Law firms fared well financially in 2019, but as the entire world grapples with the economic turmoil brought on by the COVID-19 pandemic, those days now feel like they were a million years ago.

Revenue for the 100 largest law firms in the United States grew by 5% last year, rising to a record $104 billion. That's less improvement than the 8% and 5.5% growth the U.S. legal industry saw in 2018 and 2017, respectively, but still right on track with the 4.9% average growth over the past decade.

Similar to the gains in gross revenue, the Am Law 100 also saw an increase in revenue per lawyer that was respectable, but not quite as high as the growth from the past two years. The RPL average for the Am Law 100 cracked the $1 million threshold last year, as it rose by 3% to $1,001,289. In 2017 and 2018, RPL, which legal consultants consider to be a good indicator of a law firm's financial health, grew by 3.2% and 4.2%, respectively.

Profits per equity partner also grew at a healthy clip last year. The 21,270 equity partners who worked in an Am Law 100 firm last year raked in an average of $1,967,895 in profits, a 5% increase over 2018.

"Everything we heard from clients at the beginning of 2020 was that 2019 was another good year, comparable to 2018," Altman Weil consultant Eric Seeger says. "We had quite a few clients tell us that 2019 was a record financial year for them."

"They were highly optimistic about 2020," Seeger adds.

But then the novel coronavirus began to spread, plunging the global economy into an unprecedented and unpredictable crisis and raising questions about how healthy the industry might look this time next year.

The Unpredictable Future

By all accounts, 2020 was shaping up to be a good year. Multiple law firm leaders and financial consultants say the momentum they saw in 2019 was rolling into this year, based on their returns from January and February.

Even March ended up being a decent month results-wise, as the effects of the COVID-19 pandemic didn't begin impacting the United States widely until the middle of the month. Most law firms began transitioning to remote work around that time and have stayed busy since then.

That's been the experience at Jenner & Block, which has only seen a 10% drop in lawyer productivity, co-managing partner Randy Mehrberg said in late March. 

But as the calendar flipped to April, the coming months had the U.S. legal industry sweating. As parts of the country ground to a halt and the cash stopped flowing, some firms began to lay off employees, pause partner draws and cut staff and attorney salaries. Consultants say the crisis is giving firms cover to cull underperforming lawyers and practice groups. Financial expectations for the year were entirely thrown out in most cases.

"Law firm projections assume a normal linear projection of the recent past, and that just got erased," Seeger says.

The legal industry is going to take a haircut next year, Joe Mendola, senior director of sales at Wells Fargo Private Bank's Legal Specialty Group, says. He notes that financial institutions such as JPMorgan Chase and Wells Fargo are predicting significant cuts in the U.S. gross domestic product.

Gretta Rusanow, head of advisory services within Citi Private Bank's Law Firm Group, says the impact of the coronavirus is expected to show up in second-quarter results, but until more is known about the economic fallout, "it's too soon to call" how drastic the drop will be.

Rusanow says law firms with practices centered on bankruptcy and restructuring, government relations, tax advisory and labor and employment are poised to do well in the pandemic-triggered downturn. By the same token, law firms with practices that serve the hospitality, airline and energy industries are likely to struggle as those sectors take a hit.

"There will be practices that will see activity continuing in the event we're in a prolonged downcycle," Rusanow says.

She says large-scale M&A deals are also likely to be negatively affected by a downturn, but adds that there will be clients looking for buying opportunities.

Small and regional law firms will likely feel the hit first, Mendola says, because they tend to be concentrated around clients, practice areas or geographies. 

"From a cash flow perspective, they don't have the scale," Mendola says.

Generally speaking, law firms that performed well in 2019 and have been performing well for the past couple of years are better positioned to weather the economic storm the COVID-19 pandemic is causing, Mendola says.

Zeughauser Group consultant Kent Zimmermann shares a similar sentiment. A law firm that is profitable has greater "flexibility in how to manage through a crisis, particularly if there's a significant drop in revenue," he says.

Austin Fragomen, the chairman at immigration-focused Fragomen, which placed 61st on this year's list with nearly $702 million in revenue, says his firm was in fine shape as the effects of the crisis hit. Coming off a year in which Fragomen posted 10.1% revenue growth, he says the firm has plenty of work lined up for the second quarter. 

"We have a lot of work in the pipeline, which will probably keep us very busy in the next three months regardless of what happens," Fragomen says. "It's only what happens after three months from now that's really going to impact us. If it all springs back in three months, it won't make that much difference."

Certain practices do well in an economic downturn, but the COVID-19 pandemic has thrown a wrench into how the practice of law is conducted. Courts have suspended or pushed back trials. Travel is restricted, both by firm edicts and local, state and national governments. Merger exploration talks aren't happening. Depositions have been postponed. 

"It's a little tough to do litigation if you can't go to court," Mendola says. "I'm sure there will be plenty of lawsuits coming out of this, which should augment the industry in the latter part of the year, fingers crossed."

Mehrberg points out, however, that not everything has stopped. Lawyers can still make electronic filings, and arbitration and mediation can occur in a virtual setting. One partner describes an all-day arbitration session that became a 10-hour conference call. 

Time is the critical question for law firms and legal consultants. If the pandemic—and the economic havoc it's wreaking on the country—extends into the summer and fall, then more layoffs will be coming, Fragomen says.

"That's one of the realities of the flattening of the curve. It makes this whole process go on until … I guess, until they have a cure," Fragomen says. "I don't really know where it ends."

For Altman Weil's Tom Clay, the fundamental economic issue that's ground the U.S. economy to a halt is the lack of cash flow. People have stopped buying things with the exception of such necessities as food and medicine.

"People have business models that make sense," he says. "If no one's buying anything, it doesn't make sense."

The Billionaire Class

Stratification continues to be a recurring theme in the Am Law 100, but 2019 appears to be in line with 2018, when revenue growth was fairly balanced across the list, than 2017, when the richest firms grew even more rich than everyone else. Forty-two firms cracked the $1 billion threshold last year, while 11 firms entered the $2 billion stratosphere. 

Like in 2018, the 10 highest-grossing firms raked in roughly 26% of the revenue the Am Law 100 generated last year. The next 16 firms accounted for about another quarter of the year's revenue, meaning that half of the revenue generated by the Am Law 100 came from the top 26 law firms. In terms of parity, it was a step forward after the top 10 firms alone brought in 38% of the group's total revenue just two years ago.

The gap between the average RPL at a top 25 firm ($1.215 million) and the rest of the Am Law 100 ($996,813) grew slightly in 2019. But the differences between the elites and everyone else are most stark when looking at PEP. On average, the 25 highest-grossing firms had profits per equity partner of $3.014 million. That number dropped to $2.285 million for the next 25 firms, $1.603 million for firms 51 to 75 and $1.462 million for firms 76 to 100. 

Cream of the Crop

Kirkland & Ellis continued its reign last year, becoming the first U.S. law firm to break through the $4 billion ceiling with $4.154 billion. It's an astounding climb for the Chicago-founded law firm, which surpassed the $3 billion threshold just two years ago. That was the same year Kirkland surged past Latham & Watkins, which also had a strong 2019. Both firms posted double-digit gains in revenue in 2019, with Latham bringing in $3.76 billion.

But Kirkland's lead in the rankings has grown. The gap between the two firms is now $387 million, or roughly the same as the total revenue of 525-lawyer Dorsey & Whitney, which landed at No. 98 on this year's list. 

Private equity and mergers and acquisitions work continue to be moneymakers for the Am Law 100, even as the former matures. Private equity accounted for $678 billion in transactions in 2019, but both the number and total disclosed value of those deals dropped compared with 2018, according to PitchBook. 

Kirkland, in particular, has strengthened both of those practices. In 2018, Kirkland's lawyers handled at least 564 M&A transactions whose combined value totaled more than $276 billion, according to Bloomberg. But in 2019, it handled 664 announced deals, advising on more than $465 billion in transactions. The only firms reported to have a larger market share in 2019 were Wachtell, Lipton, Rosen & Katz and Sullivan & Cromwell.

Rise and Fall

The top 10 saw some shake-ups in 2019. DLA Piper surpassed Baker McKenzie for the No. 3 slot, seizing on the latter's lackluster 0.7% revenue growth last year. DLA Piper, meanwhile, saw its top-line revenue increase by 9.7%, allowing the firm to crack the $3 billion threshold.

The same happened with White & Case and Jones Day, as the former rose to ninth place on 6.6% growth, at $2.184 billion in revenue, while the latter dropped to 10th on the back of a meager 1% growth in its receipts. Jones Day is in danger of falling out of the top 10 next year—only $68 million separates it from a surging Gibson, Dunn & Crutcher, which posted double-digit revenue gains to become the 11th U.S. law firm to hit the $2 billion revenue mark.

Morgan, Lewis & Bockius also overtook Hogan Lovells, with the former settling into seventh place and the latter in eighth. Both firms, however, delivered good revenue growth in 2019, at 8.1% and 6%, respectively.

There were other noticeable climbs and drops on the Am Law 100. A 5% decline in revenue led to Cleary Gottlieb Steen & Hamilton falling from No. 21 to No. 27. 

Double-digit gains by Holland & Knight, Fox Rothschild and Barnes & Thornburg led to those firms surging ahead several places on the Am Law 100, with the Midwest-centered Barnes & Thornburg going from No. 93 to No. 83.

Drinker Biddle & Reath dropped 11 places after suffering another 4.1% drop in overall revenue, making it the only firm still on the Am Law 100 that saw negative growth in both 2018 and 2019. The Philadelphia-based firm has since merged with Faegre Baker Daniels of Minneapolis. The newly combined Faegre Drinker says it has 1,300 lawyers spread across 22 cities. 

Gordon Rees Scully Mansukhani and Husch Blackwell joined the Am Law 100 in 2019 after growing their revenue by 11.9% and 7.6%, respectively. Both firms have expanded in secondary and tertiary markets that are largely being ignored by bigger firms at this point.

Gordon Rees completed its 50-state strategy last year with the opening of its Hawaii office, along with 15 other outposts. The goal behind the strategy, according to managing partner Dion Cominos, is to have lawyers everywhere so their clients know that, no matter where they are, they can go to Gordon Rees.

And through Husch Blackwell's use of fixed-rate and multiyear pricing, the firm can tap lawyers in underpriced markets such as Omaha, Nebraska, to work on projects emanating from more expensive cities.

Those firms' gain is Williams & Connolly and Baker, Donelson, Bearman, Caldwell & Berkowitz's loss. Both Baker Donelson and Williams & Connolly fell out of the Am Law 100.

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