As it has in years past, the lateral hiring market among the nation's largest law firms remained robust in 2018. With private equity and corporate practices in the highest demand, some firms have been busy recruiting top legal talent with top paychecks to match.

But as law firms brace for the impending economic downturn, will the lateral strategies they implemented in 2018 lead them down a rabbit hole in the next year that will leave them wishing they'd chosen a different path?

Despite a dip from 2017, lateral activity was still high last year. ALM Intelligence's Legal Compass, which tracks lateral moves, counted 2,754 partner moves among firms in the Am Law 200 from Oct. 1, 2017, to Sept. 30, 2018. This marked a drop of about 3.5 percent from the previous 12 months, during which there were 2,849 moves. Last year's report saw a 2.25 percent decline.

Even with the small drop, legal recruiters and consultants contend that the lateral market was as strong as ever. Law firms stared down the barrel of what many economists predict is an inevitable recession in the next few years and kept on hiring.

“In 2018, firms were more aggressive than usual in the market,” says longtime California-based legal recruiter Larry Watanabe. “I think people were actually preparing and bracing for a market correction. So while the markets were still reasonably good, firms were very aggressive in their lateral recruiting.”

DLA Piper also made significant pickups in Texas, adding a dozen partners across its Dallas and Austin offices, including six institutional investment partners from Jackson Walker.

But the firm also had one of the biggest groups of departures last year, with 57 partners decamping the firm. Norton Rose Fulbright had the most lateral departures, losing 88 partners last year.

“Norton Rose Fulbright experienced significant growth in 2017 as a result of completing combinations with leading firms Chadbourne & Parke, Bull Housser and Henry Davis York,” Peter Martyr, Norton Rose Fulbright's global chief executive, said. “While this strategic growth to expand our global platform is in the best interest of our firm and clients, having departures after a year of three major combinations is typical of a post-merger transition.”

Most of DLA's departures were the result of a lateral raid by McDermott Will & Emery in early 2018 that resulted in more than 20 partners making the move to the Chicago-based firm, including DLA's co-managing partner of the Americas, Michael Poulos, and Michael Sheehan, the former co-chairman of its global employment practice and chairman of its U.S. employment practice.

The firm also lost senior partner and global co-chairman Juan Picon, who joined Latham & Watkins.

“They left in part because … their vision of the firm's future was different than the firm's leadership's vision,” Meltzer says of the firm's departing partners.

And while McDermott raided DLA Piper, Morgan, Lewis & Bockius, which was among the busiest hiring firms last year, recruited 16 of McDermott's intellectual property partners to join the Philadelphia-based firm's offices in Chicago, Washington, D.C., San Francisco and Orange County, California.

“We've been very lucky to attract groups and teams, and that's something that we focus on as a strategy,” Morgan Lewis chairwoman Jami Wintz McKeon says. “We look for already highly successful groups who have synergies with existing Morgan Lewis groups or clients and who really fit in well with our collaborative culture.”

Holland & Knight had the second-most lateral acquisitions among the Am Law 200, adding 63 lawyers across the firm. The Miami-based firm picked up 11 partners from Reed Smith in July to open its Philadelphia office, which included Reed Smith's Philadelphia office managing partner, Leonard Bernstein, and the chairman of its global executive compensation and employee benefits practice, John Martini. The firm added a dozen more lawyers, including five partners, to double the size of its newest office later that month.

Holland & Knight also picked up a dozen lawyers from Am Law 200 firm Winstead, including five partners in Charlotte, North Carolina, and it tacked on two partners from Houston private wealth boutique Ostrom Morris.

Gearing Up for the Downturn

By far, the largest number of lateral hires and departures last year were across firms' corporate practices, accounting for 22.8 percent of arrivals and 22.9 percent of departures.

Banking and finance followed with 16.3 percent of practice area arrivals, and litigation accounted for 15.8 percent of the total.

“There were a number of firms, especially on the corporate and private equity [side], that were just going bananas, trying to do everything they could to bolster up their private equity practices,” Watanabe says.

In its highest total in a decade, private equity activity reached $556 billion last year, up nearly 4 percent from the prior year, according to Mergermarket. There were also a record number of private equity buyouts and private equity exits.

Private equity is the hottest overall practice area in any jurisdiction, says Sabina Lippman, co-founder of global legal recruiting firm Lippman Jungers.

“It is the best way to get a continuous revenue stream with that type of investment,” she says. “In any economy, there's going to be a lot of work in that space and, even with the anticipated downturn, they're seeing a lot of deals out there.”

And as the private equity market led, law firms followed.

For perennial private equity power Kirkland & Ellis, nearly 70 percent of its 32 hires were in its corporate practice, including the global head of the investment management and funds group at Debevoise & Plimpton, Erica Berthou, and its deputy corporate chairman, Jordan Murray, in late 2017.

Kirkland also added Cravath, Swaine & Moore M&A expert Eric Schiele, as well as Jennifer Perkins, a former global co-chairwoman of Latham & Watkins' private equity practice in New York.

Sidley Austin added Akin Gump Strauss Hauer & Feld private equity partners Adam Weinstein and Tony ­Feuerstein in New York. Weinstein has a reported book of business totaling more than $30 million.

“The lateral market of attorneys reflects what happens with the financial markets,” says Sharon Mahn, CEO and founder of Mahn Consulting.

And as the global economy remains robust, partners with strong books of business, especially in a hot area like private equity, are taking advantage, she says.

A Loosening Lockstep

“Everybody talks about the 'Kirkland effect,' and that was still continuing on in 2018,” says Alisa Levin, cofounder of legal search firm Greene-Levin-Snyder, noting the Chicago-based firm's  long-standing willingness to pay for top talent. “That had a major impact on the market, clearly, and there's only a couple of other firms that can compete at that level.”

Senior Cravath partner and former leader of its litigation department Sandra Goldstein joined Kirkland in April for a reported $11 million annually over the next five years.

Such departures from these white-shoe firms were unheard of decades ago. Now, many experts are questioning if the traditional lockstep model can withstand the stresses of such large paydays.

Top partner compensation at lockstep firms ranges from around $3 million to $6 million, but not much higher than $7 million, Lippman says. But, as in recent years, firms such as Kirkland and Paul, Weiss, Rifkind, Warton & Garrison have compensated their laterals well beyond that range.

“These firms aren't really falling apart, but they're losing people they don't want to lose and so they're feeling that their lockstep systems are threatened,” Lippman says. “Some of them are even in the process of changing their lockstep systems based on that.”

Simpson Thacher & Bartlett famously broke with its lockstep compensation model to lure back initial public offering specialist Joshua Bonnie ahead of his proposed departure to Kirkland four years ago. In recent months, the Wall Street firm has altered its partner compensation model to attract and retain top-quality talent. And it isn't the only one.

“We work a lot with U.K. firms and, of course, they have more lockstep firms and a lot of them are adjusting their compensation systems both to keep people but also to be able to attract people from nonlockstep,” says Janet Stanton of Adam Smith Esq.

Law firm partners want to know what the market can command, if they're getting the most money at their firm when compensation time rolls around, if they're being fairly compensated and what another firm might compensate them for, she says.

“Back in the day, there was this stigma to moving. People used to say, 'I'm not moving, don't call me,'” Mahn says. “Nowadays, everyone has me on their speed dial, even if they're not looking to move.”

But as months go by and the impending recession starts to cast a larger shadow among law firms, some see the move away from a lockstep-type model as a treacherous gamble.

“In a down economy, you're going to find that firms that are conservatively managed—that have a lockstep-ish compensation model—[are] better off, because it protects the bottom line,” Watanabe says.

They don't have the drastic ups and downs of an “eat what you kill” model, which often coincide with very high turnover rates, he says.

“People that have decided to leave [traditional lockstep firms] and have gone upstream have gone to firms that are more profitable, where their income level is going to be more wide open at the top end of the scale,” Watanabe says.

And while a handful of law firms are immune to such a move because of their extreme profitability, most will feel the pain. Their lateral additions might, too.

“It doesn't necessarily mean they move for a better deal,” Watanabe says. “They move for a riskier deal.”

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