Trump Executive Orders Expose—And Exploit—Biglaw Vulnerability

Some billion-dollar firms have feet of clay—which the executive orders were perfectly designed to smash.

Dewey & LeBoeuf, RIP (photo by David Lat).

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A version of this article originally appeared on Bloomberg Law, part of Bloomberg Industry Group, Inc. (800-372-1033), and is reproduced here with permission.

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On the surface, large law firms look stronger than they’ve ever been. The Am Law 100, the nation’s 100 largest firms based on revenue, collectively grossed a record $158 billion last year. Kirkland & Ellis became the first law firm in history to break the $8 billion mark in revenue——at $8.8 billion, within shouting distance of $9 billion—and posted profits per equity partner of $9.25 million.

So why did nine major firms rush to cut deals with the Trump administration—offering a total of $940 million in pro bono work to support causes endorsed by the president, among other concessions? And why did eight of these firms, including Kirkland, settle preemptively—before they were even hit with formal executive orders attacking them and their work?

It’s because Biglaw firms have feet of clay—which the executive orders were perfectly designed to smash.

Law firms aren’t like other billion-dollar businesses. They don’t own giant factories, warehouses full of merchandise, or valuable patents. Their key assets are their people—talented and hardworking lawyers who each bill thousands of hours a year, at rates up to $3,000 an hour.

Every night, these human assets go down the elevator and out the door. They don’t have to come back. And over the years, more and more lawyers have chosen not to, instead moving to rival firms.

When I graduated from law school around 25 years ago, the typical path was to join a firm after graduation, often the one where you had spent your 2L summer, and work there your entire career. It was relatively unusual for a firm to hire lateral partners—and especially rare among the elite New York firms, who prided themselves on “homegrowing” their talent.

That’s no longer the case today. In what has been accurately dubbed Biglaw’s free-agent era, virtually all firms hire lateral partners—including white-shoe firms that used to eschew hiring outsiders, such as Cravath and Davis Polk.

Is all this movement a good thing? Conventional wisdom views lateral partner movement negatively, blaming it for a more mercenary mindset among partners that reduces loyalty and collegiality. All the churn destabilizes firms and can cause them to collapse—à la Dewey & LeBoeuf, which went on a lateral partner hiring spree before imploding.

But if lateral partner hiring is such a bad thing, why has more lateral movement coincided with record profitability in Biglaw? I don’t think it’s a coincidence. I believe that lateral hiring, like non-equity partnership, gets a bad rap. And just like non-equity partnership, lateral movement can benefit both law firms and individual lawyers.

Firms that excel at lateral hiring—such as Kirkland, Milbank, Paul Hastings, and Paul Weiss—have supercharged their profits, outstripping rivals that do less lateral hiring (or aren’t as good at it). And lateraling can benefit lawyers as well.

The financial rewards can be obvious, with top laterals landing $20 million pay packages—but it’s not all about the benjamins. Instead, partners move to firms that are the best “platforms” for their practices. Partners might lateral because they believe the new firm will better support their practice, provide a superior cultural fit, or pose fewer client conflicts.

Lawyers and firms change, and they shouldn’t hesitate to part ways when they’re no longer a good fit. The notion that you should spend your entire career at the firm you happened to summer at your 2L year makes no sense—and I can’t think of any other industry that runs itself this way or looks down on moving to a different company.

But I agree that increased lateral movement has weakened firms as institutions. When a firm hits a rough patch, individual partners have less motivation to ride it out. Instead, they can—and often will—take both their talents and clients across the street, to a peer firm. (Because of legal-ethics rules protecting client freedom to choose their lawyers, firms generally can’t impose non-competes on partners.)

And when many top partners leave a firm in a short time period, that can start the process of the firm’s collapse. As Yale law professor John Morley observed, partner departures can lead to more partner departures, turning into “a spiraling cycle of withdrawals that resembles a run on the bank.”

The prospect of damaging defections was clearly on the mind of Brad Karp, the chairman of Paul Weiss, when he became the first Biglaw leader to reach an agreement with President Donald Trump. Karp said in a firmwide email defending the deal that after the administration issued its executive order targeting Paul Weiss, rivals started “to exploit our vulnerabilities, by aggressively soliciting our clients and recruiting our attorneys”—posing an “existential” threat to the firm.

Imagine you’re a transactional partner at a top M&A firm, such as Davis Polk or Wachtell Lipton. You need approvals from an alphabet soup of federal agencies for the billion-dollar deals your clients have hired you to close, as I recently told Noam Scheiber of The New York Times (gift link).

With the stroke of a pen, Trump has told the world that your firm is, in Karp’s words, “persona non grata with the Administration.” Clients call you to express worries that the federal government won’t sign off on their transactions—and suggest they might have to replace you as their lawyer.

Do you stick it out with your current firm, while the firm fights the government in court—for months, or even years? Or do you move your practice to a firm that’s in the administration’s good graces?

In some ways, the most profitable firms are the most susceptible to such pressure. It’s extremely hard to achieve and maintain astronomically high profits per partner. Defections of just a few big rainmakers can quickly dent those numbers. So it comes as no surprise that the firms settling with the Trump administration enjoy much higher profits per partner, on average, than the firms battling the administration in court.

That’s the duality of Biglaw: firms are both stronger and weaker than they’ve ever been. They’re enjoying record profitability, but maintaining sky-high profits requires them to hold on to their top rainmakers at all costs. That gives rise to a major Achilles’ heel—one the executive orders targeted with uncanny precision.

The challenge faced by law firm leaders today is how to hold together partnerships through non-financial means. As Indiana University law professor William Henderson noted around the time Dewey & LeBoeuf collapsed, “Money by itself is weak glue.” But figuring out what can replace it is easier said than done.

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