May 7, 2009 12:39 PM

Report Projects Legal Spending Increase

Posted by Nate Raymond

As law firms continue to conduct layoffs and mull pay cuts, a new report suggests major U.S. corporations are preparing to increase legal spending by as much as 5 percent in the second half of the year.

Research firm BTI Consulting Group surveyed 370 corporate counsel at Fortune 1000 companies and found that, on average, they cut legal spending by nearly 7 percent in the first three months of 2009 to $19.4 million. Yet the report also forecasts a rebound in spending come July thanks to demand for legal services in regulatory, bankruptcy, securities, and employment practices.

"What happened is the first quarter saw this tremendous cut in outside counsel spending," says Michael Rynowecer, president of BTI. "And the cuts were so deep and so severe that corporate counsel are realizing that they may need to bring some of that back just to meet core needs."

While those four practice areas are expected to grow, others will likely see further cuts. Spending on M&A and corporate transactions is expected to fall 6.8 percent. Companies also are expected to spend less on investigations, litigation, and environmental practices. For the year, BTI projects legal spending will fall 1.4 percent.

"The thing that surprised me was just the wholesale drop in IP litigation, because that market had really been growing dramatically" Rynowecer says. Intellectual property is expected to see a 4.3 percent spending reduction in the second half of the year, while IP litigation could fall by 7.7 percent, the report says.

Before the recession, Rynowecer says big global companies seemed willing to take a harder line against patent trolls. Those companies also were becoming more aggressive in monetizing their IP assets, which required more litigation.

"It just looks like that initiative has taken a backseat to protecting yourself in this uncertain world," he says.

Despite the promise of more legal spending in the second half of the year, Rynowecer says he doesn't believe law firms will stop laying off lawyers because some firms are still overstaffed for the work that exists. Still, the promise of a return in growth to legal spending should be good news for law firms.

Lately, some law firm heads and consultants say they too have seen economic green shoots. "I think we have in the last month had some information that demand for legal services has at least stabilized if not ticked up a little," says Bradley Hildebrandt of consulting firm Hildebrandt International. Bankruptcy and regulatory practices are seeing increased demand, and litigation has stabilized, Hildebrandt says.

BTI's report also projects a 2.1 percent increase for securities and finance practices after a long period of steep drops. Rynowecer say the bulk of that is related to economic stimulus programs coming out of the Treasury Department and the Federal Reserve.

Some firms say they are already seeing an increase in the securities and finance area. Cahill, Gordon & Reindel has been busier lately thanks to an uptick in high-yield debt deals. "By the end of the  week, we may have seen as many high yield deals for this year as for all of last year," says co-administrative partner Jonathan Schaffzin.

And those deals have been picking up, as the firm has has seen as much activity in the first five weeks of this quarter as it did all last quarter. Since the capital markets area was the first to take a hit, Schaffzin says, it holds the most promise for leading the economy out of a recession. He's cautious in declaring a recovery, but says he thinks the increase in activity his firm has been experiencing could be a first sign of recovery.

"Whether this is a sustainable trend or not I don't know, but it's definitely an improvement," he says. "It's no where near the volumes we had before the credit crunch hit, but it's definitely got a better feel to it."

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