Even Lawyers Have It Bad

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.”

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  1. Anonymous

    Interesting. A friend of mine, who used to be an analyst at Lehman, and is now at Barclays, told me today about a law firm in San Francisco, owner of a 12 story building full of their lawyers, just completely shut down early last month. He said something like 600 people had been let go.

  2. Anonymous

    The information about Heller and Thelen is misleading. They collapsed as a result of their corporate structures and the credit crisis more than anything else. My understanding is that each was set up as a shell corporation and each lawyer had their own personal corporation. The firm cleared out its bank accounts and distributed the profits at the end of every month. In the meantime, the firm would get short term financing. This structure collapsed with the credit freeze. KQED radio in S.F. had a good episode discussing just this subject a few weeks back. http://www.kqed.org/epArchive/R810300900

  3. Anonymous

    Heller did have a volatility- increasing capital structure (it was end of the *year* clear out, not end of the *month*), but the credit squeeze was just a late stage complication, not the disease that brought on death. As has been seen with Mudge and Brobeck and many others, it matters not whether a firm’s revenues are in the hundreds of millions or whether it has stood tall for over a century, such an entity always teeters on failure, no matter how sound it may seem. Its main assets can walk over a weekend, whereupon fixed costs soon overwhelm the remaining attorneys’ ability to make any further operation profitable. We will see more of these liquidations. I know firms that have expanded aggressively, promising fixed draws to new lateral hires. It is a recipe for quick implosion when revenues come in below budget. I recently left to start my own firm. I’ll probably make more money this way, but I don’t really need more money at this stage of my life. I do need peace of mind. The thing that made me sick enough to go against my normal “path of least resistance” nature and leave was the constant greed of my partners (or rather, the delusions of these partners that the decisions they made were somehow in the best interest of the firm or their “team” when in fact hardly a decision was ever made that wasn’t completely driven by pure unadulterated self-interest (and directly contrary to the interests of their associates and others who made their practice possible)…and don’t even get me started on the sickening and constant grab for billing and origination credit, no matter how little connection someone might have to the client in question). Anyway, they’ve made their bed. They think fees and PPP only go up. That’s just what the CDO originators thought too, wasn’t it? Assets only go up? We’ll see.

  4. Anonymous

    Today's layoff of 77 lawyers by White & Case is just the beginning. Not only is corporate work–especially M&A–way down for the foreseeable future, but the litigation departments had been driven by securities claims 1) against banks that no longer exists, 2) against banks that no longer have sufficient funds to payout and 3) in an environment where judges and juries were happy to award large sums to plaintiff's lawyers from banks who had so much money anyway. Times have changed, and the legal profession is in for a very tough contraction on most fronts.

  5. Mike

    Law firms always do this sort of thing in economic downturns. But because of their inherent risk-averse nature, as well as the desire to always peddle the "safe & secure" career the law provides, they do it on the DL.

    The reason so much of this news is seeping out is because it's so BIG. Big economic mess; big layoffs.

    And it'll trickle down to all segments. I'm a class action litigator, and my firm is busy as hell right now. But if we're experiencing a slow-down in deals now, there'll be less deals gone bad to sue upon in 6 months, one year, etc.

  6. Anonymous

    Yves: “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).”

    Litigation over crappy issuances/deals heats up. But that work doesn’t go to all firms.

    Yves: “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.”

    No, clients try to prevent juniors from working on projects because they are more expensive, even taking into account billing rates, due to massive inefficiency caused by them not really knowing what they are doing.

  7. Matt Dubuque

    Estate and trusts is quite good in recessions for lawyers.

    Rich people always die and their children always fight over the money.

    Some law firms, positioned for the Depression, anticipated this and planned accordingly.

    Matt Dubuque

  8. Anonymous

    On a related front, I have friends telling me that insurance companies are offering fast settlements way above what a claim should be worth. I strongly suspect that the insurance companies are trying to avoid having their financial status become public to any degree. If insurance companies really are broke, that will decimate the legal profession, regardless of how well/poorly a firm is managed.

  9. Anonymous

    Law is just a bad business to get into right now. If you have any relatives or friends thinking about law school, advise them against it unless they’re going to an Ivy or going for free.

    There are just TOO MANY law grads being sent out into the world, and the darn ABA for some reason keeps accrediting new law schools which will only make the problem worse.

  10. macndub

    Going to fixed fees is penny wise, pound foolish.

    What you said, Yves.

    I’ve lost track of the number of articles I read on fixed-fee billing becoming the norm at some time in the future, all of which underestimate the complexity of the business.

  11. Hooray

    Lawyers suck. Sorry, I take that back. What I really meant to say was….lawyers suck *big time*.

    There are some outstanding lawyers out there, for sure. But overall, I feel that the legal profession needs some downsizing so that it becomes a net enabler of economic growth, instead of the parasitic shake-down operation it has become. My hope is that the laid-off lawyers will either become more efficient via a lower billing rate, or simply choose another profession.

  12. Anonymous

    I used to work at a large firm which did RTC work in the early 1990s and large corporate bankruptcies. I quit in 1997 because I wanted to and I have headhunters calling and asking if I want to come back. I find that funny.

  13. Anonymous

    I am a lawyer but thankfully, not working at these sweatshops. I used to work for a large multinational firm and the appalling lack of efficiency is one of the reasons I had to leave that system. It was amazing oftentimes how corporate clients would just accept the way things were. Why do they accede to paying a freshly-minted law grad $250 an hour when that grad doesn’t know squat?

    And you don’t learn anything in these places. All these places do is provide a sense of entitlement that doesn’t sit well in an economic downturn. Then they’re thrown out eventually and they are compelled to hawk their skills like securitizing mortgages around, and people in the real world laugh in their face.

    Lawyers deserve a ton of scorn, but be that as it may, I’m still glad I became a lawyer.

  14. Anonymous

    “That way, it can remain an open question: was the person fired no good? Not brining in enough business?”

    Well I’ll be pickled!

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