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As businesses struggled to stay afloat during the COVID-19 pandemic and many workers in the energy, retail, and hospitality sectors were forced into unemployment, one industry did just fine, taking home millions in profits from the disruption.
The country’s top law firms — among the wealthiest white-collar workers in America — had a banner year, in part from the fees they charged to companies in peril.
That’s according to figures from an annual report produced by legal publication The American Lawyer, which releases financial data about the country’s top law firms, including their revenue and profits.
One large law firm known for its restructuring and bankruptcy practice, Kirkland & Ellis, saw revenue increase 16 percent, to $4.8 billion. This meant its 476 equity partners averaged $6.1 million in profits each.
The profit increase was the highest spike Kirkland experienced since a decade ago, when the firm picked up legal work stemming from the last financial crisis.
This past year, it advised numerous debtors hit by the pandemic, including retailers J.C. Penney, Neiman Marcus, and Lord & Taylor, as well as energy companies like Chesapeake Energy Corp. and Whiting Petroleum Corp.
Kirkland & Ellis did not respond to a request for comment.
Academics who have studied the legal industry told Insider that law firms are generally counter-cyclical businesses. When businesses face problems, it’s typically great news for attorneys.
This year’s pay bump for attorneys was unusually high compared with past recessions, especially compared with the 2008 global financial crisis, according to Ben Barton, a professor at University of Tennessee College of Law who has written several books about the legal sector.
This time around, law firms have been buoyed by advisory work on merger and acquisition activity, and some firms took cost cutting measures like pay cuts and layoffs.
The legal website Above the Law reported in September that Winston & Strawn had laid off associates and secretarial staff, while other firms including Kirkland, Skadden and Hogan Lovells, made staff cuts of their own, The American Lawyer reported.
“It’s a bad look,” said Barton of the measures. “It’s reflective of their strong desire for profits. Squeezing every nickel out of the business you run over the last year maybe isn’t the right way to go.”
Some firms also rode a wave of legal fees generated by consolidation taking place within industries, including some blockbuster mergers and acquisitions.
While M&A declined in the first half of 2020, it picked up by the end of the year, as Morgan Stanley agreed to buy E*TRADE for $13 billion and S&P Global announced the acquisition of IHS Markit for $44 billion.
The deal activity padded the coffers of New York M&A firm Wachtell, Lipton, Rosen & Katz, which averaged $7.5 million in profits per partner, up from an average of $6.3 million the year before, according to American Lawyer figures.
Wachtell did not respond to a request for comment.
The total revenue generated by large law firms is a relatively modest figure when compared to other industries like construction, retail, and healthcare, which run into the trillions. The sum of the revenues of the top 100 law firms is much lower — about $111 billion.
The catch is that Big Law has a far smaller workforce by headcount and the industry comes with more significant barriers to entry, including three years in law school and graduating with top marks from one of the most selective schools.
Cliff Winston, an economist at the Brookings Institution, said the 2020 pay figures confirm his belief that the legal industry is in need of reform.
“The high profitability gives the illusion that this is a successful industry — and that is the problem,” said Winston, who considers Big Law “anything but a successful industry,” but rather one that benefits from its clubbiness and exclusivity.
Winston said the outsized profitability of law firms through the pandemic highlighted the need for pro bono and cheaper attorneys who can provide services to a broader population of everyday people and small businesses.
Law firms often stress the pro bono help they provide, putting their talented partners and associates at the disposal of death-row inmates, immigrants facing expulsion from the US, and low-income families fighting eviction. But millions of Americans with legal problems still can’t get help, according to a report by the Legal Services Corp., which provides cash to organizations that help low-income people with legal issues.
Bill Henderson, a professor at University of Indiana, Maurer School of Law, said the entire legal system is broken. But he stopped short of placing blame on lawyers themselves.
Rather, he pointed to how the legal industry has grown over the past several decades, without much headcount growth at the top law firms. Their services have become more and more expensive as many of the largest corporations build out in-house law departments to handle the cheapest legal work, farming out only the priciest pieces to outside firms.
“Their business isn’t going to grow in selling more hours, but the hours they do sell is going to go for a lot more money,” said Henderson.
Perhaps no firm benefitted more from the boom in public markets than Davis Polk & Wardwell, which worked on hundreds of IPOs and other debt and stock offerings. Its 156 partners took home an average of $6.35 million individually, a 40% jump from 2019.
Davis Polk didn’t respond to a request for comment.
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