The legal industry is in constant flux due to changing laws and shifting trends in the business of running law firms and in educating lawyers. The Business Journal’s Jane Yu asked local attorneys what surprises they expect in the industry this year. Here are the edited versions of their answers.
Craig Barbarosh Partner, Katten Muchin Rosenman LLP, Chicago
Clients are becoming much more sophisticated consumers of legal services. Beyond greater scrutiny of legal fees and use of third-party fee review services, clients are more focused than ever on efficient provision of services, and rightly so. Institutional clients are well educated and experienced in knowing what services are necessary and how much they should cost. They are very focused on managing legal projects beyond just scrutiny of invoices. In this regard, clients are more focused than ever on alternative billing arrangements and structuring fees to align interests and success between the law firm and client.
For law firms, this means greater focus on staffing, efficiency and resource utilization. Greater communication with clients about project expectations, risks and likely outcomes is more imperative than ever.
Law firm strategy is particularly important in this economic environment. Midsize law firms (typical of Orange County) need to clearly identify and articulate why they are unique and how they provide differentiated skills and services to their clients. Today, clients hire individual lawyers, not firms, and it is important for law firms to be able to clearly and concisely articulate their distinct brand and communicate why they are specially qualified for a particular type of work or project.
Similarly, the days of ‘build it, and they will come’ are history. In years past, law firms were eager to expand, either domestically or more commonly to exotic foreign locales. In many instances, firm management would convince itself that if they have more offices, they will attract more clients and more high-profile business. However, evidence showed that unless there are clear existing client needs to support geographic expansion, it usually fails.
We expect to see additional law firm merger activity in 2014, as many firms have convinced themselves that bigger is better. However, just as with geographic expansion, unless a law firm combination can be rationalized by actual client imperatives, partners of merger candidate firms should satisfy themselves that such transactions will in fact be revenue and profit accretive.
Daniel Callahan
Founding Partner, Callahan & Blaine, Santa Ana
The biggest surprise will be a continued transformation in the manner by which companies and general counsel procure legal services. The economic downturn of the last five years forced virtually all companies to re-examine their historical practices of hiring international mega firms, which typically have hundreds of young lawyers being trained on the client’s nickel. This economic belt-tightening forced companies to hire smaller boutique litigation firms staffed with experienced, efficient and effective attorneys with real-world courtroom and litigation skills, as well as real trial experience.
I believe that these trends will continue in 2014, even as the economy continues improving. Corporations and their general counsel have now seen the many benefits of hiring boutique litigation firms, and they will want to continue to reap the financial benefits of such practices. It does not make sense for companies to go back to old practices of paying bloated legal bills just because there is more money to spend.
As more companies are becoming prudent in their spending for legal services, they are also becoming more aware that knowledge of insurance is key to settling any case. Cases settle with money, and insurance companies are the primary source of that money. Insurance expertise is critical, whether you are on the defense or plaintiff.
John Cannon Chair, litigation department, Stradling Yocca Carlson & Rauth PC, Newport Beach
There should be no real surprises to a well-managed enterprise, including a law firm, because the only constant in today’s and tomorrow’s legal and business markets is the fact that change is going to happen. Successful businesses and law firms anticipate change and find opportunities in a constantly changing market.
The U.S. is experiencing a dramatic increase in federal regulation and enforcement. The requirements on and risks associated with operating a business have never been higher. For example, the Securities and Exchange Commission recently announced that the agency’s enforcement actions in fiscal year 2013 resulted in a record $3.4 billion in monetary sanctions. The SEC filed 686 enforcement actions in 2013. Last year’s disgorgement and penalties were 10% higher than 2012 and 22% higher than 2011. This trend will continue.
Moreover, the SEC’s actions are not isolated. The same growth in regulation and enforcement activity can be seen in nearly every agency of the federal government. This change in the business environment means that legal compliance, preparedness and defense is or should be on the short list for every company, particularly companies in regulated industries or that do business directly or indirectly with the federal government.
Another example of change is the impact of technology on the practice of law. Ten years ago, law firm offices were populated with banks of facsimile machines; today, they are nearly gone. Ten years ago, documents were exchanged between parties in litigation in hard copy. Five years ago, litigation productions were on CDs. Today, some productions are still completed on disks, but they can also be done on thumb drives or downloaded from secure servers. More importantly, the information being produced is all in electronic format and is or can be converted to a searchable format, including substantial meta data. The preservation, production and ownership of electronic information is an issue that we should not be surprised to see dominate business and legal agendas in the years to come.
Mona Hanna
Managing Partner, Orange County Office, Michelman & Robinson LLP, Los Angeles
It’s been difficult to watch California courts experience the devastating funding crisis in the past few years. Across the state, we’ve seen reduced operating hours, massive staff layoffs and courtrooms and court buildings actually closing altogether. I will say that up until now, the savvy and proactive Orange County judiciary has weathered the storm better than most counties. For example, Orange County courts cut significant costs by implementing electronic filing services. While OC has mitigated the impact of the reduced budgets, it is currently faced with a shortfall in the millions after another round of sweeping cuts.
One area where the court budget process may be impacted by ongoing litigation is in the area of binding arbitration agreements. Overcrowded courts exacerbate the underfunding issues. One way the courts have seen reduced court volume is through the increased use of binding arbitration. Further, appellate courts, using federal precedent, have become increasingly receptive to enforcing binding arbitration agreements.
This has been a hotly contested issue that the Court of Appeal has been focusing on lately. Historically, failure to enforce these agreements has kept many cases active within California courts that could have been disposed of through enforcement of binding arbitration.
I believe that the increase in the enforcement of binding arbitrations will have a positive impact on the overcrowded court system. Procedurally, once the agreements are enforced, the matters will be removed from state court dockets and go to private arbitration. In light of the depleted resources, courts will be forced to explore alternative avenues to resolve certain cases. In the interest of judicial expediency and efficiency, trial judges will likely take a pragmatic approach in order to move matters along. I also believe that the current trend to enforce binding arbitration agreements will result in a decrease in class actions, or we’ll possibly see a rise in class-action arbitrations. This anticipated trend to enforce binding arbitration agreements may take some attorneys by surprise.
John O’Malley Senior Partner, Newport Trial Group, Newport Beach
One area of surprise for the legal industry that we anticipate is the growing request by clients, particularly larger corporations and area businesses, for creative legal fee arrangements, including contingency fee, hybrid or flat fee agreements in litigation matters. With recent cutbacks in court funding and longer expected waiting times to get to trial, the legal industry will be surprised at the increasing rate at which clients demand workable alternatives to simple hourly billing.
Over the course of the last decade, I have serviced many clients that have significantly benefited from contingency, hybrid or flat fee arrangements. Many clients could not have filed and prosecuted cases or defended cases absent creative fee arrangements. Those clients absolutely needed the flexibility of creative fee arrangements and were rewarded via recoveries of millions of dollars as plaintiffs or via successful defense of cases. My firm and a select group of others have been willing to be creative in fee agreements for years. However, with the ever-growing cost of litigation and the need for clients to budget better, it is becoming clearer each day that all clients, including larger corporations and area businesses, can benefit from creative fee arrangements and will be requesting them in the coming years. We are well prepared for this expected movement, but other firms may see it as a true surprise. Under any scenario, as creative fee arrangements are good for clients on multiple levels, the percentages of all clients requesting them will be increasing in the coming year and the future.
Kenneth Parker
Partner, Haynes and Boone LLP, Dallas, Texas
As a longtime Orange County resident and partner in a growing office of a national firm, I am often asked by my New York, Washington, D.C., and Texas partners what things look like for Southern California. The general consensus among the ‘advisers’ appears to be that the legal industry revenues in 2014 will be flat over 2013. I disagree. The biggest surprise in 2014 will be that the need for legal services will explode, particularly in Orange County.
The Orange County economy and the industries that drive it—real estate, high tech and high-tech services, and healthcare—will do great this year. That will create a surprising amount of positive growth in the legal industry here.
I believe healthcare companies like Edwards Lifesciences Corp. and Allergan Inc. will continue to experience record growth, thanks to new products and robust pipelines. These companies’ growth will continue to generate growth in use of legal services, mostly corporate, transactional, business litigation and patent litigation.
It’s been a long time coming, but real estate has turned the corner. I expect OC real estate companies—from household names like the Irvine Co. and Lennar Homes to the more nimble TRI Pointe Homes, and including Southern California companies like KB Home—to be incredibly active and successful. With their increased activity will come a long-awaited renaissance in the legal services that built every Orange County office more than 20 years old: handling residential and commercial real estate master planning, financing and other transactions. I expect double-digit growth in this sector in 2014.
Finally, there is my specialty: patent litigation. I expect the initiatives in Congress to reform patent laws with an eye toward controlling patent ‘trolls’ to fizzle and fail, both due to lack of attention in Congress and technical issues that exist with the various proposals. However, I expect our federal appellate court and the executive branch to deliver some incremental remedies that will generally decrease the impact of ‘troll’ patent litigation. In the meantime, I expect competitor-versus-competitor patent litigation and other litigation to increase as companies begin to try to protect market share and believe additional expenses are justified.
David Perry Administrative Partner, Orange County office, K&L Gates LLP, Pittsburgh, Pa.
The legal market has changed substantially over the last 10 years. I think the balance has shifted in terms of the market for legal services. For instance, a lot of firms were sellers of legal services. Now there’s a surplus of services, and companies that are buying legal services have more bargaining power. The buyers have gotten more sophisticated in terms of getting what they need. So in the current market, clients are much more attuned to how to manage their outside law firms. Sophisticated clients are bringing their procurement groups into the discussion.
That changes the dynamics quite a bit. Now when we’re responding to a company’s request for a proposal, our audience is not only the general counsel’s office, but it’s also the procurement department. That makes the decision about which law firm to keep much more objective. I think that will continue to change the market for legal services dramatically.
Another surprise might be the growing sense of globalization of legal services as enterprises of all sizes continue to expand business outside the U.S. Companies in Orange County are becoming more globalized, not just the larger corporations but also the guy who’s making widgets in his garage. And that’s a good thing for firms like us. We have 48 offices all around the world, and we can take care of those businesses. For regional firms, that’s going to be a challenge. The surprise factor here is that people are going to wake up—maybe not this year but soon—and see that there’s a lot going on overseas. If a law firm can’t follow that, it’s going to lose that business.
In addition, there is likely to be increased competition for associate talent. Law firms have not hired associates over the past five years. There is a shortage right now of well-trained associates, both in our firm and other good firms. As business begins to pick up, there’s going to be a big demand to find good young lawyers. We’re trying to confront it now, and we’re probably going to be aggressive on campus hiring.
Michael Tenerelli Partner, Southern California office head, Dorsey & Whitney LLP, Minneapolis, Minn.
From a global standpoint, we will continue to see local companies doing business overseas. Two regions where we will continue to see increased activity and the need for legal counsel are Latin America and Asia. Countries in these regions are receiving attention from American businesses looking for new opportunities.
From a local perspective, we will see an uptick in the area of real estate law. Our real estate industry clients, especially in South Orange County, have seen a demand for housing, and they are working quickly to meet the need.
As emerging technologies make it easier for us to communicate, we have seen a rise for legal counsel and protection related to data protection and privacy. This area will likely become an area of full-time practice for outside counsel. We have also seen companies with large amounts of personal data and information creating in-house legal positions, such as ‘chief privacy officer,’ to better mitigate the problems with data security. A number of attorneys at our firm, including the Orange County office, have become certified privacy professionals in order to assist clients in this new and rapidly evolving space.
Orange County has shown strength in attracting medical device and life science companies to the region. We continue to see developments in these industries, such as the new facilities for Gavin Herbert Eye Institute at UC Irvine and Jim Mazzo’s recent appointment as the executive chairman of Neurotech Pharmaceuticals. In addition, the medical device and information technology industries are well positioned in Orange County for a convergence that will continue to drive economic growth. This is evidenced by the recent success of companies like CNS Response, a company that applies big data analytics to the increasing needs of the delivery of antidepressants. Medical device, life science and technology companies have corporate and legal needs at the earliest stages. We will see firms and lawyers focused on these industries continue to be attracted to building a practice here.
Kim Thompson Managing Partner, Rutan & Tucker LLP, Costa Mesa
In a world of constant change and unpredictability, I believe that one of the biggest surprises that may be in store for the legal industry in 2014 is that we will experience more of the same.
Growth seems to be moderate but steady in most litigation-based practice areas. The transactional areas, such as real estate, corporate and labor—which historically tend to heat up when the economy heats up—appear to be on a steady growth trend for this year, as well. Having that type of sustained growth has been a surprise, and I believe will continue to be a surprise for this year.
In addition, I think this year will be the breakout year for the use of technology for the everyday lawyer. Desktops, laptops and smartphones have long been a staple of all attorneys. It seems like most of us have iPads or other tablets, and many attorneys have begun to incorporate them into their practices. This year will be the year that attorneys and firms begin to discover the many uses for the tablet beyond just email and Internet access, including access to substantive materials, organization, making handwritten comments on PDFs and mobile access to their desktops. For example, LexisAdvance and DLaw provide access to substantive materials, while Above the Law gives us access to trends in the legal industry from a different perspective. Apps like FlightTrack help keep our travel organized and less costly. Technology has significantly shaped the way we practice, and it’s easy to think that trend line is flattening. I think the surprise is that it will actually steepen.
Another surprise that may be in store for us and could hit close to home is that our new healthcare system may affect the healthcare plans provided by law firms. Law firms have had extremely rich plans covering all of their personnel, and I don’t expect that to change. There has been little in terms of outside influences that have shaped the plans themselves. As a result, law firms’ healthcare plans are predominantly as we have desired and designed, and little has changed except premiums. I don’t expect the latter to change, but for the first time in several years, I’m hearing rumblings of possible changes to the plans themselves. However, much of it is rumor and speculation. Time will tell.
