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Detroit Firm Leaders Don't Fear Being Driven off the Road
The American Lawyer
November 14, 2008
The U.S. auto industry is by nearly all measures in dire straits.
General Motors is reported to be considering a Chapter 11 filing if an economic aid package isn't approved by year's end. President-elect Barack Obama made the industry's woes a priority on Wednesday when he named Georgetown University law professor Daniel Tarullo to head his nascent administration's auto industry transition team. Car dealers are also having a tough time staying in business and federal and state legislators have passed legislation designed to increase the production and use of fuel-efficient hybrid and electric-powered vehicles.
What does this mean for the law firms dependent on Detroit's business? Cars and trucks can seek out alternative fuel sources, but most firms still run on billables.
We reached out to the heads of eight Detroit-area law firms and heard back from several humbled yet hopeful leaders. (All the firms mentioned in this story solely represent management; Detroit firms must choose which side to represent, there is no crossover.)
"The big risk to all of us is the threat of this massive consolidation and that when all the chairs are [filled], who will be left standing," says Michael Hartmann, CEO of Detroit's Miller, Canfield, Paddock and Stone. "But in the interim all this turmoil creates a lot of legal work."
Miller Canfield, Hartmann says, handles troubled supply and labor work for Ford and discovery work for Chrysler; it also represents several large auto suppliers as well as captive financier Ford Motor Credit. While the firm doesn't represent GM, Hartmann says that current economic conditions have clients pushing back.
"Although no one wants to admit it, I think we're all getting price pressure from our clients," he says. "Everyone is short of money right now. But at least we're not seeing the phenomena of work drying up or a big client saying they're not paying or slowing payments by 30, 60, or 90 days."
Through the middle of November, Hartmann says, the firm's collection rate has held steady. But price pressure is being felt everywhere as the economy de-leverages. And the real worry is what the longterm fallout of the current situation will mean.
"In the short run all of these dislocations mean there are more deals out there for folks buying and selling certain divisions," Hartmann says. "Longterm, the economy is going to be smaller and poorer, and there's probably not a firm in Detroit that doesn't have a significant investment in the automotive industry."
Even a national firm like Foley & Lardner, which has one of the largest practices representing tier-one auto suppliers, is seeing some clients get squeezed.
"All of this will certainly have an impact [on us]," says Foley automotive practice co-chair John Trentacosta. "A GM bankruptcy filing could cause more headaches than any other bankruptcy in the history of our country." Trentacosta recently told the Detroit Free Press that if GM collapsed it would have disastrous implications for auto suppliers.
RIDING THE ROLLERCOASTER
The auto industry itself is no stranger to precipitous downturns.
Dickinson Wright chairman Dennis Archer, a two-term Motor City mayor and former president of the American Bar Association, says some of his firm's auto supplier clients are hurting because of reductions in certain car and truck lines, particularly gas-guzzling SUVs. The firm counts both Chrysler and Ford as clients.
John Hern Jr., CEO of 118-year-old Detroit firm Clark Hill, says that during periodic downturns his firm focuses on expense management of everything from paper clips to staffing client matters. (Clark Hill does commercial and asbestos litigation work for Chrysler and represents several auto suppliers.)
"While the recent headlines might be viewed by the nation as something new, for us it has really been going on for the past several years," Hern says. "So right now we're just trying to stay the course."
Until last week, Miller Canfield's Hartmann says, the buzz in boardrooms throughout Detroit was about GM and Chrysler's merger talks. It was an especially hot topic at Miller Canfield and Clark Hill, where Chrysler is an important client.
"All the big [Detroit] firms that I know of have relationships with more than one OEM," says Hartmann. (As original equipment manufacturers, OEM is industry parlance for the Big Three.) "So we were sitting here trying to figure out how that would shake out, but by the end of the week it was off the table." (Private equity firm Cerberus Capital Management, which owns Chrysler, has reportedly approached Hyundai and Nissan about a possible sale.)
Talk now has shifted to rescuing the entire industry, and that has some firms considering what it means to be too Detroit-centric.
Dykema Gossett, which besides the Big Three also represents foreign manufacturers like Nissan and Toyota, says through a spokesperson that its automotive practice has been busy with restructuring work and with helping clients sell off non-core assets.
Dykema chairman and CEO Rex Schlaybaugh Jr. told The National Law Journal's Karen Sloan in October that clients have been aggressively shopping for cheaper rates.
"That trend becomes accelerated in tough economic times," Schlaybaugh told the NLJ. "Purchasers of legal services have found that there is tremendous value in what I call 'Main Street' firms as compared to 'Wall Street' firms." (Schlaybaugh declined to comment directly to The Am Law Daily, citing client concerns.)
As such, the firm has looked to diversify, acquiring 53 lawyers from banking boutique Schwartz Cooper in July to bolster its presence in Chicago.
Still, many within the Motor City legal community believe there's only so much a firm with Detroit roots can do.
"If you live and work in this community, you can't help but be tied to [the auto industry]," says Clark Hill's Hern. Adds Miller Canfield's Hartmann: "It's hard to find someone who isn't under some kind of stress these days. The big question will be what this industry looks like when it's been restructured."
HOPE FROM UNCLE SAM
As an old Democratic hand, Dickinson Wright's Archer isn't one to stray far from partisan politics.
"The auto industry has been crying out for understanding for some time but has been ignored by President Bush, who didn't bother meeting with any of the Big Three for any substantive discussions until his eighth year in office," Archer says. "Now we've got to get this proposed $50 billion bailout approved in a lame-duck session of Congress next week."
Archer says the Big Three account for one out of every seven or eight jobs in the U.S., so if one automaker goes under, the effects will be felt far beyond Detroit's law firms.
"I think Congress will act because you've got to remember that the auto industry has never defaulted on a loan," says Archer, noting that legendary Chrysler chairman Lee Iacocca avoided a bankruptcy filing in 1980 by securing a $1.2 billion loan from the federal government that was paid off with interest within three years. "America has a short memory. If GM had not sold their cars and trucks at a loss after 9/11 -- remember they did many of those deals with zero financing -- other OEMs and major retailers wouldn't have followed their lead and helped us avoid a deeper recession."
Hartmann agrees, echoing Archer's point.
"It's a challenging time to run any business in America," says the Detroit native. "I worry more about Michigan than I worry about the narrow legal market. [Lawyers] will be just fine."
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
