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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.

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. 4

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. (Thelen Managing Partner Douglas Davidson, pictured)

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 few big companies are in dire straits or well beyond, including the collapsed Lehman Brothers and Circuit City, and the number of corporate bankruptcies is beginning to rise, according to the American Bankruptcy Institute. The group reported there were 18,456 bankruptcies in the first half of this year, compared with 12,985 during the same period of last year. But because the financial crisis damaged Wall Street first, corporate collapses in many other sectors — automobiles, airlines and the like — have not happened, at least not yet.

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.

“You have to wait and see if you have any damages and, if so, what they are,” said Ward Bower, a principal at Altman Weil, a consultant in Newtown Square, Pa., to law firms. “That tends to cause a lag.”

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.

Lawyers at firms that have taken such drastic steps say that the problem is simply that they have too many people with the wrong kinds of expertise at the wrong time.

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.

A survey of about 600 corporate executives by Acritas, a London-based research firm, found that 32 percent expected billing practices to change over the next two years.

“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.

“It’s a pretty significant change,” Mr. Fong said, and it is occurring as companies use internal lawyers for more work, to control costs and take advantage of the broader expertise of their own legal staffs.

Lawyer departures, whether voluntary or through layoffs, pose special risks to firms. Layoffs scare off law school recruits, who crave security and wealth.

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