The Meaning of America’s Largest Law Firm’s Bankruptcy

On May 28, Dewey & LeBoeuf LLP international law firm submitted its bankruptcy filings to the federal bankruptcy court in Manhattan, formally declaring the end of the century-old top law firm, and becoming the biggest law firm bankruptcy in U.S. history.

According to court documents, Dewey & LeBoeuf had a debt of $315 million and assets of only $193 million, and was in a position of insolvency. Headquartered in New York City, the firm was the product of the 2007 legal merger between Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & McRae LLP, and had been quite prominently known in its professional field; during its heyday, it employed more than 1,400 lawyers in 26 offices. However, with the demise of Dewey & LeBoeuf, the former industry giant collapsed instantaneously and nearly all of its partners fled to join other law firms.

Dewey & LeBoeuf’s collapse undoubtedly elicited a sigh; as the former federal judge Richard Holwell puts it, “This is a very sad day for the legal profession.” At the same time, Dewey & LeBoeuf’s demise sends out a caveat: This tragedy might not have been an anomalous case, but rather exposed the existence of deep-seated problems in the American legal profession. For a long time, people gravitated toward the idea that the legal profession, especially large law firms that specialize in corporate and securities cases, can easily withstand the risks associated with economic cycles. In a bull market, the firms focus on managing listings, mergers, acquisitions and other transactions; should a recession hit, the firms undertake a large number of bankruptcy and reorganization cases. In fact, one of Dewey & LeBoeuf’s predecessors, Dewey Ballantine LLP, was able to develop rapidly during the Great Depression precisely because of this model.

Yet the financial crisis that swept the world in 2007 seems to have broken the large U.S. law firms’ “impregnable” image. After the 150-year-old Coudert Brothers LLP declared bankruptcy in 2006, two large San Francisco law firms, Thelen and Heller Ehrman, closed down due to poor business in 2008, followed by the 2010 disintegration of 500-employee Howrey LLP due to financial difficulties, and the demise of Dewey & LeBoeuf LLP today. These seemingly unsinkable “giants” are much like the Titanic that collided into an iceberg and sank below forever.

On the surface, the reason behind the collapse of large law firms as represented by the Dewey & LeBoeuf case is the global financial crisis that produced a difficult market, resulting in sharp declines in business volumes, leading to a deficit when revenues cannot support enormous expenditures. However, under careful analysis, Dewey & LeBoeuf’s bankruptcy essentially reflects the drawbacks that have been long-present within the large U.S. law firms’ operation and governance.

Law firms are providers of professional legal services; their survival and prosperity are contingent upon two factors, internal and external. Internally speaking, the law firm as an organization has from the start emphasized “human compatibility,” that is, mutual trust and cooperation between its members. The earliest law firms began as forms of partner institutions, with all of its partners bearing several joint and unlimited liability debts in the business process; sink or swim, they were in it together. Therefore, only lawyers who were philosophically similar and had mutual trust chose to join the same firm and conduct business together, which ensured that there existed a sense of mission and cohesion within the organization. Externally speaking, the legal profession as a service industry cannot be detached from the trust of its customers. To win the trust of his customers, a lawyer must be diligent, always show loyalty to his customers and provide high-quality professional services. As one critic said, the only valuable asset that a law firm has is its customers.

However, as some firms grew larger and stronger, the internal and external foundations were abandoned. The traditional partnership organization firms can adhere to “human compatibility” but are subject to the unlimited liability system, and cannot expand like ordinary share-based companies that can absorb a large number of new members. To overcome this issue, the limited-liability-partnerships form was legally generated, which allowed partners to enjoy the benefits of the limited liability system under the company’s law. As a result, law firms can feel assured when including a new partner and fixate their attention on whether or not the new partner can bring a lot of business to the table rather than the congeniality between the different partners.

Over time, a less appealing culture began to develop within the legal profession. Large law firms viewed lawyers who could bring big businesses as gold mines, and thus considered attracting this type of lawyers to join the firm as their only mode of expansion and development. To this end, various law firms began to whip out huge salaries to recruit “outstanding talents,” and even initiated battles to “dig out talents” that ultimately resulted in heavy financial burdens. For instance, Dewey & LeBoeuf insisted on providing million-dollar guarantees to its partners even in its financially distraught year, in an effort to maintain “the troops’ morale.” This approach is wholly contrary to the original intent of the law firm structure, causes the public to renounce the idea that partnerships are based upon concepts of loyalty, collaboration and equality, and makes them view law firms as self-interest-maximizing, money-making machines.

It is under this kind of money first, profit-driven thinking that the attitude and quality of customer service at large law firms began to take a large toll. Lawyers no longer view the client as God, but rather see them as “easy targets” for deception and exploitation. In recent years, large law firms ask for high consulting fees of a few hundred dollars per hour as if it should be the norm, and allow the customer to bear the full cost of their operations while rarely guaranteeing the quality of their services. Over time, many large law firms have deviated from the core requirements of the service industry; instead of putting effort toward increasing work efficiency, reducing operating expenses and improving service quality, energy has been channeled to extensive growth strategies of “talent digging.” When the economic situation was excellent, customers were generously willing to carry the huge cost of legal services and legal partners were often deluded by the easily gained sum, buying into the illusion that this “wool on sheep” pattern of growth could sustain forever and continued to increase spending lavishly. As Indiana University law professor William Henderson said, “The biggest problem big firms have right now is 30, 40, 50 years of incredible success. That breeds reluctance by partners to think of a new mode.”

When the financial crisis struck, traditional clients of these firms — large financial institutions — were closed down or forced to tighten their belts, and the good days became a thing of the past. Clients began to complain about the big expensive bills of the large law firms, and even sought financial advisers to audit spending or switched to those firms that had lower rates but higher efficiency. Under the suddenly change of climate, established partnerships like Dewey & LeBoeuf could not adapt and eventually came crashing down.

Dewey & LeBoeuf has again cautioned the entire legal profession to bear its foothold in mind: Carry a concept of a shared wish to overcome difficulties and provide exemplary service to clients by virtue of expertise and professional conduct. The economic prosperity of the past had generated a herd of rich and powerful law firms and successful millionaire partners, but in this time of crisis, the entire legal profession now faces big reforms. Even though societal and market demand for professional legal services won’t disappear, it seems that in the long term, law firms need to provide more efficient services in order to survive the fierce competition in the industry. Faced with this challenge, large law firms will not be spared a choice: Take the initiative to convert back to the basics, or accept the fate of elimination.