The American Lawyer - February 2008

Paul Braverman, Judy Lopatin, Anthony Paonita
(Corporate Counsel), Joseph Phalon ( americanlawyer.com),
Jim Schroeder, Brian Zabcik (Corporate Counsel)
SUPPLEMENTS EDITOR
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Richard Lloyd

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at The American Lawyer

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Eileen Vella

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AS WE GO TO PRESS, Cadwalader, Wickersham & Taft has announced the layoff of 35 capital markets and structured finance lawyers. After years of enjoying record profits from helping devise new financial products for Wall

Street to sell, the mortgage and credit markets tanked, and Cadwalader took a big hit.

The surprise is that there is any surprise. Web message boards lit up with mostly aggrieved and always anonymous posts from law firm associates decrying partner greed at Cadwalader and the failure of its management to anticipate the collapse. But whether you approve of the cuts or not, Cadwalader’s actions were consistent with its avowed mission to maximize profits. That doesn’t have to be a firm’s all-consuming goal, but given how clear Cadwalader made its ambition, no one can claim to have been blindsided.

I doubt Cadwalader will be the last firm to fire associates this year. The firm was decent in offering a severance package—three months’ pay and a year of medical coverage—that will become the benchmark for subsequent layoffs. It remains to be seen whether Cadwalader’s bloodletting will hurt its associate recruiting; Shearman & Sterling’s defenestration of corporate associates after the last bust didn’t kill its campus efforts. Cash-bearing law firms don’t have much trouble hiring debt-burdened law students: To vary the aphorism, during recruiting season, there’s an associate born every minute.

The sackings, current and anticipated, point up the disingenuous nature of rhetoric about associates and their retention. There are three simple rules that explain almost everything, though they are rarely publicly declared. For future reference, here they are: O Rule One: This is an owner’s game. The partners are the owners, and the chances of joining their ranks, at most places, get slimmer every year.

O Rule Two: Most associates leave. The only question is who decides the timing—the associates or the firm.

O Rule Three: When in doubt about a workplace matter, consult Rule One.

So layoffs are predictable, businesslike, and, as everyone acknowledges, difficult for those on the hit list. Cadwalader’s action will make it easier for other firms to follow suit. As the pack forms, though, we should ask whether there is an opportunity for a firm to make its mark as the anti–Sweeney Todd.

Let’s assume that the layoffs are for economic reasons and not an excuse for targeted associate cleansing. That would mean that the laid-off lawyers have been performing up to the firm’s standards and have benefited from the firm’s training ( presupposing, of course, both real standards and real training). Also, let’s take most managing partners at their word when they say associates become more valuable the longer they stay. They insist that firms don’t start making their money back until the third or fourth year. Finally, remember the past: After a year or two of shrinkage, firms will need more senior associates and will pay headhunters to fill the gap.

So what should firms do? First, level with your lawyers about the situation. Second, sharply reduce the size of first-year classes. Given a choice of homegrown lawyers you know and a gaggle of youngsters you don’t, choose the former. This means that some midlevels will be assigned to kids’ stuff, but so be it. Third, look for alternative places to park underworked midlevels: secondments; business school (with paid tuition); fellowships to work for the city attorney, the public defender, or a friendly NGO. Fourth, tell the world. If you’re going to make a statement, don’t be shy.

This assumes that only a practice or two are wounded and that the rest of the firm is growing. And it assumes that partners will take a real hit to build a stronger institution. This is hard; it’s easier to cut and run.