"Almost every law firm that's collapsed has done so at a moment when it was still formally profitable." Dewey & LeBoeuf, Heller Ehrman, Brobeck, Bingham McCutchen, Sedgwick: none ran out of money the way an ordinary business does. They ran out of partners. John Morley's explanation is simple and unsettling: "Law firms are inherently structurally fragile because they're owned by their workers," and the ethics rules make that fragility nearly impossible to engineer away.
In this TalksOnLaw interview, recorded in 2023, Joel Cohen speaks with John Morley, the Augustus E. Lines Professor of Law at Yale Law School and a leading scholar of organizational law, about why large law firms implode, the anatomy of a collapse, and what partners and firm leaders can do before and after the run begins.
Why Worker Ownership Is Fragile
Morley explains the difference between economic and formal profit: a firm whose partners can earn more elsewhere is losing money in the only sense that matters, even when its income statement looks fine. Because partners are both owners and the firm's only real asset, Model Rule 5.6's ban on non-competes means nothing stops them from leaving, and each departure lowers the earnings of everyone who stays. He explains why firms cannot build a war chest (the partner who retires next year will not vote to save for the one who arrives next year), why Rule 5.4 bars outside capital that could absorb losses, and how the modern toolkit of guaranteed compensation, non-equity tiers, and profits-per-equity-partner arithmetic hides the same dynamics. Dewey's fixed-pay guarantees to its rainmakers, he argues, were the accelerant, not the cause.
Anatomy of a Collapse
He walks through the spiral: a few lateral departures, a dip in profits, more departures, bank covenants, and a point of no return at which the rational partner leaves first. "What you have in the end is a spiraling cycle of departures that looks a lot like a run on the bank." Then the bankruptcy lawyers arrive with three liabilities every partner should understand before signing a partnership agreement: unfinished-business claims, clawback of pre-collapse distributions, and preference actions.
What Firms Can Do
Morley discusses the mitigations that work (waiving unfinished-business claims in the partnership agreement, dissolving before rather than after the exodus, avoiding guaranteed pay) and the ones the rules forbid. He closes with Slater & Gordon, the only large firm ever to go through a bankruptcy and survive, which was possible only because the firm was owned by investors in Australia and the U.K. rather than by its lawyers.
What to Know Now
The pattern has repeated since this recording. Stroock & Stroock & Lavan, a 147-year-old New York firm, dissolved in October 2023 after a failed merger and a wave of partner departures, and Burns & Levinson wound down in 2024. The 2025–26 merger wave (Troutman Pepper Locke, Herbert Smith Freehills Kramer, McDermott Will & Schulte, Ashurst Perkins Coie, and Hogan Lovells' July 2026 combination with Cadwalader after thirty-three Cadwalader partners departed) shows the other exit from fragility. The ownership question has moved too: Arizona's alternative business structure program now licenses KPMG Law US, the first Big Four-owned U.S. law firm, and private equity has entered through management-services companies, including Rafi's $125 million raise and Morgan & Morgan's stake discussions, testing the limits of Rule 5.4. The 2025 executive orders targeting Perkins Coie, Jenner & Block, WilmerHale, and Susman Godfrey, and the agreements other firms struck to avoid them, added a new kind of shock to the model Morley describes; the firms that sued won in the district courts, and the appeals were argued in the D.C. Circuit in May 2026. On unfinished-business claims, the highest courts of New York (In re Thelen, 2014) and California (Heller Ehrman v. Davis Wright Tremaine, 2018) have held that a dissolved firm has no claim to profits on hourly matters that departing partners continue elsewhere, which sharply limits that exposure for most big-firm work. Professor Morley and Joel Cohen now discuss the business of law weekly on the New Law Order podcast.
