Guaranteed pay agreements sink Dewey & LeBoeuf

A furniture store posts a 'going out of business sign' in Manassas, Virginia.

David Brancaccio: In what's seen as the biggest collapse of a big corporate law firm, Dewey & LeBoeuf filed for bankruptcy protection last night. Financial mistakes, heavy debt, and the defection of top talent get the blame, and there are reports the firm won't reorganize, it will liquidate.

Marketplace's Amy Scott has been looking into the story. Hello, Amy.

Amy Scott: Hello.

Brancaccio: What else went wrong at that firm?

Scott: Well one thing is that they got too big just when the economy turned. And one way they did that was by luring talent away from other law firms by offering guaranteed compensation regardless of how well the firm did. When revenues started falling off, Dewey was still on the hook for millions of dollars in this guaranteed pay. I spoke with a consultant, Ken Zimmermann, who helps law firms with their growth plans, and he says the trouble at Dewey was that a lot partners didn't know about these deals.

Ken Zimmermann: And I think after Dewey, many lawyers will be much more involved, wanting to have a say and be on board and build consensus around their firm's growth plan.

Scott: In fact, as you mentioned, most of Dewey's 300 partners had been leaving in droves because of concerns about these deals and the firm's financial position.

Brancaccio: What do you think Amy, are we going to see more of this, of these collapses in the legal profession?

Scott: Well the economy certainly hasn't been kind to law firms. Zimmermann says these sorts of guaranteed pay deals are highly unusual. But, people say there is a problem with the culture of these big law firms. There is too much emphasis on growth; they are not so much partnerships in the traditional sense any more. There have been several bankruptcies, this is the biggest, and analysts say there likely will be more.

Brancaccio: Marketplace's Amy Scott, thank you very much.

Scott: You're welcome.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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