A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients (individuals or corporations) about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other matters in which legal advice and other assistance are sought.
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Law firms are organized in a variety of ways, depending on the jurisdiction in which the firm practices. Common arrangements include:
In many countries, including the United States and the United Kingdom, there is a rule that only lawyers may have an ownership interest in, or be managers of, a law firm. Thus, law firms cannot quickly raise capital through initial public offerings on the stock market, like most corporations. They must either raise capital through additional capital contributions from existing or additional equity partners, or must take on debt, usually in the form of a line of credit secured by their accounts receivable.
In the United States this rule barring nonlawyer ownership is promulgated by the American Bar Association and is adhered to in all U.S. jurisdictions, except the District of Columbia.[1] The U.K. has a similar rule, but in recent years law firms have been able to take on a limited number of non-lawyer partners.
The rule was created in order to prevent conflicts of interest. In the adversarial system of justice, a lawyer has a duty to be a zealous and loyal advocate on behalf of the client, and also has a duty to not bill the client excessively. Also, as an officer of the court, a lawyer has a duty to be honest and to not file frivolous cases or raise frivolous defenses. A lawyer working as a shareholder-employee of a publicly traded law firm would be strongly tempted to evaluate decisions in terms of their effect on the stock price and the shareholders, which would directly conflict with the lawyer's duties to the client and to the courts.
Law firms are typically organized around partners, who are joint owners and business directors of the legal operation; associates, who are employees of the firm with the prospect of becoming partners; and a variety of staff employees, providing paralegal, clerical, and other support services. An associate may have to wait as long as 9 years before the decision is made as to whether the associate "makes partner." Many law firms have an "up or out policy" (pioneered around 1900 by partner Paul Cravath of Cravath, Swaine & Moore):[2] associates who do not make partner are required to resign and join another firm, go it alone as a solo practitioner, go to work in-house in a corporate legal department, or change professions (burnout rates are very high in law).[3]
Making partner is very prestigious at large or midsized firms, due to the competition that naturally results from higher associate-to-partner ratios. Such firms may take out advertisements in professionals publications to announce who has made partner. Traditionally, partners shared directly in the profits of the firm, after paying salaried employees, the landlord, and the usual costs of furniture, office supplies, and books for the law library (or a database subscription). Partners in a limited liability partnership can largely operate autonomously with regard to cultivating new business and servicing existing clients within their book of business. However, many large law firms have moved to a two-tiered partnership model, with equity and non-equity partners. Equity partners are considered to have ownership stakes in the firm, and share in the profits (and losses) of the firm. Non-equity partners are generally paid a fixed salary (albeit much higher than associates), and they are often granted certain limited voting rights with respect to firm operations. The oldest continuing partnership in the United States is that of Cadwalader, Wickersham & Taft, founded in 1792 in New York City.
It is rare for a partner to be forced out by fellow partners, although that can happen if the partner commits a crime or malpractice, experiences disruptive mental illness, or is not contributing to the firm's overall profitability. However, some large firms have written into their partnership agreement a forced retirement age for partners, which can be anywhere from age 65 on up. In contrast, most corporate executives are at much higher risk of being fired, even when the underlying cause is not directly their fault, such as a drop in the company's stock price. Worldwide, partner retirement ages can be difficult to estimate and often vary widely, particularly because in many countries it is illegal to mandate a retirement age.[4]
In the United States, Canada and Japan, many large and midsize firms have attorneys with the job title of "counsel", "special counsel" or "of counsel." As the Supreme Court of California has noted, the title has acquired several related but distinct definitions which do not easily fit into the traditional partner-associate structure.[5] These attorneys are people who work for the firm, like associates, although some firms have an independent contractor relationship with their counsel. But unlike associates, and more like partners, they generally have their own clients, manage their own cases, and supervise associates. These relationships are structured to allow more senior attorneys to share in the resources and "brand name" of the firm without being a part of management or profit sharing decisions. The title is often seen among former associates who do not make partner, or who are laterally recruited to other firms, or who work as in-house counsel and then return to the big firm environment. At some firms, the title "of counsel" is given to retired partners who maintain ties to the firm. Sometimes "of counsel" refers to senior or experienced attorneys, such as foreign legal consultants with experience in international law and practice and their own clients. They are hired as independent contractors by large firms as a special arrangement, which may lead to profitable results for the partnership. In these situations "of counsel" could be considered to be a transitional status in the firm.
Mergers, acquisitions, division and reorganizations occur between law firms as in other businesses. The specific books of business and specialization of attorneys as well as the professional ethical strictures surrounding conflict of interest can lead to firms splitting up to pursue different clients or practices, or merging or recruiting experienced attorneys to acquire new clients or practice areas. Results often vary between firms experiencing such transitions. Firms that gain new practice areas or departments through recruiting or mergers that are more complex and demanding (and typically more profitable) may see the focus, organization and resources of the firm shift dramatically towards those new departments. Conversely, firms may be merged among experienced attorneys as partners for purposes of shared financing and resources, while the different departments and practice areas within the new firm retain a significant degree of autonomy.
Law firms can be small or can be huge. The tiniest law firms are lawyers practicing alone, who form the vast majority of lawyers in nearly all countries.[6][7]
Smaller firms tend to focus on particular specialties of the law (e.g. patent law, labor law, tax law, criminal defense, personal injury); larger firms may be composed of several specialized practice groups, allowing the firm to diversify their client base and market, and to offer a variety of services to their clients.[8]
Large law firms usually have separate litigation and transactional departments. The transactional department advises clients and handles transactional legal work, such as drafting contracts, handling necessary legal applications and filings, and evaluating and ensuring compliance with relevant law; while the litigation department represents clients in court and handles necessary matters (such as discovery and motions filed with the court) throughout the process of litigation.
The United States pioneered the concept of the large law firm in the sense of a business entity consisting of more than one lawyer. The first law firms with two or more lawyers appeared in the U.S. just prior to the American Civil War (1861–1865).[9] The idea gradually spread across the Atlantic to England, although "English solicitors remained a corps of solo practitioners or very small partnerships until after World War II."[10] Today, the United States (and the United Kingdom) have many small firms (2 to 50 lawyers) and midsize firms (50 to 200 lawyers).[11]
Lawyers in small cities and towns may still have old-fashioned general practices, but most urban lawyers tend to be highly specialized due to the overwhelming complexity of the law today.[12] Thus, some small firms in the cities specialize in practicing only one kind of law (like employment, antitrust, intellectual property, or telecommunications) and are called boutique law firms.[13]
The largest law firms have more than 1,000 lawyers. These firms, often colloquially called "megafirms" or "biglaw", generally have offices on several continents, bill US$750 per hour or higher, and have a high ratio of support staff per attorney.[14][15] Because of the localized and regional nature of firms, the relative size of a firm varies.[16]
The largest firms like to call themselves "Big-Law" firms because they have sections specializing on each category of legal work, which in the U.S. usually means mergers and acquisitions transactions,[17] banking, and certain types of high-stakes corporate litigation. These firms rarely do plaintiffs' personal injury work. However the largest law firms are not very large compared to other major businesses (or even other professional services firms). In 2008, the largest law firm in the world was the British firm Clifford Chance, which had revenue of over US$2 billion. This can be compared with $404 billion for the world's largest firm by turnover Exxon Mobil and $28 billion for the largest professional services firm Deloitte.[18]
The largest law firms in the world are headquartered primarily in the United Kingdom and the United States. However, large firms of more than 1,000 lawyers are also found in Australia (Minter Ellison (1,500 attorneys),China (Dacheng 2,100 attorneys)and Spain (Garrigues, 2,100 attorneys).The American system of licensing attorneys on a state-by-state basis, the tradition of having a headquarters in a single U.S. state and a close focus on profits per partner (as opposed to sheer scale) has to date limited the size of most American law firms. Thus, whilst the most profitable law firms in the world remain in New York, four of the six largest firms in the world are based in London in the United Kingdom.[19] But the huge size of the United States results in a larger number of large firms overall — a 2003 survey found that the United States alone had 901 law firms with more than 50 lawyers, while there were only 58 such firms in Canada, 44 in Great Britain, 14 in France, and 9 in Germany.[20] There is an increasing tendency towards globalisation of law firms.
Due to their size, the U.S. and UK-based law firms are the most prestigious and powerful in the world, and they tend to dominate the international market for legal services. A 2007 research paper noted that firms from other countries merely pick over their leftovers: "[M]uch of the competition is relatively orderly whereby predominantly Australian, New Zealand, and Canadian firms compete for business not required by English or American law firms."[21]
As a result of the U.S. recession in 2008 and 2009 many U.S. law firms have downsized staff considerably, and some have closed. The Denver Post reported that major law firms have cut more than 10,000 jobs nationwide in recent months.[22] On February 12, 2009, Bloomberg reported that 700 jobs were cut that one day at law firms across the country.][23] Among the firms closed included Heller Ehrman, a San Francisco-based firm established in 1890[24] and Halliwells of the UK.[25] Among those that survived, law firm layoffs became so common that trade publications like American Lawyer produced an ongoing “Layoff List” of the law firms nationwide that cut jobs.[26]
Law firm salary structures typically depend on firm size. Small-firm salaries vary widely within countries and from one country to the next, and are not often publicly available. Because most countries do not have unified legal professions, there are often significant disparities in income among the various legal professions within a particular country. Finally, the availability of salary data also depends upon the existence of journalists and sociologists able to collect and analyze such data.
The U.S. is presently the only country with enough lawyers, as well as journalists and sociologists who specialize in studying them, to have widely available data on salary structures at major law firms.
In 2006, median salaries of new graduates ranged from US$50,000 per year in small firms (2 to 10 attorneys) to US$160,000 per year in very large firms (more than 501 attorneys).[27]
Many large firms in major markets such as New York City,[28] Los Angeles,[29] Washington DC,[30] Boston[31] and Chicago[32] compensate new associates using the following pay scale:
| Year | Salary (US$) |
|---|---|
| First | 160,000 |
| Second | 170,000 |
| Third | 185,000 |
| Fourth | 210,000 |
| Fifth | 230,000 |
| Sixth | 250,000 |
| Seventh | 270,000 |
| Eighth | 280,000 |
Other markets such as Texas[33] start at US$160,000, but the annual increases are much smaller than the above scale.
With a few exceptions, markets such as Atlanta,[34] Philadelphia,[35] New Jersey,[36] Florida,[37] Denver,[38] and Seattle[39] generally start at US$35,000-US$50,000 for small law firms to US$130,000 or US$145,000 for large law firms.
With a few exceptions, most other U.S. markets start within US$20,000 to US$100,000.
As a result of the current recession, many firms froze salaries (no annual salary increases in January 2009), reverted to the early 2007 pay scale shown below, and/or cut salaries.[40]
| Year | Salary (US$) |
|---|---|
| First | 145,000 |
| Second | 155,000 |
| Third | 170,000 |
| Fourth | 190,000 |
| Fifth | 210,000 |
| Sixth | 225,000 |
| Seventh | 240,000 |
| Eighth | 255,000 |
NYC bonuses (the highest in the U.S.) in 2007 were as follows:[41]
| Year | Bonus (US$) |
|---|---|
| First | 45,000 (35,000 + 10,000 special bonus) |
| Second | 55,000 (40,000 + 15,000) |
| Third | 65,000 (45,000 + 20,000) |
| Fourth | 80,000 (50,000 + 30,000) |
| Fifth | 95,000 (55,000 + 40,000) |
| Sixth | 110,000 (60,000 + 50,000) |
| Seventh | 115,000 (65,000 + 50,000) |
In 2008, several firms reverted to the 2006 bonus structure (e.g., no special bonus) or creating a new scale as shown below.[42]
| Year | Bonus (US$) |
|---|---|
| First | 17,500 |
| Second | 20,000 |
| Third | 22,500 |
| Fourth | 25,000 |
| Fifth | 27,500 |
| Sixth | 30,000 |
| Seventh | 32,500 |
Larger markets outside NYC typically match the base bonus without the special bonus. Smaller markets and/or smaller firms pay $5K to $20K bonuses, if any at all.[43]
Some prominent law firms, like Goodwin Procter and Paul Hastings, give generous signing bonuses (e.g., $20k)[44][45] to incoming first-year associates who hold JD/MBA degrees.
Most law firms are located in office buildings of various sizes, ranging from modest one-story buildings (e.g. SLC),[46] to some of the tallest skyscrapers in the world (though only in 2004, Paul Hastings was the first firm to put its name on a skyscraper). Some solo practitioners practice out of their homes or in offices built as special additions to their homes.
Because their "work product" is often intangible, or at least conceptually difficult for clients to grasp, large corporate firms are notorious for using jaw-dropping interior design (huge amount of floor space and fantastic views) as a "shock and awe" tactic to impress prospective clients and intimidate opposing counsel. Other firms will find more modest office space, depending on the nature of the practice.
In late 2001, it was widely publicized that one personal injury plaintiffs' firm in the state of New York has been experimenting with bus-sized "mobile law offices."[47] The firm insists that it does not "chase ambulances". It claims that a law office on wheels is more convenient for personal injury plaintiffs, who are often recovering from severe injuries and thus find it difficult to travel far from their homes for an intake interview.
As legal practice is adversarial, law firm rankings are widely relied on by prospective associates, lateral hires and legal clients. Substantive rankings typically cover practice areas such as The American Lawyer's Corporate Scorecard[48] and Top IP Firms. Work place rankings are directed toward lawyers or law students, and cover such topics as quality of life, hours, family friendliness and salaries.[49] Finally, statistical rankings generally cover profit-related data such as profits per partner and revenue per lawyer.[50]
In an October 2007 press conference reported in The Wall Street Journal and The New York Times, the law student group Building a Better Legal Profession released its first annual ranking of top law firms by average billable hours, pro bono participation, and demographic diversity.[51][52] Most notably, the report ranked the percentages of women, African-Americans, Hispanics, Asian-Americans, and gays & lesbians at America's top law firms. The group has sent the information to top law schools around the country, encouraging students to take this demographic data into account when choosing where to work after graduation.[53] As more students choose where to work based on the firms' diversity rankings, firms face an increasing market pressure in order to attract top recruits.[54]
A number of television shows have revolved around relationships occurring in fictional law firms, highlighting both public fascination with and misperception of the lives of lawyers in high-powered settings.