A perennial subject for speculation is whether or how the consolidation
trend among BigLaw will end. A primary—and by sheer headcount
perhaps the prevalent—point of view is that the industrial structure
of BigLaw is moving towards a bimodal distribution, with a few dozen
(at most) truly Global US and UK firms, on whose empires the sun never
sets, and at the opposite end of the curve a profusion of boutiques and
regional powerhouses. On this view, however, the days of the "mid-size,
full service" firm are numbered.
I think it’s fair to say that the Bimodal Model represents a relatively
straightforward linear extrapolation of recent and current trends, so
if, as Paul Brest, Dean of Stanford Law School when I was there, used
to say, "the best predictor of tomorrow’s weather is today’s," then endorsing
this view is plausible and rational.
But as faithful readers may intuit, I have an intellectual aversion
to subscribing to the common wisdom without at least tossing a few questions
at it. Today my question is, "Won’t the multiplication of
client conflicts in bigger and bigger firms put a ceiling on size?"
Helpfully, the FT gives us some
insight. They begin with
the story of how, when
"Australia’s Macquarie Bank started considering a bid for the London Stock
Exchange," they found every single Magic Circle firm conflicted out from
representing them, and ultimately went with Baker & McKenzie, which scant
years ago would barely have been visible in the M&A tables.
Some observers who are more than qualified to know think this is not
just an anecdote, but a trend:
"Keith Clark is international general counsel at investment
bank Morgan Stanley, and was previously chairman of Clifford Chance.
[…] He says: “In the London marketplace, you have a situation where you have
got half a dozen law firms servicing a huge number of the big transactions,
whereas in New York you have far more law firms. When you get into hostile
M&A, those conflict issues really come into play.”"He believes the situation will only get worse."
It may be that there are "more" New York firms, but interestingly, the
FT characterizes the rules on conflicts as "looser" in the UK
than they are here, and still the problem arises.
I’m not sure I would characterize our rules as looser or stricter than
the UK’s, I just think they’re different: In the UK, conflicts are analyzed
from the perspective of the transaction, whereas here of course
they’re analyzed from the perspective of the client. UK
rules pre-empt a firm from acting for two clients whose interests are
adverse in
a given deal, while US rules bar firms from acting against the interest
of a client even in matters wholly unrelated to the firm’s representation
(absent consent, of course).
An unintended consequence of the US-style rule is that firms
have reason to turn away individuals or smaller clients for fear of
being conflicted out of a big deal later for the sake of a small fee
now. And according to McDermott Will & Emery’s London managing parner,
it’s happening. So the US rule, superficially more "protective" of the
client’s interests, may deprive them of their firm of choice! Be careful
what you wish for.
Pushing right back against the heightened problem with conflicts is,
I believe, a more potent force: Economics and business sense. Again
to Keith Clark:
"[Because of increased globalization,] the ability to
service a deal across a variety of jurisdictions is more significant
than it was last time around. That tends to consolidate the work into
larger law firms."
In other words, the larger firms’ global footprints become, and the
more attractive they are to dealmakers on the economic and business
merits, the more likely they’ll face conflicts.
Doesn’t this cry out for a "re-think" of how the profession analyzes
"conflicts"?
I for one would nominate the jurisprudence of conflicts for a doctrinal
re-evaluation in light of 21st-Century realities. Being
precluded from engaging the firm of your choice for what is, by hypothesis,
a big deal transaction, is a far more destructive wrench in the gears
than what is often the remote and hypothetical "emanations and penumbras"
of a conflict—which can also be used strategically as a weapon
to deprive an adversary of their counsel of choice.
But back to where we started: Will "conflicts" law ultimately
put the brakes on global consolidation of BigLaw?
Actually, we don’t have the privilege of answering that question: Clients
do. They will vote their economic interest, and if globe-spanning
firms are the model they prefer, we will evolve to match their preference.
Conflicts,
after all, are always and everywhere merely in the eye of the beholder.
I think the real question will be if the political situation creates a globalization in which business competition is encouraged or discouraged.
I don’t think the global law market is structurally different from a multijurisdiction regional market. In those markets, while many of the large businesses are forced to pay the rates at the big firms since only those firms have the capability to meet the work demand and the contacts to push deals through, there’s a huge demand among mid-sized and smaller businesses — and even certain tasks of the big businesses — for small firms that can offer much lower rates.
The same will hold true on a global level: if you’re not a corporate giant, why pay a combined rate approaching $3000/hour (once you add in the partner, the senior associate, and the revolving junior associates and paralegals) when a small firm can do identical work for less than $700/hour and can give you more attentive service?
I’ve seen this dynamic at work in a number of regional markets — as the business marketplace opens up to new competitors, so does the legal market. I don’t see any reason why the same would not apply internationally.
The Big Eight accounting firms went through the merger rash with many of the same problems as the law firms, especially client conflicts. The difference is that in law firms, many of the conflicts are adversarial. But I also noted that the mergers that led to the Big Three strengthened the second tier companies. (e.g. Grant Thornton) You know the answer — the clients decide who grows and who doesn’t. That, by the way, is why we wrote Client at the Core.
Bruce W. Marcus
I always thought Joe Flom of Skadden Arps maintained a healthy skepticism about conflicts rules, that essentially they were unworkeable and ought to be abandoned. This would be fine in a totally libertarian world a la Ayn Rand, but that doesn’t exist. We inhabit a world made up of ethical commitments that express more our inherent contradictions rather than espouse our ideals. I think any resolution of conflicts will have to be the result of a dialogue between lawyer/law firm and client. Imposing external hard and fast rules will provide incentives for exemptions and work arounds, some of which will be illegitemate. That is why I think up to now the British way has been better. As you say it starts from the perspective of the transaction and therefore can accommodate overlapping interests. Of course once that transaction leeches into the courts as happened with Philip Green, Freshfields, and Slaughter & May, it gets messy again and fear sets in. In part I think the problem revolves around the fundamental questions of who is the lawyer and who is the client? Most professional conduct rules still adhere to the individual lawyer as the standard rather than the firm. And with large corporations, how do you identify the part or parts which could be said to be the client? There is also the potential for conflicts to be used within firms as a means to power. With lawyers joining and leaving on a regular basis, conflicts are unavoidable. Mobility encourages them. One can imagine discussions/arguments within firms over whose client should prevail: these could be sharp turf wars. Finally, my apologies for the length of this comment, there are two books on the subject that are interesting. One is “Tangled Loyalties: Conflict of Interest in Legal Practice” by Susan Shapiro (Univ of Michigan Press, 2002); the other is “Serving Two Masters: Conflicts of Interest in the Modern Law Firm” by Janine Griffiths-Baker (Hart, 2002).