Law Firms Can’t Afford to Miss Out on Data Center Boom

Large law firms are going all in on the nationwide data center build out—nevermind that lurking AI bubble.

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On today’s episode of our podcast, On The Merits, we hear from Bloomberg Law reporter Roy Strom about several examples of law firms deploying multidisciplinary practice groups to solve complex problems for data center builders. Roy also talks about why it may not pay for firms to approach the data center boom cautiously.

“If this work goes away, the law firms will struggle, there’ll be some partners who have a lot of time on their hands,” he said, “but the bigger risk to the law firms right now is probably missing out on a sort of once-in-a-generation extravaganza.”

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This transcript was produced by Bloomberg Law Automation.

David Schultz:

Hello, and welcome back to On the Merits, the news podcast from Bloomberg Law. I’m your host, David Schultz.

A once-in-a-generation opportunity. That’s what the current data center boom represents for certain interdisciplinary law firms, according to a recent story from three Bloomberg Law reporters. To support all the new AI tools out there, data centers are sprouting up all across the country, and these complex infrastructure projects need lawyers, a lot of them.

Today, we’re gonna be talking about several different types of these projects and the roles that law firms played in bringing them to fruition. First up, let’s talk about data centers. As we talk about the role that data centers played in bringing them to fruition, we’re also gonna be asking what might happen to these firms if there is an AI bubble and it pops.

Our guest today is Roy Strom, who, along with fellow reporters Mahira Dayal and Eric Killelea, wrote about all the ways law firms are cashing in on data centers. I started off our conversation by asking Roy Strom why this type of work is such a big deal for big law.

Roy Strom:

So I think there’s a few reasons for it. First of all, if you take a step back and look at what this data center boom really is, it starts to look like a perfect storm for big law in a lot of ways. First off, it’s just a huge amount of money that’s being invested. If you look at four of the biggest so-called hyperscalers, the largest technology companies who are building this infrastructure, they estimate they’ll spend something like $650 billion this year on this data center build-out, just an unprecedented amount of money, triple what they spent just two years ago.

So anytime there’s that amount of money being spent, big law firms are just bound to be involved. They’re a follow-the-money business. And then if you think about what work is required, it’s a very broad range of legal services. So the law firms are getting the land approved to be built on, they’re working with regulators to bring this massive amount of energy to these sites. For a modern-day large law firm, it’s really the perfect package for what they want to be doing. They want to work on projects that allow them to bring to bear all these different partners and their specialties, and that’s what the term cross-selling really means. It’s important for law firms because it’s a way that they can make client relationships really sticky.

David Schultz:

Yeah, well, let’s get into that. I mean, because as you kind of mentioned, it’s not just real estate, it’s not just zoning, it’s not just energy. Law firms are involved in all aspects of data center construction here. Tell me more about what kind of things they’re doing. You guys were reporting on some really creative financing options that firms are helping with these companies.

Roy Strom:

Yeah, financing is a major part of it. The law firms call it project infrastructure work. It’s the sort of thing that they do when they’re building a major power plant, really, or any other major infrastructure project. There’s a lot of moving pieces, and they are part of making sure all the different players are, at the end of the day, sort of speaking the same language and agreeing to the same things.

Another aspect of it is what they might call technology transactions, which is basically structuring the sale of these AI-specific chips, and in the case of OpenAI and these big chip companies like NVIDIA and Broadcom, there’s a lot of legal work around formalizing the relationships that these companies have made. Some of those relationships have been criticized as sort of like a form of circular financing, but they’re basically an effort to finance this intention by OpenAI and some of the others to spend an amount of money that that company and other companies on their own today just don’t have.

David Schultz:

You, Mahira, and Eric cited three examples of situations where big law was instrumental in getting a data center built. Let’s talk about them one at a time here, and let’s start in Wisconsin. What was that project all about, and what did the firm do there?

Roy Strom:

Yeah. So I just want to say that was the intention of this story, was to really try to hone in and be as specific as possible and looking at all the different ways that the lawyers are involved. And I think this project in Wisconsin to open a data center for Microsoft was one of the earliest examples and still one of the few examples where we found a law firm that was really fairly public about all the work it had done for a specific client.

That law firm was Husch Blackwell, and the work was interesting. This site in Wisconsin had previously been approved to be a manufacturing plant that was going to be built by the Taiwan-based manufacturer Foxconn, which I think most people probably recognize for building iPhones, right? And the state had spent a bunch of money trying to get this Foxconn manufacturing plant off the ground, but it never materialized.

And so Husch Blackwell came in to help Microsoft get this plot of land approved for a massive data center, and that work involved coordinating with local officials on zoning and land use regulations, environmental reviews, and then negotiating tax incentives, among some other things. It worked out, and that is a data center that exists today.

So for the law firm, it seems like this relationship with Microsoft has grown. The company has more plans for data centers in the Wisconsin-Chicago area. It’s an important group for the firm, it appears.

David Schultz:

Let’s move on to a project for Meta in Louisiana. This involved several firms, many of which are household names to a lot of our listeners. Tell me about this project and how those firms helped really engineer some creative financing to get this project built.

Roy Strom:

Yeah, it’s weird to say, but I think if any general public listener knows about any specific AI data center, it’s probably this one. The Meta data center in Northeast Louisiana is called Hyperion. You’ve heard the president talk about how much money it’s going to cost. It’s tens of billions of dollars.

So I guess to back up, Hyperion, like I said, it’s just massive. It’s a tract of land that’s like the size of Manhattan. There were a lot of Manhattan law firms on the deal. Latham & Watkins, Kirkland & Ellis, Milbank, Clifford Chance were just a few of them.

One issue that the lawyers really helped to solve was that somebody is going to be spending billions of dollars to build this, tens of billions of dollars to build this thing. But Meta doesn’t want to carry all that debt on its own books and risk its credit rating. So the lawyers involved helped develop this joint venture structure. It’s received a lot of coverage that basically allows for a private credit fund operator called Blue Owl to be the majority owner of the data center. Meta will basically pay some version of rent to that investment vehicle. And they also backstop the agreement. They agree to pay some amount of money if the data center never ends up being used, which to me is super interesting because these companies are spending all this money. And they can’t, with perfect clarity, tell you that this technology will still even be needed by the time the lease runs out.

A Milbank lawyer who worked on that deal told my colleague Mahira that the joint venture structure was really novel and is already in demand to be used on other data center deals.

David Schultz:

All right, finally, let’s move on to Texas, where there was a Cloudburst project. This was an example, it seems like, of a firm really coming up with a creative solution to a problem, which is needing energy. These data centers just need a tremendous amount of energy to operate.

Roy Strom:

Yeah, so energy is one of the biggest constraints when it comes to building these AI data centers. And these centers have had to get creative about where they get that energy from. This was an example of that data center built by a company called Cloudburst. It is in San Marcos, Texas, which is a little southwest of Austin. But the location was important because it sits really close to a natural gas pipeline that runs from the west side of Texas, where there are natural gas reserves that are being drawn out.

So this Cloudburst data center will basically get its own natural gas from this pipeline. And that is through an agreement that the Texas-based law firm Jackson Walker helped to strike between Cloudburst and the natural gas pipeline operator called Energy Transfer. And that company will provide Cloudburst with enough natural gas to generate up to, I think, 1.2 gigawatts of electric power, which is about, what, 240,000 homes.

David Schultz:

Yeah, I think the phrase that you guys used in the story was a behind-the-meter solution, that they’re not getting their power from the electric utility. They’re getting it directly from the source.

Roy Strom:

Yeah, it’s called a behind-the-meter solution. And it’s a really important solution to the problem of just how much energy these plants require. Because if they are drawing energy from the grid, they’re competing with regular people and businesses that have heretofore not had to pay vastly higher energy bills as a result of 240,000 homes being plopped onto the grid right next to them.

David Schultz:

Finally, though, I wanted to talk about the downside, which is that, what if we are in an AI bubble? And what I mean by that is that maybe the AI market doesn’t turn out to be what we thought it would be. Maybe data centers are just getting too hard to build, and there’s less activity, or any number of different things. Are law firms thinking about this, that they’re bringing in all this money now on data center projects, but it may not last? Is that something that you hear from folks?

Roy Strom:

It’s a really hard question, because I’m not sure the law firms who want to be involved in this work really have the luxury to also be preparing for it to suddenly stop. I mean, I think they sort of have a choice, right? Do this work while it exists, and hire the lawyers who are needed, who are required to do the work, or just sort of stay away from it. I mean, and I don’t hear many firms who say, yes, we are purposely staying away from it, because we don’t think it’s sustainable. Most firms are, in one way or another, positioning themselves as capable in this field.

As to what will happen for the law firms if this data center build-out does crash, I don’t think it is going to sort of bankrupt all these firms that are doing the work. For one thing, it’s just not the only thing that any law firm is doing right now. I mean, all the firms we’ve talked about, Latham, Kirkland, Sullivan & Cromwell, Milbank, Jackson Walker, Husch Blackwell, they’re all huge, big firms with a very diverse set of practices. So they’re in court doing litigation, they’re doing M&A deals that don’t have much to do or anything to do with data centers.

In other, more broad economic coverage, people compare it to like the dot com crash. What will happen? Will it be like the dot com bubble? In that episode, there was a law firm called Brobeck, which failed, but basically that firm had specialized in IPOs for tech companies, right? And those didn’t happen anymore for a long, for a drawn-out period of time. There isn’t really an equivalent law firm that’s like the AI data center law firm, right? Like we’ve been talking about, the work is just such a mishmash of disciplines that that law firm just doesn’t exist.

David Schultz:

That’s really fascinating. So these law firms are really getting into the AI data center build-out, they’re making a lot of money, but it doesn’t sound like any one of them has put all of their eggs in this basket and that if there is a crash in the future, that they’re pretty well-diversified, that they’ll sort of be fine and move on to the next thing.

Roy Strom:

That’s my read of the situation because the AI data center build-out is massive, but it isn’t the only thing that any one particular firm is doing and I’d be hard-pressed to guess that it’s such a large portion of any one firm’s revenue that even if it were to go away overnight, the firm would be up against the wall as a result. I think if this work goes away, the law firms will struggle, there’ll be some partners who have a lot of time on their hands, but the bigger risk to the law firms right now is probably missing out on a sort of once-in-a-generation extravaganza, for lack of a better word.

David Schultz:

Yeah. All right, well, that was Roy Strom talking about the AI data center extravaganza. Roy, thank you so much for talking with us. I really appreciate it.

Roy Strom:

Thank you, Roy. I appreciate being on the show.

David Schultz:

And that’ll do it for today’s episode of On the Merits. For more updates, visit our website at news.bloomberglaw.com. Once again, that’s news.bloomberglaw.com.

The podcast today was produced by myself, David Schultz. Our editors were Chris Opfer and Alessandra Rafferty, and our executive producer is Josh Block. Thanks, everyone, for listening. See you next time.