Dewey's decline and the rise of high-risk Big Law

May 15, 2012: 12:19 PM ET

The firm's fall from grace offers a look into how the once genteel, clubby world of law firms has taken on a hustling business culture of free agent partners.dewey_leboeuf

By Elizabeth G. Olson

FORTUNE -- As top-drawer New York law firm Dewey & LeBoeuf teeters on the edge, likely to fall from high-paid grace, its closely chronicled decline is providing a look into how the once genteel, clubby world of law firms has morphed into a risk-taking, entrepreneurial industry.

"Dewey may be an extreme example," says Robert Gordon, a Stanford Law School professor who is writing a book on the country's legal profession. "But it may also be an example of something that is happening a lot. Law firms have expanded at a greater rate than other businesses. Some have loaded on debt and made promises of compensation that they can't keep."

Most corporate law firms aren't on the skids, but they are being roughed up by the confluence of technology, employee-heavy structures, and corporate cost-cutters determined to lop off a sizeable chunk of their legal costs.

But airing it all in public, through the drip-drip-drip revelations about Dewey's  departures and sky-high partner compensation, has laid bare a hustling legal culture. Firms are competing feverishly for lucrative corporate business, working against their counterparts by poaching profit-making partners through the cunning use of eye-popping salary guarantees. This behavior has essentially dismantled the traditional track to partnership, a seat that was usually won after years of in-house training and experience.

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"Legal partnerships were brands that drew loyalty, but that changed when partners began to sell themselves to the highest bidder," says Brian Tamanaha, a law professor at Washington University Law School in St. Louis. "We still maintain the facade of being a profession. But when lawyers measure themselves against the highest-paid CEOs or the richest Americans, it's a pretense."

As recently as the early 1980s, "being a law firm partner was prestigious, but it was not a way to get rich," recalls Stanford's Gordon. Law firms began to shed their romantic cloak of "service and craft above the mores of the marketplace" as demand for legal services accelerated in the 1970s, he adds.

Law firm associate salaries "began to climb steadily starting in the mid-1980s as armies of young lawyers were being recruited," adds Jim Leipold, executive director of the National Association for Law Placement, or NALP, which tracks  legal industry employment. To compete with glamorous Internet startup recruitment efforts, law firms noticeably hiked salaries a decade later to nab stars from the most elite law schools.

The dot.com bubble burst slowed the competitive race, but legal work was still plentiful, giving firm beginners' salaries another boost in 2006 and 2007. Between 1997 and 2007, first-year salaries doubled from $80,000 to $160,000 at the toniest law firms, often referred to as Big Law. While such law firms employ, at best, only 20% of  law school graduates, the big-city firms set the tone for the rest of the industry.

At the top of the law firm pyramid, partner salaries are reaching the levels of top corporate chieftains, with hourly rates reaching as high as nearly $900 per hour, according to a new survey by TyMetrix, Inc., a workforce management company that surveyed 4,000 law firms nationwide.

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At the 100 largest U.S. law firms, profit per partner averaged $1.36 million in 2010 -- almost double the $741,056 figure in 2000, according to statistics from The American Lawyer.

Partner fees have skyrocketed as "lawyers who were involved in big financial deals saw bankers taking big fees," says Gordon. "Salary envy is what it is," he says. "They call it scoreboard salaries."

Soaring law firm salaries took a dip when "the demand for legal services slipped in the Great Recession," says Leipold, "but partner compensation remains strong."

Some 45,000 jobs disappeared during the economic meltdown, and a group of large, well-known law firms, like Howrey, Heller Ehrman, and Thelen Reid collapsed. Suddenly "rainmaker" partners who made seven figures were facing a sizable drop below that, making them ripe candidates for other firms. And the salary gap between lower paid personnel and partners widened as large firms sought to shore themselves up by zealously recruiting stellar business generators from other firms with salaries for some approaching $10 million annually, according to industry experts.

One of Dewey's highest-paid lawyers, Morton A. Pierce, the former vice chairman of the firm and a prominent mergers and acquisitions specialist, was paid as much $8 million annually. His firm, Dewey Ballantine, merged in 2007 with LeBoeuf, Lamb, Greene & MacRae. He has left the merged entity, called Dewey & LeBoeuf, but claims he is owed $61 million, a sum that is likely derived from deferred compensation, retirement funds, and investment in the firm.

As Dewey frays and faces staggering sums promised to partners, a stream of partners have left for well-paid perches at flourishing law firms, leaving the firm's administrative staff, paralegals, younger lawyers, and pensioners to fend for themselves.

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"Too many law firm leaders look for short-term income, rather than long-term investment, "says Jim Cotterman, a principal at law firm consultant Altman Weil. Firms make huge investments in new law graduates, he says, but "it takes until year four for the firm to make a profit on an associate. And, by that time, half of them are gone."

So "mobility is the trend," he says, because law school graduates have significant debt, and "they need to pay it down and get the big law firm pedigree on their resume before moving on to a smaller firm or elsewhere."

Gordon and other legal industry experts trace Big Law's unraveling to the late 1970s when such firms "eagerly connived" -- in Gordon's words -- to provide compensation figures to newly launched legal publications like The American Lawyer. That was "flaunting purely commercial criteria of success," Gordon notes. The numbers served as the basis for calculating average profits-per-partner, which led to firm rankings, a development which further commercialized law firms, legal industry scholars say.

"It became a bragging contest, and the legal profession became a business like any other, but with pretensions," says Paul Campos, a University of Colorado law professor and blogger at Inside the Law School Scam.

The growing pay gaps, the insertion of lateral partners, and even less loyalty and longevity among employees have all turned firms into "loose confederations," Gordon concludes. And "partners these days are more like free agents."

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