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Can Small Firms Survive Rising Competition in Texas?

A number of small Texas firms have closed since the start of 2019, with the lawyers scattering to other firms in the Lone Star state's massive legal market.

The Texas legal market has been changing at a rapid pace over the last 18 months, as out-of-state firms open Texas offices, big Texas firms merge with even larger firms, and lawyers shuffle among firms because opportunity calls.

Smaller firms aren't immune to losing talent in the hot lateral hiring market, and their lawyers are just as susceptible as those in BigLaw to getting calls from recruiters.

"If they can get somebody who has got a book of business, they'll go after them. They don't just rob from big firms, they go after anybody," said Bill Cobb, a recruiter in Houston at Cobb Consulting.

Still, some law firm consultants and legal recruiters suggest it's likely that recent small firm closings simply reflect the ebb and flow within the legal market and not a structural change.

"It goes on," Cobb said. "Firms start up, then split up, and start up."

Lee Albritton, a founding partner at Amicus Search Group in Austin, said that he's seen some small, established firms close recently but also suspects that other small boutiques are opening.

"Some of it is generational. The ones folding back into larger firms tend to be a little bit older, a little more established. The ones being created are by the Young Turks in practices either rate-restrained in a large firm or youthfully entrepreneurial," Albritton said.

In that sense, Albritton said, the difference between the small firms that have closed and the fresh ones in the market is more about the enthusiasm of the firm founders than anything structural.

"Young Turks are Young Turks. If it's 1991 or 2019, it really doesn't matter," he said.

Lisa Smith, a firm consultant at Fairfax Associates in Washington, D.C., said small firms are not being phased out in the Texas market, noting that big-firm spinoffs often slip into the void created when small firms close.

"It's not the end of small firms," she said.

Big-Firm Offers Lead to Small Firm Closings

Firms close for a number of reasons. Often, a pending lease renewal forces the lawyers to think about the future of the firm. The retirement of firm founders or big rainmakers can cause a similar consideration. So can the loss of a major client or the end of some big litigation. Competition within the practice niche can lead to other small firms close.

A pending lease renewal prompted the lawyers in 18-year-old Watt Thompson Frank & Carver of Houston to close the firm on January 31 and take their practices to other firms.

Joe Thompson, who was the firm's managing partner, said in an interview in January that the firm had a good run, but the partners decided it was time to "change things up." Lawyers from Watt Thompson landed at several firms in Houston including Munsch Hardt Kopf & Harr, Porter Hedges and Pierce & O'Neill.

Dick Watt, who joined Pierce & O'Neill, said in February that nothing negative broke up the firm. It was simply the fact that the partners didn't want to sign another lease in the Pennzoil building and decided to part as good friends.

Cobb said leases are a huge factor in the closing of small firms because the decision to renew forces lawyers to think about their future, like the lawyers at Watt Thompson did. "When you come within two years of a lease, the question always come up: 'Do I want to be on a joint- and-several liability lease for the next five to 10 years?'" he said.

Cobb said small firms are also subject to breakup when founders—often the only equity partners—"get crosswise" over strategy, such as whether a firm should grow. He said a split under those circumstances isn't necessarily a bad thing, because it may be best for all lawyers involved to find firms where they support the long-term strategy.

Smith, the consultant, said some small firms can't survive the retirement of a founder because the firm isn't structured for the long haul.

"The founders may hold all of the ownership. They may not be willing to bring people along," she said.

The niche practice of a boutique can even lead to small firm closings—when too many are trying to capitalize on that niche. Mark Werbner, whose firm Sayles Werbner closed earlier this year, said he hears from lawyer friends in Texas that some litigation boutiques are under pressure not only from general counsel who may have reservations about hiring a small firm for big litigation, but from a glut of litigation boutiques in the market.

"It's much more competitive than it used to be," he said.

The temptation to join a larger firm led to the February closing of Dallas-based Rose Walker after 20 years. A group of five lawyers from Rose Walker, including trial lawyer Martin Rose, moved to Frost Brown Todd's Dallas office.

Rose said in February that it made sense to move to a large full-service firm to meet the needs of firm clients. He said some large businesses prefer to be represented by a full-service firm. With the move, he said, they avoid the troublesome aspects of practicing at a small trial boutique—the need to refer out important work such as appeals, and the inability to provide advice to clients in areas in which the small firm didn't have expertise.

Likewise, litigator Richard Sayles decided earlier this year that it was time to move to a larger firm with a network of offices. The demise of 25-year-old litigation boutique Sayles Werbner came after nine of the firm's lawyers, led by Sayles, decided to open a Dallas office for Bradley Arant Boult Cummings.

Bradley also acquired a small health care boutique, Rogaliner Law Firm, at the same time. Sayles now heads Bradley's new Dallas office.

Sayles' fellow name partner, Werbner, said he was impressed with Bradley and seriously considered the firm's offer but decided to weigh a number of other offers, mostly at large firms.

"I wanted to make this next phase an exclamation mark on my career. I'm being very deliberate," Werbner said in March.

On April 8, Werbner joined Winston & Strawn as a complex commercial litigation partner in Dallas. He said he would have joined Winston & Strawn earlier, but had to resolve a client conflict first.

Small firms can also close because they need to expand and don't.

Scott Fiddler said in a February interview that he decided to move his employment practice to Jackson Walker to solve a couple problems that popped up at once. Fiddler said he had so much work last fall at Fiddler & Associates that he needed to hire two more lawyers. Then, unexpectedly, he learned that the firm would lose its office space.

But the end of a lease isn't necessarily a signal to close a firm. It can also be a reason to recommit.

The 34-lawyer Graves Dougherty Hearon & Moody moved in March to new offices on the 27th floor in Austin's Frost Tower. It's a smaller space in the same building where the firm has been based since 2004, five floors up.

The firm lost some 10 lawyers in 2018 to Austin's McGinnis Lochridge. So the partners were considering some alternatives, Graves Dougherty President John McFarland said. As it turned out, building management wanted the firm's two-floor space for another tenant, so it provided money for the firm to build out modern, efficient space.

McFarland said the opportunity to move into the new offices at a good lease rate that fits the size of the firm—with some room for growth—takes pressure off the firm and strengthens the partners' resolve to stay independent.  Graves Dougherty gets calls about potential mergers all the time, but no one within the firm is interested, he said.

"We like the place in the market where we are. We like the clients we have and have some really good young lawyers," he said.

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