naked capitalism

Although this New York Times article gives a good overview of how the economic downturn is affecting legal practices, it does a bit of a disservice in implying that law is recession proof. Some types of law are highly cyclical: M&A, and to a lesser degree, securities law. While bankruptcies pick up in downtimes, they are generally not sufficient to absorb all the excess M&A/securities/general corporate lawyers at big firms that are underutilized. Litigation, as the article points out, tends to fall off in down times, since even if you think you have a good case, you have to have the stamina and firepower to go a few rounds to force a favorable settlement (95% of lawsuits settle).

From the New York Times:

In downturns of years past, law firms exploited corporate failures and bitter, protracted lawsuits to keep busy and keep billing. But in this still-unfolding crisis, the embittered and the bankrupt have been relatively slow to appear, at least in court.

Law firms in turn are feeling the strain. Thelen and Heller Ehrman, two firms whose deep San Francisco roots extend back decades, have collapsed outright, in part because of the business slowdown. Each firm left several hundred lawyers out in the cold. Many others, including Sonnenschein Nath & Rosenthal and Katten Muchin Rosenman, two Chicago firms ranked among the nation’s hundred most profitable by American Lawyer magazine, and the international giant Clifford Chance have jettisoned dozens of associates.

Still others, like Powell Goldstein, a firm based in Atlanta with more than 200 lawyers, are merging with larger rivals in deals that may be bids for stability. Over all, the Bureau of Labor Statistics reported on Friday that the legal services industry lost more than 1,000 jobs in October

This is not how it is supposed to work; businesses are supposed to need lawyers in good times and bad alike…..

A wave of big company litigation — those suits that pit armies of associates against each other — has also not materialized. A recent survey by one big firm, Fulbright & Jaworski, found fewer large companies reporting new lawsuits against them this year. Although executives may desperately want to sue one another over recent losses, they may not know how big those losses are or want to know how big they are. In any event, cash is precious in this downturn, and litigation is both costly and risky….

The number of lawyers affected at big firms is tiny when measured against the thousands of jobs disappearing at brokerage firms and banks. But in the rarefied world of corporate law, layoffs are unusual. It is striking to have just 20 associates sent packing — as a spokesman confirmed had happened at Clifford Chance, which has 3,900 lawyers worldwide.

Funny, I hear of lawyers being let go all the time, but normally individuals (or even teams) are hived off quietly so as not to give an appearance that a firm’s business is slack. That way, it can remain an open question: was the person fired no good? Not bringing in enough business? Good but not a personality fit with the firm?

Back to the article:

Sonnenschein, for example, cut about 24 of its 700 lawyers last month, mostly people who worked on real estate deals or related transactions, said Linda Butler, a spokeswoman for the firm. The layoffs were the second round for Sonnenschein, which cut more than 30 earlier in the year.

McKee Nelson, a New York firm, announced last week that it had shaved 17 corporate and finance associates, reducing its complement of lawyers to 174. In a statement, the firm cited the “devastation that befell the credit markets.” Bell Boyd & Lloyd, a Chicago-based firm with about 260 lawyers, cut loose 10 associates, also blaming “unprecedented market conditions.”

Beyond the current crisis, corporate clients are trying to rein in spending on law firms. Now that firms are increasingly desperate for business, some corporate general counsels say, the firms are more willing to accept less profitable payment arrangements that do not reward the firms for simply assigning more lawyers to spend more time on a project….

“Rather than having hourly rates, we are increasingly negotiating flat fees or fixed fees, or success fees,” which include a premium based on predetermined conditions, said Ivan K. Fong, chief legal officer and secretary at Cardinal Health in Dublin, Ohio, and chairman of the Association of Corporate Counsel. Some law firms have resisted those changes, he continued, but may find they have to accept clients’ wishes.

The framing is odd. Big corporate clients have become much tougher about costs on all fronts for years. Smaller clients are still appreciative of service and are more willing to pay, but often have less ability. But it is likely that the screws have been tightened even further. Going to fixed fees is penny wise, pound foolish. Unless the matter is very routine, it is hard to make a good estimate. It is almost certain to put the client and lawyer at odds: the client will try to squeeze more out of the lawyer, the lawyer will try to fob the work off on juniors and cut corners. There are better solutions to the same problem’ more frequent billing, so the client can manage costs better; breaking the engagement down into sub-projects with go/no go decision points; carving out routine bits and having those parts done on a fixed-price basis; discussing in some depth in advance who will do what and what their billing rates are.

Back to the article:

Lawyers’ voluntary departures create the perception that a firm’s condition is deteriorating. If enough lawyers leave, perception becomes reality…

The slowdown also has made it much harder for lawyers looking for work to find positions, said Robin S. Miller, a principal at Corrao, Miller, Rush & Wiesenthal Legal Search Consultants in New York…

“The last time we saw anything like this, this bad, was in the early ’90s,” Ms. Miller said. “But it’s starting to feel even worse.”