The Decade's Big Law Failures: Why Do Big Law Firms Fail?

The Decade's Big Law Failures: Why Do Big Law Firms Fail?
The Decade's Big Law Failures: Why Do Big Law Firms Fail?

Brian Holmes – Remember Dewey & LeBoef? Just one of the last decade’s law firm failures, some of which BloombergBigLaw have kindly catalogued as a decade send-off for the failed firms.

Law firms fail for a large number of reasons, but one of the unique aspects to major law firm failure is the unique nature of their ownership. As John Morley pointed out in a Harvard University report, “. . this makes the partners unusually sensitive to decline. As a firm’s profits drop, the decline can feed on itself and turn into a self-reinforcing spiral of partner withdrawals.”

Law firms, he said, die with extreme ease “and astonishing speed.”

Although the death of a large law firm tends to come as a shock to the people who work for it, law firms actually collapse in surprisingly predictable ways. Every large law firm blowup has followed the same basic pattern.

This pattern emerged from a review of news and litigation records I conducted for every major law firm collapse since 1988. I reviewed 37 firms in all, starting with Finley Kumble (aka “Finley Crumble”) in 1988 and ending with Bingham McCutchen in 2014. The list of firms includes marquee names like Dewey & LeBoeuf, Heller Ehrman, and Coudert Brothers, and slightly lesser known but still important firms like Darby & Darby, Adorno & Yoss, and Lord Day & Lord.

Harvard Law School Center on the Legal Profession

A recent article in American Lawyer reported consultants who said that law firm failures can often be traced back to one or more of three issues: expanding too quickly, failing to manage costs and generally poor leadership.

. .they all had something in common: a strategy developed in the best of times that didn’t consider what the worst of times might hold.

American Lawyer

The crash-and-burn failures largely came from mismanagement, over-extension and over-expansion, Meghan Tribe reports.

An examination of financial data for 12 failed law firms over recent years shows that gross revenue is not a clear indicator that a firm is approaching failure. The data, available through ALM Intelligence, shows some unsurprising common threads, including reduced head count and profitability in the year or two before a firm’s closure. Naturally, mass departures are often the first public sign that a firm is in grave danger.

The Last Decade’s Big Law Failures

The largest of the failures –

Howrey. Main cause of failure: overexpansion, lax management, declining productivity.

“Founded in 1956 in Washington, Howrey specialized in antitrust litigation. At its peak it had $573 million in revenue, $1.3 million profits per partners and a bench of over 700 lawyers across roughly 18 offices worldwide. Even as the recession raged on in late 2008, the firm hired 40 lawyers from the now-defunct Thelen. In July 2009 it acquired a high tech boutique in Silicon Valley. But just 18 months later, the firm collapsed.”

Dewey & LeBoeuf. Main cause of failure: Mismanagement.

Formed in 2007 through the merger of highly regarded New York firms Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, Dewey & LeBoeuf was a powerhouse law firm, once ranking 22nd on the Am Law 100 with more than 1,000 lawyers.

Dewey was unable to pay its lawyers. When it closed its doors in May 2012, it was largest law firm failure in U.S. history.

The firm filed for bankruptcy that month, but that wasn’t the end of the Dewey saga. It’s chair Steven Davis, executive director Stephen DiCarmine, chief financial officer Joel Sanders, and client relations manager Zachary Warren were all charged in connection to the firm’s collapse.

Bingham McCutchen. Main cause of failure: Internal rifts & fading workflow.

Boston founded Bingham McCutchen’s 2009 revenues increased 12 per cent from the year prior to $860 million and its profits per partner were up 2 per cent to $1.44 million.

“Internal rifts followed Bingham Dana & Gould’s 2002 merger with McCutchen, Doyle, Brown & Enerson and again after its 2009 merger with McKee Nelson, thanks in part to multiyear compensation guarantees granted to the McKee group. By 2012, two main sources of work, on insolvency and on Deepwater Horizon oil spill litigation were starting to fade”

Everthing ended for the firm in 2014 as 750 of Bingham’s lawyers, including 226 partners, joined Morgan Lewis & Bockius, closing the doors on Bingham McCutchen.

Dickstein Shapiro. Main cause of failure: Slowing work flow and mismanagement.

The lobbying and law firm had over 400 lawyers but struck trouble after the 2008 recession, needing to cut staff. Despite attempts to merge with several firms, the 2016 departure of over 100 lawyers and staff to Blank Rome lead to the failure of the firm.

In 2013 the firm hired Republican former House Speaker J. Dennis Hastert to rebuild its lobbying practice but he resigned in 2015 after he was indicted on bribery charges.

Sedgwick. Main cause of failure: Over-extension, slowing workflow.

At one time, the San Francisco-based Sedgwick was a go-to firm for many insurance companies. But following the 2008 recession, the firm struggled with the changed legal market and by 2017 the firm was losing lawyers and closing offices.. In October 2018, the firm filed for Chapter 11 bankruptcy protection.

LeClairRyan. Main reason for failure: Over-expansion.

The firm started in 1988 to handle work for starups and entreprenuers and soon grew to 25 offices. The fast growth lead to overhead expenses and some excessive compensation for partners.

Massive partner departures followed problems, including what was regarded as excessive partner compensation.

In a bid to save the firm, LeClairRyan attempted to tie-up with alternative legal services provider UnitedLex to create ULX Partners, a joint venture where 300 of the firm’s professional staff were rebranded to ULX and then leased back to the firm. But this failed with the firm winding up in September.

Sources describe LeClairRyan’s compensation system as opaque and overly complicated, not to mention the cuts that came in the firm’s later years. Many lawyers at the firm were aware of the guaranteed contracts some colleagues were granted, but their exact terms were a closely held secret, sources say.

Partners Caught by Surprise

When problems become more obvious and partners are caught by surprise, it serves to speed up the demise of the firm.

Legal industry consultant Brad Hildebrandt, who has been the trustee on at least eight law firm dissolutions, including Shea & Gould and Wolf Block, says the issue is made worse by the increasing pace of lateral movement throughout the law profession.

These and other changes, including poor leadership, are a recipe for Big Law failure.

“You have to lay a dissolution pretty much at the feet of the people leading the firm,” he Hildebrant said to American Lawyer.

“Poor leaders, he says, are worried more about themselves than the firm. They allow the business to incur too much debt and commit to excessive lease holds, and they don’t tell partners about the firm’s problems. The latter can seriously damage morale when things get bad.”

Whether any of this might change for Big Law in the next decade remains to be seen.

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