Cratered: The Lessons of Dewey & LeBoeuf
Dewey & LeBoeuf, one of the world’s largest law firms, filed Chapter 11 bankruptcy back on May 28, 2012. Spare WC the lawyer jokes; he’s heard them all already.
But how can a big law firm go broke? WC has been pointing out for some time that the economics of a law practice are not what they used to be. Multiple factors have contributed to an ongoing squeeze on attorney wallets. The recession is a factor. When the economy slows, work slows for lawyers who are dealmakers. Whether it is mergers and acquisitions, construction and development loans or refinancing, there’s simply less work. That, in turn, puts downwards pressure on hourly rates. It’s inescapable when there are more lawyers chasing less volume of work. And the clients pay a lot more attention to the bills when times are lean than they do when times are posh. All of which means a steep decline in revenue.
Costs, on the other hand, continue to climb. In particular, health insurance premiums and malpractice insurance premiums have seen steep increases the last few years. Insurance expenses are now commonly the second largest expense in a law firm, after compensation. Compensation to the partners, the owners, is squeezed between declining revenue and rising expenses.
Those economic forces don’t allow many mis-steps, and Dewey & LoBoeuf made several. First, management at D & L recruited new partners with promises of guaranteed salaries. It turned out that the promises were too high, and that the newly recruited partners weren’t earning their own way, they were being subsidized by other, more profitable partners. That’s a recipe for disaster. Worse still, management at D & L tried to solve the problem by borrowing money to meet the shortfalls. It may or may not be a good idea to borrow money to pay staff, at least for a short while. It is never all right to borrow money to pay the owners their compensation. Borrowing for shareholder compensation is, quite literally, compounding the problem. Finally, D & L continued to attempt to grow the law firm in the face of a pretty bad economy. WC, from the outside, can’t tell if management was betting on an early recovery from the Great Recession, or simply thought lawyers were immune to economic forces. Either way, they were wrong.
So another big law firm bites the dust. It will be a messy Chapter 11, because many of the individual members of the firm are creditors, with unpaid salary claims, and also guarantors of portions of the money borrowed to try to keep the sinking ship afloat. The assets of the firm will be fought over for months and maybe years. But that’s all right, because it will be lawyers doing the fighting, and they will be paid.
There are about 1,750 fewer lawyer jobs than there were, in a market which is already hyper-saturated with lawyers. The very good lawyers will have already landed at another firm, although perhaps at lower pay. The others may have more challenges.
WC doesn’t expect many tears to be shed. These are lawyers, after all. But a business that was what, 125 years old? Is no more.
Move along. Nothing to see here. Move along…