What is something you never thought you would hear anyone say ever?
There are not enough lawyers.
Yet, that is exactly the situation that has developed in Dallas and Houston.
Large and mid-sized corporate law firms in Dallas and Houston suddenly face a shortage of experienced, high-quality business attorneys to handle the growing legal needs of their clients.
Compounding the problem, according to law firm leaders, is the invasion of dozens of national and regional law firms into Texas, which has severely fractured a relatively modest-sized business law community that witnessed little to no growth in its overall lawyer count since the Great Recession nearly a decade ago.
The result, according to 16 corporate law firm leaders based in Dallas and Houston and interviewed by The Texas Lawbook, is that the Texas legal market is not keeping pace with the proliferation of new businesses and expansion of existing companies in the state.
“There are too many law firms dividing up too few lawyers and it is truly limiting the growth potential of many law firms here in Texas,” says Yvette Ostolaza, who is managing partner of the Dallas office of Sidley Austin. “The bottom line: We need more lawyers.”
Phil Appenzeller, managing partner at Munsch Hardt, says the problem is that the business legal market is simply not expanding fast enough for demand.
“Work is just moving from one law firm to another,” Appenzeller says. “At some point soon, the market will hit its saturation point for too many law firms.”
The 16 corporate firm leaders told The Texas Lawbook that the shortage of talent is one of the biggest challenges they face in growing their operations and it is driving the price of legal services up.
“There is not a market in America that offers so much high-end legal work of all kinds from locally based corporate clients and yet we have a relatively shallow pool of high quality legal talent to handle it,” says Rob Walters, managing partner of Gibson, Dunn & Crutcher in Dallas.
Andy Calder, managing partner of the Houston office of Kirkland & Ellis, agrees.
“We have an abundance of legal work from our clients,” says Calder. “As crazy as it sounds, we need more lawyers to do the work we have and we are struggling to find the right people here.”
More than 60 national or regional law firms have opened operations in Texas during the past five years and up to a dozen more are reportedly looking to launch new offices, but the number of business lawyers practicing in the state has remained relatively flat since 2010 and the end of the Great Recession.
Texas Lawbook data shows that there were 7,003 lawyers employed in the Texas offices of the 50 largest corporate law firms operating in the state in 2017 – a 0.5 percent increase over 2016 and only 1 percent more than 2015.
In 2009, the top 50 law firms in Texas had a headcount of 7,140 attorneys, according to a review of data published by the Texas Lawyer in May 2010.
“The number of new law firms moving into Texas is a lot more than the number of new lawyers moving here,” says Bell Nunnally & Martin managing partner James Skochdopole. “As a result, when new firms open in Texas, the deck does not get any larger, it just keeps being reshuffled.”
Hilda Galvan, managing partner Jones Day’s Dallas office, has started recruiting lawyers from the firm’s other offices.
“Seventeen corporations relocated their headquarters to North Texas in 2017 and they all have legal needs,” Galvan says. “We need more lawyers in the region to meet this growth. We are getting stretched very thin. There is especially a real demand at the associate level. ”
The need for more corporate lawyers in Texas is the result of a confluence of factors, including:
• Companies in the oil and gas sector grew exponentially with the evolvement of fracking;
• Private equity firms loaded with cash poured into the energy sector;
• Scores of corporations have relocated their headquarters to Texas; and
• Existing Texas-based businesses, such as AT&T and the airline and healthcare industries, have witnessed phenomenal growth through acquisitions and joint ventures.
At the same time these events were occurring, corporate law firms trimmed staffs and hired fewer lawyers following the Great Recession in hopes of improving their revenue per lawyer and profits per partner numbers. Similarly, law schools significantly reduced their acceptance – and thus graduation – numbers.
Then, in 2010, elite national law firms suddenly discovered that Houston was the energy capital of the world and started opening branch offices in the state. Their extraordinary financial successes led middle market law firms to rush into Dallas and Houston to get their share of the pie. Both stole lawyers from the Texas legacy firms.
Simultaneously, an unrelated development occurred: scores of litigation partners left their large, full service firms to start trial boutiques.
“There are now so many law firms in this space that there are not enough experienced lawyers for them to hire,” says Scott Barnard, managing partner of Akin Gump in Dallas. “The legal market here seems super saturated with law firms.”
Barnard and others say the shortage of business lawyers tends to favor the existing firms in Texas.
“It is getting incrementally harder and harder for out-of-state firms to attract a large enough group of lawyers to make an impact,” says Latham & Watkins Managing Partner Tim Fenn in Houston. “It is the same supply, but much more demand.”
If the pool of experienced business lawyers doesn’t get larger in the near future, according to Fenn and others, some national and regional firms will never get above 15 or 20 lawyers and that is not a large enough team to justify having an office here.
“Texas is witnessing an increased demand for a limited number of lawyers,” says Kent Zimmermann, a law firm consultant at Zeughauser Group. “As more and more law firms move into Texas, the law firms get more aggressive in competing for legal talent. The result is that law firms pay more for the talented lawyers who then charge more to their clients and the price of legal services goes up.”
The Texas Lawbook reported this week that as many as a dozen law firms are seriously considering opening offices in Texas during the next six months. The Lawbook also reported that a handful of national law firms that are already in Houston or Austin are interested in expanding to Dallas, including King & Spalding, White & Case, Dechert and Shearman & Sterling.
When opening new offices, national and regional firms have been hiring lawyers already practicing at other firms in Texas to staff their operations.
“Traditionally, when companies move to a new headquarters, they relocate their most talented and successful leaders to the new location,” Zimmermann says. “Law firms don’t do that.
“As a result, fixing this problem is not so simple,” he says.
Walters of Gibson Dunn agrees.
“I don’t think I’ve seen a law firm move a lead partner or a star legal talent into Texas when they’ve opened an office here, with the exception being Andy,” he says.
When Wall Street firm Simpson Thacher & Bartlett opened its Houston office in 2011, it moved M&A lawyer Andy Calder from New York. Three years later, Kirkland & Ellis hired Calder to start its Texas operation, which has grown from five attorneys in April 2014 to more than 200 lawyers today.
“I don’t think it is automatic anymore that Texas corporations send their biggest and most complex deals to New York firms like Wachtell, Cravath or Sullivan,” Calder says. “We have the sophistication and experience to do the work. We just need lawyers here to do it.”
In order to grow, law firms like Kirkland and Winston have gotten aggressive in stealing established and experienced lawyers from competitors by offering six-figure signing bonuses and guaranteed multimillion-dollar, multi-year contracts.
To retain their best lawyers, several Texas firms have restructured their compensation systems to pay more to their stars. Higher salaries and bonuses to lawyers result in higher billable rates for clients. But money can go only so far.
“We would like to grow our office here – maybe even double in size – but we are limited because it is a simple matter of numbers,” says Tom Melsheimer, managing partner of the Dallas office of Winston & Strawn. “We look around the market and there’s only a small number of people we would recruit – a handful of trial lawyers and a handful of transactional lawyers. Most of them have already made one or two lateral moves and are unlikely to move again.
“Truthfully, I don’t think there are enough bodies out there for a new national firm to move here and grow,” Melsheimer says.
The same is true for regional practices.
“As we see smaller and mid-sized law firms move into the state, it will be interesting to see how far they are willing to go to get the lawyers they need to be successful,” says Jackson Walker Managing Partner Wade Cooper. “Six-figure bonuses are a sign that the market is a bit frothy. I think we are coming to the tail end of the land rush.”