California Legal Market

2006 California Legal Market Update

A wise job seeker keeps abreast of trends in the legal marketplace because they directly impact your career options. As law firms merge, dissolve, and gain and lose partners and practice areas, job opportunities change. So, where are we now?

Consolidation

“Merger mania” continues to be upon us. There were 49 law firm mergers in 2005, continuing the upward trend from 47 in 2004, 35 in 2003, and 22 in 2002. There were 82 mergers in 2001, however, before the dot.com bust. The largest mergers in 2005 included the combination of DLA Piper Rudnick Gray Cary and Pillsbury Winthrop’s merger with the DC firm of Shaw Pittman. Another merger affecting the California market was the acquisition of Hancock Rothert by Duane Morris last year. All six of the mergers involving California firms in 2005 involved out of state firms expanding into this market. Just this March, Los Angeles-based Van Etten Suzumoto & Beckett was acquired by McGuireWoods.

As the economy improves, there also have been fewer law firm dissolutions. There were 13 law firm failures in 2003, many of which had California offices, the most notably being Brobeck. There were only 5 law firm dissolutions in 2004, and none were in California. Things continued to improve in 2005, with only four firms closing, the largest being Coudert Bros., a long-standing international firm.

In addition, only a few out of state firms have closed their California offices, such as Fried Frank closing its Los Angeles office last year, and the recent Northern California closures of White & Case’s San Francisco office to focus on its Silicon Valley branch, and Milbank Tweed closing in Palo Alto. Overall, while a few out of state firms closed certain California offices, those were offset by new offices being opened here by other out of state firms.

It seems that virtually all law firms, national, regional, and local, either have considered or have been involved in merger discussions with other firms. In 2004, of the AmLaw Top 200 firms, 26% say they were seeking a merger partner. The trend seems to indicate that many of even the most highly regarded small to mid-sized firms (which these days is defined as having up to 300 or so lawyers!) are having difficulty competing with the larger firms on associate compensation and in providing clients with a full array of legal services. Those firms with a clear strategic focus and narrow geographic, industry, or practice niches have the best chance of enduring.

Globalization

Global mergers also are becoming a trend, especially between US-based firms with British and European firms. A number of European firms have moved to New York, but California has not been an important target thus far. The first British firm to reach the West Coast arrived in 2003—Clifford Chance—by acquiring a large number of Brobeck attorneys up and down the state. Ironically, however, Clifford Chance did not take California by storm as it had expected to do. About a year later, that firm closed its San Francisco, Los Angeles and San Diego offices, keeping only a very small presence in Silicon Valley.

Associate Hiring

Law firm hiring is up across the board, due to the stronger economy. Of the AmLaw Top 200 firms, 34% plan bigger first year classes, and 37% expect the same size as in 2005. Some of the larger firms have increased their summer associate classes significantly this year, as well. For example, Morgan Lewis is up 18%; Skadden increased its class by 17% and Morrison & Foerster’s class is 15% larger. In general, however, firms have learned by experience to be conservatively optimistic.

Salaries

After the tremendous increases in associate salaries and bonuses at the height of the dot.com boom, compensation, at least for starting associates, had been flat for the past 5 years and just now is moving up again. As salaries for the new attorneys go up, so do those for more senior associates though the increases are not as dramatic. At many firms, there is a compression of salaries as seniority increases. Over the past several years, entering associates at the top firms had been earning a base of $125,000, with most of the competitive business firms paying in the $100,000 to $125,000 range. Recently, those numbers increased to $145,000 at the most elite New York-based firms, and $135,000 in other financial centers, including California. However, LA-based Quinn Emanuel recently announced that it would match the $145,000 entry level base salary, and there is speculation about what other firms will do. Some think that Quinn is a different enough firm that others will not need to follow suit in order to compete for the best and the brightest candidates.

Remember that, as recruiters, we are dealing with only the very top echelon of the legal marketplace, as those are the employers who will pay our fees. There is a huge variety of salary scales below that, depending on the size, location, practice, and profitability of the firm. In the Midwest, salaries lag behind the coasts (as does their cost of living). However, as the salaries at the most elite firms on the coasts rise, it does pressure all market segments to move upward.

For the past few years, most firms paid year-end bonuses of some sort to their associates, but it is somewhat common to tie the bonus to a minimum of billable hours. In addition, many firms have moved away from lockstep salary increases by class year and are heading towards merit based compensation. As the economy improves and firms are more profitable, we expect bonuses to become more generous.

Partnership Opportunity

During bad economic times, the number of associates being elevated to partner is significantly fewer than in boom years. Law firms generally make partnership announcements at the beginning of the year and, in 2005, with an improving economy, we saw better numbers. The 2006 new partner announcements are coming out and, in California, they seem to be slightly down from last year. Many of these new partners are non-equity, and there is an overall trend for law firms to slow the growth of their equity partner ranks.

Hot Practice Areas

Regardless of the strength of the economy, law firms continue to hire strategically at the partner level, adding areas of practice where they were weak or where they wish to offer their clients new services. Many will cherry pick partners who will bring them business in the next “hot” practice areas. What this means for you as you continue in your career, is that your partnership chances increase if you are in an active and profitable practice area and you need to stay aware of the lateral movement of partners and practices so that you can adjust your career plans accordingly.

Hot practice areas change and depend upon a variety of factors such as the economy, new laws, current enforcement, technological advances, and the social and political climate. Currently, the following areas are hot:

Litigation - heads the list of most opportunities by far. A 2005 survey of the AmLaw 200 firms shows that more than half expect greater growth this year in litigation than in any other area of practice.

Intellectual property - including patent prosecution, copyright, trademark, and licensing, as well as infringement litigation. The increased importance of intellectual property also is fueling antitrust work, such as the investigation of disputes over refusal to license IP, and the propriety of certain patent lawsuit settlements such as between brand name and generic drug manufacturers.

Real estate/land use - including the development, purchase and sales of existing properties, real estate finance, and REITS. Additionally, changing regulations and continued population growth increase the need for land use legal advice. Huge acreage of agricultural or other non-urban land has been converted to urban use in California over the past five years, particularly in the Inland Empire, San Diego and Kern counties (just North of Los Angeles). Note: Expect real estate work to slow if interest rates climb significantly.

Labor and employment - including wrongful termination, discrimination, and harassment as well as wage and hour class actions. This area of practice is constantly changing and employers need lawyers to help them comply with new laws, revise employee handbooks, train and counsel management and employees and, of course, to defend against the inevitable lawsuits.

Corporate - including securities, M&A, capital markets and, especially, corporate counseling. The Sarbanes-Oxley Act passed in 2004 in the midst of the huge corporate financial scandals. In addition to traditional corporate transactional work, many attorneys are busy advising clients how to comply with new regulations and possible loopholes in their Directors and Officers insurance.

“Warm” practice areas include:

Environmental - related to the increase in real estate transactions. Lawyers must assess issues such as contamination and water supply before a deal can go forward. After an environmental assessment has been done, remediation efforts must go into effect which means obtaining permits, complying with regulations, and procuring insurance.

Tax - including the tax aspects of corporate and real estate transactions. As the number of transactions increase, so does tax work.

“Cool” areas are:

Bankruptcy - was strong in a weak economy, but not as strong in California as you might imagine. Because the majority of incorporations are done in Delaware, most bankruptcies are handled back East. As the economy improves, this work will continue to slow. There was a slight flurry before the bankruptcy laws tightened up last year but, in general, this work is cooling down.

Healthcare, banking, and government contracts.

Emerging areas of practice:

Elder care and Estate Planning/Wealth management - practices are increasing as the population ages. Boomers will start turning 65 in 2010-2030. The National Academy of Elder Law Attorneys had 25 members when it began in 1988; now it has 5000. The organization focuses on the needs of seniors and encompasses many fields of law such as estate planning and administration, Medicaid/Medicare planning and claims, conservatorships and guardianships, disability issues, social security, retirement, family business succession, and ERISA.

And for those of you with "stars in your eyes": although Los Angeles is an entertainment center, it remains extremely difficult to break into that industry unless you know someone!

Job opportunities are a moving target. Keep up with market trends and movement in the legal marketplace and you will be poised to take advantage of changes as they occur.

California Legal Market 2006 California Legal Market Update A wise job seeker keeps abreast of trends in the legal marketplace because they directly impact your career options. As law firms merge, dissolve, and gain and lose partners and practice areas, job opportunities change. So, where are we now? Consolidation “Merger mania” continues to be upon us. There were 49 law firm mergers in 2005, continuing the upward trend from 47 in 2004, 35 in 2003, and 22 in 2002. There were 82 mergers in 2001, however, before the dot.com bust. The largest mergers in 2005 included the combination of DLA Piper Rudnick Gray Cary and Pillsbury Winthrop’s merger with the DC firm of Shaw Pittman. Another merger affecting the California market was the acquisition of Hancock Rothert by Duane Morris last year. All six of the mergers involving California firms in 2005 involved out of state firms expanding into this market. Just this March, Los Angeles-based Van Etten Suzumoto & Beckett was acquired by McGuireWoods. As the economy improves, there also have been fewer law firm dissolutions. There were 13 law firm failures in 2003, many of which had California offices, the most notably being Brobeck. There were only 5 law firm dissolutions in 2004, and none were in California. Things continued to improve in 2005, with only four firms closing, the largest being Coudert Bros., a long-standing international firm. In addition, only a few out of state firms have closed their California offices, such as Fried Frank closing its Los Angeles office last year, and the recent Northern California closures of White & Case’s San Francisco office to focus on its Silicon Valley branch, and Milbank Tweed closing in Palo Alto. Overall, while a few out of state firms closed certain California offices, those were offset by new offices being opened here by other out of state firms. It seems that virtually all law firms, national, regional, and local, either have considered or have been involved in merger discussions with other firms. In 2004, of the AmLaw Top 200 firms, 26% say they were seeking a merger partner. The trend seems to indicate that many of even the most highly regarded small to mid-sized firms (which these days is defined as having up to 300 or so lawyers!) are having difficulty competing with the larger firms on associate compensation and in providing clients with a full array of legal services. Those firms with a clear strategic focus and narrow geographic, industry, or practice niches have the best chance of enduring. Globalization Global mergers also are becoming a trend, especially between US-based firms with British and European firms. A number of European firms have moved to New York, but California has not been an important target thus far. The first British firm to reach the West Coast arrived in 2003—Clifford Chance—by acquiring a large number of Brobeck attorneys up and down the state. Ironically, however, Clifford Chance did not take California by storm as it had expected to do. About a year later, that firm closed its San Francisco, Los Angeles and San Diego offices, keeping only a very small presence in Silicon Valley. Associate Hiring Law firm hiring is up across the board, due to the stronger economy. Of the AmLaw Top 200 firms, 34% plan bigger first year classes, and 37% expect the same size as in 2005. Some of the larger firms have increased their summer associate classes significantly this year, as well. For example, Morgan Lewis is up 18%; Skadden increased its class by 17% and Morrison & Foerster’s class is 15% larger. In general, however, firms have learned by experience to be conservatively optimistic. Salaries After the tremendous increases in associate salaries and bonuses at the height of the dot.com boom, compensation, at least for starting associates, had been flat for the past 5 years and just now is moving up again. As salaries for the new attorneys go up, so do those for more senior associates though the increases are not as dramatic. At many firms, there is a compression of salaries as seniority increases. Over the past several years, entering associates at the top firms had been earning a base of $125,000, with most of the competitive business firms paying in the $100,000 to $125,000 range. Recently, those numbers increased to $145,000 at the most elite New York-based firms, and $135,000 in other financial centers, including California. However, LA-based Quinn Emanuel recently announced that it would match the $145,000 entry level base salary, and there is speculation about what other firms will do. Some think that Quinn is a different enough firm that others will not need to follow suit in order to compete for the best and the brightest candidates. Remember that, as recruiters, we are dealing with only the very top echelon of the legal marketplace, as those are the employers who will pay our fees. There is a huge variety of salary scales below that, depending on the size, location, practice, and profitability of the firm. In the Midwest, salaries lag behind the coasts (as does their cost of living). However, as the salaries at the most elite firms on the coasts rise, it does pressure all market segments to move upward. For the past few years, most firms paid year-end bonuses of some sort to their associates, but it is somewhat common to tie the bonus to a minimum of billable hours. In addition, many firms have moved away from lockstep salary increases by class year and are heading towards merit based compensation. As the economy improves and firms are more profitable, we expect bonuses to become more generous. Partnership Opportunity During bad economic times, the number of associates being elevated to partner is significantly fewer than in boom years. Law firms generally make partnership announcements at the beginning of the year and, in 2005, with an improving economy, we saw better numbers. The 2006 new partner announcements are coming out and, in California, they seem to be slightly down from last year. Many of these new partners are non-equity, and there is an overall trend for law firms to slow the growth of their equity partner ranks. Hot Practice Areas Regardless of the strength of the economy, law firms continue to hire strategically at the partner level, adding areas of practice where they were weak or where they wish to offer their clients new services. Many will cherry pick partners who will bring them business in the next “hot” practice areas. What this means for you as you continue in your career, is that your partnership chances increase if you are in an active and profitable practice area and you need to stay aware of the lateral movement of partners and practices so that you can adjust your career plans accordingly. Hot practice areas change and depend upon a variety of factors such as the economy, new laws, current enforcement, technological advances, and the social and political climate. Currently, the following areas are hot: Litigation - heads the list of most opportunities by far. A 2005 survey of the AmLaw 200 firms shows that more than half expect greater growth this year in litigation than in any other area of practice. Intellectual property - including patent prosecution, copyright, trademark, and licensing, as well as infringement litigation. The increased importance of intellectual property also is fueling antitrust work, such as the investigation of disputes over refusal to license IP, and the propriety of certain patent lawsuit settlements such as between brand name and generic drug manufacturers. Real estate/land use - including the development, purchase and sales of existing properties, real estate finance, and REITS. Additionally, changing regulations and continued population growth increase the need for land use legal advice. Huge acreage of agricultural or other non-urban land has been converted to urban use in California over the past five years, particularly in the Inland Empire, San Diego and Kern counties (just North of Los Angeles). Note: Expect real estate work to slow if interest rates climb significantly. Labor and employment - including wrongful termination, discrimination, and harassment as well as wage and hour class actions. This area of practice is constantly changing and employers need lawyers to help them comply with new laws, revise employee handbooks, train and counsel management and employees and, of course, to defend against the inevitable lawsuits. Corporate - including securities, M&A, capital markets and, especially, corporate counseling. The Sarbanes-Oxley Act passed in 2004 in the midst of the huge corporate financial scandals. In addition to traditional corporate transactional work, many attorneys are busy advising clients how to comply with new regulations and possible loopholes in their Directors and Officers insurance. “Warm” practice areas include: Environmental - related to the increase in real estate transactions. Lawyers must assess issues such as contamination and water supply before a deal can go forward. After an environmental assessment has been done, remediation efforts must go into effect which means obtaining permits, complying with regulations, and procuring insurance. Tax - including the tax aspects of corporate and real estate transactions. As the number of transactions increase, so does tax work. “Cool” areas are: Bankruptcy - was strong in a weak economy, but not as strong in California as you might imagine. Because the majority of incorporations are done in Delaware, most bankruptcies are handled back East. As the economy improves, this work will continue to slow. There was a slight flurry before the bankruptcy laws tightened up last year but, in general, this work is cooling down. Healthcare, banking, and government contracts. Emerging areas of practice: Elder care and Estate Planning/Wealth management - practices are increasing as the population ages. Boomers will start turning 65 in 2010-2030. The National Academy of Elder Law Attorneys had 25 members when it began in 1988; now it has 5000. The organization focuses on the needs of seniors and encompasses many fields of law such as estate planning and administration, Medicaid/Medicare planning and claims, conservatorships and guardianships, disability issues, social security, retirement, family business succession, and ERISA. And for those of you with "stars in your eyes": although Los Angeles is an entertainment center, it remains extremely difficult to break into that industry unless you know someone! Job opportunities are a moving target. Keep up with market trends and movement in the legal marketplace and you will be poised to take advantage of changes as they occur.	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