NOVEMBER 14 — Prominent national law firms such as Chadbourne & Parke and Jenner & Block tried for three decades to crack the Texas legal market. They were lured by the milk and honey of corporate law: boatloads of billable hours from cash rich oil and gas businesses that do not blink at paying top rates.
But nearly each time, the mega-firms from Chicago, New York and Los Angeles were met by severe resistance from Texas’ prominent law firms, especially those representing the energy sector. The result was nearly always the same: the outside firms either closed their Texas operations or reduced their expectations to the point that their presence was minimal.
That streak has ended.
Nearly a dozen national law firms have launched offices or significantly expanded their practices in Dallas and Houston during the past two years. And legal industry insiders say several more global law firms have strategically targeted small and medium sized Texas firms for a possible merger.
“Texas is experiencing an invasion by out of state firms,” says Ward Bower, a principal at Altman Weil Inc., a prominent legal consulting firm. “Just about every national law firm in the U.S. is trying to enter the Texas market.”
The reason, according to Bower and others is simple: Texas corporations, especially in the energy sector, continue to spend big money on mergers, acquisitions, joint ventures, and complex commercial litigation. That translates to lots of billable hours for higher priced business lawyers.
The trend means more competition for prominent Texas law firms that have dominated the state’s business law for generations, more choices for Texas-based corporations, and more job opportunities for law students graduating at the top of their classes and experienced business lawyers seeking new challenges.
“A lot of law firms are revisiting their strategies following the recession and are becoming much more industry focused instead of practice focused,” says Mike Short, who advises law firms for the consulting group LawVision.
“Big growth industries equal long-term strength,” says Short. “Because of energy, Texas is a very target rich environment.”
Latham & Watkins, which boasts 2,000-lawyers, 31 offices and more than $1.8 billion in revenues, kicked off the Texas rush in March 2010 by opening an office in Houston. A month later, 700-lawyer firm Perkins Coie created an outpost in Dallas. In February 2011, Gibson, Dunn & Crutcher, a 1,000-lawyer firm with $1 billion in reported annual revenue, greatly expanded its Dallas operations with eight high profile lateral additions.
That was just the start. Prominent national law firms such as New York-based Simpson Thatcher & Bartlett, Chicago-based Winston & Strawn, Philadelphia-based Blank Rome, and even Cadwalder, Wickersham & Taft, which is the oldest continuously operating law firm in the U.S., opened offices in Houston during the past few months.
And just two weeks ago, Baker Donelson, one of the oldest and most prominent law firms in the southeast and home to lawyers such as former Senate Majority Leader Howard Baker, former Secretary of State Lawrence Eagleburger and current U.S. Senator Lamar Alexander, opened an office in Houston just down the street from Baker Botts, home to former Secretary of State James Baker.
“Texas has truly become ‘The Third Coast’ of the U.S. economy,” says Jeffrey Chapman, who left Vinson & Elkins’ Dallas office earlier this year to join Gibson Dunn.
“Texas has been transformed from being an energy center to having one of the most diverse economies in America,” says Chapman. “Dallas has a particularly diverse economy and our firm’s strategy reflects the business base of the state.”
Most of the new firms entered the Texas market either by luring partners away from other firms or swallowing up smaller firms – a trend that is markedly different from previous efforts by national firms to expand into the state.
Baker Botts, Fulbright & Jaworski, Akin, Gump, Vinson & Elkins and other major Texas-based firms kept national law firms at bay through close client relationships with major energy clients and by developing an environment that “made extreme loyalty a culture” and shunned partners from jumping to other firms, according to Short.
Texas firms cultivated tight partnerships with general counsels at most energy companies. In turn, those firms placed many of their lawyers on the in-house legal teams of those companies who then sent more business back to their law firms.
“Texas has been, historically, a closed market to outside law firms,” says Bower. ”Big Texas law firms effectively shut them out and made it a nearly impossible place for outside firms to survive. ”
No better example than Latham & Watkins, which had considered the Texas market three previous times during the past two decades, only to abandon its efforts.
“Houston, in particular, had been an extremely insular market,” Michael Dillard, managing partner of Latham & Watkins’ Texas operations, recently told the ABA Journal. “But that has changed. We’ve gone from zero lawyers in Houston at the start of 2010 to more than 50 by the end of this year. And our Houston office has had the most billable hours on a per lawyer basis within all of Latham & Watkins.”
Legal industry observers say the Texas legal market is more open and competitive simply because the legal market is maturing. They point out that many of the ever-expanding energy companies, including Shell Oil and Exxon Mobil Corp., have new general counsels. In addition, several major law Texas firms will change their senior leadership within the next year, which adds to the instability, according to Short.
“The mindset of general counsels in Texas has changed,” says Chapman. “Until a few years ago, there was a significant bias toward Texas-based law firms. Corporations have become less Texas-centric in how they operate their business.
“It just doesn’t matter any more whether the law firm flag flown in a Dallas or Houston law firm office was originally stitched in Texas, California or New York,” he says.
Another factor, according to Dillard, is that hourly rates charged by the large Texas firms increased significantly during the past decade, making the national firms already higher rates more competitive to Texas clients.
But Darrell Jordan, a long-time Dallas litigator and power player in Texas legal circles, says the increased hourly rates of the big Texas law firms also has opened the doors to medium-sized regional firms. Two good examples are Atlanta-based labor law specialists Constangy, Brooks & Smith and Kansas City-based real estate and healthcare firm Polsinelli Shughart, both of which opened Dallas offices this year.
“We are able to attract clients because those bigger firms have priced themselves out of the market,” says Jordan, who is the managing partner at Dykema, a Detroit firm that opened a Dallas office three years ago. “We think we can attract a lot of clients because we are a mid-sized firm and we are able to negotiate our rates, something the big national firms won’t do.”
There are three mega-firms that successfully planted roots in Texas long ago. Jones Day, which has more than 2,500 lawyers in 34 global offices, gained a foothold in Texas during the savings and loan scandal and now has a 170-lawyer office in Dallas and another 50 lawyers in Houston.
Weil Gotshal, which has 1,200 lawyers in 20 offices, used its thriving bankruptcy practice to grow to 112 lawyers in Texas.
And the 3,800-lawyer, 69-office firm Baker McKenzie continues to expand in Texas with 90 lawyers in Dallas and Houston.
But legal industry analysts say don’t feel sorry for the large institutional firms in Dallas and Houston. Legal observers point out that the large Texas-based firms netted record profits in recent years. And they note that firms such as Baker Botts, Akin Gump and V&E have been expanding outward, into California, New York, Asia and the Middle East. In doing so, these Texas firms have done their share of poaching laterals from their national and global partners.
“No need to worry about the big Texas firms,” says Short. “The pie may be sliced into more pieces, but it is a much larger pie and firms such as Fulbright and V&E are eating very well.”
Mark Curriden is senior legal affairs writer for TexasLawbook.net and is Writer in Residence at SMU Dedman School of Law.