September 29, 2014

LAW360
By Erin Coe

SAN DIEGO – Although the economy is generally brighter today than in recent years, flat demand for legal services is leaving numerous popular practice areas struggling to stay profitable, with some lawyers seeking cover in busier specialties and others fleeing to firms that bill at lower rates.

Firms in the AmLaw 200 are racing after the same matters since demand isn’t increasing, and they are primarily able to execute only on the high-end, bet-the-company matters that can justify the billing rates of the big firms, according to Larry Watanabe, founder of legal recruitment firm Watanabe Nason LLC.

“Practice areas like corporate, mergers and acquisitions, patent litigation and commercial litigation continue to be busy and real estate has rebounded well,” he said. “Those are examples of areas where firms are focusing their efforts right now.”

But while a practice area may be hot one year, it can be slow the next, and firms always need to be on the lookout for market developments that could take a toll on the demand for a practice group’s services, according to Larry Latourette, a principal at Lateral Link Group LLC.

“Law firms and lawyers always need to ask themselves whether they are in a bubble or whether they can count on this level of work in a steady way year in and year out,” he said.

Here, experts point to six practice areas that are lagging right now:

Bankruptcy

Because bankruptcy practices tend to do well when the economy is floundering, the 2008 financial crisis served as a boon for restructuring attorneys. But as the economy and capital markets have picked up, fewer companies are finding themselves in distress and those that are in trouble are getting acquired.

The decline in company defaults is leaving slim pickings for big firms that tend to represent creditors committees, banks and private equity funds as well as for smaller, more specialized firms that tend to represent debtors, according to Michael Allen, managing principal at Lateral Link.

“Both sides are seeing a slowdown in those markets that are tied to when the economy goes bad,” he said. “If companies are paying their bills and making money, they don’t have beef over trying to negotiate a haircut, and there is less work to go around.”

In May, Stutman Treister & Glatt, a 25-lawyer bankruptcy firm based in Los Angeles, shut its doorsafter more than 60 years of practice in part because of slower Chapter 11 activity and greater options for distressed companies to refinance. The firm was known for advising debtholders in some of the most complex U.S. bankruptcy cases, including Lehman Brothers Holdings Inc., Enron Corp., Delphi Automotive PLC and Tribune Co.

“It was a very profitable firm, and some partners had $7 million or $8 million books of business, but there were a lot of attorneys who weren’t absorbed by the market,” Allen said.

Law firms are not as motivated right now to hire bankruptcy partners because even if they have a current multimillion-dollar book of business, the value may drop over the next couple of years, according to Allen.

“Law firms have less of an appetite to bring on bankruptcy partners,” he said. “It’s not likely their book of business is to scale and will grow. It’s more likely their book of business will stay the same or drop.”

While many large firms have trimmed their bankruptcy attorney ranks, other firms have moved their restructuring talent over to other practices in the meantime until there is another downturn, according to Bob Denney of law management and strategic planning firm Robert Denney Associates Inc.

“Some lawyers have shifted to other practice areas, such as commercial litigation or any type of financial work,” he said.

Latourette predicted that further bankruptcy attorney cuts at firms were unlikely but that firms wouldn’t be growing their practice until the next downturn.

Labor and Employment

Even though wage-and-hour class actions, particularly in California, are not declining, lawyers are seeing a gradual repositioning of labor and employment practices from major law firms to those that are able to charge clients lower rates, according to Allen.

Employers are still taking significant wage-and-hour class actions and high-stakes cases to major law firms like Morgan Lewis & Bockius LLP and Proskauer Rose LLP, but they are handing off single-plaintiff disputes, counseling needs and rudimentary employment work to boutiques like Littler Mendelson PC and Ogletree Deakins Nash Smoak & Stewart PC and AmLaw 200 firms with lower billing rates, according to Watanabe.

“There is tremendous rate pressure in employment litigation unless it’s really significant class action work,” he said.

The move coincides with the globalization of law firms over the last decade and their focus on practice areas where they can increase their rates, according to Watanabe.

“Once major firms open offices throughout Europe and Asia and in order to justify those cost structures, they need to maintain productivity and profitability,” he said. “Firms have no interest in creating a global law firm platform and having partners with a localized practice with accompanied rate pressure. Those things don’t coincide with one another.”

Securities Litigation

The financial crisis brought in a steady amount of work for securities litigators, but in the last year or two, fewer big cases have been launched and many that have been filed are getting settled, according to Latourette.

“There has been a readjustment in this area,” he said. “Some thought that President Barack Obama’s new emphasis on being tough on the financial industry would result in additional securities cases. There have been some, but some have settled and the others haven’t taken up as huge a volume of lawyers as the litigation following the meltdown did.”

As a result, some securities litigators have moved from big firms to smaller firms and boutiques, Latourette said.

“The grand old days of securities litigation are probably gone unless there is some sort of new exposure,” he said. “If firms are getting sued over cyberbreaches, for instance, and there’s a securities angle, that could foster another boom. But absent something like that, the practice will limp along.”

Insurance Defense

Because insurance defense practices tend to be made up of high-volume, low-rate work, some of the firms that have specialized in this area are running into problems making money or staying afloat this year, according to Denney.

“Firms can’t charge that much for insurance defense matters,” he said. “And because they are high-volume, you need to have an awful lot of cases to go on to make money at low margins.”

Nelson Brown & Co., the insurance boutique that last month rebranded itself from Nelson Levine de Luca & Hamilton LLC after two of the name partners left, has experienced a shake-up this year. On Sept. 18, a firm spokeswoman told Law360 the firm decided to eliminate some attorney and staff positions. At least six attorney profiles were recently removed from the firm’s website, according toGoogle cache records of the pages.

The firm has seen its entire data privacy practice move to Lewis Brisbois Bisgaard & Smith LLPwhen that firm opened a new office in the Philadelphia suburbs, while partners working in subrogation and liability defense have departed to start their own firms or join others.

Finding fewer insurance defense firms available, some insurance companies have resorted to bulking up their in-house staffs to take on the work, according to Denney.

“Instead of having outside lawyers manage all of their cases, insurance companies have started to build up their legal departments to handle the work,” he said.

Unlike bankruptcy lawyers who may be able to shift over to litigation areas when their practice is slow, insurance defense attorneys have fewer options and may end up having to move to smaller firms with lower overhead, he said.

White Collar

Some law firms have not been as successful with their white collar practices as they had hoped, in part because the attorneys they enlisted from the U.S. Department of Justice and other government agencies have not been effective at generating business and getting the practice going, according to a legal recruiter who asked not to be named.

About 10 years ago, a wave of firms committed to having a white collar capacity to feel competitive, but over the years, that interest has waned, the recruiter said.

“The reality is that the people coming from government weren’t cut out to be part of major law firms,” the recruiter said. “They were smart lawyers, but they weren’t used to getting out on the street to compete and build a practice. Firms found that some partners were not developing business and were generally unproductive.”

Some firms have pushed out the white collar talent they acquired, leading those attorneys to return to the government or head to boutiques, according to the recruiter.

“Firms are not clamoring to add those with white collar experience as of late,” the recruiter said.

Public Policy

Gridlock in Congress has taken a toll on law firms’ lobbying practices over the last couple of years, and the drop in business has been particularly noticeable in Washington, D.C., where many of the groups are based, according to Latourette.

“The Hill used to be the solution for many problems,” he said. “Appropriations and big dollars could be had if you had lobbyists in D.C. working Congress, but now with the gridlock, the amount of work has slowed and lobbying revenues are off. … The whole industry has suffered along with the rest of the country because of the dysfunction of Congress.”

Big firms like Akin Gump Strauss Hauer & Feld LLP, Holland & Knight LLP and Squire Patton Boggs LLP still remain big players in the public policy area, but several D.C. firms are condensing their lobbying groups, according to Latourette.

“Their groups are tightening up because the dollars just aren’t there,” he said.