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New Gold Mine for Law Firms

In this post, Larry Bodine reports on a hot-off-the-the-presses New Jersey ethics decision that would allow a law firm to own another firm as a wholly owned subsidiary.  Took me a while to fully comprehend the implications of this ruling, but Bodine lays them out fairly concisely here:
As a result of New Jersey's decision:

• Law firms can buy and sell other law firms as investments.

    • Law firms can hire a pinpoint boutique to handle a spike in client demand, and then sell it off or shut it down when the demand falls off.  The owner firm wouldn't have to fire any of its own staff, as happened when the technology bubble burst.

    • The owner law firm can acquire a smaller firm without having to charge big-firm rates or pay big-firm salaries.  A large firm could own, for example, an insurance defense firm, pay the lawyers bottom dollar, and be able to bill out at $100 an hour.  This means big law firms won't leave money on the table.

    • Owner law firms can acquire less glamorous practices, like collection law firms (which are very profitable and make a 40% commission on debts collected) without having to sully its own reputation.  This can be very handy when the big firm has a bank as a client, and is happy to do its securities and acquisition work, but doesn't want to foreclose on mortgages.  It makes the owner law firm a full-service firm.

    • Big firms can get into profitable areas they won't touch now -- like matrimonial law and plaintiff’s personal injury law -- without having to have their own lawyers do the work.  Of course, the subsidiary PI firm would be conflicted out of suing clients of its owner.

    • Law firms can market themselves like General Motors, and have separately branded divisions, like Cadillac, Chevrolet, Pontiac and Buick.

    • Or, law firms can market themselves like General Mills, with individual brands like Betty Crocker, Pillsbury, Green Giant and Häagen-Dazs.

This decision has huge implications, not just for large firms, but solos and small firms as well.  Should small firms that specialize in collections or defense work now start figuring out ways to lure large firms to buy them out, which might bring some added stability to the smaller firm?  Or will large firm ability to buy out small firms diminish competition and increase conflicts to the point where smaller companies and individuals will have trouble finding a lawyer.  Stay tuned ....

Posted by Carolyn Elefant on April 28, 2006 at 07:20 AM | Permalink | Comments (4) | TrackBack (0)


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