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April 12, 2009

Law jobs dry up as firms sit tight

Debt-beset students face rough waters in Del.'s legal industry

By MAUREEN MILFORD
The News Journal

Danielle Eisenbrey of Newark laughed grimly when she heard a fellow third-year law student detail his Plan B for employment after graduation: Sell suits at a JoS. A. Bank Clothiers store.

"We all understand. With the way the legal economy is, if you can't get a legal job, you have to find a job somewhere," said Eisenbrey, 25, a third-year visiting student at Widener University School of Law who is, so far, without a job offer.

For Eisenbrey and other law students burdened by more than $100,000 in student loans, this wasn't what they envisioned when they entered law school in 2006. In those intoxicating times, a $160,000 entry-level job at a big firm was the expect- ed payoff for the pain and sacrifice.

"You don't go through all this stress and anxiety to get any job," said Eisenbrey, who will graduate from Pace Law School.

Soon-to-be graduates like Eisenbrey are on the front lines of what is the worst economic downturn to hit the legal community in memory. Hardest hit are legal specialties in corporate finance, mergers and acquisitions and real estate.

After years of heady growth that pushed some starting salaries for new lawyers higher than those paid to some judges, demand for legal services has plummeted.

Average sales in the legal-services sector nationwide fell 0.53 percent in 2008 from 2007, after years of solid growth, according to Sageworks Inc., a financial data company specializing in private companies.

Increasing the pain, corporations are moving aggressively to reform the legal industry while it is weakened, demanding reforms in billing practices clients say lead to excessive charges.

With prospects that the legal industry will slump even more over the next six months, confidence among managing partners fell to new lows in the first quarter, according to Citi Private Bank Law Watch. Profit growth, if any, is not expected to exceed 5 percent over the next 12 months.

"MPs [managing partners] no longer appear to hold out any hope that the legal market -- or their firm -- is exempt from its impact," the report said.

That was driven home in Delaware recently when the 106-year-old WolfBlock of Philadelphia, which has had an office in Wilmington, announced it would dissolve. Nationwide, other firms have dissolved and dozens of law firms have resorted to layoffs. More than half of the 50 largest U.S. firms have cut lawyers and staff in the past 18 months, according to Bloomberg News.

While Delaware firms are largely spared the mass layoffs, they report cutbacks of support staff and paralegals, hiring freezes, cuts in summer programs for law school students and other belt-tightening measures.

That's a concern for a state that relies on its community of lawyers to support its important incorporations business.

"One of the reasons companies come here is because of our legal expertise," said Cynthia Kane, special assistant with the Delaware Secretary of State.

In the fourth quarter of 2008, legal services employment in Delaware dropped by 2.4 percent, compared with an overall job loss of 2.7 percent, according to George Sharpley, labor market economist with the Delaware Department of Labor.

"This is my 31st year in practice and I've never seen these kinds of layoffs and failures," said David Stratton, managing partner of the Wilmington office of Pepper Hamilton.

Thomas Sager, general counsel with the DuPont Co., a lawyer for more than three decades, said there's been nothing like it -- "not even close." He said most of the corporate counsel he's been in touch with are holding down their legal expenses, with DuPont targeting a 10 percent reduction in legal expenditures.

"Most legal departments have bought into the idea of doing more with less," Sager said.

Some companies are aggressively slashing legal costs as the recession drags on, said Susan Hackett, general counsel of the Association of Corporate Counsel.

"Companies don't want to cut functions first that produce revenue. They want to cut expense functions and, while the law department produces vital services, they are a cost center," Hackett said.

That diminishes hope for private-practice lawyers and students looking for a job in a corporate legal department.

The National Association for Law Placement reports that all measures of legal employment trended down in 2008, marking the beginning of what could be a weaker employment market for "a number of years."

"I think the whole industry is concerned," said LeaNora Ruffin, president of the association and assistant dean of career development at Widener Law.

Major corporate clients appear to be using the crisis to examine the existing business model for law firms. In September, the Association of Corporate Counsel launched an initiative to address the traditional fee structure, among other things.

"It's tipping-point time," Hackett said. "There are firms out there who believe that, if they can just hold on for a couple years, when the economy improves, things will go back to the way they were -- to the golden age of profitability. They're nuts."

Lawyers dislike risky territory

In the past three months, Stratton, a bankruptcy lawyer with Pepper Hamilton, began getting letters that show just how tough things are.

Résumés of mid-level and senior associate lawyers are saying things like, "I know I'm not a bankruptcy lawyer but if you're looking for someone with experience I'm willing to retool."

It's a dramatic about-face for a profession known for its steadiness and its courtly civility.

During previous downturns, firms might quietly rescind offers to new associates or let go contractors or under-performing lawyers. But layoffs of partners or associates on the partner track were almost unthinkable.

"No one who goes through the time, energy, money and sacrifice to go to law school and obtain their J.D. [doctor of law degree] ever expects to lose their job through a layoff," said Laura Davis Jones, managing partner of the Wilmington office of Pachulski Stang Ziehl & Jones in Wilmington.

It's particularly jarring for lawyers who, by nature, are risk-averse.

People go into law with the expectation that their lives will be relatively stable, said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Unlike in some corporate careers, lawyers could advance without moving to a new city every two years.

The new environment runs contrary to those expectations, Hackett said.

"Worse than that, they've been trained to look to precedent -- or previous experience -- and there is not previous experience for what's coming up. This is new territory. And lawyers don't necessarily have the skill set or comfort zone to jump into new territory. They are not entrepreneurs," Hackett said.

Nearly two-thirds of the lawyers surveyed by Law Watch expect business to drop over the next six months.

With expenses expected to grow by as much as 10 percent over the coming year, firms are looking to trim wherever possible. The largest expense is lawyer compensation, followed by salaries for secretaries and support staff, office costs and technology expenditures.

"Many firms have been actively trimming fat from their budgets for some time now, and these findings suggest a sense that there is not much left to cut," the Law Watch said.

So, many firms are doing the unthinkable -- resorting to layoffs. Even top-tier law firms -- such as the 108-year-old White & Case, whose main office is in New York City -- have had layoffs. White & Case is telling nearly two-thirds of its incoming fall associate class not to report to work until 2010. A limited number of public-interest fellowships will be offered to deferred associates who agree to pursue volunteer and community service during the period. They will be paid a $75,000 stipend. Deferred associates who do not do volunteer and community service will receive $45,000. The stipends will cover bar-exam costs.

Other major firms with offices in Wilmington, including Skadden, Arps, Slate, Meagher & Flom; Reed Smith; Blank Rome; Buchanan Ingersoll & Rooney; and Stradley Ronon Stevens & Young, have had layoffs.

Skadden said it did not lay off any attorneys in Wilmington. Blank Rome said it cut one lawyer in Delaware.

Reed Smith said it has not had any staff or attorney cuts in Wilmington. But in a March internal memo informing personnel of a second round of layoffs, the managing partner said the firm's capacity continued to exceed the demand for legal services.

"Unfortunately, we do not foresee significant changes in this picture in the near or medium term," wrote Gregory B. Jordan, global managing partner.

Buchanan Ingersoll & Rooney, a Pittsburgh-based firm that is one of the top 100 U.S. law firms, had staff cuts in February. There were no layoffs at the Wilmington office, spokesman Tracie Gliozzi said.

Stradley Ronon said there were no layoffs in Wilmington.

Richards, Layton & Finger, a venerable Delaware firm, cut the summer program for law students -- called the summer associate program -- in half, according to William Wade, executive vice president of the firm.

Morris James, another old-line Delaware firm, has put hiring new associates on hold.

"What we're basically doing is not filling vacancies," said Edward McNally, head of litigation at Morris James in Wilmington.

'Dramatic downward shift'

Because of its unique legal history, Delaware lawyers have not been as hard-hit as attorneys in other communities, experts said.

Delaware is the preferred home for corporate Chapter 11 bankruptcy cases, so bankruptcy practitioners have been thriving since last year. The federal court has a busy docket of intellectual property cases.

"We're busier than ever -- but this is our time," said Jones of the Pachulski Stang bankruptcy specialists.

What's more, many of the homegrown firms are tiny compared with global firms that can have more than 2,000 attorneys.

But Delaware firms acknowledge the environment is challenging. The expected wave of litigation related to the corporate scandals and financial meltdown has not yet materialized, according to Law Watch.

Plaintiffs' attorneys are "perhaps unwilling or unable to invest the substantial sums of money needed to fund these endeavors up front," the Law Watch said.

Sager of DuPont said that, when it comes to complex commercial disputes, there's been a "dramatic downward shift in the zeal" among plaintiffs.

Seth Rigrodsky, a plaintiffs' lawyer with Rigrodsky & Long in Wilmington, said he's noticed a drop in filings in Delaware of shareholder derivative cases. The decrease has intensified in the past six months, he said.

"I haven't seen that drop off in other places. We try to encourage people to file in Delaware. But people are filing in other courts," he said.

Another legal sector hit hard has been real estate.

Parkowski, Guerke & Swayze, for example, let go some staff that was related to the commercial real estate practice, said David Swayze, a firm director in Wilmington.

Major changes lie ahead

For Ruffin, who recently took the helm of the association for law placement, it could be the dawn of a new age for how law is done.

"Everything is on the table. People are willing to discuss things in a way they haven't been."

For starters, many expect there will be downward pressure on starting associate salaries. The so-called "lock-step" compensation model, where salaries increase every year based on what the competition is paying, is threatened as well.

Clients are rebelling against paying $300 an hour for a junior level associate to do legwork, said Hackett of the corporate counsel association.

In 2007, some new associates at the highest end made as much as $185,000, according to the law placement association. In comparison, judges in the state's prestigious Court of Chancery -- considered the most important business court in the world -- make $185,750.

Clients are hiring non-lawyers to do tasks that lawyers previously had done but don't necessarily require a legal degree, such as document production work, legal research and preparing witnesses.

"A lot of clients are looking for people who can do it for less, such as outsourcing to providers where labor is cheaper -- from West Virginia to India," Hackett said.

In response to client demands, some firms are making adjustments. For example, Locke Lord Bissell & Liddell, a national law firm, has attempted to reduce its legal research costs by having the firm turn to a lower cost online legal research service called Loislaw for nonbillable legal research before turning to LexisNexis or Westlaw, according to Above the Law legal tabloid.

A firmwide memo said the firm recognizes that, in today's economic climate, clients are sensitive to legal research costs passed on to them as disbursements, according to Above the Law.

The billable hour is under assault like never before, experts said.

"I don't have a crystal ball on what will be, but I wouldn't predict the billable hour will stand forever," Ruffin said.

Sager said DuPont wants to invest in long-term relationships with law firms that understand the challenges of the client and are willing to be flexible and creative in billing, such as considering bonuses for successful outcomes.

DuPont also has a large number of law firms that are not among the nation's largest on its slate of outside counsel, including Morris James and Potter Anderson & Corroon in Wilmington.

"This is a time to look at structural changes to be competitive years ahead," Sager said.

Ruffin said the crisis is also affecting law school curriculums. Widener Law, for example, offers courses on professionalism. Students are urged to consider other legal career paths that might not pay $160,000 to start, but that offer valuable experience, such as the military or the public sector.

"It's an interesting moment in time to see how the industry reshapes itself," Ruffin said.