Law firms are distinctive creatures. The worker-owned governance structure, mandated by law’s professional responsibility rules, accidentally enables a distinctive type of business collapse known as a “partner run.” Partner runs are total liquidations, never reorganizations, and deeply feared by any law firm of scale. In my recent paper, I test whether a partner run can pose systematic threats to the legal profession, and find evidence suggesting that the answer is no. The equilibrium of the legal profession, then, is an odd structure where every individual law firm is highly vulnerable, but the ecosystem as a whole remains resilient.
Partner Runs: Theory and Background
Morley (2020)’s paper establishes the ingredients of a partner run. Nearly every state bar imposes a rule where nonlawyers cannot own profit interests in law firms, blocking law firms from being publicly traded corporations; large law firms are therefore nearly always (limited liability) partnerships. A separate professional responsibility provision blocks most forms of noncompetes for lawyers, meaning that a law firm in decline cannot stop its partners from leaving.
Meanwhile, Bankruptcy Code anti-fraudulent transfer provisions put distributions to partners made after a law firm becomes insolvent at risk of clawback in a bankruptcy, and preferential transfer provisions also put partners who exit post-insolvency at risk of not being able to have their capital contributions repaid. Partners who anticipate a bankruptcy, therefore, have a strong incentive to leave before insolvency is reached.
The above setting means that in the event of scandal or any mass departure of valuable partners, the profits per partner of the law firm decline, mechanically cutting compensation to the remaining partners. With a reduced incentive to remain at the firm, the remaining partners in turn become more likely to leave, and do so until concerns begin to spread about the firm’s solvency, at which point there is a full-blown run for the exits. Partners cannot be kept from leaving because lawyers generally cannot be bound by noncompetes. And as the law firm’s entire value proposition is its lawyers, the business collapses completely, even if it had continued revenues right up to the moment of bankruptcy.
Existing literature has articulated the general process of a partner run, but no paper has looked at what happens to the lawyers of a law firm that experiences one of these distinctive bankruptcies. Literature from economics employing either survey or administrative data suggests that while for most workers, displacement from a job results in years of meaningful lost wages on average, highly educated workers are relatively less affected. Lawyers could then be expected to not really lose out in layoffs. On the other hand, however, the legal profession is highly status-conscious and networked, and so lawyers who lose their jobs as a result of their firm’s chaotic implosion could face career damage from stigma or dissolution of firm-specific relational capital (embeddedness in intra-firm networks).
For my purpose, I will consider a partner run to pose a systematic threat to the legal profession if it results in lawyers permanently exiting legal practice en masse. This metric does not take into account the harms partner runs cause with regard to firings of non-lawyer firm employees, non-employment (e.g. psychological) damage to lawyers, and potential disruptions in legal services to clients. This measure is therefore incomplete, but chosen as to be (1) empirically testable and (2) a view that prioritizes the stability of the legal profession as an institution in a loosely analogous manner to how the stability of the banking system is prioritized in the study of bank runs.
Dewey & LeBoeuf as a Partner Run Case Study
To capture the impact of a partner run comprehensively, I handcode relevant data relating to the law firm Dewey & LeBoeuf. Dewey’s decline was the talk of the press for months, and the firm ultimately filed for bankruptcy in May 2012. The firm, with a headquarters in New York and offices across the United States and the world, had over a thousand lawyers at the time of its collapse, and had ranked in the V50 most profitable law firms per equity partner. Using Martindale-Hubbell lawyer directories, I catalogue every associate, counsel, and partner who was at Dewey’s U.S. offices in late 2011 (685 lawyers).
To get a control group of law firms who appeared similar to Dewey on paper but who did not go bankrupt, I first asked former Dewey managing partner Steven Davis about which firms he considered to be Dewey’s peers and primary competition and then verified that they had similar metrics like profits per partner to Dewey at the time (Fried Frank, White & Case, Mayer Brown, Shearman & Sterling, Dechert, Akin Gump, Orrick, and Sidley Austin). Due to limitations on my ability to handcode many thousands of lawyers, from each peer firm I grab the lawyers who worked in ‘meat and potatoes’ practice areas (M&A, capital markets, debt finance, antitrust, and white collar) to make direct comparisons (890 attorneys).
For each lawyer, I code their late-2011 job and their late-2022 employer and job. For ex-Dewey lawyers, I code the first post-Dewey employer and job in 2012. I also code background information like year of admittance to the bar, gender, law school attended, and Chambers ranking (if any). If a law firm submitted data to Martindale-Hubbell, I used Martindale-Hubbell as my primary data source; if not, I used the Wayback Machine on the law firm’s online directory page. For 2012 and 2022 data, I use law firm pages, LinkedIn, state bar information, and general information publicly available online. I am able to identify the 2022 jobs of 95% of the 1,575 lawyers in my sample.
Dewey is useful as a case study for two reasons. First, as the largest partner run in history, all eyes were on Dewey, and so if channels of stigma or dissolution of networks within the law firm were to have an impact on any partner run, they would do so in this one. Second, the timing of the bankruptcy (2012) means that the disruption did not occur at either a trough of legal hiring (2010) or a peak (2021), and that associates at Dewey had a decade to try to become law firm partners if they wished to do so by the time I collected my modern-day data, in line with the timing of the modern partner track.
Empirical Results – the Short-Term
Almost exactly half of ex-Dewey associates remained associates at other AmLaw 100 law firms (by top 100 profits per equity partners) in 2012; most of the rest scattered to other law firms, in-house counsel positions, or miscellaneous jobs. I identify about 6% of ex-Dewey associates who remained unemployed for the rest of 2012, and cannot find information about 12% of such associates; presumably some of them were also unemployed for this period. This indicates substantial near-term impact to Dewey’s associates of the bankruptcy.
By contrast, about 80% of ex-Dewey partners remained partners and senior counsel at other AmLaw 100 firms, and some of those who exited to other law firms founded their own firms. Most Dewey partners essentially landed on their feet in analogous positions. I cannot find the information of only 2% of ex-Dewey partners.
My most interesting short-term result is the clear evidence at cluster hiring at firms like Winston & Strawn, DLA Piper, Proskauer Rose, and Willkie Farr, each of which hired as many as 53 ex-Dewey lawyers. Firms would hire swaths of practice groups at once from the Dewey carcass, and half of the ex-Dewey associates who remained in the AmLaw 100 went to a firm as a result of a cluster hire. I note that male ex-Dewey associates were more likely, on average, to stay in Biglaw than female ex-Dewey associates (54% vs 44%), and that male associates made up 64% of the associates who were cluster-hired, indicating that cluster hiring contributed to a gender imbalance in the sort into new jobs.
Empirical Results – the Long-Term
A decade later, 16% of people who were associates at Dewey in 2012 are now partners in AmLaw 100 law firms (using the 2022 AmLaw 100 profits per partner rankings). This is true of 26% of those who lateraled into AmLaw 100 firms in 2022, but only 6% of those who did not. For men, 22% of ex-Dewey associates are now AmLaw 100 partners, while 10% of such women are; this ten percentage point gender gap mirrors the ten percentage point gender gap in Biglaw retention in 2012. The rest have spread out widely across counsel positions, other law firms, in-house, and other jobs in government, nonprofits, or business; only 1% are between jobs. I am able to find about 90% of such people a decade out.
Half of people who were partners at Dewey in 2012 remain partners in AmLaw 100 law firms; the rest have mostly moved into senior counsel roles, started their own law firms, or are retired or deceased. I am able to find 97% of such people a decade out.
Using probit regressions, I test if being at Dewey (vs. being a control firm) is associated with a differential likelihood of being an AmLaw 100 partner a decade later. Controlling for level of experience, gender, law school attended, practice area, and if the lawyer had a Chambers ranking in 2010 or 2011 (for partners), I find no evidence that ex-Dewey associates were disadvantaged in becoming a Biglaw partner relative to their similarly situated industry peers. Looking at ex-Dewey partners, I find only very weak suggestive evidence that they are less likely to remain partners a decade out relative to their similarly situated industry peers; because ex-Dewey partners were so successful in retaining analogous jobs in 2012, I am inclined to think that any slight difference here is not due to reluctance of firms to hire ex-Dewey lawyers. The mean AmLaw 100 ranking of the employers of ex-Dewey lawyers who remain in the AmLaw 100 is not statistically different from the mean AmLaw ranking of the employers of ex-peer firm lawyers in both the ex-associate and ex-partner samples.
Conclusion and Implications
In the short-term after the Dewey bankruptcy, ex-Dewey associates’ careers experienced tumult as only half of them were able to remain in Biglaw, while ex-Dewey partners emerged mostly unaffected. Such a result implies that while there was not much of a stigma attached to those who were closer to Dewey’s management, there was dropoff among those whose intra-firm network was not strong enough to get them cluster hired into another analogous law firm. In the long-term, however, there is no meaningful evidence that the employment profile of ex-Dewey lawyers is different than the employment profile of ex-peer-firm lawyers, indicating that what essentially happened is that most Dewey associates who would have eventually left Biglaw anyway instead left Biglaw at the point of the Dewey collapse. The experience was undoubtedly terrifying, but from the cold perspective of the legal profession as an institution, this does not pose a systemic issue.
The state of play, therefore, is that individual firms remain highly fragile, but it seems that the profession may not be. I argue that my results therefore suggest a limited upside to reforms to provisions that accidentally contribute to generating partner runs, like the (controversial) requirement of exclusive lawyer ownership of law firms. If changing such laws would also generate little-understood risks – like opening the door to mass private equity purchase of law partnerships, as has happened in law’s sister profession, medicine – then reformers should proceed with caution.
Andrew Granato is a JD-PhD candidate in financial economics at Yale Law School and the Yale School of Management.
This post is adapted from his paper, ‘After the “Partner Run”: the Dewey & LeBoeuf Diaspora,’ available on SSRN.
This article dives deep into the inner workings and consequences of partner runs within law firms, highlighting the vulnerabilities at the firm level while suggesting a resilient ecosystem overall. The study’s empirical approach, focusing on Dewey & LeBoeuf as a case study, sheds light on both short-term and long-term impacts on lawyers, revealing a mixed picture of tumult in the short-term but eventual normalization in the long run. It’s intriguing to see how intra-firm networks played a role in post-collapse transitions and the gender imbalance observed in cluster hiring. The findings imply that while individual firms face fragility, the legal profession, as a whole, remains intact despite these collapses.