The Death Spiral of America's Big Law Firms

How some of America's top law firms devoured profits before the Great Recession, got too fat, and are now suffering the consequences 

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This month, the legal industry has been fixated on the gathering storm clouds around Dewey & LeBoeuf, a high-end international law firm based out of New York. The issue is not so much whether Dewey is in trouble -- that much is obvious -- but whether the firm is in the midst of an accelerating death spiral. About 20 percent of its partners have defected to other firms this year. More may be jumping ship. Former partners are speculating about whether the firm will merely shrink, or be "busted up into a bunch of little pieces." 

But no matter what Dewey's final fate may be, its travails are a sign of something larger, which Bloomberg Businessweek calls out in a new article this week: Slowly but surely, the rarefied world of corporate law appears to be coming apart at the seams. 

Last year saw the collapse of Howrey, a venerable Washington, D.C. firm that had once been among the most powerful forces in corporate litigation. In the last decade, Businessweek notes, a dozen major firms have crumbled, and more may be in trouble: 

Many more, like Dewey & LeBouef, confront existential challenges that were unimaginable just a few years ago. J. Stephen Poor, chairman of Seyfarth Shaw, an 800-attorney firm in Chicago, sums up the predicament of corporate law firms he refers to as "the 99 percent": "We have to improve or die."

There are any number of ways to interpret the crisis in Big Law, as the top tier of the industry is known, but the story, at its core, is a simple cautionary tale. (Disclaimer: I worked on the business side a firm for about a year and a half.) During the early and mid aughts, firms built unsustainable business models that survived off the froth flying from Wall Street. Now, many have become too bloated to change course and adapt to a new era in business. 

It starts with the two graphs below, from a report this year by Citi, which is a major law firm lender, and the Hildebrandt Institute. Do yourself a favor and ignore the acronyms. In essence, it shows the growth in profits at top law firms pre- and post-recession. The left axis on each is a measure of profitability. The bottom axis is the percentage growth of profits over time. And here is the upshot for our purposes: Before the economy crashed, business was plentiful and growth was easy. After the economy crashed, business was lean and growth became very, very hard. 

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You might notice that a few firms still appear to be producing stellar results. In fact, they seem to be doing better than ever. And it's true -- a few are. These are the metaphorical 1 percent of the legal industry, the elite firms based mostly in New York that have been able to maintain their performance by focusing on the most expensive, sophisticated work. For everyone else, the wrenching changes that followed the recession have disrupted their business. 

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Jordan Weissmann is a senior associate editor at The Atlantic.

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