Dewey & LeBoeuf to close on Friday? Lessons to be learned for all law firms.

Over the last few years quite a bit of attention has been focused on the financial difficulties experienced by some smaller and mid-sized law firms as a consequence of the global economic conditions.  Many would have thought that the larger firms would continue to thrive even in a downturn – after all, distressed situations for client companies tend to generate lots of work for lawyers as they seek to restructure or renegotiate contracts, and economic downturns often lead to a rise in white-collar litigation. However, the sad tale of Dewey & LeBoeuf should serves as a timely warning that no firm can consider itself immune to failure, and that in a people business once things start to go wrong they can unravel with appalling haste.

From the outside, Dewey looked like it had it made.  The firm came about as the result of the merger of two venerable old firms (LeBoeuf, Lamb Greene & MacRae and Dewey Ballantine) in 2007.  At its peak, the merged firm (“Dewey”) had more than 1,100 lawyers in 26 offices spanning major financial markets around the world, was one of the largest law firms in New York City and one of the largest US firms located in London.  It was a multiple award winning business – it was ranked in American Lawyer's prestigious A-List in 2011, which ranks the top 20 law firms in the US according to their revenue per lawyer, pro bono activity and commitment to associate satisfaction and diversity, and was ranked as one of Vault's "20 Best Law Firms to Work For."

When Dewey & LeBoeuf reported a revenue increase for 2011 to $935 million, up $25 million on the previous reported figure, it seemed that things were going reasonably well.  Profits were reported as $340 million, up 1% on the prior year, which was not a stellar performance, but hardly disastrous. From the outside, Dewey seemed to have things pretty much under control.

But that is when things started to go seriously off-track.  The first sign of difficulties was that some key lawyers started to leave the firm – such as the New York insurance law team.  Rumour has it that this was at least partly the result of dissatisfaction between different stakeholders in the business – particularly salaried partners whose pay was cut significantly to enable the firm to meet guaranteed payments to laterally-hired “stars” who, in many cases, had not yet generated the income levels expected of them. 

Then the American Lawyer magazine, which had reported the figures set out above, subsequently revised the 2010 and 2011 financial numbers it reported for Dewey.  The re-examination of the Dewey numbers appears to have been prompted by an article that appeared in Bloomberg where Richard Shutran was quoted as saying the firm earned $250 million in profits for 2011, far less than the $340 million figure reported by AmLaw three weeks earlier.  The Bloomberg story itself followed a Wall Street Journal piece in which former partners said the firm’s 2011 revenues were around $780 million. 

As a consequence the revenue figure for 2011 was revised by AmLaw to $782 million, up 3% from the previous year’s revised figure of $759.5 million.  So although the actual numbers for both years were considerably lower than originally reported, they still showed an upward revenue trajectory.  At the time, Shutran explained the discrepancy in the numbers as being the result of the fact that the American Lawyer uses different metrics to measure firm revenue than those used in the firm’s normal budget calculations, and that may well have been correct, but it seems that the reporting fiasco had turned a difficult situation into a disastrous one.

By April 2012 it was reported that the firm had retained bankruptcy counsel, its 2012 summer associate programme was cancelled, and the trickle of exiting lawyers became a flood.  Despite the management team having tried to keep a brave public face on the situation for as long as possible, stories began appearing in the press that the firm’s own leadership had discreetly advised partners to seek employment elsewhere and on 4^th May 4, it is believed that the firm sent "conditional advance notice" to all US employees under the Federal WARN Act that their employment may be terminated - the first formal acknowledgement to employees that the firm could ultimately close. 

By the second week in May, it was being reported that approximately 200 of the 300 total partners had left the firm, and it is now being openly speculated that the firm will enter bankruptcy in the US, and administration in the UK, as early as this Friday.  Although there has as yet been no formal confirmation of this, it is impossible to see how any firm can recover from such a position, and it seems that closure is indeed inevitable.

Doubtless over the coming months and years many people will look in detail at what has caused the demise of such a once-great business.  From the outside, for the time being, all we can do is to speculate.  But the one thing which is already crystal clear is that in businesses which depend on their people as their number one resource, as all law firms do, then a few key defections can lead to  panic and a rush to the exit door, with devastating consequences. 

It is astonishing that a firm which was still making quarter of a billion dollars in profits by the end of 2011, and one which was still winning awards both for the quality of its work and as an employer, has collapsed as quickly as Dewey has done.  Clearly the firm had problems which it needed to address, such as the tensions within the firm between those seen (and remunerated) as “stars” and those who were not, but these should not have been insurmountable.  

There will be lessons to be learned by all firms from the aftermath of the Dewey saga, and managing partners of firms across the world may sleep less easily in their beds at night having seen how a firm can get many things right, but still fail spectacularly quickly.