Why a $2 Billion Law Firm Suddenly Collapsed

Weil, Gotshal & Manges LLP

Across the shows: 1 speaker in other episodes, 0 bullish and 1 bearish calls, past 30 days

• John Morley · Yale Law SchoolBearish

  Weil collapsed because its relative profitability fell, even though its profits kept rising.

  Morley's framework says a firm can collapse whenever its profits grow more slowly than peers', even with no meaningful debt and rising profits. Weil's profits-per-partner rank fell from about 9th in 2020 to about 20th in 2025, and the decline was starker over a longer history. Its profits still grew year over year, just more slowly than Kirkland's. He attributes this to Weil neither expanding nor shrinking. A powerful rainmaker, Mike Aiello, left in September, and that departure was the final straw. Departing partners take revenue with them, but costs such as leases, staff, pensions and bank debt fall slowly. The remaining partners then earn less, and each departure makes the next one more rational, producing a run-like spiral.

  “I specifically predicted that a firm could collapse even when it had no meaningful debts, and even when its profits were not just large but increasing. A firm can collapse basically whenever its profits are not increasing as quickly as its peers.”at 26:02

• John Morley · Yale Law SchoolBearish

  All of Weil's remaining cash, including incoming fees, will go to creditors, mainly landlords with long leases.

  During the wind-down, a few lawyers still serve clients, and the fees they bring in go to the firm. Morley says that cash, including fees over the next few months, will all be consumed by creditors. Weil has little financial debt, but it has many creditors with claims. The largest will be landlords. Monthly rent looks small against revenue, but a landlord with ten years left on a lease can claim the full remaining amount now. That claim would exceed the cash left in the firm.

  “But all of the cash, including the fees that are brought in over the next few months, all of that's going to get eaten up by creditors. ... The biggest category by far is gonna be the landlords.”at 47:27

• John Morley · Yale Law SchoolBearish

  Weil's partners will lose their large January payout, which creditors will absorb during the wind-down.

  Law firm partners are paid monthly or quarterly, but they receive a large share, around 50-60% of annual pay, in mid-January after the prior year's books close. Weil's partners worked the first ten months of the year, but they will never receive the January portion for that work, because creditors will absorb the cash. Morley says this makes the situation sad for the partners, though they are not liable for the firm's debts.

  “What this means in effect is that the partners at Weil [Gottschall] worked for ten months out of the year, and they're never gonna see the 50% of their compensation for that period that would have been paid to them in January. That's all gonna get eaten up by creditors.”at 48:38

• John Morley · Yale Law SchoolBearish

  Weil's collapse was a confidence-driven run, worsened by unfavorable economics and toxic governance after Nie's departure.

  Morley says Weil's problems combined poor economics with what was reportedly a toxic governance culture. When the news broke that Ramona Nie would not chair the firm, and that she may have known months earlier before disclosing it, he thought whatever faith remained in management would be gone. He describes a law firm collapse as a bank run driven by a crisis of confidence. He had seen the firm in trouble since mid-summer, but this was when he judged the collapse inevitable.

  “it had by all accounts a pretty toxic governance culture. ... when that news about her came out, I thought whatever faith was left in the management of this firm is going to be gone.”at 51:07

Slater and Gordon

• John Morley · Yale Law SchoolNeutral

  Investor ownership let Slater and Gordon wipe out equity and keep operating, which a partnership could not do.

  Slater and Gordon went public in Australia after rule changes, then bought firms in Australia and the UK and acquired Quindell, a fraudulent business. When the write-down exposed the overpayment, it went to its lenders for a workout. They wiped out equity, converted junior debt to equity, split the business between Australia and the UK, and kept operating. Morley attributes this to the fact that the lawyers were not owners. Their pay did not fall with profitability and they faced no liability, so they kept working. Investors can sell their shares but cannot take back their share of the firm's assets, so the money stayed inside the firm. A partnership cannot do this, because equity holders who are wiped out can walk away to another firm, as Weil's partners could.

  “So Slater and Gordon was able to say to its equity holders, you're wiped out. Go away. And they just did, but the money stayed inside the firm.”at 45:37

Kirkland & Ellis LLP

• John Morley · Yale Law SchoolNeutral

  Kirkland's announced $500M AI investment is modest against its revenue, and its AI spending figure is likely inflated.

  Kirkland has announced a $500M AI investment spread over five years. Morley notes Kirkland's revenue is roughly $10B a year, so at its growth rate the firm would earn around $80B over those five years. Against that base the spend is small, and partners could absorb it by giving up about 1% of compensation. Pacing it over five years also lets Kirkland match the expense to the revenue the technology brings in. He adds that nobody tracks what counts as AI investment, and the firm has an incentive to label much of its spending as AI, so the headline figure may overstate the commitment.

  “Who's keeping track? What is the AI investment? I don't really know. They have an incentive to expansively characterize a lot of what they do as an AI investment. So the bottom line is it's a relatively modest investment”at 56:53

Professional services & law

• John Morley · Yale Law School

  Worker ownership suits law firms because lawyers' contributions are easy to measure, unlike at GM.

  Morley draws on Henry Hansmann's argument that the efficiency of worker ownership depends on how easily workers' contributions can be measured. Imagine GM owned by its workers: there would be constant conflict between executives and factory staff over relative pay, because contributions are hard to compare. In a law firm, lawyers bill by the hour and their clients can be traced to them, so productivity is easy to measure. Even earlier, simple seniority-based pay worked because lawyers of the same level were similar enough. That makes the partnership ownership model more tenable in law than in most other businesses.

  “His argument was that in a law firm, the contributions of the workers are relatively easy to measure and perceive, which reduces the risk of conflict among the workers.”at 7:35

• John Morley · Yale Law School

  Eat-what-you-kill pay makes partners keep client relationships personal, undermining the firm's own interests.

  Management wants clients to be loyal to the firm, not to individual partners. Partners want the relationship to be personal so they can leave with it, and under eat-what-you-kill pay they get credit for bringing in business, so they have an incentive to keep it unique to themselves. Morley says firms undermine their own objectives by adopting this pay system. Paying partners for tying clients to themselves encourages them to do exactly that. Yet if firms do not pay for origination, partners will wait for others to generate business. This is a trade-off between two variables pulling in opposite directions.

  “The management wants to institutionalize all the clients and make sure that the client's loyalty is to the firm, not the partner. The partner wants to keep the clients individual to the partner so that the partner can leave.”at 12:08

• John Morley · Yale Law School

  Partner profit payouts from a failing firm can be clawed back, so departing partners face liability.

  Bankruptcy law voids giveaways made while a firm is insolvent, under the fraudulent transfer doctrine. Employee wages are contractual debts that must be paid. Partners, however, are owners, and their profit share is a discretionary distribution the firm can withhold, as Berkshire Hathaway can withhold its dividend. So when a firm goes under, creditors can claw back distributions paid to partners during the insolvency window. Courts have treated partners as owners, not employees, so the partners cannot argue those payments were wages. This makes a collapsing firm's partners financially exposed, which in turn raises the incentive to leave early and adds to the partner run.

  “And here's the catch. A distribution on profits is a giveaway under that doctrine, because it doesn't actually have to be paid.”at 16:41

• John Morley · Yale Law School

  Big law is sorting into giants and small boutiques, leaving mid-sized firms like Weil squeezed.

  Morley argues big law is following the hollowing-out of the middle seen in other industries, with firms gravitating toward either very large or very small scale. Weil was uncomfortably in the middle, and that was a deliberate strategic choice. Clients increasingly want a large platform with deep specialization, which only giants like Kirkland can offer at scale. Small firms like Wachtell and Kravath still do well with premium public-company M&A work, but they face profound poaching pressure, and Weil lacked the strength to withstand it. Morley says Weil was not crazy to pursue this strategy, but was crazy to hang on to it too long. He also cites Cadwalader, which had to merge with the less prestigious Hogan Lovells after failing to grow.

  “Big law is in the midst of this sorting that actually resembles the sorting we've seen in many other industries, where the middle is getting hollowed out and you're seeing this gravitation towards either becoming humongous or becoming really small. And Weil was uncomfortably in the middle.”at 26:57

• John Morley · Yale Law School

  US Rule 5.6 bans lawyer non-competes, unlike the UK, so partners can take clients when they leave.

  Rule 5.6 of the ABA model rules of professional conduct, adopted in some form by nearly every state, prohibits lawyers from signing agreements that restrict their right to practise. That includes non-competes. Other countries do not have this rule. In the UK, lawyers can sign non-competes, and firms generally require them and frequently enforce them. Other professions, such as accounting, engineering and management consulting, can also impose these restrictions. Because of Rule 5.6, a US firm cannot stop a rainmaker from leaving with clients, which makes the partnership model more fragile.

  “The answer is rule 5.6 of the model rules of professional conduct, which prohibit a lawyer from signing any agreement that would restrict their right to practice. ... In The United Kingdom, lawyers are free to sign non compete agreements.”at 29:10

• John Morley · Yale Law School

  Outside investors can own law firms via MSOs with equity forfeiture, but whether that works is untested.

  Non-lawyer ownership rules bar outside investors from owning law firms directly. Venture- and investor-backed businesses get around this by splitting the business in two. The law firm, owned only by lawyers, provides legal advice. A managed service organization, owned by investors and lawyers, handles support staff, finance, leases and technology, and the law firm pays it fees. Non-compete bans under Rule 5.6 mean a private equity buyer cannot stop partners from leaving after being bought out. The workaround is to give partners MSO equity that they forfeit if they leave, which is not a restriction on their right to practise. Morley says this works fairly well, but whether it works well enough will be a central question of the new private equity boom in law firms.

  “So the best solution you have is to give them equity in the MSO and require them to forfeit that if they leave... It works pretty well, but whether it works well enough is gonna be one of the central questions of the new private equity boom in law firms.”at 30:25

• John Morley · Yale Law School

  Law partners' shares vanish on retirement, so older partners underinvest in the firm's long-term future.

  Shareholders in permanent-equity companies like GM or Microsoft are willing to fund investment that pays off a decade out, because their shares carry a price reflecting the indefinite future. Law firm partner shares are extinguished on retirement, with no buyback. A 61-year-old partner has little reason to invest in the firm's future, while a 31-year-old partner has every reason to. Morley calls this generational conflict, and it extends to the people who stay versus those who might leave. Lateral movement has intensified the conflict, and it feeds into compensation. If partners can leave at any time, the firm can pay them only their market value. Lockstep pay underpays productive lawyers, who then leave, which pushes firms toward eat-what-you-kill systems.

  “When I retire from a law firm, whether that's Cravath or Covington and Burling, my shares simply disappear. They're extinguished. Nobody buys them back from me.”at 33:47

• John Morley · Yale Law School

  Law firm collapses will keep happening; dozens have failed and more will follow.

  Morley says the Weil collapse is not isolated. He studied three dozen firms in his paper, and since then more have failed, including Bingham, McCutcheon, Stroock and Stroock and Levant. He treats law firm collapse as a recurring pattern caused by the partnership model's fragility, not a one-off, and expects more to follow.

  “this has happened to dozens of firms. In my paper, I studied three dozen firms. ... In the years since I published the paper, there's been more. ... There will be more. I promise you there will be more.”at 57:54

Enterprise AI adoption & AI software

• John Morley · Yale Law School

  Law firms will rent AI from third-party vendors rather than build it, though AI will still transform legal practice.

  Morley argues that partners today won't fund large technology bets whose payoff goes to the partners of five years from now, because partner groups turn over. So although AI will transform the practice of law, very little AI technology will be developed by law firms. Firms make small investments, such as branding, associate training and office renovation, and he predicts AI will follow that pattern. He uses the analogy that firms renovate office space rather than buy it, so they will rent AI and pay licensing fees to third-party providers rather than buy or develop it.

  “although AI will transform the practice of law, very little AI technology will be developed by law firms... They won't buy or develop AI. They will rent it. They'll pay licensing fees to third party providers.”at 54:22