May 2, 2011 6:00 AM
The Am Law 100: Grand Illusion
Posted by Ed Shanahan
By Peter Kalis from the May 2011 Issue of The American Lawyer
Law firm managing partners await publication of The Am Law 100 with great anticipation. In the publishing industry, rankings are a sure seller, and The Am Law 100 is a ranking par excellence. It's the show-and-tell of the legal industry in the United States. And, while The American Lawyer often relies upon law firms to supply their own financial data, there is widespread belief that the reported metrics are substantially correct.
The ranking has been undermined not by law firms but by the magazine itself. Because The American Lawyer now treats two or more independent firms within a Swiss verein as a single law firm, it has debased the financial results upon which its ranking rests. There is no question that the Am Law 100 ranking works well when it compares single law firms. But if, through the device of a verein, two or more law firms are permitted to report results on a consolidated basis, the ranking is distorted, and the value of The Am Law 100 is undermined.
In the obscenity case Jacobellis v. Ohio, the late Justice Potter Stewart famously resisted the temptation to define constitutionally unprotected speech and instead relied on the commonsense notion of "I know it when I see it." In a more prosaic setting, the reader here is invited to apply the same test to the simple question, "What is a law firm?" As you might guess, far more turns on the answer than the composition of The Am Law 100.
Let's begin with the question, "What is a Swiss verein?" A verein is an association of member organizations recognized under Swiss law. It is used to maintain separation among entities under a common brand. In the legal context, a verein is formed through simple articles of association without creation of an entity that actually practices law. Rather, the member law firms independently render legal services and severally accept the rewards and liabilities that accompany such work. They do not share a common profit pool.
Although this is reminiscent of the Articles of Confederation--separate economies, regional constituencies, fragmented decision making--law firms can affiliate with each other as they see fit. When a Swiss verein permits a common brand to mask the existence of two or more law firms, however, and single firms are compared to the verein firms treated as one, the factual basis for that comparison becomes of more general interest.
In September 2010, the British publication Legal Week published an article titled "DLA Piper US and International arms to adopt same strategy." Nearly six years after their purported merger, two firms sharing a brand in a Swiss verein began a review of their businesses "which will for the first time see DLA Piper International and DLA Piper US share the same three-year strategy." The review was being led by a U.S. leader, a U.K. leader, and "their respective executive boards."
That the two firms have separate strategies requiring coordination should come as no surprise. After Legal Week reported in September 2007 that the two DLAs were putting the "finishing touches" on "full financial integration," it reported less than a year later that the two DLAs had executed "a U-turn" and in fact had renounced the goal of financial integration. When the music stopped, the verein known as DLA Piper was simply a referral arrangement between two firms—DLA Piper US and DLA Piper International.
Although the two DLAs don't treat themselves as a single economic unit, The American Lawyer now does for purposes of The Am Law 100. The basis for this consolidated treatment is unclear. It can't be that a common brand alone is sufficient, or The Am Law 100 would include another international referral society, Lex Mundi. Extending this logic further, law firms pursuing a "best friends" arrangement could simply slap a label on their cooperative structure and create a new brand, thereby vaulting up the Am Law 100's gross revenue rankings. Once The American Lawyer permits inclusion of vereins and other confederations that do not share a single profit pool, it's difficult to discern a coherent limiting principle. The American Lawyer offers none.
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Peter Kalis is chairman and global managing partner of K&L Gates.