Inside the struggles at Hughes Hubbard & Reed, the once high-flying law firm that's now slashing staff and losing rainmakers

  • At least 20 people at law firm Hughes Hubbard & Reed, including veteran staff and young associates, were laid off on in early July, even though the firm got a loan to preserve jobs.
  • Hughes Hubbard made hundreds of millions working on big corporate collapses and smokers' cases against the cigarette giant Lorillard, but those cases have largely dried up and the work that replaced it hasn't been nearly as lucrative.
  • Airbus, the firm's top client, has significantly reduced the amount of work it needs done, according to two sources.
  • Visit Business Insider's homepage for more stories.

Law firm Hughes Hubbard & Reed was flying high in 2013. Its lawyers worked on major cases like the collapses of MF Global and Lehman Brothers, bringing in a reported $396 million in revenue that year. Profit margins were strong enough that its 76 equity partners took home an average of $1.95 million each, according to the American Lawyer, ranking it 25th among US law firms. 

Today, Hughes Hubbard is struggling. The big brokerage collapses that fueled its growth have wound down, and its top client, Airbus, has significantly less work to go around. Its profit margin fell to 18% last year, one of the lowest among big law firms, and average partner compensation has fallen, making it harder to attract lawyers who have relationships with high-billing clients.

Hughes Hubbard has benefitted less from the boom in dealmaking than other Big Law firms. Its aviation finance practice has been working for big airlines and deputy chair Ken Lefkowitz is seen as a rainmaker with a diverse base of corporate clients, but their success has not scaled up; the firm still has about three times as many lawyers in its litigation practice as in its corporate practice. 

"I think the firm has generally relied on a few really big clients, and when the clients go away, they're just hoping and wishing that another one comes," said a former associate.

In early July, about 20 to 30 people, including 5 to 10 lawyers, were laid off, according to two sources familiar with the scope of the cuts. The layoffs came even though the firm received a forgivable loan for $5 million to $10 million through the Paycheck Protection Program that was meant to preserve jobs, according to federal disclosures.

Ted Mayer, Hughes Hubbard's chair, said in an interview that the firm was "thriving" despite the layoffs, which Mayer said they were largely of administrative staff. Among attorneys, he said, layoffs were "more at the junior level and in areas that are less in-demand."

A few days after the layoffs, two groups of international trade lawyers left who did an estimated $12 million in business left the firm. One of them, Joanne Osendarp, was the third member of the firm's executive committee to leave in two years. The move had been in the works for months and wasn't directly related to the pandemic, according to a person involved with the move.

But it underscored the firm's struggles to develop and keep business.

Mayer declined to comment on the trade group's revenue numbers, but said, "it's not unusual for people to leave after a high year in this industry." The firm's core areas of business, he said, are bankruptcy, aviation finance, litigation, corporate and M&A work and investigations.

Loss of Airbus a big blow

The most immediate blow to the firm's revenue has been the wind-down in work on an internal investigation of Airbus, according to two people familiar with the matter. Starting in 2016, the firm flew more than 30 US lawyers to Paris to help the airplane manufacturing giant ensure it complied with anti-bribery laws, but the work slowed down substantially over the past year, three people said.

Mayer said Airbus remains an important client, and said it wasn't unusual for an investigation to slow down after an initial burst of activity. Stefanie Christopher, a spokeswoman for the firm, said in an email that the firm's Paris office has grown 50% in five years, and said, "the substantial capability we built for Airbus enabled us to win many more investigations clients."

But Airbus is just the latest in a long-term trend. For the past five years, Hughes Hubbard hasn't been winning the jobs that have helped it rake in tens of millions of dollars at a time and keep entire offices busy; there haven't been any big brokerage collapses since the Madoff scandal, where the role Hughes Hubbard played in other cases went to BakerHostetler. Lorillard, the cigarette maker and a major client of Hughes Hubbard, was acquired in 2015, with most of the work sent to Jones Day, according to reports and interviews.

Other dealings that led to lots of work have wound down. James Giddens, now senior counsel at the firm, was named the trustee for the broker-dealer units of failed financial giants MF Global and Lehman Brothers Holdings. The firm made $87 million in the MF Global case, where its role concluded in 2015, and more than $400 million in the Lehman case, which has slowed down significantly, with $6 million awarded for all of 2019.

There have been exceptions; the Danish government has reportedly budgeted around $73 million in legal fees this year for a big tax fraud litigation campaign where it's working with Hughes Hubbard and other firms, although it's not clear how much will be paid to Hughes Hubbard and a representative of the country's tax authority declined to share those numbers.

The firm has also struggled with costs. As salaries for Big Law associates have mounted, the firm has not kept up. In 2018, after the firms Milbank and Cravath increased associate pay and led to many top firms following suit, Hughes Hubbard only matched the Cravath/Milbank scale for its first- and second-year associates.

Associates have complained about inconsistent workflow. "There were times when there was just nothing to do," said one former employee. "There were some people who kept getting work — they were getting 2,500, 2,600 hours a year … but there was no one to control the ebb and the flow."

Christopher said in an email that its associate pay system is bonus-driven and offers chances to beat the market; she wouldn't say what fraction of senior associates actually ended up earning above-market compensation, but said more than 50% of associates have gotten at least some bonus for each of the past several years, and a greater share of senior associates did so. She added that firm leaders hadn't heard complaints about the work allocation system despite meeting regularly with an associates committee.

Lorillard business fades 

Another source of business that has faded away is the firm's defense of Lorillard, the tobacco giant that was acquired by Reynolds American in 2014, in scores of lawsuits brought by smokers who claimed they were misled. The American Lawyer reported in 2015 that Reynolds transferred much of the Lorillard litigation work to Jones Day. At the time, the Kansas City office, where much of the work was done, reportedly numbered 45 people. Now, the firm's website only lists 13 people in Kansas City.

Lorillard work also kept lawyers in other offices busy, sources said, including Miami and New York. At one point, "I'd say more than half of the litigation department in New York was working on Lorillard," said one former attorney.

Christopher said it was not the case that half the New York litigation department worked on Lorillard matters, and said the firm counts RJ Reynolds, a unit of British American Tobacco, as a "major client." 

The firm said its presence in markets like France and Latin America have helped it win business, and said profits from those work have been spread across the firm. The company's office in Miami is has been recognized for its presence in Latin America, and its office in Paris has won plaudits for internal investigations and data privacy matters.

And Hughes Hubbard's products liability team is still well-regarded. The firm was one of Merck's top lawyers in the Vioxx litigation more than a decade ago that settled for over $4 billion. It is still working on big disputes, including for Merck, but they aren't as high-stakes as Vioxx.

The firm has represented Imerys, a French minerals company, whose subsidiaries were sued along with Johnson & Johnson for alleged asbestos contamination of talcum powder. Damages sought from Imerys were far lower than what was sought from Johnson & Johnson. Hughes Hubbard's fees from the work aren't known, but the firm only entered the picture in late 2018 when Imerys' longtime lawyers at Latham & Watkins pivoted to represent the French company's US subsidiaries, according to a bankruptcy court document.

Similarly, while the firm has a client that has been accused of stoking the opioid pandemic, that client — the Belgian drugmaker UCB — hasn't found itself in the crosshairs of governments and individual plaintiffs to the degree that bigger manufacturers and distributors have. UCB had just a 0.2% market share for two common opioids, it said in a statement to shareholders, although its legal fees to Hughes Hubbard have not been disclosed.

Robb Patryk, a litigation partner, said a "core group" of seven or eight partners in the mass torts and product liability practice is "very busy" on a variety of matters. Asked what major cases or controversies were on the horizon, he said, "the next case has always come along. You never know where it's going to come from."

Exodus among trade lawyers

More partners have been leaving than joining. Some of the most recent departures have been from the firm's international trade practice. Akin Gump Strauss Hauer & Feld picked up Matthew Nicely, who brought three lawyers with him. And McDermott Will & Emery added a seven-lawyer team led by Joanne Osendarp, who ran Hughes Hubbard's international trade practice and sat on its executive and compensation committees, and partner Eric Parnes. The firm still has trade lawyers, but they have been rolled into the firm's sanctions and export controls practice.

Nicely has represented the Solar Energy Industries Association, a major trade group. Osendarp is also known as the Canadian government's go-to trade disputes lawyer. Hughes Hubbard raked in more legal fees paid by the Canadian Department of Justice than any other law firm for each of the past five fiscal years, according to public disclosures. In each of the past two fiscal years, in US dollar terms, Hughes Hubbard has been paid about $5 million by the Canadian government; in the two years before that, it was closer to $6 million.

Assuming each of the lawyers who left brought in the average revenue per lawyer, as reported by the American Lawyer, the departure of the 11 lawyers means more than $12 million in annual revenue out the door.

Despite the loss of partners and layoffs, one possible fix that's not in the cards, Meyer said, is a merger. He said the firm is the right size to service its clients, and remained open to meeting with talented lawyers. 

"We're very committed to our model, to our partners, to our people," he said. "This is something that has worked for us for over 100 years."

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