Demand, Office Space, & Clawbacks
Deal volume fell in February, down 33% compared with January and 35% below February 2021 (As M&A Quiets and Headwinds Pick Up, Dealmakers Reckon with a Slowdown, Dan Packel, 3/23/22, American Lawyer). Inflation, war in Europe, and increased antitrust enforcement are all concerns. However, several M&A practice leaders view February’s slump as temporary, as companies, funds, and lenders are flush with cash, and many companies are prepping for sale and will take to market soon.
As courts re-open and trials resume, litigation is expected to pick up this year and next (Big Law Betting on a Litigation Resurgence in 2022 and into 2023, Andrew Maloney, 3/25/22, American Lawyer). Demand for litigation was up 3.3% in 2021 over 2020, but still 1.2% below pre-pandemic 2019 (Litigation Resurgence, citing 2022 State of the Legal Market Report). Demand in litigation in 2022 will likely eclipse 2019, as courts and practitioners juggle backlogs and new filings.
Interestingly, Big Law is turning increasingly to litigation funding (Big Law’s Share of the Litigation Funding Pie Skyrocketed in 2021, Dan Packel, 3/23/22, American Lawyer). Big Law accounted for 41% of the 426 new deals initiated by litigation funders in 2021, a 46% increase over 2020. In particular, Big Law greatly increased its use of funding for portfolio deals (groups of cases), by 488% over 2020.
Office Space
Data released from key card security company Kastle Systems reveals that law firms nationally are at 67.2% occupancy, compared to 40% occupancy for all industries (Law Firms Have Started Their Real Estate Diets, Dan Packel, 3/31/22, American Lawyer). A recent survey of law firms by commercial real estate broker Cushman & Wakefield found that only 20% of respondents were fully back at work at pre-pandemic levels.
Law firm management face challenges in navigating return to work and post-pandemic real estate decisions. Surveys reveal that most lawyers and staff do not want to return to the office 5 days a week. However, many lawyers also appear to be adverse to sharing offices or practicing in cube farms. Perhaps some firms will follow the model of accounting giant BDO and calculate the cost of a single-occupancy office and then deduct that cost from the compensation of any individual refusing to share an office (In Our New Hybrid Future, Our Offices are a Luxury Good, Dan Packel, 3/24/22, American Lawyer). However, in this current climate, it seems likely that any firm that takes a hardline on returning to work or office-sharing runs the risk of losing talent.
Clawbacks
Speaking of losing talent, some firms are inserting deterrent provisions into partnership agreements, in an effort to discourage lateral movement (To Stem Lateral Movement, Firms Are Adding Clawback Clauses in Partnership Agreements, Jessie Yount, 3/22/22, American Lawyer). One such measure is to push end-of-year bonus payments out until the Spring. Another is to structure part of compensation as a loan, forgiven over a period of years, which can be repaid through the departing partner’s capital contribution if necessary.
According to employment lawyers, firms considering deterrent provisions should consider non-compete laws and clients’ interest in selecting the counsel of their choosing. Also, some commentators view such provisions as a sign of weakness; and draconian provisions may repel lateral candidates. In response to these provisions, some hiring firms are making lateral partners whole for forgone bonuses and agreeing to indemnify lateral partners against any clawbacks.
