The nightmare for any law firm is a “partner run,” a domino-style collapse that can turn a temporary downturn into a liquidation in months. In a new paper, I use an empirical case study to find that unlike its namesake of a bank run, the risk that a partner run will pose a systemic threat to the legal profession on an institutional level is likely negligible. Reform efforts in the legal profession to open up law firms’ rigid governance structure could reduce partner run risk but could also open the profession to a host of new hazards.
What Are Partner Runs, and How Are They Caused?
A partner run is an explosive cocktail exclusive to the legal profession. It derives from the confluence of several provisions in professional responsibility law, the Bankruptcy Code, and partnership governance law.
As articulated by Professor John Morley, the key ingredient is a professional responsibility rule banning nonlawyer ownership of law firms, essentially requiring law firms to operate as worker-owned businesses that cannot engage in an IPO. A separate professional ethics law essentially bans enforcement of noncompete agreements against lawyers. Bankruptcy law puts payments to partners after a firm is ruled insolvent (anti-fraudulent transfer) at risk of clawback and similarly locks in partner capital contributions (preferential transfer). And in some states, under the Jewel doctrine, partners may have to share revenue with a defunct partnership’s estate on matters that previously belonged to the partnership.
If profits per partner at a law firm decline, partners’ distributions from the partnership must decline mechanically, increasing the incentive to lateral to another firm. If a highly profitable partner leaves, remaining profits per partner decline again, setting off another round of exits. Eventually, if the firm’s solvency is even slightly in question, a stampede results among partners determined not to be left holding the bag. Law partners cannot be bound to the firm by noncompetes, and so the entire business abruptly folds, with no hope of reorganization, even if revenues had declined only modestly.
Empirical Setting: Dewey & LeBoeuf
It is unclear what happens to the lawyers of a firm that experiences this distinctive type of bankruptcy. Do they easily get comparable jobs? Or, in the tight network of the status-conscious legal world, do they suffer stigma or lose connections?
To address this question, I choose the setting of the 2012 end of Dewey & LeBoeuf, the largest law firm bankruptcy ever. I also employ a control group of comparable firms (Sidley Austin, Shearman & Sterling, Akin Gump, Dechert, Orrick, Fried Frank, Mayer Brown, and White & Case) for comparative analysis. Using Martindale-Hubbell lawyer directories, the Internet Archive’s Wayback Machine, LinkedIn, state bar information, and any information available through general web search, I generate a dataset of (1) every lawyer at Dewey’s U.S. offices and (2) every New York City-based lawyer working in M&A, capital markets, debt finance, antitrust, and white-collar defense for Dewey’s peer firms. I include additional information like law school, gender, year of bar admittance, and Chambers ranking, if any, as well as the first post-Dewey job and employer for ex-Dewey lawyers and the 2022 job and employer of all lawyers. In total, I am able to identify information about 95 percent of the roughly 1,600 lawyers in my dataset.
In the immediate aftermath of Dewey’s collapse, about half of ex-Dewey associates became associates at other law firms that made the 2012 AmLaw 100 by profits per equity partner, which I use as a proxy for remaining in Biglaw. Of ex-Dewey partners, 80 percent became partners or senior counsel at such firms, and some of those who left Biglaw started their own boutiques.
For ex-Dewey associates, the name of the game in 2012 was to try to get cluster-hired together by partners who moved laterally to other firms with their practice groups. Winston & Strawn, for example, hired over 50 ex-Dewey lawyers, and several other firms hired many more. Half of ex-Dewey associates who stayed in Biglaw did so in this way.
A decade out, 26 percent of ex-Dewey associates who remained in Biglaw in 2012 are partners in AmLaw 100 firms, while 6 percent of those who did not stay in Biglaw in 2012 are AmLaw 100 partners now. (The overall rate is 16 percent). The rest work in a wide range of positions: as counsel in law firms, lawyers in smaller firms, in-house lawyers, or lawyers in government, nonprofits, or businesses. Only 1 percent are unemployed, while in 2012 I could identify about 6 percent who were unemployed for 6 months after Dewey’s bankruptcy filing (I could not identify the whereabouts of some others who may have also been unemployed).
Of ex-Dewey partners, half remain partners in an AmLaw 100 firm. The rest work mostly as senior counsel in an AmLaw 100 firm, started their own law firms, or are retired or deceased.
Looking at a control group of lawyers who worked in the NYC office of an AmLaw 100 comparable firm in a ‘meat and potatoes’ (cap markets, M&A, finance, white collar, antitrust) practice area for a consistent comparison, I test whether being at Dewey rather than a peer firm in 2012 is associated with a lower likelihood of being a Biglaw partner a decade out. I control for gender, law school, level of experience (using number of years since bar admittance as a proxy), practice area, and 2010-2011 Chambers ranking (for ex-partners), and find that ex-Dewey associates became Biglaw partners at essentially identical rates as associates at peer firms. For ex-Dewey partners, there is weak evidence that they are slightly less likely to be partners than partners at peer firms, but the statistical significance does not reach conventional confidence thresholds.
Looking at lawyers still in AmLaw 100 firms, the average 2022 AmLaw 100 ranking of the firms where ex-Dewey lawyers are is not meaningfully different from that of the firms where lawyers who worked at peer firms in 2012 are (in both the ex-associate sample and ex-partner sample).
Shortly after the Dewey bankruptcy, ex-Dewey associates scrambled for Biglaw jobs via cluster hire, while ex-Dewey partners went mostly unscathed. This dynamic implies that little stigma was attached to partners, who were closer to the scandal swirling around Dewey’s management, but that many associates, whose relational capital within the legal industry was more limited to the firm that had just dissolved, were unable to move to a similar firm. Over the long run, though, Dewey lawyers’ outcomes are not statistically distinguishable from the outcomes of similarly situated lawyers at peer firms. One way of framing this result is that the Dewey bankruptcy likely accelerated the exit from Biglaw of associates who would have left Biglaw anyway, but it did not alter their long-term careers, on average.
Here, I have considered a partner run to be a systemic threat to the private legal profession if it results in the permanent loss of lawyers from private firms who otherwise would have remained at those firms. This measure is focused on what I can test empirically and gauges only the stability of the legal profession as an institution; it does not take into account the firings faced by Dewey’s non-lawyer employees, transaction costs imposed on Dewey’s clients, and psychological distress faced by all involved. While this accounting is therefore incomplete, I argue that it tests the concept of a partner run in the appropriate way – to see if it has systemwide implications in a loosely parallel matter to its namesake phenomenon, the bank run.
Having established evidence that the legal profession is likely not harmed by partner runs nearly as much as individual law firms are, I conclude that we should move cautiously in changing the laws that inadvertently generate partner runs, most controversially the banning of nonlawyer ownership of law firms. Such efforts may introduce unintended consequences, like enabling private equity firms to surge into legal services, with limited upside.
This post comes to us from Andrew Granato, a JD-PhD candidate in financial economics at Yale Law School and the Yale School of Management. It is based on his recent article, “After the ‘Partner Run:’ the Dewey & LeBoeuf Diaspora,” available here.