The Impact of the Economic Downturn on the Legal Industry

by Heather Chapman (New York City)

The financial market isn’t the only industry being affected by the recent downturn in the U.S. economy. Businesses all across the nation have seen a decline in customers. However, in the legal industry, the number of bankruptcy, litigation, regulatory compliance, white-collar defense, and divorce cases has risen as people and businesses try to either save themselves from collapse or cash in on someone else’s. With questions like “Should I keep investing my money?” to “What do I do about my health insurance plan?” lawyers are finding that business is booming.

Rjon Robins, attorney and founder of a lawyer coaching website, says that he is seeing more personal consumer bankruptcies. “The biggest reason is the social factor. When you see other people around you taking advantage of bankruptcy relief the social stigma is reduced which makes the decision easier for you to make. The same is true of commercial bankruptcies. Except that business owners tend to come to the decision a little faster with the help of accountants and vendors who prevent them from avoiding the reality of their predicament.”

He continued, “Litigation attorneys are seeing an uptick in new business. And we expect that trend to continue too, but not necessarily because the economy is causing people to have more reason for litigation. Rather every time we see a down-swing in the economy what seems to happen is that people who might otherwise have focused on the future instead of resorting to litigation start to try and tie-up loose ends.”

Thomas W. Kerner, attorney for Kerner & Betts in Williamsburg, North Carolina, agrees. He sees consumer debt collection and tax litigation rising, in addition to business-to-business (B2B) debt collection. “Especially among contractors and subcontractors who are not being paid because banks have pulled the funding on projects they’ve put months of work into; I would say 75-80% of it is directly or indirectly related to the building slowdown, which has been fueled by the collapse of the housing market and the tightening of lending practices which has caused a lot of projects to stop dead in their tracks.”

Julie, a lawyer in New York, says that her firm is seeing a rise in the amount of work in their bankruptcy department, in addition to an increase in their tax department.

On the more personal side of matters, Clinton J. David, founding partner of Dallas, Texas, law firm David, Goodman & Madole, says that divorce litigation is also on the rise. “We saw it in 2001-2002 and we’re probably going to see it again. The number one thing couples fight over is money and with the pressures of job uncertainty, a declining stock and housing market, shrinking 401Ks and the holiday shopping season coming up, cracks in marriages become larger. And divorces in bad times tend to be uglier than divorces in good times. A couple’s largest asset is their home. In good economic times, they can just sell it and go their separate ways. In bad times, the house won’t sell and even if it does there may not be any profits to split.”

Larger firms that handle several areas of law, instead of focusing on one, are so busy trying to help and inform their clients that they have put together multidisciplinary task forces. In an interview with the ABA Journal, Greg Markel, chairman of Cadwalader, Wickersham & Taft’s litigation department, said that, “The severity of clients’ financial issues is greater than anything I’ve seen in 35 years. The dot-com bubble was a narrow problem, whereas the credit crisis is so wide-ranging, there is a broad need for expertise. There is more interaction among practice groups and more of a concerted effort among the groups to address the complex needs of clients.” Other firms such as Potter Anderson & Corroon, Roetzel & Andress, Holland & Knight, Chadbourne & Parke, and Patton Boggs have formed similar taskforces to advise their clients.

Yet despite the new business that lawyers across the country are receiving, the firms and the lawyers who work for them are also being personally caught up in the negative aspects of a declining economy. Due to the credit crunch, corporate businesses aren’t necessarily paying the same high fees that they were, resulting in mass layoffs. Just this past week, there was news of significant layoffs across the legal industry. In Chicago, Sonnenschein Nath & Rosenthal let go of about 24 lawyers out of 680—their second round of dismissals this year—and Katten Muchin Rosenman laid off 21 lawyers out of 650. These aren’t the only firms laying off lawyers – big firms like Clifford Chance, Cadwalader, and Thacher Proffitt & Wood have all recently laid off some of their cadre of attorneys. Most experts expect this trend to continue, at least until the market shows some sign of improvement.