Spring/Summer 2010 California Lateral Update

Spring/Summer 2010 California Lateral Update

As we move into summer, law firms continue to seek partners with multi-million dollar books of portable business and there is a slight thaw in law firm associate hiring, but we have a long way to go before there is a return to a robust lateral market at any level of seniority.  Law firm downsizing due to the economy has resulted in more potential candidates on the market, but significantly fewer openings to fill.  Furthermore, the large law firm model is changing, affecting the numbers of new lawyers and junior associates being hired.  Partner demand remains strong, but a higher bar regarding the size of portable books of business is being set and firms generally are more risk averse.

Since March 2009, roughly 31,300 jobs have been lost in the legal sector nationally.  Sporadic layoffs may continue throughout 2010. On the other hand, as the economy begins to improve, legal work appears to be increasing.  For instance, at Los Angeles based Gibson Dunn, deal work has increased in recent months, placing it among the top 20 legal advisors in the world on global mergers and acquisitions in the first quarter.  The improved economic environment has not yet translated into an appreciable upswing in associate hiring, however, at least at the big firms.

Fundamental changes in the structure of law firms are being driven largely by their clients who want better and cheaper services. Corporations are refusing to pay for the training of junior associates and inefficient layers of staffing on matters.  Thus, law firms are reducing the number of entry-level associates.  Some firms are cutting their career track associate classes in half by better screening to ensure that entering associates are interested in practicing law and aspire to become partner.   Associate compensation is moving away from lockstep to merit-based.  There are more contract/project lawyers and non-partnership track positions.  Meanwhile, law schools recognize the need to better equip students to enter the job market and service clients.

At big firms in California, to the extent that there is associate hiring, firms are being extremely selective, seeking candidates in a narrow bandwidth of experience and expertise with absolutely stellar credentials.  Some firms will not hire associates who have been laid off.  Firms often will not use recruiters to fill these positions; or, when they do, they are being even more stringent in their requirements.

Smaller, local firms are doing more hiring, viewing this market as an opportunity to upgrade.   Most activity is in litigation boutiques seeking candidates with significant hands-on skills such as deposition and courtroom experience.  Some of these firms are using recruiters.

In Los Angeles, practice areas in greatest demand are litigation, intellectual property, bankruptcy, labor, and employment.   In Orange County and San Diego, there are very few openings, and primarily in the intellectual property area.   In San Francisco, the most active areas are intellectual property and litigation.  In Silicon Valley, intellectual property dominates.

To cut costs, many corporations are keeping more work in-house rather than farming it out to law firms.  Thus, some corporations are expanding their legal departments.  In Los Angeles, however, there are few public corporations with large legal departments. Still, there is hiring in a variety of industries, including banking, healthcare, aircraft leasing and utilities.

With lateral partner hiring, most firms are requiring a bigger book of business and are doing more extensive due diligence before extending offers.  Los Angeles has seen fewer partner moves compared with other markets.  This may be the result of fewer out-of-area firms coming into Southern California than in prior years.  Indeed, none entered Los Angeles during the first quarter of 2010 and one firm opened in Orange County.  Several firms that indicated an interest in establishing California offices now are holding off.   On the other hand, firms that took the plunge are continuing to bring in partners.  Overall, there is greatest interest in adding partners in the following practice areas:  all types of commercial litigation; corporate; real estate; intellectual property, labor/employment; bankruptcy; regulatory areas such as environmental and health care; and tax.

Another trend is the spin-off of groups of lawyers from larger firms to form boutiques, primarily to allow for greater flexibility in setting billing rates and alternative fee arrangements.  Thus, instead of moving from one major law firm to another, many partners with business are striking out on their own with colleagues.  This is not a new phenomena but one that further dilutes the pool of rainmaking partner candidates.

Silicon Valley may be the hottest area in California for lateral activity at the partner level. Law firms continue enter the Bay Area to capture business in technology, energy and Asia practice.  But, as in Southern California, it is more difficult to close lateral partner deals now than even six or seven months ago and risk-averse firms are passing on opportunities that they may regret down the road.

So what does the future hold?  Obviously, much will depend on the economy in general.  Although the stock market and housing markets have started to rebound, employment statistics have not improved.  A recent Thomson Reuters poll of M&A professionals predicted more mergers in the life sciences, which could mean more work in San Diego and Silicon Valley.  In Southern California, there also must be an improvement in commercial and residential real estate transactions and financings.  But, due to the prolonged downturn, the structural changes the legal profession has made in response may be permanent, not just temporary fixes. Consequently, even if the economy continues to improve, we may never see the return of the days when law firms hired legions of lateral associates at high compensation levels and brought in partners on a hope and prayer of bringing in business.

Valerie Fontaine
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