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Amid Austerity Measures, These Firms Can’t Cut Lawyer Salaries

May 21, 2020, 9:41 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at how “virtual” firms are being viewed as an appealing alternative to the traditional firms across Big Law implementing austerity measures. Sign up to receive this column in your Inbox every Thursday morning.

While reporting on the spread of law firm austerity measures over the past month, I have heard a common argument as to why partners will accept pay cuts or answer capital calls: they have nowhere else to go.

And, besides, most other firms are taking the same cash-saving measures.

There is some truth to that, at least for Am Law 200 partners looking to join competitors in their traditional cohort.

But a group of so-called “virtual” law firms say they are seeing a surge in interest from those in Big Law who are fed up with financial agreements they feel shifting under their feet as firms weather a crisis.

These non-traditional firms pay their lawyers through simple formulas based on billings and origination. They don’t do capital calls and have no way to administratively slash salaries as many Big Law firms have done to preserve cash. They also have no expensive real estate, a form of overhead that’s helped prompt cash-saving measures at traditional firms.

That doesn’t mean there’s no risk in joining a virtual firm. If work dries up entirely, so do the paychecks.

But for a subset of AmLaw partners, and especially those who handle their own clients’ work, a virtual firm may seem a better deal at this unique moment in history.

Virtual firms may not have the cachet of some “brick and mortar” competitors, but there are financial upsides worth considering. At FisherBroyles, a 265-lawyer virtual firm, attorneys can take home up to 80% of the billings for work they generate and handle themselves.

Leaders of these non-traditional firms say stay-at-home orders have been an unexpected recruiting boon. They’ve helped partners overcome fears of leaving the office. And with that, they’ve started asking what else they could leave behind.

“We are committed to paying the partners first, every two weeks, based on collections. And we run the firm based on what is left over,” said Kevin Broyles, FisherBroyles co-founder and managing partner.

“When you realize the enormous expense of real estate, young associates, and bloated staff, you understand how we can make that work. When we get rid of all those things, we can operate without debt and without requiring capital calls from our partners.”

FisherBroyles has grown close to becoming an AmLaw 200 firm itself. The firm says it brought in $91.25 million in 2019 revenue. That’s just about $10 million shy of where AmLaw rankings placed the 200th largest firm in the country last year.

The firm has hired 38 partners since the start of June last year, and it expects to hire another 35 partners by the end of the year to reach 300.

This week, the firm hired four new partners for its London “office.” The new hires were formerly at Davis Polk & Wardwell, DLA Piper, and Seyfarth Shaw.

The nine-year-old virtual firm Potomac Law Group, which has more than 100 attorneys, has also expanded its roster since lockdown orders started spreading in March. The firm has hired six partners and plans to add three more on June 1, said Marlene Laro, the firm’s chief operating officer. Those lawyers come from firms including Hogan Lovells, Pillsbury, Quarles & Brady, and McGuireWoods.

Laro said the firm attracts more than just lone-wolf types who manage their own clients’ work. About 35% of the firm’s revenue is generated by lawyers handling work on behalf of other partners’ clients.

“The crisis has brought a whole new wave of interest from Big Law lawyers,” Laro said in an interview. “Many lawyers were intrigued by our model but uncertain how they would enjoy working remotely. But now that everyone has been forced to work without offices, many don’t want to go back to the traditional model.”

Frederick Shelton, a law firm recruiter who exclusively represents new-model law firms, said there are minor differences in virtual firms’ compensation models. They pay lawyers, in total, 70% to 80% of firm revenue. Rainmakers get 20% to 30% for work they originate, and lawyers who do the work earn between 40% and 52% of revenue, he said.

Virtual firms are increasingly grabbing the attention of high-end partners at AmLaw 200 firms, he said.

“These firms are not what people think they are,” he said. “The great myth of Big Law was that in order to build a multi-million dollar, high-end, sophisticated practice, you had to put up with the politics, the lifestyle, and all those things. These firms prove that none of that is true anymore.”

Chris Wilson has developed a hybrid virtual model at Atlanta-based law firm Taylor English Duma. He has hired about 20 partners in a “remote” firm who work from home but can send work to a group of associates and other lawyers in the firm’s traditional office.

In an interview, Wilson said he has spoken to a number of Big Law attorneys who have been put off by their law firms’ response to the crisis.

“It’s one thing to just learn about it and it’s another to have the intestinal fortitude to make the jump,” Wilson said. “But I do think you’re going to see more do it simply because some lawyers are busy right now and they don’t believe they should be taking that 25% pay cut.”

Worth Your Time

On Retirement:t Attorney and professional clarinetist Jeffrey Gettleman retired from Kirkland & Ellis to pursue his musical ambitions, but he’s now back to help with a deluge of bankruptcy practice work. The 74-year-old rejoined the firm, which has already billed more than $60 million on four large, public company bankruptcies this year, in late March.

On Houston: McGuireWoods’ former Houston office managing partner has joined Willkie Farr & Gallagher, just as M&A lawyers in the energy industry grapple with depressed oil prices.

On Gender Bias I: A group of female former Jones Day associates can continue pursuing claims that the firm’s black-box pay system and its requirement that lawyers don’t discuss compensation had a disparate impact on women.

On Gender Bias II: A Yale Law student group has issued an annual report on gender diversity warning law firms to “respond equitably” to the economic crisis when conducting layoffs and making other cutbacks.

On Restaurants: Many may be closed for dine-in customers, but restaurateurs are dialing up lawyers asking how to apply for stimulus funds, re-open under new health guidelines, and handle their workforce.

That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Tom P. Taylor at ttaylor@bloomberglaw.com; Rebekah Mintzer at rmintzer@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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