Law Firms Tightening Belts -- By Request

By V. Dion Haynes
Washington Post Staff Writer
Monday, October 20, 2008

Robert Ruyak, chairman and managing partner of Howrey LLP, said he began feeling the heat from corporate clients last year. With tighter budgets, legal departments at Procter & Gamble, Qualcomm, GE Healthcare and others prodded the Washington-based law firm to provide significant savings in the fees it charges.

Howrey responded: It is assigning more work to lower-paid staff attorneys and negotiating fixed fees for certain clients rather than billing by the hour. To keep up profit, the firm is hiring fewer associates and has acquired a Madrid firm to expand its antitrust practice into the booming Spanish market.

Washington area law firms are retooling due to a financial crisis that is bringing growing pressure from corporations and a drop in work in mergers and acquisitions, litigation and commercial real estate. At least one global firm with a D.C. office is closing, and another announced layoffs last week. Some big firms here are becoming bigger through mergers, which are up this year, or by snagging teams of lawyers from their competitors. Others are shifting to more lucrative specialties, such as bankruptcies, foreclosures and regulatory work related to implementing the bailout package, or capping salaries of associates and restructuring.

"Clearly, we have to economize for our clients," Ruyak said. "This is more important because of the uncertainty."

More than 36,000 lawyers work in the Washington region, ranking it behind only the New York City area, according to the Greater Washington Initiative, an economic development organization. More than 60,000 people work in the legal profession in the Washington area, which, per capita, employs more in that sector than any other metropolitan region in the nation. Washington lawyers' heavy reliance on work in government contracts, regulations and technology has protected them from the widespread layoffs occurring in New York, particularly their counterparts involved in mortgage-backed securities.

Still, the D.C. area's legal community is not immune to the shakeups at global law firms.

Heller Ehrman, a San Francisco-based law firm with an office in Northwest Washington, said recently that it is closing. The firm had operated since 1890 and specialized in big litigation. It collapsed in part because it was unable to replace income from several cases that were settled and after some of its key lawyers were hired away by other firms, according to an official who spoke on condition of anonymity because he was not authorized to speak publicly. The official said about 80 people worked in the D.C. office.

Last week, the Clifford Chance firm announced it was laying off 17 lawyers from its New York office and three from the District after losing litigation work from the demise of the financial services industry. The firm said it expects to lay off some non-lawyers in its business unit by the end of the year.

The firm "did all kinds of litigation. But that's not happening right now," said George Schieren, a partner at the firm who oversees securities litigation.

"After September 15, we lost investment banks," he added. "That's what drove the problem."

The conventional wisdom has been that litigation work, which represents nearly a quarter of the revenue generated by the legal industry, increases in economic downturns. But the West Peer Monitor Economic Index, a survey of law firms around the nation, shows that while demand for bankruptcy and regulatory work grew, litigation declined 2 to 5 percent in each of the past 10 months. Mark Medice, who oversees the survey, attributed the decrease to cost-conscious corporations curtailing their legal filings.

And as demand drops, so does revenue at some law firms.

Officials of corporate legal departments say they have reduced spending on outside law firms. Legal spending by corporations increased 3 percent this year, compared with 6 to 7 percent last year, according to a survey conducted last month by Hildebrandt International, a legal consulting firm.

"The uncertainty has a chilling effect on mergers and acquisitions" of corporations, said Douglas Woloshin, a partner at Duane Morris.

In the past, "there would probably be five to 10 transactions on a monthly basis -- local, regional or national. That has now dwindled to one to five a month," Woloshin said, adding that the firm now is relying more on its immigration and intellectual property practices.

Law firms' profits per equity partner dropped by 9.1 percent in the first half of 2008, compared with a 9.3 percent increase in the past seven years, according to a study by Citi Private Bank.

Because of the higher expenses they pay for associates' salaries and office space, larger firms in general are hardest hit by the slump, Medice said. But smaller ones say they are struggling because it is taking longer to collect fees from clients.

"What we're finding is that people who normally pay every 30 days stretch it out to 45 or 50 days. People who normally pay every 45 days stretch it to 60 or 75 days," said Sam Klewans, a partner at Grad, Logan & Klewans in Falls Church.

"In a small firm, you live on cash flow," Klewans added. "It can become difficult."

But others say the faltering economy is spurring them to seek new opportunities. Experts say they are seeing a wave of mergers and expansions of law firms.

There were 58 law firm mergers in the first three quarters of the year, up from 44 last year, according to Altman Weil, a legal consulting firm.

Crowell & Moring, which specializes in antitrust and bankruptcy, brought in Lightfoot Vandevelde, a small Los Angeles firm with seven attorneys handling corporate litigation cases. Muldoon Murphy & Aguggia linked up with Atlanta-based Kilpatrick Stockton to expand their representation of financial institutions. Ross, Dixon & Bell, which specializes in commercial litigation and insurance, merged with Atlanta-based Troutman Saunders, which handles real estate and finance cases. And O'Connor & Hannan, which practices government relations law, joined forces with Los Angeles-based Nossaman Guthner Knox & Elliott, which handles land use and health-care cases.

Some are growing through acquiring lawyers from other big firms.

Last month, Arent Fox expanded its commercial real estate practice by hiring away a team of four from Nixon Peabody -- Edward M. Rogers and Debra D. Yogodzinski were named partners; ElChino M. Martin was named counsel to the real estate group; and Ellen M. McCarthy was named director of planning and land use. They brought with them a list of high-profile clients, including the Freedom Forum, which owns the Newseum; Specialty Hospitals of America, which owns United Medical Center in Southeast; and Abdo Development, which is overseeing a reconstruction project at Catholic University.

Arent Fox officials said even though revenue is up, the firm needed an experienced team to handle the more rigorous and cumbersome procedures that large-scale projects now require in the aftermath of the financial crisis.

"Given all that's happened over the last 90 days, we're clearly heading into an environment of more government regulation," said Mark M. Katz, who heads the firm's real estate practice.

"The deals are taking longer to close," Katz added. "It takes longer and is more complicated."

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