Six weeks ago, Lucantonio Salvi, an attorney at Sheppard Mullin Richter & Hampton in Washington, got an unusual phone call.
One of his clients, a middle-market defense contractor that provides construction services, was struggling to pay the principal on a bank loan — and needed Salvi’s help to restructure loan payments.
Salvi is now negotiating with the bank’s lawyers on a deal he hopes will be amicable for both the bank and the contractor. Repaying debt, he said, is becoming a growing problem among small and mid-size contractors in the face of automatic federal spending cuts known as the sequester.
“This is an example of what a lot of government contractors are facing these days,” Salvi said. “It’s a tough economic environment with lots of uncertainty that affects [contractors’] profitability.”
The uncertainty surrounding defense spending cuts also means a new stream of work for people such as Salvi, who specializes in the aerospace and defense industry.
Sequestration-related legal work is flowing in from nearly all directions as contractors consider laying off workers and reexamine parts of their business that can be trimmed or sold off. Worker Adjustment and Retraining Notification Act notices, which must be sent to employees in advance of some mass layoffs, call for the expertise of employment lawyers. Bid protest claims, which challenge the government’s contract awards decisions, call for litigators. The buying and selling of business units calls for corporate lawyers.
“A year ago, we talked about the budget uncertainty having the effect of creating more legal work,” said Robert Nichols, co-chair of the government contracting group at Covington & Burling, the District’s largest law firm. “We’ve seen that materialize and we expect it’ll continue to do so.”
The legal industry feeds off of changes that force companies to play by a new set of rules — the Patient Protection and Affordable Care Act drove so much regulatory and compliance w
ork to health care attorneys that some joked the reform law was the “lawyers’ employment act of 2011.” Similarly, the sequester is bringing new business opportunities to the region’s law firms.
Mergers and acquisitions because of tough economic times are poised to bring an influx of work for corporate lawyers, said Jay Heath, a government contracts attorney at McKenna Long & Aldridge in the District. Those deals, he said, will bring in government contracts lawyers to advise on the rules of the federal acquisitions process.
“If a contractor that has one foot in the defense space and one foot in the commercial space needs to divest the defense business unit . . . that’s where you’re going to get the uptick in M&A work,” Heath said. “The corporate [attorneys] are going to be structuring the deals. The tie-in will be having government contracts attorneys on either side of those deals providing expertise on federal acquisitions regulations.”
The opportunities from sequestration are pushing some firms to make strategic moves to win certain types of business from contractors.
A year ago, Covington & Burling began a concerted effort to quadruple its government contracting group, growing from five to about 20 attorneys. The firm, which is still looking for more, has brought in, among others, Susan Cassidy, a former senior in-house attorney at Northrop Grumman; Steven Shaw, who was the Air Force’s top anti-fraud enforcer; and Sarah Wilson, a former judge in the U.S. Court of Federal Claims, which oversees contractors’ claims against the government.
Each of those hires brings a specific set of contracting knowledge that helps capture new business, Nichols said.
“We believe that . . . fraud matters are already significantly on the rise,” Nichols said. “They’re going to continue gaining momentum over the next decade as budget shortfalls play out.”