This post contains highlights from a recent webinar Logikcull hosted with the Association of Certified eDiscovery Specialists on the impacts of an economic recession on litigation demand and practice. Stay tuned for part two of the recap, in which we highlight advice and insights from our esteemed panelists, Bruce MacEwen, President of Adam Smith Esq., Eli Wald, Charles W. Delaney Jr. Professor of Law, University of Denver Sturm College of Law, and Robert Hilson, Vice President of Marketing at Logikcull.
We are in, as they say (over and over and over again), uncertain times. We are facing a health crisis on a scale that few people alive today have experienced before, and a resulting economic crisis whose initial impacts are closer to the Great Depression than the 2008 financial crisis or the Dot Com bust.
But what does that mean for the law and for litigation specifically?
Litigators, after all, tend to be of two minds when it comes to economic downturns. On the one hand, there’s less out there, so people spend more time fighting over the scraps, so to speak. Litigation stances get more aggressive and some litigators are expecting an increase in demand. On the other hand, you can’t do better than your clients. If your clients don’t have the budget for litigation, or are facing existential threats themselves, your business can suffer.
We are certainly in the early stages of the coronavirus’s economic impact, but the data points to an economic shock almost without parallel.
Many readers may have seen the figure on the right of the slide above, or some variation of it, several times now. It tracks unemployment claims, which have now reached over 36 million, absolutely eclipsing any numbers since recording began. The small bump on the left of the chart, for example, is the Great Recession. It’s barely noticeable against the spike seen in late March and onwards.
There is, though, a small glimmer of hope. Though the total number of unemployed individuals is rising, the rate of new claims is falling, though it remains higher than ever seen before.
In total, the U.S. currently faces a 14.7 percent unemployment rate, according to the latest numbers. For context, that means that more than one out of every eight members of the labor market is out of work.
Of course, given the nature of shelter in place, some industries have been hit much harder than others. Retail and entertainment industries have seen unemployment rates nearing 50%, for example. The legal industry, as we’ll see, has seen less of a downturn.
Beyond unemployment, the pandemic and shelter-in-place orders have had a massive impact on economic output. The data above, from the Bureau of Economic Analysis, shows the rate of GDP change quarter over quarter for the past four years.
We see a nearly constant growth between two and four percent a quarter, until the first quarter of 2020, at which point GDP declined 4.8%. It’s important to note that Q1 ended March 31st. Most shelter-in-place orders did not go into effect until mid- to late-March. Here in San Francisco, where I’m writing this, the first shelter-in-place order wasn’t issued until March 16th. New York issued its statewide order on March 20th, and Texas followed on March 31st.
So this decline represents only a small percentage of the whole quarter and just the beginning of the economic impact.
To give greater context, at the peak of shelter in place in April, Moody’s Analytics estimated that 29% of all economic output was shut down.
The impacts on the economy at large have been, it’s safe to say, enormous. For the legal industry, too, the pandemic has been incredibly disruptive, though the initial impacts have been more muted.
Of course, most courts are still shut down to a significant capacity. The chart above shows areas where in-person proceedings have been paused statewide, in green, while the blue represents states where in-person proceedings have been shut down only in certain locations.
There is no place where there has not been a slowdown. Of course, hearings and even trials have started to pick up via video conference—Texas and New Jersey have both started trials by video conferencing, and even the Supreme Court has moved to oral arguments via live stream. But these approaches are still just in their beginning stages.
Overall, the legal industry lost 64 thousand jobs in April, according to the Bureau of Labor Statistics. That represents a 4.4% decline in legal sector employment between April 2019 and April 2020.
It’s a steep fall, but significantly lower than the 14.7% unemployment rate overall.
How are law firms responding to the uncertain and declining economy? If you read the legal press, and even the mainstream press these days, it’s easy to get the impression that firms are shedding employees left and right, that doom and gloom reign. But that’s, thankfully, not entirely the case.
If we look at measures law firms have taken in response to the pandemic, we see that salary cuts are by far the most common. Of 113 large firms tracked by Above the Law and Wolters Kluwer, 75 percent had enacted salary cuts. These are typically graduated cuts, as well, with those on the top taking the largest hit, by percentage, while law firm employees making under a certain level, often $100,000 or less, take smaller reductions.
When it comes to more drastic measures, furloughs and layoffs, we see firms being much more hesitant. Only 31 percent of the tracked firms have furloughed employees, and just 21 percent have enacted layoffs--including so-called “stealth” layoffs that happen unannounced. This is a welcome departure from the reaction we saw in the Great Recession, when whole classes of associates were given the ax en masse. It seems, at least for now, that the pain is being spread more widely and firms are quite hesitant to let staff go.
We also have some early insights into how law firms are adjusting their spending during the pandemic. This data, on the right side of the chart above, comes from Thomson Reuters’ Peer Monitor and represents just a narrow moment during the pandemic—March 2020, compared to March 2019—but they also provide a glimpse into the legal industry’s initial reactions.
That data shows a small drop of three percent in full-time employee compensation in March, which is law firms’ largest expense and represents 31 percent of the spending at tracked firms. Occupancy costs, the second-highest expense, also dropped by 10 percent. That drop may be inspired by the pandemic, but it could also speak to broader trends. As March was just the beginning of the work-from-home era of the pandemic, a 10 percent decline year over year also suggests trends that were already in play and which the pandemic may only be accelerating. Finally, we see a truly large drop in spending on marketing and business development in March, as many firms paused existing programs to reassess their approach.
Looking specifically to impacts on litigation practices, the data shows initial declines but large discrepancies by firm size and even geography. In March of this year, litigation demand was flat among AmLaw 100 firms, when compared to 2019, Peer Monitor data reveals. Demand took a small dip among the Am Law Second Hundred, where litigation demand declined 3 percent. Mid-sized firms, many of whom have been claiming a larger share of the litigation market for years, saw a slight increase in litigation demand, with a 1.5 percent rise.
There are two caveats to these numbers, however. First, these are only early indicators, however, and we’ll need to wait for data from the following months to see how demand has been impacted as the crisis continues. Second, Peer Monitor data represents the largest law firms. Yet the legal industry is made of thousands of smaller firms as well.
How have smaller firms fared? We lack data on litigation demand specific to these organizations, but reporting from Clio, the cloud-based practice management software used by thousands of small and mid-sized firms, indicates that these firms have been impacted much more severely than larger firms.
According to Clio’s COVID-19 impact research, new matter creation has declined more than 40 percent from its peak in February, and more than 30 percent from its baseline rate. That decline started to reverse slightly in April, but is still significant. Further emphasizing the hurt being felt among small and mid-sized firms, 57 percent of legal professionals surveyed by Clio said they were worried not just about the success of their firm, but their very ability to make a living during the pandemic.
Just as the impacts aren’t spread evenly among law firms, they’re not felt evenly across geography. Returning to Peer Monitor data, we see a divergence in litigation demand across the California market, for example.
Law firms in Northern California saw a 3.3 percent decline in litigation demand in March 2020, compared to 2019. But the decline was more than twice as large in Southern California—7.2 percent. And while Northern California has experienced a smaller outbreak than Southern California during the pandemic, that was not the case in March, making it too early to draw any connection between the size of an outbreak and the decline in litigation demand.
When we look at the economic impacts of the pandemic, “the worst is at hand,” as Moody’s Analytics reported this week. There is virtually no question that the U.S. economy is currently in a recession, nor that the legal industry and litigation demand is facing a decline. But there is a reserved optimism in this assessment as well. If worst is at hand, better times are ahead. What those times look like remains to be seen, but smart legal professionals will begin preparing for them today.
Stay tuned for part two in this series, where we examine the pandemic’s potential long-term impacts on litigation and what legal professionals can do to prepare. Subscribe to the blog to stay up-to-date.