Features

Howrey's Bankruptcy and Big Law Firms' Small Future


Howrey's Bankruptcy and Big Law Firms' Small Future

Photograph by Florian Groehn/Gallery Stock

With a recessionary chill in the air, Washington’s legal elite put on a brave face in October 2009 for an annual gala at the Ritz-Carlton Hotel. For the second consecutive year, Robert Ruyak, the dapper chairman of a litigation powerhouse called Howrey, heard his name included on an honor roll of leaders of the American bar. Ruyak, 60, certainly looked the part, his silver hair contrasting perfectly with a classic black tuxedo and cummerbund. Legal Times, the trade publication that sponsored the event, dubbed him a “visionary” who “in tough times found ways to build up his law firm, push for wise solutions for complex legal clashes, and insist on democratic and constitutional answers in government disputes.”

Since assuming the top spot at Howrey in 2000, Ruyak had more than doubled the firm’s size to 750 attorneys. He completed a merger with a Houston-based intellectual-property partnership and acquired firms or opened offices in Amsterdam, Brussels, Madrid, Munich, and Paris. Even with the economy deteriorating in late 2008, he hired 40 attorneys from a faltering bicoastal firm called Thelen, known for representing construction companies. In July 2009, Howrey expanded its reach into high tech by acquiring a boutique partnership in Silicon Valley. With average per-partner profits of $1.3 million, a firm record, Ruyak’s creation seemed like a countercyclical juggernaut.

Eighteen months later, Howrey collapsed.

The firm specialized in grind-them-into-dust antitrust litigation, with a sideline in patent and trademark disputes. It introduced an admired high-intensity training program for young attorneys. It invested in a support-services operation with offices in suburban Virginia intended to save clients money on labor-intensive document review. Other firms imitated its faddish one-name title and snappy marketing campaigns. One Howrey slogan: “In court every day.”

What remains of the firm is indeed in court every day: federal bankruptcy court, where creditors are picking over its carcass. A judicially appointed trustee is suing some former partners to claw back fees from ex-Howrey clients they took to new gigs. In what amounted to an autopsy report filed on March 11, the trustee, Allan Diamond, explained that Howrey’s demise was well under way by the time of the Ritz-Carlton fete on October 2009. The firm, Diamond wrote, hurtled “from boom to bankruptcy in less than three years,” or about the time it takes to complete a law degree. Ruyak, who declined to comment for this article, has landed at the Washington office of Chicago-based Winston & Strawn. The furniture and fittings from Howrey’s former Pennsylvania Avenue offices have been auctioned off, as has an art collection that included an Andy Warhol print of John Wayne.

Howrey is just one casualty of the contagion spreading through Big Law. In a new book, The Lawyer Bubble: A Profession in Crisis, Steven Harper, a recently retired partner of Chicago-based Kirkland & Ellis, ascribes the problem to self-inflicted mistakes ranging from growth for growth’s sake to breathtakingly incompetent leadership. The most spectacular collapse was that of New York-based Dewey & LeBoeuf last year. Other large partnerships that have expired in the past dozen years include Thacher Proffitt & Wood; Heller Ehrman; Jenkens & Gilchrist; Coudert Brothers; Brobeck, Phleger & Harrison; and Arter & Hadden. Some partners at Thelen stumbled twice: once when that firm fell apart and again after Howrey snapped them up before sputtering into Chapter 11.

“When Howrey imploded, it was kind of a shock,” says Ben Davidson, who joined the firm in 1997 and assumed he’d spend the rest of his career there. He attended law school at night at George Washington University while working as a patent examiner for the federal government. He had climbed the ladder to “income partner,” a designation in between associate and full equity partner. “An event like that,” Davidson adds, “forces you to ask, what are you doing as a lawyer and what are you going to do for the rest of your life?”

Those are questions that law school graduates expecting diplomas in the next few weeks ought to be asking themselves. A surplus of new talent means many won’t find the kind of well-paid positions that made the profession attractive. Many won’t find any job at all, at least not one that requires the J.D. they paid more than $150,000 in tuition to acquire. Like medicine, college teaching, and, for that matter, journalism, law is going through wrenching structural changes that make the occupations less appealing to many of their practitioners. For large law firms, the spread of a free-agent mentality among partners has bred instability. Successful rainmakers increasingly jump to whatever firm promises the heftiest paycheck. “This is a process that started 25 years ago, accelerated in the 1990s, and was exacerbated by the Great Recession,” Harper says. And it’s not over. “More large firms will fail.”
 
 
Jack Howrey, a former chairman of the Federal Trade Commission, co-founded Howrey, Simon, Baker & Murchison in 1956. Howrey embodied a long-lost era of genteel high-end law practice. A Kansas farm boy turned bon vivant, he had “a fancy for racehorses, weekends in the Virginia countryside, and tennis played in long white pants,” according to the Washington Post. His aristocratic avocations notwithstanding, Howrey honed a streamlined business providing large companies with courtroom and regulatory representation. No corporate finance department, no securities law, no trusts and estates. “They knew what they were doing and earned a lot of respect as excellent lawyers,” says Steven Levitsky, a New York-based antitrust attorney who first encountered Howrey lawyers in the 1970s.

Specialists, of course, expose themselves to shifts in their narrow market segment. In the early 1980s, President Ronald Reagan pulled the plug on federal antitrust enforcement—good news for Howrey clients in the oil and food industries; not such good news for the firm’s lawyers. Figuring they’d built something worth preserving—and that political tides would turn—top partners took pay cuts and reduced head count. The firm survived.

Beginning in 1989, President George H.W. Bush and then his successor, Bill Clinton, cautiously reenergized antitrust enforcement. Some large Howrey clients helpfully got into high-stakes private court battles. Ruyak (Georgetown Law, ’74) joined the firm in 1976 after a judicial clerkship and rose rapidly through the ranks. In 1989 he represented steel manufacturers Jones & Laughlin and Republic in an antitrust brawl against major railroads over claims of group boycotts and monopolization of docks on Lake Erie. Ruyak obtained damages of more than $600 million in a jury case upheld on appeal—one of many lucrative wins. In the courtroom, he showed impressive versatility. He won the acquittal of paper company Mead when it was prosecuted for criminal price-fixing and represented Wang Laboratories in seminal patent cases concerning computer memory modules. He also made time to help the Catholic Church with legal issues, serving pro bono for many years as a board member of the Archdiocesan Legal Network.

By the time Howrey’s six-member executive committee anointed Ruyak managing partner in 2000, average profits per equity partner stood at $575,000, according to American Lawyer, the bible of large law firm compensation. That put Howrey at No. 58 on the AmLaw 100.

That wasn’t good enough for Ruyak. During the dot-com bust of 2001-02, which caused many law firms to retrench, he pushed expansion. Howrey added lawyers and opened expensive new offices across Europe. By 2006, gross revenue and per-partner profits had more than doubled to $457 million and $1.2 million, respectively. For a while, says John Taladay, a former member of Howrey’s executive committee, “Bob’s strategy was working.”

Ruyak explained his ambitions in a chapter he contributed to the 2003 book Leading Lawyers: The Art and Science of Being a Successful Lawyer. In the past, he wrote, managing partners “thought of their role more like driving an aircraft carrier. They were there to keep a large operation on course.” That, he declared, “is no longer acceptable.” Leaders have “to provide a structure and a vision that will adapt quickly to change. Much like a corporation, you have to develop a very specific business plan for how to achieve your goals, and you have to execute.”

Ruyak even composed a personal philosophy of leadership, some of which he committed to verse and circulated. (The danger of visiting inspirational poetry on one’s underlings is that someone will leak it to a gossipy website such as abovethelaw.com.) In one poem, included in early 2000s training materials for Howrey associates, Ruyak wrote: “A leader is not a concept,/ But the defining characteristic of/ A person or organization. One … compelled to explore the unexplored,/ Grasp for the untouched, and/ Keep the unthinkable firmly in mind.”
 
 
The Big Law arms race affects a narrow segment of the broader legal industry. The largest 250 firms employ 15 percent of practicing lawyers, according to Harper in The Lawyer Bubble. Big firms have disproportionate influence, however. They represent the wealthiest and most powerful corporations. They handle cutting-edge issues and unlock the revolving door to senior government posts. “The big firms set the tone for the legal profession the same way GE (GE) or Apple (AAPL) do so for corporate America,” Harper says.

Present-day legal behemoths trace their roots to the 1970s, when corporate consolidation and the profusion of government regulation spurred law firm growth. Globalization, advances in technology, and expansion of the financial-services industry further increased demand for high-end legal advice. Law school became a choice destination for top college graduates, especially those who didn’t excel in organic chemistry or lacked the entrepreneurial gene.

In 1985, the 50 top-grossing law firms had total revenue of $3.4 billion. If that figure had increased at the rate of inflation, it would have been the equivalent of $7.1 billion in 2011, observes Michael Trotter, a corporate lawyer in Atlanta and author of the 2012 book Declining Prospects: How Extraordinary Competition and Compensation Are Changing America’s Major Law Firms. Instead, total revenue exploded to $48.4 billion. “Big law firms got used to the idea that every year they just raised their hourly rates,” Trotter says in an interview. “It’s a nice arrangement for as long as clients go along with it.”

Expectations grew. “When I came out of Harvard [in 1977], you expected to get a good job with good pay at a good firm where you’d make partner and stay for the rest of your career,” says Andrew Ness. A prominent construction industry litigator, he ended up moving through three firms before Ruyak persuaded him to join Howrey in 2008. “We were all making five times what we ever expected to make,” Ness adds. “But the risk is that the firm down the street is going to cherry-pick your partners by offering more money. That means keeping any big firm together becomes a real high-wire act.”

A hundred lawyers under the same roof once constituted a large firm. By the early 1990s, several employed 1,000 or more. The biggest, DLA Piper, has more than 4,000 attorneys in 77 offices in 30 countries. Twenty-one other firms have more than 1,000 lawyers, all prodigiously chronicled by American Lawyer. “For the past 20 years,” Harper writes, leading a firm up the AmLaw 100 “has been regarded as a badge of honor for the managing partner who could achieve it.”

This is an odd goal because, according to Altman Weil, a leading management consultancy specializing in law firms, “there are no economies of scale in private law practice.” Yes, you read that correctly: “Larger firms almost always spend more per lawyer on staffing, occupancy, equipment, promotion, malpractice, and other nonpersonnel insurance coverages, office supplies, and other expenses than do smaller firms.”

The firms that consistently generate the most profits per partner, and typically keep those partners for decades, are not among the largest. Wachtell, Lipton, Rosen & Katz and Cravath, Swaine & Moore, both merger-and-acquisition aces, consistently show up in AmLaw’s top five most profitable firms. Even with New York overhead, Wachtell’s 79 partners enjoyed an average of nearly $5 million apiece in 2012; Cravath’s 83 partners took home an average of $3.4 million each.

“The ultra-elite have remained relatively modest in size,” says Harper. “The firms that have chased growth by hiring high-priced lateral talent and doing lots of mergers are the ones you see blowing up or in danger of blowing up.” The skills that make someone an effective lawyer—verbal acumen, nimbleness juggling clients, go-for-the-jugular competitiveness—do not necessarily translate into farsighted statesmanship, notes Levitsky, the New York antitrust attorney, who toiled at Dewey & LeBoeuf until it foundered and now works at Duane Morris. Unfortunately, some successful lawyers don’t understand this, he adds: “Put in charge, they can take a firm that’s moving along nicely and steer it right off the road and into a ditch.”
 
 
In the late 1990s, John Taladay made partner at a Washington antitrust boutique called Collier, Shannon, Rill & Scott. Howrey scooped up most of the Collier firm in 2001. That made sense to Taladay: “Howrey had a great antitrust brand, and we were combining strengths.” Howrey’s subsequent European expansion made Taladay more nervous. The firm committed itself to “a lot of fixed costs and expensive lateral hires from the European firms we were absorbing,” he recalls. Still, the Brussels office developed promising antitrust and IP practices. In 2008, he says, “we actually were crushing it.”

At Ruyak’s elbow as he charted Howrey’s growth was a consultant named Peter Zeughauser. Ruyak “was doing a lot of innovative things, maybe a few too many at one time,” says Zeughauser, a former corporate general counsel whose firm is based in Newport Beach, Calif. “Howrey didn’t have a tradition of consensus or consultation,” Zeughauser observes, so Ruyak’s instincts met little resistance. That became even more pronounced when the firm’s executive committee lost two rainmakers to premature cancer deaths in 2007 and 2008.

Over time, Ruyak’s personal style began to raise eyebrows, according to former Howrey lawyers. At a firm retreat in 2008, he handed out a pamphlet entitled “Our Iceberg Is Melting” about a penguin family facing a crisis. Whatever the literary merits of this Aesop’s-lite fable, Ruyak continued crowding Howrey’s iceberg. In November 2008 he personally wooed 40 lawyers specializing in construction-related litigation from the failing Thelen, itself the victim of a misbegotten merger with a New York firm. “He was an unbelievable salesman, I’ll give him that,” says Ness, one of the immigrants from Thelen. “It turned out we joined Howrey on probably the best day it ever had, and it was downhill from there.”

Robert RuyakPhotograph by Diego M. Radzinschi/Legal TimesRobert Ruyak

Ness calls Ruyak “a great Mr. Outside” who lacked “a Mr. Inside who actually knew something about running a business.” In 2008, as the world economy descended into a severe recession, demand for Howrey’s legal services, as measured by billable hours, was eroding, according to Diamond, the bankruptcy trustee. This ominous development, which persisted in 2009 and 2010, was masked for a time by winnings from a handful of high-stakes cases the firm had taken on a contingency fee basis.

“From 2008 until 2011,” Diamond said, “Howrey increased its borrowing from Citibank (C) in an effort to meet the cost of its rapid expansion and to plug financial holes caused by the firm’s declining hourly revenue and collections.” Those hours they were billing increasingly didn’t lead to full payment from struggling corporate clients. “Internally,” according to Diamond, “Howrey partners referred to accounts receivable as inflated, uncollectible bad debts, or just plain ‘crap.’  ”

Meanwhile, Howrey discovered conflicts between longtime U.S.-based clients and the European clients they assumed their new branch offices would bring with them. “Someone hadn’t done enough due diligence,” says Ness, “which is ironic, because that’s what lawyers are supposed to do for a living.”
 
 
When free-market ideology crimped antitrust enforcement in the 1980s, Howrey’s partners hunkered down for the good of the firm. That kind of institutional devotion has since eroded throughout Big Law. “Partners tend to look out for their own interests and are ready to leave at the first sign of trouble,” observes the consultant Zeughauser. By the same token, outside consultants and their cousins in the headhunting trade are continually circling law firms, suggesting mergers and nominating big-ticket lateral hires. “Maintaining a sense of firm ‘culture’ becomes difficult in this environment,” Zeughauser acknowledges. “It’s gotten more cutthroat.”

In early 2010, as his vision started to look more like a mirage, Ruyak told his partners that Howrey had missed its budget projections by 35 percent in 2009. European intellectual-property partners with tenuous ties to the firm complained they’d been blindsided. Most of that practice—some 25 attorneys—soon decamped. “When partners left, so did cash—in the form of lost revenue, lost clients, and return of capital,” Diamond said. During the rest of 2010, an additional 40 or so partners left. “Howrey was on the road to financial collapse,” said Diamond.

Like many expansion-minded firms, Howrey “relied heavily on borrowing” to fuel growth, the trustee noted. “While most firms had deleveraged during 2008 and 2009, Howrey had not engaged in serious cost-cutting measures.” In the spring of 2009, Howrey began a cycle of defaulting and restructuring its Citibank debt. The trustee compared it to “reshuffling deck chairs on the Titanic.”

One-time contingency winnings dried up, leaving Howrey on the hook for a batch of other high-risk contingency cases that showed no sign of paying off. “By May 31, 2010, the firm had a ‘deferred investment’ of more than $80.7 million in contingency cases, with no significant immediate return on the investment on the horizon,” the trustee noted. Howrey’s support-services operation became a burden as lower-price outsourcers undercut it on back-office functions.

In January 2011, as the miserable state of the firm’s finances became evident, Ruyak conceded that Howrey had again missed its budgeted compensation, “with profits per partner falling to less than $550,000—or hundreds of thousands less than 2010 or 2009, and less than half of 2008,” Diamond recounted. Remaining partners “began leaving the firm in droves, and Howrey’s descent into dissolution was quick.”

“What’s sad,” says Taladay, “is that a great brand was lost, and a group of great lawyers who liked working together got broken up.”
 
 
For corporate clients, there’s a potential silver lining in Big Law’s disarray. From 2007 through 2009, firms with more than 500 lawyers saw their billable hours decline by more than 5 percent. They unloaded associates by the thousands. While the billable-hours drought has eased with the economic recovery, companies increasingly are demanding better deals on rates, says Adam Epstein, a San Francisco-based board consultant for small-cap corporations. “The law firm brands don’t matter as much anymore,” he explains. “I tell clients that they need to go out and find the attorney who knows how to do their kind of financing, regardless of where that attorney practices.” Chances are that attorney has recently switched firms, anyway.

Epstein, himself a former associate at Brobeck Phleger, which went belly-up in 2003, also advises companies to be skeptical of any large law firm partner proposing to charge more than $1,000 an hour for routine transactions. There will be equally skilled partners at a smaller firm or large-firm branch offices outside of major metro areas willing to do the work for a flat fee that could save the client tens of thousands of dollars. “The law business has changed a lot over the past 20 years,” Epstein says. “I see it changing even more drastically in the next five to seven years as the shakeout continues.”

Some things won’t change. For bet-the-company mergers, some CEOs still reflexively choose Cravath or Wachtell. Those firms and a few New York-based rivals (Sullivan & Cromwell; Davis Polk & Wardwell; Simpson Thacher & Bartlett) enjoy cover-your-ass appeal. “Yes, the deal went south on us,” management can tell an angry board of directors, “but we did hire Cravath.”

For practically everyone else in Big Law, the future looks chaotic. Client fee pressures will be matched by the cost overhang of the pre-recession go-go era. Young lawyers will increasingly struggle to establish a foothold. To protect their personal pocketbooks, firms are lengthening the path to partnership amid an oversupply of fresh labor. The Bureau of Labor Statistics estimates that during the decade ending in 2020, the U.S. economy will create 73,600 lawyer positions. Law schools are pumping out 25,000 graduates a year, suggesting an excess of 176,400 J.D.s no one really needs.

All of that adds up to a gloomy picture for newly minted lawyers, predicts William Henderson, a professor at Indiana University. In “From Big Law to Lean Law,” a paper he delivered last November at George Mason University, Henderson warned that an increasing proportion of young attorneys will get stuck working as non-partner-track “staff lawyers” or as employees of document-processing outsourcing firms. Most large law firms, meanwhile, “seem to be managed for the short-term benefit of individual rainmaking partners.” Howrey’s faded luster nevertheless has stood some of its former partners well. When Ruyak arrived at Winston & Strawn in September 2011, the hiring announcement noted that during his tenure at Howrey, “he burnished his national reputation for excellence in trial advocacy and became a closely watched innovator in litigation and trial techniques.” The notice didn’t mention Ruyak assuming a management role at Winston & Strawn.

Taladay moved with a group of former Howrey antitrust experts to Baker Botts, a 725-attorney firm with Texas roots. He recently was named the head of Baker Botts’s 135-lawyer Washington office. Ness migrated with his construction litigators to the Washington outpost of Jones Day, a firm that started in Cleveland and now has 2,400 lawyers worldwide.

After some additional skirmishing, the Howrey Chapter 11 collection actions are expected to settle out of court. Ruyak and several former colleagues have signed an interim deal with the trustee forestalling potential litigation against them until at least Sept. 30 while they try to work out a compromise.

Ben Davidson, the night law school grad who was shocked by Howrey’s failure, has also landed on his feet. Rather than join another large firm, he went into business for himself in Los Angeles. The Davidson Law Group, with two attorneys, handles patent trials and offers its founder the opportunity to get into court more often than he used to at Howrey. “The judges in Los Angeles know me now, and they respect that my name and reputation are on the line every time I appear before them,” he says. He takes the cases he wants and doesn’t have anyone else counting his billable hours. Most mornings before heading to the office, he jogs on the beach. “Big firms are more of a business,” Davidson says. “On my own, I’m enjoying being a lawyer.”

Barrett_190
Barrett is an assistant managing editor and senior writer at Bloomberg Businessweek. His new book, Law of the Jungle, tells the story of the Chevron oil pollution case in Ecuador.

Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • GE
    (General Electric Co)
    • $25.62 USD
    • 0.48
    • 1.87%
  • AAPL
    (Apple Inc)
    • $111.78 USD
    • -0.87
    • -0.78%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus