quick settlement is typically cheaper than trial. However, just 14 percent who resolved their dispute out-of-court or through arbitration/mediation say that insurance (or an insurance company) caused them to pursue the settlement route taken (Q#8a1). While insurance may have pushed some small-business owners not to pursue an in-court settlement and had those recommendations rejected, insurance plays a mediating role in a limited number of disputes involving small-business owners.
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b. Topics and Disputants
The topic of these disputes varies. While a modest number of topics define most of them, potential overlap often makes it difficult to categorize a dispute. For example, debtor/creditor relations could involve contracts. Despite the possible duplication, the data offer a reasonably clear portrayal of the disputes in which small-business owners are engaged. Twenty-one (21) percent of the most recently settled disputes involved debtor/creditor relations and/or debt collection (Q#8b). The next most frequent topic was contracts (19%). Contracts was followed by liability (14%), employment (10%), real estate (10%) and accident/injury/Workers’ Compensation (5%). Accident or injury could easily have fallen under the liability or employment rubric and Workers’ Compensation under employment.
Disputes most frequently involve customers. Forty-seven (47) percent of the most recently resolved disputes involved at least one of them (Q#8cA). Suppliers were the second most frequent party involved. They were concerned in one of four (25%) instances (Q#8cB). The third group most often participating were employees (17%) (Q#8cC). Competitors followed employees in frequency, but competitors were cited as a party only 8 percent of the time (Q#8cE). The least frequent was government at 7 percent (Q#8cD). Two points are worth noting in this regard. The percentages total more than 100 percent because more than one type of party listed could be involved in a particular dispute with a small-business owner. For example, both employees and customers could have been involved in an incident and decided to sue. In addition, there are potential parties that did not appear on the questionnaire. One respondent mentioned that he had had a dispute with a neighbor.
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c. Legal Costs
Hiring lawyers to help resolve disputes costs money, at least initially. The median estimated un-reimbursed legal expense for the most recent settled dispute from the time an attorney was first contacted to the dispute’s ultimate resolution was about $5,000. However, the dispute cost 11 percent of involved owners more than $25,000 in legal expenses, a significant sum for most small businesses (Q#8d). Twenty-seven (27) percent could not/would not provide an estimate. The likely reason is that the costs of the dispute are tied in with other legal costs and/or disputes often occur in more than one fiscal year leaving costs spread over more than one budget. It is also possible that legal costs were minimal and therefore did not come to the owner’s attention.
The most common method of payment to lawyers in these disputes is an hourly fee. Sixty-one (61) percent of the time small-business owners paid their lawyers by the hour (Q#8e). Other forms of payment were employed much less frequently. The second most often used form was a flat fee (17%) followed by a retainer (5%) and a contingency fee (5%). Twelve (12) percent did not answer adding further evidence to the proposition that many disputes about which we do not have data (no answers) are relatively minor or mixed in with other issues.
Two-thirds (67%) of disputes in which small-business owners procured legal help resulted in no money or anything else of monetary value exchanging hands among disputants (Q#8f). In 31 percent of cases, it did. Most disputes, therefore, are settled with the primary costs to the parties being legal expenses.
Twice as many are satisfied with the outcome of the dispute as are not satisfied. Sixty-one (61) percent of disputants report that they were satisfied (25% very satisfied) with 30 percent dissatisfied (15% very dissatisfied) (Q#8g). Ten (10) percent did not express an opinion. The survey did not attempt to elicit an assessment of who won and who lost. The reason is that not only is it often difficult to determine a winner, but disputes do not always have winners and losers; both parties can feel good or bad about an outcome. The substantially greater number who expressed satisfaction with the resolution reflects a “multiple parties as winner” experience. The survey also did not elicit who was the plaintiff and who was the defendant in the dispute. However, the positive relationship between satisfaction with the outcome and no value exchanging hands suggests that small-business owners were more often than not defendants.
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Lawyers continue to play a prominent role as advisors and service providers to small-business owners. Nearly two of three of owners have consulted a lawyer in the last year and over three of four in the last three years. With notable dissent, small-business owners say that lawyers and the legal profession enjoy their confidence and trust. Undoubtedly, that confidence and trust is continually re-enforced by numerous, routine interactions between lawyers and their small-business owner/clients. Most of these involve consultation and the preparation of legal documents, such as letters and contracts.
People focus on the lawyer’s role as an advocate for his/her small-business owner/ clients in a legal dispute. Advocacy is clearly an important function. However, about one in 10 small employers a year become embroiled in a dispute that requires the services of a lawyer. The overwhelming majority of these disputes are resolved out-of-court, involve modest legal expense, and require no exchange of money or value between parties. While resolution of these disputes requires competent legal services, they are not typically the high profile cases that the public has come to expect. Nor are they necessarily time-consuming nor expensive to resolve. Still, there are obvious instances involving perhaps an additional 2 percent to 3 percent of small employers each year where the time and expense required to resolve a dispute can paralyze owner decisions for extended periods and possibly result in substantial financial loss. But, the fact that about one-third of these disputes do result in some exchange of value suggests that costs often extend beyond associated legal expenses. It is this minority of disputes that small-business owners fear and stimulate them to take defensive measures, defensive measures which may or may not be necessary and which may or may not be economically beneficial.
The data presented here merely outline the relationship between small-business owners, lawyers and the legal system. More detailed information would be helpful for a series of practical reasons. Still, lawyers are an increasingly critical service provider to small-business owners and even modest amounts of information can help distinguish between television portrayals and reality.