Freshfields Signs 15-year Lease in New York City

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Reuters reports that UK-based Freshfields Bruckhaus Deringer has signed a 15-year lease for new larger offices in New York City. 

Freshfields is no stranger to New York; it opened its NYC office in 1977 and now has more than 200 lawyers in the U.S. It has had a good track record of hiring lateral partners from U.S.-based Am Law 200 firms. 

In this market, entering into a 15-year lease involves a huge degree of uncertainty. Who knows what the legal landscape let alone the world will look like in 2039. Freshfields currently wants its lawyers to work out of the office three days a week, but that doesn’t mean that offices will still play the same role in fifteen years time. New York City may be much less important by then compared to Asian markets, and perhaps even the relations between the U.S. and the U.K will look very different. 

It’s always easy to pick holes and suggest why a sizable financial commitment may backfire. If nothing else, Freshfields is making a bold move when many of its competitors are looking to scale back their law office leases. 

This is yet another shot across the bow of other international law firms, very few of which can expand their presence in the U.S. by hiring high-priced lateral partners and investing in long-term leases. International law firms that have relied on entering into informal arrangements with U.S. based law firms are likely to lose market share as they increasingly face competition from international law firms that are opening offices in U.S. markets. 

Recent Trends Impacting International Law Firms Looking To Grow their U.S. Presence

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A recent article published in the Global Legal Post does a good job summarizing what some of the so-called “Magic Circle” U.K. Firms have been doing to grow their presence in the U.S. Specifically, the article identifies recent moves made by Allen & Overy, Freshfields, and Linklaters to hire lateral partners from Am Law 100 and open offices in various major U.S. locales such as Boston, New York, Los Angeles, San Francisco, and Silicon Valley.

Setting aside that the phrase “Magic Circle” might sound strange and witchcrafty to certain American ears, the expansion of Allen & Overy, Freshfields, and Linklaters into new U.S. markets has interesting implications for other international law firms who want to expand their U.S. presence but lack the resources to pay lateral partners millions of dollars or to invest in long-term leases in Class A buildings in the most expensive real estate markets in the U.S.

So how should most international law firms react to the spells cast by the “Magic Circle”?

Strategic planning begins by recognizing opportunities and threats.  Much of the legal media treats the biggest global firms as constituting a distinct market segment, such that they barely mention what is happening to most law firms, even ones with 200-500 attorneys. The first task for leaders of sizable international law firms is recognize that what Allen & Overy and others are doing impacts their efforts to attract U.S.-based clients.

Let’s start with the threats posed to most international law firms. Historically they relied on attending international legal conferences and joining associations of international law firms to expand their visibility within foreign markets. When larger firms open physical offices in U.S. cities and other countries, it makes it less likely that attorneys in those cities with reach out to foreign-based law firms. Joining an association or consortia of firms is going to be less effective when, for example, a law firm based in the UK doesn’t need to communicate with a firm based in Greece and can instead directly talk  to their colleagues in their Greek offices. And given that the largest U.S. firms are also opening up more offices in more countries, there is a growing risk that the biggest global firms will interact with each other, and other sizable international firms will be increasingly cut out of the picture.

The expansion of the global megafirms into more U.S. cities also presents opportunities for other sizable international law firms. One opportunity involves increasing legal fees; Allen & Overy attorneys are pricey, which has the effect of allowing other international firms to charge more, but still be perceived as relative bargains. To take advantage of this dynamic, international law firms must be selective and focus on expanding their U.S. presence with respect to specific practice areas. There are some practice areas, such as antitrust, global mergers, and bet-the-company international arbitrations where corporate clients are unlikely to move away from the global giants. But that leaves other practice areas, such as intellectual property, real estate, privacy compliance, and tax, and others where international firms are well-positioned to attract U.S.-based clients.

In addition, many international law firms would be well advised to reach out to firms that are also competing with the biggest of the big in their home markets. There is an adage that the enemy of my enemy is my friend. And that principle applies here. Too many international firms fail to connect with large U.S. based law firms who compete with the Am Law 100. This oversight is understandable. It can be hard for foreign lawyers to grasp the size and scope of the U.S. legal industry. It is a $250 billion USD industry annually, and while the biggest law firms gain a lion’s share of the media attention, there are hundreds of firms with between 50 and as many as 500 lawyers who would be natural potential allies for sizable foreign law firms.

As consultants to law firms, we have firsthand knowledge and over 20 years experience working with these large U.S. firms. Opportunities do exist for foreign law firms looking to expand their presence in the U.S. or generate more work from U.S. based business clients back in their home countries. The first step is for the leaders of international firms to recognize that, notwithstanding what the “Magic Circle” conjures up, they do have options in the U.S.

Allen & Overy Opens Up New Boston Office

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We are used to seeing articles involving Am Law 200 firms who raid each other for lateral partners.  We might be seeing the beginning of a new development—international firms, especially those based in the UK, joining the lateral partner fun.  The news of Allen & Overy’s entry into the Boston market has largely flown under the radar, but it merits further analysis. 

The basics of the deal are straightforward- Allen & Overy is opening up its Boston office after lateralling five partners from Goodwin. The partners work in IP litigation and related fields and together will establish a U.S.-based Life Science practice. 

The potential upside of this move for Allen & Overy is clear. Boston is perceived to be one of the centers of healthcare law and life sciences.  Goodwin is definitely a name in that market, so if Allen & Overy wants to get noticed, especially in the Boston legal market, they undoubtedly have succeeded. 

But at what cost? 

It is already well-established that law firms have tended to overpay for lateral partners. They tend to overestimate the extent to which their book of business is portable. In addition, when lawyers move together in groups, such moves are more likely to command a premium. If one assumes that the five partners moving to Allen & Overy have a collective book of business in the neighborhood of $10 million or more, it is likely that A&O paid a whole lot. And the compensation costs associated with such a move are on top of the costs of opening up an office in a Class A building and potentially entering into a long-term lease. It is safe to presume that this constitutes an investment in the tens of millions of dollars over the next several years. 

There are good reasons to be skeptical about the long-term prospects of such a move. Large law firms have struggled to keep lateral partners; once lawyers leave one firm it is not uncommon for them to move again within a few years.  Lawyers also tend to underestimate the importance of firm culture when they make a lateral move and Americans are less used to this than their European counterparts with interacting with professionals from other countries.  There is a good possibility that Allen & Overy paid through the nose and won’t be able to recoup their investment. And if one or more of the partners hits it big, one of the very biggest US firms could swoop in and convince one or more of the five partners to return to their American roots. 

However, if this move turns out for Allen & Overy, it is clear that very few international firms can afford to re-create this strategy. Hiring laterals and entering into long term leases are beyond the reach of all but the biggest and well-heeled international firms. Most international firms must therefore adapt to a world in which having a relationship with a U.S. firm as part of a consortium is a lot less effective or impressive than it once was. 

There are a lot of moving parts here, but it appears that it will be more important for mid-sized U.S. firms to become more aware of what the biggest international law firms are doing in the U.S.