Twelve of L.A.’s biggest law firms reported that their profits increased in 2009, up from four in the previous year, a sign of a turnaround.
What’s more, attorneys and experts believe that increased activity in the fourth quarter signals even better times ahead for the local law industry.
According to the Business Journal’s annual ranking of law firms, Gibson Dunn & Crutcher LLP and Sheppard Mullin Richter & Hampton LLP saw single-digit increases in profits per partner and higher revenue. Latham & Watkins LLP reported increased profits but lower revenue.
Profits per partner – a common way to measure a law firm’s financial performance – declined at Quinn Emanuel Urquhart Oliver & Hedges LLP; revenue was down as well. Quinn Emanuel, which in 2007 became the first L.A. firm to hit $3 million in profits per partner, reported its first decline in profits since debuting on the Business Journal’s annual ranking of law firms in 2005. Nevertheless, the firm’s profits remained above the $3 million mark and it retained its top ranking for profits.
O’Melveny & Myers LLP remained the largest firm on the list; profits declined there as well. Two other firms on the list reported that profits fell. In all, 34 of L.A.’ 50 biggest law firms did not report profits.
Two firms on the Business Journal’s list, Gibson Dunn and Sheppard Mullin, are examples of the turnaround.
Gibson Dunn reported increases in both revenue and profits per partner thanks to some higher-profile cases and transactions handled by the firms’ attorneys. Profits per partner increased 1.6 percent, from $1.88 million to $1.91 million.
Attorneys in Gibson Dunn’s downtown L.A., Century City and Irvine offices represented Dole Food Co. in its legal fight with Nicaraguan banana workers who claim they were exposed to a pesticide that rendered them sterile. But in a key victory, the attorneys convinced a Los Angeles Superior Court judge to dismiss two of the cases against the Westlake Village fresh food giant based on evidence that they were part of a massive scheme to extort billions of dollars from Dole.
Chairman Ken Doran said his firm’s success on the Dole case led Chevron Corp. to hire Gibson Dunn to represent the oil giant in its battle over oil pollution in Ecuador.
“Some of the experiences that we developed and successes we had working closely with the Dole team have enabled us to take some of that experience to others,” Doran said.
Sheppard Mullin’s revenue rose, and its profits per partner increased by 5.6 percent from $1.18 million to $1.24 million.
Chairman Guy Halgren said higher profits resulted from the firm’s mix of practice areas. Some, including labor and employment, government contracts and antitrust, are countercyclical – activity increases in downturns.
“We are consistent performers,” Halgren said. “We don’t have high spikes that some firms have and typically don’t have dives when times are bad.”
Sheppard Mullin was involved in several higher-profile cases and transactions last year, including Comcast Corp.’s $30 billion acquisition of NBC Universal Inc.
The firm also adopted greater flexibility in how it bills clients, using “alternative billing” methods such as negotiated flat fees and so-called success premiums, with the goal of retaining clients by lowering their costs.
“We are doing more alternative fee structures than ever before, and being proactive and talking to clients,” Halgren said.
“If you look at the way the indigenous Los Angeles firms performed, considering what happened nationwide, they did well,” said Peter Zeughauser, a Newport Beach-based legal consultant. “And cutting costs and overhead was part of it. But some just had strong years.”
Quinn Emanuel still showed the highest profits per partner, even though the numbers dropped 6.1 percent last year from $3.3 million to $3.1 million.
Quinn Emanuel is unusual among larger firms because it takes contingency cases, although it limits them to 10 percent of its billable hours. So that percentage of the firm’s revenue is outcome based and thus uncertain.
Bill Urquhart, Quinn Emanuel name partner, said the firm was concerned about the recessionary climate during the first half of 2009, but the outlook has brightened since.
“We were really concerned about what might happen, so we stopped our hiring of lateral associates for six to seven months,” Urquhart said.
But the firm is currently representing ING Bank, insurance and financial services company AXA and several private equity funds in litigation against major banks related to the meltdown of the financial industry. As a result, Urquhart said the firm’s attorneys are busier than ever.
“By the end of the first quarter of 2009, we were as busy as we’ve ever been and that has continued until now,” Urquhart said. “It’s been the longest period of sustained activity at this level, and it shows no signs of abating.”
Latham & Watkins’ mixed results reveal that things are changing on the landscape.
Revenue dropped by 5.3 percent, but its profits per partner increased 5.5 percent from $1.8 million to $1.9 million.
Chairman Robert Dell said the firm saw an increase in demand for its legal services as the economy showed signs of a turnaround.
“We are pleased with our 2009 financial performance,” Dell said in a statement, “and more importantly, have been encouraged as 2009 progressed by the gradual return of confidence in the markets.”
Industry insiders said firms that cut spending and ran leaner operations in 2009 are poised to benefit from the end of these recessionary times.
“Some firms were aggressive about managing expenses – travel, different IT functions, marketing, business development – and that’s not going to stop,” said John Childers, an L.A.-based legal consultant with Somerset, N.J., professional services consultancy Hildebrandt International.
Irell & Manella LLP did not disclose profits per partner to the Business Journal, but reported a stunning 27 percent increase, from $1.9 million to $2.5 million, to American Lawyer magazine.
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