Elvis (and Big Law) are dead

"Elvis Lives." Nathan Koppel, writing in today’s WSJ, tells us that was on Heller Ehrman's coat of arms. Of course Heller is dead. As well as Thelen, Thacher Proffitt. And, as described in the article, many behemoths are bleeding and there will be more dissolutions this year.

Nevertheless, the basic idea of the big law firm seems to live on, just as Elvis himself does in the heads of many of his friends.

Koppel’s story of what happened to Heller should give these people pause. Consider this:

• "Many law firms are susceptible to the phenomenon that led to Heller's collapse. Their main assets are their senior lawyers. * * * [L]awyers with big books of business now commonly shop themselves to more profitable firms that can offer larger compensation packages."
• "The economic downturn has prompted lawyers to jump to firms perceived to be more financially stable. If enough partners head for the exit, a firm can crater in a hurry."
• "[I]n 2007 * * * over 45 days, [Heller] lost about one-quarter of its litigation business due to settlements * * * Some Heller lawyers saw this as more than a temporary blip. They believed large-scale litigation matters -- the sort that can occupy 30 or more lawyers for years and that had been the key driver of Heller's growth -- were permanently on the wane, as companies increasingly used mediation or adopted other cost-saving measures.
• "At a shareholder gathering last spring in Colorado Springs, Colo., Heller's chairman, Mr. Larrabee, said the firm had plenty of choices of merger partners, according to lawyers who were there. Last summer, Baker & McKenzie LLP, one of the nation's largest firms, emerged as a serious candidate. But after weeks of negotiations, the deal cratered in August, partly because of business conflicts. Heller lawyers had sued many of Baker's clients. * * * Then a new suitor, Mayer Brown, emerged, but that fell through because “Mayer had grown nervous about Heller's financial state.”"
• "Heller distributes its income to shareholders at year end. As a result, at the beginning of each year, it has to tap a bank credit line to pay salaries, rent and other expenses. As revenue rolls in, it pays down the credit line. It is usually finished by August. Last year, however, revenue dropped off so much that it had trouble paying down its loan. By September, its debt hovered around $30 million, according to a lawyer knowledgeable about the finances. The formal departure of the intellectual-property group on Sept. 14 put Heller in breach of a loan covenant that limited the number of shareholders who could depart in a 12-month period. On Sept. 26, with banks controlling how Heller spent its money, shareholders voted to dissolve the firm.

So, in a nutshell:

• The major assets can walk
• These firms need lots of debt because of mismatching revenue and expense streams.
• The combination of these two conditions can make the financial condition of even the largest firms tenuous.
• Medium sized firms can’t survive these pressures. Yet client conflicts constrain growth through merger or otherwise.
• Fundamental changes in the law business, such as the long-term decline in Heller’s litigation, are changing the basic business model.

Most other industries could evolve to meet the new challenges. But the law business can’t change as easily because it’s choked by ethical rules that developed based on a century-old model of law practice that seeks to preserve the illusion that law practice is a “profession” rather than what it plainly is – a business. These rules include:

• Rigid restrictions on client conflicts.
• Prohibitions on noncompetes that prevent attorneys from binding themselves to their firms.
• Prohibitions on non-lawyer owners that prevent investments of the sort of permanent capital that sustains most other firms, and that prevent synergies between law and other businesses.

These rules have been developed by lawyers, for lawyers.  They are not in clients' long run interests.  I suspect that market pressures will kill the cartel over time, because the law business as a whole will have to see that the rules are no longer in its interests either. The economic crunch will make this happen sooner rather than later.  But not instantaneously.  After all, some people still think Elvis lives.

For some of my writing on these points, see my lawyer archive and the following articles: Law Firms, Ethics, and Equity Capital: A Conversation (with Regan and MacEwen); On My Mind: Lawyers Don't Make Enough, Forbes, October 29, 2007 at 40; Ethical Rules, Agency Costs and Law Firm Structure, 84 Virginia Law Review 1707 (1998); Ethical Rules, Law Firm Structure and Choice of Law';  Law Firms as Firms.  

Comments

[Tom K.]

The comment by the HE partner's wife after watching the $200,000 mini-opera on the firm's problems was classic.

[Michael F. Martin]

The major assets can walk
These firms need lots of debt because of mismatching revenue and expense streams.
The combination of these two conditions can make the financial condition of even the largest firms tenuous.
Medium sized firms can’t survive these pressures. Yet client conflicts constrain growth through merger or otherwise.
Fundamental changes in the law business, such as the long-term decline in Heller’s litigation, are changing the basic business model.

Exact same list applies to the ibanks.

Major clients can walk, it takes lots of leverage to stay running, hence volatility, putting smaller banks at a disadvantage, and turning ibanks into bank holding companies.

Seems to fit with your general theory that law is a business.

[Carolyn Elefant]

I would think that someone like yourself who favors competitive markets would embrace the legal profession's ban on non-competes. Non-competes do just what they say: they stifle competition by preventing individuals from breaking away from a business to start one that competes with it. In law, the ban on non-competes serves clients, not law firms by protecting clients' unfettered right to a lawyer of their choosing.
Right now, the one sector of the legal profession that is innovating are solo and small firms. We've always lead the way - from eliminating restrictions on advertising (Bates) to alternative billing (the contingency fee being the most primitive example) to Internet marketing (such as Greg Siskind with Visalaw) to use of blogs. Moreover, we solos realize that law is a business - that's what makes us thrive. By allowing firms to deter lawyers from starting their own practices by banning non-competes, you would stifle the one source of competition and innovation in our profession.