The epic collapse of U.S. law firm Weil Gotshal may happen in Canada, again

Adam Dodek is a law professor at the University of Ottawa and the author of Heenan Blaikie: The Making and Unmaking of a Great Canadian Law Firm (UBC Press, 2024).

The sudden collapse of the venerable U.S. law firm Weil, Gotshal & Manges has sent shock waves through the American legal community that are reverberating here in Canada.

Weil Gotshal’s epic failure is being attributed to a raft of departures of key lawyers, a botched succession and failed merger discussions.

These headlines are likely triggering bad memories for many.

At its height in 2012, Heenan Blaikie was the seventh-largest law firm in Canada, boasting 560 lawyers in offices across Canada and in Paris. It had been home to former prime ministers Pierre Trudeau and Jean Chrétien and to future and former Supreme Court justices, ambassadors and Stanley Cup winners. However, within two years, Heenan Blaikie was no more.

From the archives: The inside story of Heenan Blaikie’s frantic final days

Individual Heenan Blaikie partners found themselves out of pocket for anywhere from $150,000 to more than $800,000. That’s because North American law firms are partnerships owned by lawyers who invest their capital in their firms. As owners, they get paid last, after all the firm’s debts have been satisfied.

The scope of Weil Gotshal’s liabilities have not been reported. Like Heenan Blaikie, it did not go bankrupt. Both firms were profitable when they decided to shutter. They did so in part because a law firm’s fortunes can change incredibly quickly.

Their implosion exposes the multiple weaknesses of the law firm partnership model.

Partners owe a fiduciary duty to each other to act in the best interest of the partnership, not in their own self-interest. That is hard, if not impossible, with several hundred partners.

Weil Gotshal has a reported 290 partners spread over 16 offices in seven countries. Heenan Blaikie had a similar number of partners located in nine Canadian cities plus Paris. Law firms like these are not real “partnerships” in which partners know, let alone trust, each other.

From the archives: Death of a law firm: Behind the collapse of Heenan Blaikie

At Weil Gotshal, the biggest rainmaker was described by some as the firm’s “most valuable partner.” His departure may have mortally wounded the firm. Large law firms both benefit and suffer from a star culture in which individual lawyers control clients that generate significant revenue for the firm. The clients’ relationships are with the lawyer, not the firm. This gives the star incredible power, not only to demand a huge compensation package for themselves and members of their team, but to dictate certain actions within the firm on threat of leaving for a competitor.

Law firm partnerships are fragile structures. Law firms have virtually no assets to realize upon. In practice, their assets are their lawyers who generate revenue. They can walk out the door at any time, and the firms have very little in the way of flexibility to deal with such losses.

As partnerships, law firms must distribute all their profits each year, which means they cannot create a reserve fund to smooth over revenue across uneven years or deal with departures or other contingencies.

The result is that each year a law firm starts with zero. And law firms cannot create R&D funds to invest in the development of new products or processes over the long term.

In practice, there is very little pressure on law firms in Canada to innovate.

Lawyers in Canada benefit from a double monopoly. They enjoy a monopoly over the provision of legal services and a monopoly over regulation through self-regulation. Not surprisingly, the lawyers who regulate the profession have not been particularly interested in fostering competition. They have also shown a general disinterest in regulating large law firms. As a result, large law firms are essentially self-regulating and protected from competition by nonlawyers.

Lawyers love to talk about innovation, but precious little innovation has emerged from within the legal industry. The industry needs more competition to help foster innovation.

Law firms should be able to operate as businesses. They should be able to incorporate, which would enable them to create research and development units, set up reserve funds and decide how to reinvest profits. Nonlawyers should be able to own law firms, as is the case in the United Kingdom and Australia. Experience shows that external investment drives both competition and innovation.

Without such changes, we are unlikely to see significant innovation emerge from within the Canadian legal industry that would benefit both the business community and the Canadian public. And what happened at Weil Gotshal may happen in Canada − again.