Listen carefully and you will hear BigLaw breathing a collective sigh of relief as we continue to distance ourselves from the worst financial crisis since the Great Depression and the ensuing havoc that characterized the legal market of 2009.
That said, as July 2010 set in, clients remained by and large insecure and major law firms focused on increasing control of revenue and costs. Newly formed transatlantic monolith Hogan Lovells announced for example that is was putting in place a quarterly partner conference and e-mail in-boxes were reportedly inundated with advice as to how to effectively network. Top law firm earners seized on the instability by escaping golden handcuffs of heretofore secure equity partnerships to assume positions of management at major corporations, highlighted by the third Cravath partner departure in as many months — one taking the helm of the legal department at Morgan Stanley, the second at private equity fund TPG Capital, and the third at consulting giant Accenture. In a similar spirit, prominent Milbank and Shearman litigation partners opted to set up their own small shops aiming to pitch more efficient service and better rates, while a former McKee Nelson tax partner gained acclaim by leaving the practice of law altogether and jumping to the trendy restaurant business.
As global transactional work and M&A activity de-thawed, so did law firm merger activity, a total of ten law firm mergers announcing in the second quarter plans to tie the knot representing a doubling of the pace from the first quarter. On the transatlantic merger front, Sonnenschein fast approached the alter with Denton (eventually tying the knot at third quarter’s end), while Proskauer and SJ Berwin continued to date. Meanwhile, London based Magic Circle firms Linklaters and Allen & Overy reported decreasing revenues in 2010 attributing the negative numbers primarily to the drying up of cross-border takeover deals, and U.S. law firms lined up to crack promising emerging markets especially in Brazil and throughout Latin America. This flurry of activity was not surprising as Brazil’s economy was expected to grow by 6 to 8 percent in 2010 and Latin America as a whole saw a 170 percent increase in M&A activity during the first half of 2010. Major firms including DLA Piper, WilmerHale, Akin Gump and Weil Gotshal which had just months before lowered associate compensation or instituted merit based compensation for associates reinstated pre-crisis salary standards, and permanent associate offers showed a marked increase over 2009 levels as well, Clifford Chance extending 60 to an applicant pool of 68 trainees. Notwithstanding, the carrot of partnership appeared less attractive than ever to BigLaw associates, only 38 percent of them expressing interest according to a major survey. And those gloomy numbers were significantly lower for female associates, a mere 29 percent indicating that they were aiming for partnership at their respective firms.
In mid July, Goldman Sachs reached a $550 million settlement with the SEC serving to further de-thaw the engine of Wall Street, while the government continued to pursue Goldman’s 31 year old trader “Fab” Fabrice Tourre, who maintained his denial of fraud related to the 2007 sale of the Abacus 2007-AC1 collateralized debt obligation linked to subprime mortgages insisting that he had relied on Goldman’s legal and compliance department in making any materially misleading statements or omissions. While the $550 million fine may have been a drop in the bucket to Goldman, the settlement’s teeth came in the form of regulations ordering Goldman to bend at the knees and establish processes to ensure that written marketing materials for mortgage securities offerings would not include any material misstatement or omit a material fact necessary to keep the statements from being misleading. Specifically, the SEC required written marketing materials to be reviewed by Goldman’s legal or compliance departments and demanded that the company record “the name of each person in the Legal Department or the Compliance Department who reviewed the materials, the date of completion of the review, and a list of the materials reviewed;” conduct an annual internal audit to ensure that it was complying with those requirements; review all marketing materials when it retains outside counsel to advise on an offering and ensure that counsel also review all marketing materials; and required that Goldman’s general counsel or head of global compliance “certify annually in writing compliance in all material respects” with the settlement. As the Goldman settlement portended similarly enhanced regulations upon the entire financial industry, major law firms sought to recruit superstar lawyers from the SEC, the Department of Justice, and the United States Attorney’s Office for the Southern District of New York in order to effectively compete for the soon expected avalanche of work for top regulatory and white collar practitioners.
Meanwhile, the delicate issue of mandatory retirement at major law firms remained in the spotlight thanks primarily to Eugene D’Ablemont and Kelley Drye & Warren. In the D’Ablemont case, the Equal Employment Opportunity Commission had sued Kelley Drye on D’Ablemont’s behalf for age discrimination after the firm revoked his equity share under its mandator retirement (at age 70) policy, the clear preponderance of major firms retaining similar mandatory retirement policies. As the parties argued whether law firm partners qualify as employees or as employers, some savvy firms without any retirement policies whatsoever such as Stroock & Stroock & Lavan bulked up by offering homes to aging talent not quite ready to call it a day including Joel H. Goldberg, who found refuge at Stroock after he was required to leave Willkie Farr upon reaching 65. As Goldberg explained: ” I still enjoyed what I was doing, and could still do it well.” More broadly though, with the recession sputtering into another year and the number of age discrimination cases swelling, related awards were generally perceived as modest. “Many very good plaintiff lawyers recognize that juries who are composed of people who’ve been laid off and gotten re-employed are more cynical about layoff cases,” explained Orrick Herrington & Sutcliffe partner Lynne Hermle.
As fall approached, law schools emerged from the dismal job market (according to a report by the National Association for Law Placement, in the fall of 2009 New York firms had reduced summer associate offers by 44 percent) and prepared for a modicum of demand for their students. Indeed, law firm summer associate hiring levels remained constrained in 2010 not only due to the challenging economy but also diminished attrition rates and firms’ plans to absorb incoming associates from the classes of 2009 and 2010 whose start dates had been deferred. Shearman & Sterling, for example, indicated that 54 deferred associates from the graduating class of 2009 would not begin work until 2011 and consequently only hired 27 summer associates in New York in 2010 (compared to 129 in 2008).
Nonetheless, Columbia Law School reported that the number of interviews firms had agreed to conduct with second year students increased in 2010 by 8 percent over 2009. “Most firms have scaled back as far as they could, so it makes sense that we would see some growth,” explained NALP’s executive director James Leipold. Cravath for example employed 22 summer associates in 2010 (compared to 121 in 2009) but was expected to hire 70 to 80 for the summer of 2011, Skadden planned to increase its summer associate class firm-wide from 78 in 2010 to 100 in 2011, and Milbank from 16 summer associates in New York in 2010 (down from 60 in 2009) back up to 50 for 2011. “The workload justifies it,” Milbank hiring partner Jay Grushkin noted. “We’re firing on all cylinders and want to get back to more of a normal intake level.” White & Case hiring partner J. William Dantzler Jr. offered a more tempered assessment: “The economy is coming back slowly, and we’re feeling better about our ability to absorb the people we deferred,” he said. “It’s not full speed ahead, but it’s cautiously optimistic half speed ahead.” Shearman hiring partner John Cannon III offered the following observation: “Obviously, the economy does not seem to have quite righted itself,” making it difficult to predict if there will be an increase in demand. Given the way the market for associates is, there’s always the possibility we could supplement a summer class with future hiring. Over-hiring creates greater problems than under-hiring.” All told, according to the U.S. Bureau of Labor Statistics, while the U.S. economy lost a total of 54,000 jobs in August, the legal sector handed out 1,000 jobs, marking the second straight month of improved numbers for the legal industry.
The increased sense of optimism for the legal sector was perhaps best exemplified by the fact that by the end of the third quarter 2010, partners were seen by and large increasing hourly rates to pre-recession levels and and shying away from the alternative fee arrangements that had been in vogue for the previous two years. This phenomenon did not escape the attention of the United States Supreme Court itself, noting in its majority opinion in Perdue v. Kenny A. Click as rationale for rejecting an argument in a fee dispute that departures from hourly billing are becoming more common: “[I]f hourly billing becomes unusual, an alternative to the lodestar method [hours worked times billing rate] may have to be found. However, neither the respondents nor their amici contend that that day has arrived.”
While the Supreme Court may have the last word in the Perdue case, our humble opinion at Hanover Legal is that the jury is still out on whether and to what extent the adjustments our major law firms implemented during the financial crisis in order to operate more efficiently and compete more effectively will take root as the economy continues to improve. We look forward to reassessing in our year end report.