In the 1980s sitcom Mr. Belvedere, the mother of the family, Marsha Owens, worked for a time in a shopping-mall law firm called Legal Hut. It seemed like a good gag at the time—a law office that was part of a big chain, located in the quotidian precincts of a shopping mall, basically a business like any other.
But could it really happen here? What if New York’s biggest corporate law firms went public?
At the moment, it’s not allowed: American legal ethics rules prohibit lawyers from sharing fees with nonlawyers. But rules are made to be broken—or, at the very least, amended.
And while the idea may seem far-fetched, it’s already caught on overseas. In Australia, Slater & Gordon, a personal-injury firm, is about to celebrate its one-year anniversary as the world’s first publicly traded firm. Slater listed its shares on the Australian Stock Exchange in May 2007. And the United Kingdom is possibly moving in the direction of permitting external investors to have stakes in law firms, through the new Legal Services Act.
Observers of the U.S. legal world have been breathlessly wondering if (or, perhaps, when) the phenomenon of the publicly traded law firm will spread to the United States.
If this happens, of course, one of the most jarring changes will be that firms here will have to answer to outside investors: their shareholders. They’ll have to provide detailed descriptions of their operations to the Securities and Exchange Commission, including 10Ks and 10Qs, the annual and quarterly reports that publicly traded companies must file with the S.E.C. Is this the way of the future?
Lawyers like hypotheticals, so here is a hypothetical press release to accompany the quarterly report of a publicly traded law firm. Any similarity to any persons or firms, living or dead, is purely coincidental.
NEW YORK, March 17, 2009—Biglaw, Inc. (NYSE: LAW) today reported net revenues of $462.5 million and net earnings of $205 million for its first quarter ended February 28, 2009. Diluted earnings per common share were $0.86, compared with $1.01 for the first quarter of 2008.
“Business conditions remain difficult,” said managing partner George Owens. “The firm is being squeezed on both ends. Clients are tired of paying $300 an hour for a junior associate who knows nothing. Meanwhile, those same junior associates demand $160,000 starting salaries, 18 weeks of paid parental leave, and Swedish massages on Fridays. Something has to give.”
Corporate. Net revenues in the Corporate Department were 12 percent lower than the first quarter of 2008. Ongoing difficulties in the credit market reduced both capital markets and merger and acquisition activity for the firm.
The M&A department spent a significant amount of time on several potential transactions for a client in the energy sector that were never consummated. Unfortunately, the firm was unable to bill for most of this time, because the work was for a long-standing client that the firm “doesn’t want to piss off,” according to Mr. Owens.
The firm cannot provide additional details about this representation, due to client confidentiality rules.
Revenue for the next quarter is projected to be even lower. This is due to the departure of a key senior partner, Ray Rainmaker, who recently left the firm, along with three other partners, eight associates, a gaggle of administrative assistants and a book of business estimated in excess of $20 million.
Litigation. Net revenues in the Litigation Department were 9 percent lower than the first quarter of 2008. Continuing criminal indictments and convictions of top plaintiffs’ lawyers led to a sharp reduction in the number of class-action lawsuits filed, especially in the securities and products-liability areas. “While I’m happy to see those bastards get what they deserve, it has, unfortunately, reduced our revenue,” said Mr. Owens.
The firm’s Criminal Defense group agreed to represent a prominent politician from a very wealthy family in connection with a federal investigation. The firm expected this matter to go to trial, resulting in thousands of billable hours at nondiscounted rates. Unfortunately, the evidence against the firm’s client, including extensive wiretap evidence, turned out to be far stronger than originally anticipated. As a result, the firm counseled the client to enter a guilty plea, which he did.
“When we first took the case, we thought our client might have been innocent,” explained Mr. Owens. “It appears we were wrong.”
The firm cannot provide additional details about this representation due to client confidentiality rules.
Expenses. Operating expenses were 5 percent higher than the first quarter of 2008.
Partner compensation expenses remain high. “Project Deadweight,” the firm’s program to remove non-business-generating partners from the firm, has not yet reached maximum effectiveness. “Some partners are simply refusing to leave, saying that they won’t leave the premises except in an ambulance or a hearse,” said Mr. Owens. “Unfortunately, many of these partners are members of groups that may be protected by laws against racial, gender or age discrimination. With respect to these partners, the firm is evaluating all its options.”
Associate compensation expenses continue to climb. In the first quarter, the firm had to pay out year-end and “special” bonuses to its associates, to remain competitive with its peer firms. “The bonus payments hit our bottom line hard,” said Mr. Owens.
Recruiting expenses, including expenses related to the summer associate program, are projected to remain high throughout 2009. The firm has discontinued its practice of sending costly bonsai trees to prospective recruits, as well as gourmet cookies at exam time.
In another cost containment measure, the firm has capped the length of its summer associate program at 10 weeks. The firm concluded that paying summer associates over $3,000 a week to do nothing but surf the Web and take three-hour lunches was not a wise allocation of corporate resources.
“Although we owe duties to the courts, our clients and our colleagues, ultimately we report to our shareholders,” said Mr. Owens. “Big Law is a big business, and we intend to run it like one.”
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