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Industry Pressures Led to Sedgwick’s Collapse

Dec. 7, 2017, 9:25 PM

Big Law firm collapses like Sedgwick’s recent demise are still rare enough that lawyers immediately try to puzzle out whether the firm was an outlier or the leading edge of a wave of failed legal entities that were too battered to survive the industry’s jarring changes.

Colliding forces in the legal industry—from lower hourly rates to fierce competition to attract and keep clients—helped fell San Francisco-based law firm Sedgwick, which announced it would close shop more than eight decades after its founding.

The venerable firm’s cratering followed a series of partner departures and a marked decline in its revenues. Even so, a handful of lawyers at the faltering firm’s London office are finding a berth with DAC Beachcroft, according to a report today . Other experienced insurance lawyers in Sedgwick’s U.S. offices will likely be given a lifeline by major London insurance firm, Clyde & Co, which is in negotiations to bring around 20 partners onboard.

“In line with our growth potential in the U.S., we are in advanced discussions with a number of its insurance partners, predominantly in California, about the possibility of them joining us,” said a Clyde & Co spokesman, who asked not to be named. He said he would decline further comment “while discussions are ongoing.”

According to the American Lawyer , a team of San Francisco lawyers led by partners Bruce Celebrezze and Alexander Potente will join the British firm Jan. 1. This follows a number of earlier lawyer departures as Sedgwick, which is ranked among the American Lawyer’s 200 largest firms, tried to negotiate the same tangle of compensation, billing, and client troubles that plagued many other firms.  Those specializing in areas like insurance, employment, and immigration law, where rates are under serious competitive pressures, were particularly hard-hit.

Like other struggling firms in the middle of the Big Law market, Sedgwick tried to right itself by exploring mergers with other firms and by adopting alternative fee arrangements to give itself and its clients more flexibility, consultants familiar with the firm said.

But Sedgwick’s core practice, insurance law, has been buffeted by cost-trimming changes in the insurance field. Those changes narrowed already slender margins for law firm work, making it difficult generally for law firms to make competitive money on their insurance practices.

“Firms in many segments of the market are being weakened by changes in the legal marketplace,” said Peter Zeughauser, a consultant to law firms. “Sedgwick was among a group of firms that are finding it harder to strike the balance between compensation and talent.”

Sedgwick, started by two lawyers in 1933, established its bona fides in the 1950s with its defense of Berkeley-based Cutter Laboratories against victims’ claims of a tainted polio vaccine. The firm was also in the headlines last year when non-equity partner Traci Rebeiro, in its Chicago office, sued on grounds that she was not paid the same as her male counterparts at the firm.

The lawsuit was settled in arbitration earlier this year, and Rebeiro left Sedgwick for another employer last summer in a year when the firm underwent a steady exodus of partners. Last January, a group of 40 partners left the firm’s New Jersey and Texas offices. Another batch followed in June , according to a report in the American Lawyer, and by August partner defections had narrowed the firm’s gross revenues by nearly one-fifth compared to 2013 .

Overall, the firm’s headcount dropped by at least 40 percent, from nearly 300 lawyers to about 160 lawyers, according to data from ALM Legal Intelligence research . The continuous defections made it tougher to successfully compete or to undertake the kind of time-intensive alignment with client long-term interests that some consultants like Mark Young recommend to their law firm clients.

Sedgwick was not an outlier because many firms have multiple offices and multiple practice areas, said Young, who had not worked directly with the firm. But “insurance differs because it tends to lower hourly rates, lower margins, and lower revenues, he noted.

“Sometimes the hourly rate model can get in the way of innovation and longer-term collaboration and planning with key clients,” said Young, the founder and counsel for Vox Actio, a Boston-based firm that advises law firms, in-house legal departments, and other organizations. “Firms need to tap into what the company’s needs are and will be.  Lawyers can’t be just lawyers anymore.”

Some of Sedgwick’s remaining insurance partners are a natural fit for Clyde & Co, which represents major insurance carriers. The firm has grown into a global behemoth since its 1933 beginning in London, and now employs some 1,500 legal professionals, including 390 partners, in offices in the U.S., Brazil, Canada, and Venezuela. It already has offices in San Francisco and Los Angeles, and the approximately 20 Sedgwick partners it appears likely to hire would largely come from Sedgwick’s offices in those cities, according to London firm sources.

Any such combination or group hiring would continue a recent cross-Atlantic trend where U.K. law firms merge with or acquire U.S. firms to expand their global locations and streamline access to legal services for the growing number of transnational deals.

Though the legal market has gone through a rough period, Zeughauser noted that “it is picking up. Business demand is rising, and there is more business hiring.”

Sedgwick’s chair, Michael F. Healy, also struck a positive note in his Nov. 21 announcement of the firm’s shuttering : “We have concluded that the best way to allow our lawyers to continue providing great service to our clients is by ceasing operations and moving to other excellent law firms.”

Sedgwick did not respond to several requests for comment.

Clyde & Co said it would announce the outcome of the ongoing negotiations, which may be complicated by firm finances. Sedgwick’s equity partners have a financial stake in the outcome—the return of their capital contributions. Typically, however, acquiring law firms—which have all the power in such negotiations—want to pay for individual lawyer expertise and book of business, and avoid taking on debt owed to former partners.

 

Contact the reporter responsible for this story: Elizabeth Olson at egolson1@gmail.com.

Contact the editor responsible for this story: Casey Sullivan at csullivan@bloomberglaw.com and Nicholas Datlowe at ndatlowe@bloomberglaw.com.