The quick and the dead

Law firms have suffered along with everyone else this fall. San Francisco-based Heller Ehrman LLP and Thelen LLP have dissolved. Atlanta's Powell Goldstein LLP announced a merger with Bryan Cave LLP of St. Louis. A host of firms have laid off associates and staff, and firms are hiring far fewer law students than they did a year ago. The pain will only get worse next year; profits at New York firms have held steady this year but could fall 30% to 50% in 2009, several lawyers estimate.

Law is a cyclical business, of course; firms went through tough times in the early 1990s and the early part of this decade, along with their clients. But this downturn may take a more significant toll on law firms than its predecessors, not only because the economy is in such comparatively bad shape but also because troubled firms will have less time to right themselves.

Blogs about law firms publicize within hours information that firms once tried to keep secret even internally, such as the "performance-based" layoff of a suspiciously high number of associates or buyouts of underperforming partners. Even the slightest hint of trouble can find its way onto the Web, and from there to the more traditional legal media and mainstream business press.

Above the Law, a blog founded in 2006 by former Wachtell, Lipton, Rosen & Katz associate David Lat, has become a clearinghouse for law firm gossip. It recently reported that the Chicago office of DLA Piper, a firm with 3,700 lawyers around the world, has canceled its holiday party and laid off 15 staffers. Such news allows law firms looking to hire laterally to identify their weakest competitors and focus their efforts on the best lawyers at those firms.

That dynamic helped doom Heller and Thelen. Above the Law exhaustively cataloged Thelen's demise, which it may have sealed by reporting in early September that the firm had canceled its 2009 summer program thanks to "too many tipsters to count." After the tech market crashed in 2000 and 2001, Brobeck, Phleger & Harrison LLP took well over a year to splinter. Heller and Thelen weren't granted such a protracted death scene. Brobeck's dissolution showed law firms weren't immune from such a fate, which may have made partners at other troubled firms more willing to move to another firm when their own starts to list.

The increased pressure on law firms is evident in the divergent fates of two New York shops that occupied similar places in the city's legal pecking order. In May 2003, Fried, Frank, Harris, Shriver & Jacobson LLP ended months of merger talks with London's Ashurst Morris Crisp, now shortened to Ashurst. Fried Frank lost a few partners but otherwise walked away from the aborted deal unscathed. Almost four years later, Dewey Ballantine LLP partners rejected a proposed merger that the firm's managers negotiated with Orrick Herrington & Sutcliffe LLP. Dewey hemorrhaged partners for a year after the deal was announced and had to agree to combine with Leboeuf, Lamb, Greene & Macrae LLP late last year to stop the bleeding.

The possibility of law firm dissolution will itself motivate troubled firms to be more aggressive about seeking merger partners -- and, perhaps, less picky about the terms they accept. Powell Goldstein talked with several firms before agreeing to a merger with Bryan Cave. The firms put a happy face on the deal, but since the mid-1990s, PoGo's standing in Atlanta had slipped considerably, and after talks with Womble Carlyle Sandridge & Rice PLLC fell apart in January, PoGo may have been faced with the same choice Dewey had: Find a merger partner or watch its lawyers go to competitors.

The robust market for lateral partners suggests law remains a healthy business, even if individual law firms may struggle. After all, a slew of rivals picked off lawyers from Thelen and Heller. Nixon Peabody LLP considered merging with Thelen, dropped the idea and ended up hiring 90 lawyers from the firm after its demise.

That meant Nixon Peabody didn't have to hire unwanted associates or staff or assume any leases or other obligations -- or pay Thelen partners anything for the firm's brand. That outcome will push the partners at other struggling law firms to cut costs aggressively in an effort to save their own firms, which will in turn give Above the Law a lot more layoffs to cover.

David Marcus is a senior writer at Corporate Control Alert.