Milton Regan has chronicled the troubled times of law firms before in Eat What You Kill: The Fall of a Wall Street Lawyer (2004). On both occasions the firms appear to have undergone profound changes in culture that have eventually destabilized them and either wrought dire consequences for the lawyers or caused the death of the firm. Regan is a methodical obituarist.
He ascribes two underlying causes to these cultural shifts. One is the tenuous hold a law firm has on its share of the market. Lawyers might move taking clients with them or new specialist firms might aggressively shift into an established market drawing business away from others. The firm’s mix of top quality work may get diluted with less valued work. The second is the organizational dynamics of the law firm. Law firms operate under continuing centrifugal forces as practice groups proliferate and new rainmakers join putting management in the position of persuading and cajoling others to stay. Emmanuel Lazega refers to these factions as composing a Montesquieu structure of interlocking competing networks. And there is the everpresent problem of ethical fading—lawyers inured to certain liminal behaviours—when lawyers may no longer realize how their behaviour may be characterized. There are two absences in Regan’s analysis: one is the role of regulation and its interaction with ethics and the other is the rise and domination of the professional services firm.
The law firm has become emblematic of the modern legal profession. Since the Cravath system came to idealize the growth and functioning of the law firm in the 20th century, its development has been both inexorable and upward (Galanter & Palay; but cf. Wilkins & Gulati). Since the 1990s law firms have sought to recreate themselves as global entities competing with other global professional service firms (Flood). For some this has entailed developing firm-specific capital (e.g. Skadden Arps [Caplan]) while for others it has meant a futile quest for dominance and riches (e.g. Finlay Kumble [Eisler]). In the 21st century law firms are evolving into quite sophisticated professional service firms (PSF) with highly developed corporate structures. (See Morgan & Quack.) This situates Regan’s tale in an intermediate space between old-style lawyering and new-style conglomerate practice. We can read this story as the death rattle of the ancient regime.
Jenkens & Gilchrist was a small but high-end law firm in Texas with desires to grow, especially into New York. But its profits per partner (PPP) were insufficient to attract the best lateral hires even though by Texas standards it was successful. (See Sida Liu’s review of profits.) Having been through a bad spell in the early 1980s the firm had rebuilt itself but it remained at heart a regional law firm. Then enter stage left Paul Daugerdas in 1998.
Daugerdas was a lawyer and an accountant who had worked for Arthur Andersen and Altheimer & Gray where he had developed a tax shelter practice. (Both of these firms have subsequently folded.) He claimed he could bring in a book of business worth $6 million a year and moreover he wanted to be compensated based on his revenues, not those of the firm. After much argument over Daugerdas himself and the legitimacy of his work he was taken on. In his first year at Jenkens he generated $28 million in revenue, the firm’s PPP rose and the firm went from 77th to 57th in the AmLaw 100.
Within a couple of years of hiring Daugerdas the Office of Tax Shelter Analysis was formed by the government and the IRS went hunting for taxpayers who had bought illicit tax shelters. Jenkens & Gilchrist soon came within range and found itself mired in investor litigation which resulted in a multi-million dollar settlement against the firm. Despite this Jenkens was also investigated by the US Attorney’s Office in Manhattan and found itself rapidly losing lawyers—from 600 in 2001 to 144 in 2006. Once the firm had admitted that it had marketed fraudulent tax shelters the end was ineluctable. Jenkens paid a $76 million penalty and went out of business in 2007. Moreover, approximately 1,400 investors advised by Jenkens owed interest and penalties. Daugerdas, himself, went on trial for fraud in March 2011. (See indictment here.)
Regan examines the case of Jenkens & Gilchrist in the light of competition dynamics and cultural segmentation. Jenkens was fortunate to find itself in a field of work which paid by the percentage rather than the hour, could be repeated, and also to an extent could be protected from external view. Competitively, Jenkens was ready to move into new and lucrative markets.
Inside the firm, however, it was known that there was risk attached to hiring Daugerdas but not how much. First, there was the question of the legitimacy of his practice and the risks it posed to the firm if challenged by the government. Jenkens seriously under-estimated the force of the IRS attack. Second, Daugerdas’s role in Jenkens was fraught in that he demanded his own compensation structure and that he wouldn’t necessarily be bound by firm policies. He was, in effect, a solo practitioner within the firm based in another office which was outside management’s control.
I have deliberately referred to Regan’s story as an obituary, one not just of a particular law firm but more of a dying old guard—a fossilized nomenklatura who are being replaced by sophisticated siloviki.The new corporatized professional service firms (Faulconbridge & Muzio)are less beholden to maverick leaders than to committees, risk managers (vide Enron and Andersen), and to potential external investors as liberalizing regulatory reforms course through the world. It is important to understand how (r)evolution in professionalism occurs so we can understand the new structures that are appearing before us. Many are based on the new emerging forms of regulation at national and global levels. These have come about through anti-competition authorities pursuing a free market agenda in respect of professional services and firms. One example is the introduction of outcomes-focussed regulation in the UK by the Solicitors’ Regulation Authority. (See Chambliss on regulators and ethical culture, the Legal Services Board “rationale of regulation”.) Although US lawyers might like to think that they will remain immune from foreign incursions into their self-governance, they are seriously mistaken as Laurel Terry’s work on GATS has shown. How quickly and to what extent the US legal profession will find itself bound up in the new professionalism is open. Yet, in this respect, Regan’s story is a cautionary tale of a law firm’s collapse in the face of the expanding regulatory state.
Caplan, L. 1994. Skadden: Power, Money, and the Rise of a Legal Empire. Farrar, Straus & Giroux.
Eisler, K 1990. Shark Tank: Greed, Politics, and the Collapse of Finley Kumble, One of America’s Largest Law Firms. Beard Books.
Faulconbridge, J & Muzio, D. 2008. Organizational Professionalism in Global Law Firms. 22 Employment and Society 7.
Flood, J. 1996. Megalawyering in the Global Order: The Cultural, Social and Economic Transformation of Global Legal Practice. 3 International Journal of the Legal Profession 169.
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Lazega, E. 2001. The Collegial Phenomenon: The Social Mechanisms of Cooperation Among Peers in a Corporate Law Partnership. Oxford University Press.
Morgan, G & Quack, S. 2006 Global networks or global firms? The organizational implications of the internationalisation of law firms, in Ferner, A et al, eds. Multinationals and the Construction of Transnational Practices: Convergence and Diversity in the Global Economy, Palgrave Macmillan.
Regan, M. 2004. Eat What You Kill: The Fall of a Wall Street Lawyer. University of Michigan Press.
Terry, L. 2010. From GATS to APEC: The Impact of Trade Agreements on Legal Services. 43 Akron Law Review 875.
Wilkins, D & Gulati, M. 1998. Reconceiving the Tournament of Lawyers: Tracking, Seeding, and Information Control in the Internal Labor Markets of Elite Law Firms. 84 Virginia Law Review 1581.