Several years of boom times for L.A.'s largest law firms came to a screeching halt in 2008 as some posted a decline in profits per partner, the key metric of firms' financial performance.
Profits per partner at L.A. stalwarts Gibson Dunn & Crutcher LLP, O'Melveny & Myers LLP and Paul Hastings Janofsky & Walker LLP saw single-digit decreases, while market leader Latham & Watkins LLP posted a 21 percent drop. Latham & O'Melveny have both laid off large numbers of attorneys and support staff as a result of the downturn.
However, litigation powerhouse Quinn Emanuel Urquhart Oliver & Hedges LLP remained strong despite the poor economy, ranking No. 1 in profits per partner for the fourth consecutive year on the Business Journal's annual ranking of law firms. The firm posted an 11 percent increase.
Quinn Emanuel's profits were boosted by several high-profile litigation matters, including a multimillion-dollar victory in the battle over the popular Bratz fashion dolls. The firm's profits per partner were $3.3 million, up from $3 million in 2007.
Profits per partner is a common way to measure a firm's financial standing. In 2003, Quinn Emanuel was the first L.A. firm to hit $1 million in profits per partner. In 2006, it hit $2 million, again the first to achieve that level, and it was the first to hit $3 million, attaining that in 2007.
But other firms were gaining, too; five local firms got at least $1.5 million in profits per partner in 2006, '07 and '08.
However, the weakening economy started taking its toll in 2008. Of the firms that reported profits per partner to the Business Journal, four had increases while 10 had decreases.
More recently, firms began laying off associates and support staff, and freezing salaries.
Latham & Watkins announced two weeks ago that the firm laid off 190 associates and 250 support staff. The cutbacks were the deepest reductions by a large law firm here since the economy soured.
On March 4, O'Melveny laid off 90 attorneys and 110 support staff firmwide.
At both firms, the job losses were concentrated in the Los Angeles and New York offices.
Before Latham's layoffs, the firm announced in December that it was freezing associate salaries. Other firms followed suit, and in January, Sheppard Mullin Richter & Hampton LLP in Los Angeles announced that associates' 2009 base compensation would remain the same as 2008's.
Legal insiders expect that there will be more layoffs in the future as firms make attempts to run leaner, more efficient operations.
"Firms that haven't announced any layoffs will in the not too distance future," said John Childers, an L.A. legal consultant with Hildebrandt International Inc. "And some that have already announced large layoffs will be doing a second round. The decline in demand has outpaced what firms have done so far."
Quinn Emanuel name partner Bill Urquhart said the firm's financials did not suffer with the rest of the economy because it concentrates on litigation, which runs countercyclical.
"Our model is perhaps about as good of a model you could have for these difficult financial times," Urquhart said. "The only thing we do is commercial litigation and advice arising out of bankruptcy and restructuring."
In 2008, Quinn Emanuel's lawyers tried 22 cases throughout the United States, a significant number that saw firm attorneys billing at record hours and bringing in big bucks.
Founding partner John Quinn, and a team of Quinn Emanuel lawyers, represented El Segundo's Mattel Inc. in the toymaker's battle with MGA Entertainment Inc. over the $2 billion Bratz empire. A jury awarded Mattel a $100 million jury verdict, and control of the Bratz dolls and products.
The firm also withstood the economic storm because it has not represented large financial institutions. As a result, Quinn Emanuel attorneys don't have conflicts in bringing suits against the banks and executives who are now being scrutinized over the economic fallout.
"We have severed our ties to the major money center banks and big investment banks with the exception of Morgan Stanley," Urquhart said. "It gives us an awful lot of opportunity to take on cases, particularly in New York and London."
In contrast, Latham & Watkins embraced Wall Street, and its lawyers capitalized on the economic boom by working on high-profile merger and acquisition deals, debt financing and residential mortgage-backed securitizations.
So when the fallout of the mortgage crisis hit the banking industry, the firm was in trouble. Profits per partner dropped 21 percent, from $2.3 million to $1.8 million, while the firm's revenues declined 4 percent, from $2 billion to $1.9 billion.
Law firms, including Latham, began to see their financials decline when the residential and commercial real estate markets softened, and when corporate work such as merger and acquisition deals, private equity financing and public initial offerings dried up.
"The engine that propelled profits in the last few years has slowed down considerably," said Sandy Lechtick, chief executive of L.A. recruiting firm Esquire Search. "And a big part that fueled O'Melveny, Latham, Gibson and Paul Hastings, and firms of that ilk, was the engine in New York."
During the boom, firms added associates and nonequity partners as demand for legal services swelled. When the workload eased due to the downturn, there were more of those attorneys than were needed.
"In the bigger firms, we are seeing that the most fungible are the senior associates and counsel," said Bill Nason, a San Diego legal recruiter. "The worst thing to be in the world right now is a highly trained, highly educated eight-year attorney with no client base."
L.A. firms O'Melveny & Myers, Gibson Dunn and Paul Hastings also posted declines in profits per partner, although the decreases were less dramatic than at Latham & Watkins.
Gibson Dunn saw its profits per partner drop 1.3 percent, from $1.9 million to $1.88 million, while revenue increased 5.4 percent, from $908 million to $957 million.
Ken Doran, Gibson Dunn's L.A.-based chairman, said the firm wasn't hit too hard because it has a wide range of practice specialties, and some thrived.
"Parts of our practice remain robust," Doran said. "Litigation is quite busy, as is antitrust, patent, securities environmental and white-collar work."
O'Melveny & & Myers' profits per partner fell 7 percent, from $1.6 million to $1.5 million, and revenues decreased 3 percent, from $934 million to $908 million. Unlike Gibson and Latham, the firm didn't amass a group of corporate lawyers who were doing the high-profile financial deals that helped to boost those firms' numbers during the economic boom.
In previous years, Paul Hastings had seen significant growth, and the firm's 2007 financials allowed the firm to take its place as the fourth powerhouse among L.A.'s largest firms.
Paul Hasting profits per partner decreased by 1 percent, from $1.92 million to $1.9 million, while revenues increased 1 percent, from $976 million to $986 million.
The outlook for small and medium-size law firms may be brighter than it is for the larger ones.
"There are some counterintuitive trends going on," said Lechtick of recruiting firm Esquire Search. "And in some cases they are being exploited by the small and midsize firms because they can demonstrate rate flexibility and staff cases a little more lean."
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