For law firms, 2014 will be year of extreme change – and challenge

December 26, 2013

Just before Christmas, a partner at one of the most perennially profitable law firms in the land told me a funny story about a former colleague’s explanation for jettisoning his career at the firm and entering academia. The Big Law refugee told his partners that being elected to their ranks was like winning a pie-eating contest, only to discover that the prize is more pie. It wasn’t worth it to put in years of crushing work to become a partner, he said, when partnership’s only reward (aside from heaps of money) is the right to continue to work yourself into numbness.

I laughed at the story, mostly at the vision of expensively suited law firm partners with their faces planted in coconut cream pies, but the context was serious. We were talking about the decline in law school applications. My Big Law companion – whose own children have avoided legal careers – said kids are smart to opt against a future in which the only certainty is law school debt. Too gloomy an outlook, especially from a partner at the pinnacle of the profession? He’s still working as hard as ever, after all. After we plowed through the Christmas party crowds at the restaurant bar and said our goodbyes, he headed back to his office to log a few more hours.

I think my Big Law friend is dead-on – and not just about the prospects for young lawyers. I suspect that 2014 is going to be a pivotal year for big-case litigators, a moment when the normal cycles of litigation combine with changes wrought by the U.S. Supreme Court to undermine the foundation of their practice. If firms fail to anticipate and adapt to looming declines in the cases they’re built to handle, new law school graduates won’t be the only lawyers looking for work.

The fall-off in smart device patent cases and litigation over mortgage-backed securities – two of the mainstays of big-firm litigation over the last five years – is a troubling, but not unusual, change for law firms, which are accustomed to the waxing and waning of particular practice areas as clients’ business strategies (and business conduct) change. To be sure, law firms will mourn the end of smart device and MBS litigation. There probably hasn’t ever been a set of patent cases as lucrative for lawyers as the smartphone wars, which have generated hundreds of millions, if not billions, of dollars in legal fees for such firms as Quinn Emanuel Urquhart & Sullivan; Morrison & Foerster; Wilmer Cutler Pickering Hale and Dorr; Sidley Austin and others lucky enough to represent Google, Samsung, Apple, Microsoft or one of the handful of smaller smart device players. Appeals of some of the many, many patent cases in which these competitors attempted to obliterate one another’s products are still under way, but, as I’ve said before, if the smartphone patent wars have taught us anything, it’s that cooperation in the form of cross-licensing deals – and not litigation – will be the only economically rational way forward for makers of products that employ dozens or more patents.

Litigation over the esoteric financial instruments that precipitated the financial crisis was also bound to fade away as we move further from the housing crash. Law firms with securities and white-collar defense practices have gotten fat in the last five years from representing banks accused of selling fraudulent mortgage-backed securities and collateralized debt obligations. And a long list of firms on the other side have done extremely well for themselves in asserting fraud and breach-of-contract claims against those banks, perhaps none more so than the tiny Texas firm of Gibbs & Bruns, which stands to earn about $150 million if both the Bank of America and JPMorgan Chase put-back settlements with private MBS investors go through. Plaintiffs shops like Quinn Emanuel (again!); Patterson Belknap Webb & Tyler; Kasowitz, Benson, Torres & Friedman; Bernstein Litowitz Berger & Grossmann; Labaton Sucharow; Robbins Geller Rudman & Dowd and Cohen Milstein Sellers & Toll (among many others) deserve credit for pioneering the theories that pushed the government to bring cases against MBS issuers and the credit rating agency Standard & Poor’s. But while the Justice Department still has plenty of time to assert claims and bring charges under the Financial Institutions Reform, Recovery and Enforcement Act, private investors don’t have the luxury of a 10-year statute of limitations. As the New York state appeals court highlighted in a ruling earlier this month on when the clock begins to tick on MBS breach-of-contract claims, time is almost up for MBS litigation.

Law firms face this kind of challenge cyclically. What’s different now, however, is the threat to entire categories of litigation, not just particular causes of action. Let’s begin with the most theoretical: the anti-troll movement. There seems to be hardening political consensus against entities that exist simply to assert intellectual property rights. It’s too early to say whether or how lawmakers can limit the ability of such non-practicing entities to bring patent suits, but if they do, there will be an awful lot less patent litigation. I’ve seen studies estimating that patent trolls filed upward of 60 percent of all patent suits in 2012. If troll suits are somehow barred, troll lawyers won’t be the only ones with a lot less work to do. And what if the Supreme Court holds later this term in Alice Corporation v. CLS Bank that computer-implemented business methods aren’t eligible for patents, as the entire software industry is urging? As you know, the Supreme Court has consistently raised the standard for patent eligibility over the last few years. Fewer patents means less patent litigation.

Securities class action defenders should also be diversifying their expertise right about now. I’ve been sounding alarms for months about the Supreme Court’s upcoming consideration of the fraud-on-the-market presumption of investor reliance that a different batch of justices established in 1988 in Basic v. Levinson – the case that essentially launched the megabillion-dollar securities fraud class action industry. Yes, I know, undoing Basic isn’t a sure thing. And yes, plaintiffs lawyers will still have ways to bring securities fraud claims even if five or more justices repudiate Basic; they can frame class actions as omission cases, which don’t require a showing of reliance, or they can bring individual suits on behalf of as many big institutional investors as they can round up. But big defense firms are built to dam a continuing stream of major securities class actions. If those cases dry up, firms won’t need as many lawyers to defend them.

Similarly, if the corporate forum selection clauses that have come into vogue since the Delaware Chancery Court endorsed their enforcement last year work as intended, there will be less shareholder M&A and derivative litigation to defend. Remember, these forum selection charter amendments and bylaws were proposed as a way to save corporations from litigating the same shareholder claims in multiple jurisdictions. The clauses adopted by Delaware corporations typically require shareholders to litigate all of their causes of action in Chancery Court. There are still some kinks to be worked out – specifically, whether it’s up to non-Delaware judges to enforce forum selection clauses when shareholders attempt to sue outside of Chancery Court – but if the provisions reduce multi-jurisdiction shareholder litigation, the reduction in corporate legal expenses means less revenue for defense firms. It is a peculiar truism of the law business that what’s good for clients may not be so good for their lawyers.

That’s just as valid when you look at non-securities class actions, for which the Supreme Court keeps erecting new obstacles. We’ve seen a lot of debate recently over whether class actions or arbitrations are more efficient at providing relief to injured consumers. That’s an open issue for financial products and services overseen by the Consumer Financial Protection Bureau, which has the power to regulate mandatory arbitration provisions in contracts involving financial products like credit cards, payday loans and checking accounts. Otherwise, as the Supreme Court told us last term in American Express v. Italian Colors, underlining its previous holding in AT&T Mobility v. Concepcion, it doesn’t much matter if class actions would do a better job of compensating claimants with small damages. If you’ve signed an arbitration agreement, you’re pretty much stuck with it, even if the provision bars classwide claims. (The 5th Circuit Court of Appeals said as much earlier this month when it struck down the National Labor Relations Board’s ruling in D.R. Horton, one of the last shreds of hope for collective damages actions by employees.)

The justices made it tougher to obtain class certification in their 2013 decision in Comcast v. Behrend, but if they grant cert next month in Sears v. Butler and Glazer v. Whirlpool, we could see the end of consumer class actions based on “benefit of the bargain” theories. The more restrictive the class, the less of a threat it poses to defendants – and the less they have to pay lawyers to ward it off.

There will, of course, always be litigation. As the U.S. Chamber of Commerce and its pro-business friends say all the time, plaintiffs lawyers are resourceful and entrepreneurial. When one road is barricaded, they’ll find another route, even if they have to blaze a new trail. Look at the booming business in representing whistleblowers who bring allegations to the Securities and Exchange Commission – a perfect example of plaintiffs lawyers adapting.

But I believe corporate litigators will be in trouble if they wait for plaintiffs firms to find the next new thing. In football, I’m a fan of the New York Giants, which means I’ve been steeped in the adage that the best offense is a good defense. Sometimes, the reverse makes more sense. For litigators in 2014 and beyond, the best defense will surely be a good offense.

Happy New Year.

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I’m betting John Coates, formerly at Wachtell, had enough pie.

Hi Allison, we talked in the past when I was covering MBS litigation in depth. I’ve moved on.

Posted by NeilMcCarthy | Report as abusive

Meant to add that I agree with your analysis. With litigation down, I don’t see how Big Law makes it up. Without litigation, Big Law would have had pain the last five years.
I-bankers used to understand that bonuses were market-driven so that you couldn’t necessarily count on equaling the prior year. Big Law partners have never gotten this.

Neil McCarthy 914 319 9248

Posted by NeilMcCarthy | Report as abusive