When Law Firms Fail

Article excerpt

I can never get this straight: Is it "grow or die" or "grow and die"? In late 2008, the Heller Ehrman and Thelen firms failed. (1) Heller Ehrman, founded in 1890, had 730 lawyers spread across fifteen offices in the U.S. and abroad. Thelen, dating from 1924, had more than 600 lawyers in offices on both the Atlantic and Pacific coasts and in Shanghai. In mid-February 2009, other large law firms terminated 1,100 lawyers and staffers in only two days. (2) A week or two later, Latham and Watkins, which had 2,300 lawyers in twenty-eight offices, terminated 190 lawyers and 250 members of its staff. (3) Over a six-month period in 2008, Cadwalader, Wickersham and Taft, a 206-year-old New York based firm, laid off 131 lawyers, 20% of the firm. (4) Cadwalader and Latham are both aggressively managed firms that have been among the most profitable in recent years.

Until last year, high-powered, high-priced consultants made money by advising law firms to invest in expansion, seek broader horizons, and jettison routine, high-volume, "commoditized" work. Firms were told that to prosper they had to double their size, move into new cities, open offices abroad serving multinational Fortune 500 clients, and specialize in high-end financial transactions. To hell with portfolio theory! (5) That was an old-fashioned, outmoded strategy used by the faint at heart; not the way to make big money.

The deterioration in the culture of major law firms is an old story, and it is always seen as deterioration--a change from groups of colleagues, once characterized as "families" or "clubs," into corporate-style businesses governed by full-time managers, heartless and impersonal. A thousand lawyers wrote that old story, and it made for some good copy. Peter Megargee Brown, a former head of the litigation department at Cadwalader who resigned from the firm in an acrimonious dispute with management, said of his antagonists:

   The nature and function of a law firm, they felt, was no different
   from an automobile company or a fish market. So-called
   professionalism was, they said, a cover for Dickensian
   inefficiency; professional values that had guided the partnership
   since 1818 were "old fashioned" and, in today's world,
   "irrelevant." (6)

Patrick Schiltz, an academic lawyer who was a partner at Faegre and Benson, gave this advice to law students:

   If you are going into private practice--particularly private
   practice in a big firm--you are going to be immersed in a culture
   that is hostile to the values you now have.... You will work among
   lawyers who will talk about money constantly. (7)

But, so long as the money was rolling in, most lawyers were willing to tolerate the unpleasantness. They were well-compensated for the loss of afternoon tea. When the credit bubble burst, however, the absence of tradition, civility, solidarity, and goodwill was all too apparent.

The mobility of lawyers among firms and the resulting changes in the culture of the firms have made it easier to terminate partners. In a firm with hundreds of lawyers, partners do not recognize one another on the street. According to one report, 48 percent of the lawyers who were made full partners in a sample of U.S. law firms between 2000 and 2006 were lateral transfers from other firms, not lawyers who had matured within the partnership. (8)

The clients have also made it easier for firms to make changes. Clients now move their work more often than in the past. Rapid turnover in the management teams at the companies also weakens ties between the businesses and their lawyers, and mergers among businesses mean that there are now simply fewer clients in many industries. Typically, the company's relationship (if there is a continuing one) is with a particular lawyer or set of lawyers, not with the firm. That is why lawyers are often able to take clients with them when they move from one firm to another. …