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Pirates in the Navy: A Retrospective on Law Firm Innovation (Pt. II)

Wed, 10/28/2015 - 11:44 -- admin25

by Billie J. Ellis and William T. Ellis

Creating an Army of Elite Lawyers

The end of the 19th century saw a capitalist revolution in progress. Never was a class of Americans so wealthy or powerful as the giant capitalists of this time. Cornelius Vanderbilt once said, “Why do I care about the law? Ain’t I got the power?” The notorious statement was only half hyperbole. His power, though extensive, was fueled by a new kind of law firm. Small firms lacked the resources to serve capitalist titans like Vanderbilt and Morgan. The complex holding company and trusts of the latter part of the 19th century required a deep understanding, and even re-conceptualization, of tax and corporate law. The transactional lawyer came to have an ever-increasing role over the litigator.

From 1890 to 1900, virtually every major city showed an increase in the growth of the large firm. Yet despite this new growth, tradition dictated who was hired, how they were hired, and how they were trained. In the early 1900s, upon passing their boards, most young lawyers did not have a job waiting for them. They would often simply show up at a law firm and ask for work. The more fortunate among them was the son of a client or blessed with another important social connection. Many of them, hailing from the leisured upper class, lacked a hearty work ethic. Once hired, they usually did not receive an income until they proved themselves useful.

A lawyer named Paul Cravath set out to change this system. He felt clients needed a new kind of lawyer for the new times. He wanted superior training and knowledge to be the hallmarks of his new lawyers. To Cravath’s partners and competitors, changing the system seemed an odd, useless, and expensive undertaking. Corporate lawyers were well paid and riding high. No economic imperative, the thinking went, demanded that successful firms train, attend to, or even initially pay their young lawyers. But Cravath recognized that legal work was becoming increasingly complex, demanding, and high stakes. In response to this emerging trend, he developed what became known as the Cravath System.

The new system addressed two primary questions: How to get the best legal talent, and how to maximize that talent once acquired? His answer began with the premise that a strong emphasis on academic pedigree, intelligence, and work ethic creates the foundation for an excellent lawyer. He focused on academic meritocracy as opposed to social connections or charming personalities. He wanted to ensure that every new hire possessed this proper foundation before they joined the firm. Further, he believed that talent and work ethic should be honed, mentored, and rewarded. In this way, his firm would forever retain a loyal, dedicated army of elite lawyers.

He paid well over market to attract the best talent out of the law schools. Competitors wondered why he was willing to pay top dollar for brand new, wholly inexperienced lawyers. Cravath saw the value in potential. His competitors viewed the hiring of newly minted lawyers as an occasionally unavoidable nuisance; Cravath saw it as a rich opportunity. A clean slate meant better molding. It meant they could all be trained in the same way, the proper way, and thereby also better assimilated into a strong firm culture.

The strategy worked. Cravath’s willingness to ignore the status quo laid the predicate not only for his firm’s survival for another 100 years, but to its evolution as one of the leading firms in the world. The Cravath System, once revolutionary, has now become a new status quo. Even in the 21st century, large firms tend to run on some variation of the Cravath model.

 

Band of Misfits

In the eyes of many, law firms in the mid-20th century operated in a kind of professional golden age. Lawyers were respected, the ABA was making inroads as a powerful organization, and law firms were growing in size and profits at a measured and pleasant pace. Lawyers faced plentiful job opportunities and once hired, promotion to partnership was virtually assured. Lawyers were considered learned gentlemen. Yet this portrait ignores the harsh reality of discrimination and bigotry that made working in law firms a privilege of a very select few. The top established firms excluded Jews, Catholics, racial minorities, women, and anyone from a less than top tier law school.

In 1948, a third year law student named Joseph Flom could not find a job, despite excellent grades from Harvard Law School. In the estimation of his potential employers, he lacked family connections, the proper background, and failed to carry himself in the right way. Rough around the edges, he was not considered gentlemanly. Most damning, he was Jewish.

But a small new firm expressed great interest in the young man. In fact, it wanted the 24-year-old so badly that during the firm’s first year, when money was tight, the partners paid him and took no draw for themselves. The hiring of Flom turned out to be a stupendous decision. He quickly became a pivotal firm leader. The new firm learned a valuable lesson: hire differently, much differently. Status quo firms were looking for the right combination of ability, background, and personality. Under Flom’s leadership, the firm only concerned itself with ability. It hired Jews and Catholics, Democrats and Republicans, and people with less than sterling upbringings. It hired people from non-Ivy League law schools. In 1959, it hired a female lawyer; a revolutionary decision for the time. The firm took pride in valuing lawyers other firms did not.

Guided by this non-elitist mentality, the firm’s democratization of hiring developed alongside a democratization of their legal services. This fledging firm not only faced the challenge of competing with the established firms for legal talent, it also needed to attract top tier legal work despite its status as a non-top tier firm. The solution was to pro-actively and creatively help clients solve business problems, rather than merely give legal advice, as other firms confined themselves to doing. This approach is considered an ideal today, but at the time, law firms felt this kind of involvement with their clients’ business superseded their narrow role and expertise.

Included in this strategy was a willingness to provide new forms of legal services other firms were not willing to offer, a practice best exemplified in the realm of hostile corporate take-overs. Most corporate lawyers opposed take-overs. Wall Street firms did not favor legal work associated with them, viewing the whole business as un-gentlemanly and unsavory. But Flom was ideologically agnostic about the practice, focusing instead on simply helping his clients. He also saw rich opportunity in this new form of legal practice, predicting their increased commonality and importance. His firm began to handle more and more of them. When takeovers became standard practice, as he predicted, the larger firms, now eager to handle them but lacking the expertise, began to outsource the work to Flom. This brought the firm an avalanche of business and established it as the lone expert in a very lucrative field. Today, this firm is known as Skadden Arps, and it’s grown into one of the most powerful and profitable firms of the country.

This is the second in a 3-part series. Part III will be in the December issue.

Billie J. Ellis is a partner at Locke Lord and can be reached at bjellis@lockelord.com. William T. Ellis, of The Law Office of William T. Ellis, can be reached at will@willellislaw.com.

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