The rising economic pressures on non-equity law firm partners
BY KENNETH ANDERSON
January 25 at 3:10 pm
New York Times business page columnist James B. Stewart has a profile in today’s paper, “A Lawyer and Partner, And Also Bankrupt,” recounting how a Manhattan partner at the now-gone Dewey & LeBoeuf law firm, Gregory M. Owens, gradually slid into personal bankruptcy on December 31, 2013. It’s a candid profile, filled with many personal details of an upper middle class professional in financial distress, on the one hand, and offering a dismaying assessment of the structural economic pressures on the highly compensated senior lawyers at many of the large New York and other big city law firms in the United States, on the other. Although Owens filed for bankruptcy, he is in fact employed – no longer as an equity partner, however, but as a non-equity “service” partner, at White & Case. That’s the firm to which his mentor (the equity partner rainmaker who had brought about the M&A deals on which Owens had done much of the detailed, technical work) departed before Dewey & Leboeuf collapsed.
The article contains a lot of personal financial information – salary, alimony and child support, rent, etc. I suppose one could spend a lot of time picking over the details and primly lecturing Owens on what he should have done differently, how he’s misspending his money, or why someone who made $356,000 in 2013 should scarcely be a pity project in the Times. But that’s too vulture-ish for me, and I’m sure I’m not alone in thinking, “There, but for the grace of God …” — more so, in that though the article doesn’t exactly say, it’s hard not to think that financial and professional turmoil had something to do with the breakup of Owens’ marriage.
But Stewart wrote the column, presumably, and Owens revealed his personal and financial situation, in an effort to explain something that goes beyond one individual’s story — the article aims to illuminate structural economic issues that have emerged in the last few years in large-firm, high-end law practice. These lawyer positions were long understood to be a haven in a heartless world for certain smart, technically skilled, professionals, once they achieved a certain level of seniority — but a haven no longer. Indiana University law professor William Henderson, who has certainly done as much as any academic to try and understand the business models of the legal profession and law schools, takes this as a cautionary tale of the many new uncertainties in big firm law practice compared to earlier decades:
“In almost any other context, $375,000 would be a lot of money,” said William Henderson, a professor at the Indiana University School of Law and a director of the Center on the Global Legal Profession. “But anyone who doesn’t have clients is in a precarious position. For the last 40 years, all firms had to do was answer the phone from clients and lease more office space. That run is over. The forest has been depleted, as we say, and firms are competing for market share. Law firms are in a period of consolidation and, initially, it’s going to take place at the service partner level. There’s too much capacity.” He added that law firm associates and summer associates had also suffered significant cuts, which has culled the ranks of future partners.
Professor Henderson goes on to talk in the article about the implications for law schools, which are seeing rapid fall-off in LSAT takers and applications to schools. As he has said in many venues, the pressures on Big-Law business models are not cyclical and merely an overhang of the 2008 recession; the shifts are structural and the returns are simply not, and won’t be, what they were. Although some would contest that big law firm practice is undergoing a genuinely structural shift, I think it is pretty widely accepted in the legal marketplace. But significantly lower returns even to big firm, high end law practice eventually has to have an impact on law school business models, to the extent that they have priced themselves to students on the basis of certain expectations (themselves likely always unrealistic) about the returns to lawyers from legal education
A Lawyer and Partner, and Also Bankrupt
JAN. 24, 2014
By JAMES B. STEWART
Anyone who wonders why law school applications are plunging and there’s widespread malaise in many big law firms might consider the case of Gregory M. Owens.
The silver-haired, distinguished-looking Mr. Owens would seem the embodiment of a successful Wall Street lawyer. A graduate of Denison University and Vanderbilt Law School, Mr. Owens moved to New York City and was named a partner at the then old-line law firm of Dewey, Ballantine, Bushby, Palmer & Wood, and after a merger, at Dewey & LeBoeuf.
Today, Mr. Owens, 55, is a partner at an even more eminent global law firm, White & Case. A partnership there or any of the major firms collectively known as “Big Law” was long regarded as the brass ring of the profession, a virtual guarantee of lifelong prosperity and job security.
But on New Year’s Eve, Mr. Owens filed for personal bankruptcy.
According to his petition, he had $400 in his checking account and $400 in savings. He lives in a rental apartment at 151st Street and Broadway. He owns clothing he estimated was worth $900 and his only jewelry is a Concord watch, which he described as “broken.”
Mr. Owens is an extreme but vivid illustration of the economic factors roiling the legal profession, although his straits are in some ways unique to his personal situation.
The bulk of his potential liabilities stem from claims related to the collapse of Dewey & LeBoeuf, which filed for bankruptcy protection in 2012. Even stripping those away, his financial circumstances seem dire. Legal fees from a divorce depleted his savings and resulted in a settlement under which he pays his former wife a steep $10,517 a month in alimony and support for their 11-year-old son.
But in other ways, Mr. Owens’s situation is all too emblematic of pressures facing many partners at big law firms. After Dewey & LeBoeuf collapsed, Mr. Owens seemingly landed on his feet as a partner at White & Case. But he was a full equity partner at Dewey, Ballantine and Dewey & LeBoeuf. At White & Case, he was demoted to nonequity or “service” partner — a practice now so widespread it has a name, “de-equitization.”
Nonequity partners like Mr. Owens are not really partners, but employees, since they do not share the risks and rewards of the firm’s practice. Service partners typically have no clients they can claim as their own and depend on rainmakers to feed them. In Mr. Owens’s case, his mentor and protector has long been Morton A. Pierce, a noted mergers and acquisitions specialist and prodigious rainmaker whom Mr. Owens followed from the former Reid & Priest to Dewey, Ballantine to Dewey & LeBoeuf and then to White & Case.
“It’s sad to hear about this fellow, but he’s not alone in being in jeopardy,” said Thomas S. Clay, an expert on law firm management and a principal at the consulting firm Altman Weil, which advises many large law firms. “For the past 40 years, you could just be a partner in a firm, do good work, coast, keep your nose clean, and you’d have a very nice career. That’s gone.”
Mr. Clay noted that there was a looming glut of service partners at major firms. At the end of 2012, he said, 84 percent of the largest 200 law firms, as ranked by the trade publication American Lawyer, had a class of nonequity or service partners, 20 percent more than in 2000. And the number of nonequity partners has swelled because firms have been reluctant to confront the reality that, in many cases, “they’re not economically viable,” Mr. Clay said.
Scott A. Westfahl, professor of practice and director of executive education at Harvard Law School, agreed that service partners faced mounting pressures. “Service partners need a deep expertise that’s hard to find anywhere else,” he said. “Even then, when demand changes, and your specialty is no longer hot, you’re in trouble. There’s no job security.” He added that even full equity partners were feeling similar pressures as clients demanded more accountability. “Partners are being de-equitized,” he said, as Mr. Owens was. “That’s a trend.”
Mr. Owens specializes in financing and debt structuring in mergers and acquisitions, a relatively narrow expertise where demand rises and falls with the volume of merger and acquisition deals that his mentors generate. Former colleagues (none of whom would speak for attribution) uniformly described him as a highly competent lawyer in his specialty and, as several put it, “a lovely person” who relishes spending time with his son. But he does not seem to be the kind of alpha male — or female — who can generate revenue, bring in clients and are generally prized by large law firms.
At Dewey & LeBoeuf, Mr. Owens’s name was perennially among a group of partners who were not making enough revenue to cover their salaries and overhead, according to two former partners at the firm. But each time, the powerful Mr. Pierce, then the firm’s vice chairman, protected Mr. Owens, they said.
“He was very good at what he knew,” a former Dewey & LeBoeuf partner said. “But he wasn’t built to adapt. To make it as a law firm partner today, you have to periodically reinvent yourself.”
As partners were leaving Dewey & LeBoeuf in droves as it neared bankruptcy in 2012, Mr. Pierce went to White & Case. Mr. Owens followed, but this time as a salaried lawyer, not an equity partner, even though he has the title of partner.
A spokesman for White & Case said Mr. Owens and Mr. Pierce had no comment. Neither did the firm.
Mr. Owens has been well paid by most standards, but not compared with top partners at major firms, who make in the millions. (Mr. Pierce was guaranteed $8 million a year at Dewey & LeBoeuf.) When Mr. Owens first became a partner at Dewey, Ballantine, he made about $250,000, in line with other new partners. At Dewey & LeBoeuf, his income peaked at over $500,000 during the flush years before the financial crisis. In 2012, he made $351,000, and last year, while at White & Case, he made $356,500. He listed his current monthly income as $31,500, or $375,000 a year. And he has just over $1 million in retirement accounts that are protected from creditors in bankruptcy.
How far does $375,000 a year go in New York City? Strip out estimated income taxes ($7,500 a month), domestic support ($10,517), insurance ($2,311), a mandatory contribution to his retirement plan ($5,900), and routine expenses for rent ($2,460 a month) transportation ($550) and food ($650) and Mr. Owens estimated that he was running a small monthly deficit of $52, according to his bankruptcy petition. He has gone back to court to get some relief from his divorce settlement, so far without any success.
In his petition, Mr. Owens said he didn’t expect things to get any better in 2014.
And they could get worse. The most recent deal on White & Case’s website in which Mr. Owens played a role was the relatively modest $392 million acquisition of the women’s clothing retailer Talbots by Sycamore Partners, in which Mr. Owens (working with Mr. Pierce) represented Talbots. That deal was announced in May 2012. The White & Case spokesman did not provide any examples of more recent deals.
“In almost any other context, $375,000 would be a lot of money,” said William Henderson, a professor at the Indiana University School of Law and a director of the Center on the Global Legal Profession. “But anyone who doesn’t have clients is in a precarious position. For the last 40 years, all firms had to do was answer the phone from clients and lease more office space. That run is over. The forest has been depleted, as we say, and firms are competing for market share. Law firms are in a period of consolidation and, initially, it’s going to take place at the service partner level. There’s too much capacity.” He added that law firm associates and summer associates had also suffered significant cuts, which has culled the ranks of future partners.
All this “has had a huge effect on law school enrollment,” Professor Henderson said.
Mr. Clay, the consultant, said many firms had been slow to confront the reality that successful service partners were probably going to need to work more hours than rainmakers, not fewer, to justify their mid- to high-six-figure salaries. Many of them “seem to have felt they had a sinecure,” Mr. Clay said. “They’re well paid, didn’t have to work too hard, they had a nice office, prestige. It’s a nice life. That’s O.K., except it’s not the kind of professional life that will do much for a firm. These nonequity positions were never meant to be a safe place to rest and not work as hard as everyone else.”
And these lawyers may have to give up the pretense that they’re law firm partners. In his bankruptcy petition, Mr. Owens describes himself as a “contract attorney,” which has the virtue of candor.
“From a prestige standpoint, being called a partner is something that’s very important to people,” Mr. Westfahl observed. “Lawyers tend to be very competitive, and like all people, titles and status matter. But to the outside world, where people think all partners are equal, it’s deceptive. And inside the firm, everyone knows the real pecking order. When people see that partners are treated disparately, it causes unnecessary dissonance and personal frustration.”
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