By Sarah Larson
When Congress created the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Paycheck Protection Program was a cornerstone of the financial relief offered to small business owners.
At the time, businesses such as restaurants, hotels, retailers and gyms were forced to furlough or lay off workers in droves. In response, the federal government authorized one of the most far-reaching economic assistance packages in United States history – $2.2 trillion to help individuals and small businesses stay afloat during the coronavirus pandemic. Of that, $349 billion was allotted for forgivable loans for small businesses through the Paycheck Protection Program. Another $310 billion was authorized in late April, bringing the total amount of PPP financing available to $660 billion.
The PPP was “designed to get cash in the hands of suffering small businesses quickly, with less red tape and fewer guardrails than the SBA’s existing loan programs. It is designed to incentivize business owners to keep employees on payroll by offering them loan forgiveness,” the Washington Post noted at the program’s launch.
But in the months since the funds were distributed, the public narrative around the PPP has shifted to criticism of some businesses that received the loans.
Too ‘Rich’ for Public Money?
Media coverage of businesses that received PPP loans started out somewhat positive. Many celebrated the opportunities for independent retail stores and local restaurants to get the funds they needed to survive the shocking and precipitous drop off in revenue brought about by the stay-at-home orders put in place to slow the pandemic.
There was far less celebration, however, of larger companies and perceived “rich” people obtaining the loans, even if it meant saving a large number of jobs.
After weeks of public pressure, the Trump administration on July 6 published the names, addresses and other data on PPP loans of $150,000 or more. Analyses of the data revealed that loans went to many businesses that the public felt should not have received the money.
Coverage of the millions of dollars in loans that went to the Los Angeles Lakers, Ruth’s Chris Steak House and Shake Shack Inc. was scathing. Facing a growing backlash, many large companies returned the money, including Shake Shack, which gave back its $10 million loan.
In Philadelphia, The Inquirer reported that dozens of private and charter schools “received millions of dollars from the PPP, including exclusive private schools on the Main Line like the all-girls Agnes Irwin and Baldwin schools, and the George School in Newtown, where tuition for boarding students tops $63,000, to the Independence Mission Schools, a network of Catholic schools in Philadelphia that laid off 180 teachers and staff this spring.”
Amidst the scrutiny, a piece on Vox.com explored the purpose of the program and the public’s reaction to the way in which it was carried out.
“The controversy surrounding the PPP, which supports businesses with 500 employees or fewer, has a lot to do with a disconnect between the program’s design and how Americans think about business,” wrote Emily Stewart, in the piece entitled The PPP worked how it was supposed to. That’s the problem.
“The real goal of the PPP was to keep American workers on payroll, not to simply keep small businesses going. And so the majority of the money was disbursed to businesses with more employees, rather than to tiny ones with small staffs. That’s why a program widely perceived as being meant to boost the United States’ most vulnerable small businesses ended up prioritizing businesses that aren’t actually that small.”
Law Firms Hit With Criticism
Once the news stories criticizing the PPP began flooding out, law firms found themselves to be a particular target. Several news outlets reported that restaurants, car-dealers and lawyers topped the list of businesses that received the most PPP funds, nationwide.
In the Philadelphia area, The Inquirer reported that law firms were the region’s biggest recipients of PPP cash. The paper noted that more than 2,100 of the PPP loans in the region went to law offices in Philadelphia and surrounding Pennsylvania and South Jersey counties. Of the total, 426 area law firms borrowed more than $150,000 each, totaling at least $228 million in loans to the legal industry. The area’s restaurant industry was second, with about 2,600 restaurants borrowing $220 million across the eight-county region.
Michael Snyder, retired judge and chancellor of the Philadelphia Bar Association, told the Inquirer it made sense that law firms received PPP funding, because the legal profession “is a key driver of the local economy.”
“We’re no longer a manufacturing center. Law, medicine, education are the professions that are the largest employers in the region,” Snyder said in the story. “It’s to all our benefit to make sure the entities that employ them stay healthy.”
The public may have raised eyebrows when lawyers received PPP funds, but in most cases, highly compensated senior partners weren’t the ones benefitting from the loan. Today’s law firms need many more people than just partners to survive and thrive, including junior associate attorneys and paralegals, administrators, assistants, librarians, and more. In addition, law firms also support an entire ecosystem of small businesses in the professional services economy – title insurance, real estate, courier services, reporting services, tech companies, marketing agencies, etc. A law firm’s ability to pay its bills impacts a wide range of jobs in each of those niche industries.
Like employees of many knowledge-based industries, most law firm employees can work from home. But that hasn’t been the key issue during the pandemic. The key issue has been cash flow. While many area law firms were able to keep their legal staffers working remotely during the shutdown, many firms’ clients stopped payments for several months due to economic uncertainty. Many law firms were unsure whether they would receive payments for their work in a timely enough manner to be able to pay their own people, and indeed, many did not.
PPP loans helped law firms pay their employees and their vendor partners when little to no revenue was coming in. This allowed them to sustain their businesses and keep people employed, and in turn, protected an important part of the local economy.
Law Firm Competitors – And Clients – Are Watching, Too
Law firm leaders faced a particularly tricky set of circumstances when weighing whether to participate in the Paycheck Protection Program. While the public and the media certainly scrutinized the PPP, law firms knew that both their competitors and their clients were watching closely, as well.
An analysis by ALM found that thousands of law firms nationwide received PPP funds, including 46 Am Law 200 firms and 1 Am Law 100 firm, Boies Schiller. In a Law.com Pro Executive Briefing published July 17, ALM Editor in Chief Gina Passerella and Patrick Fuller, Vice President, Intelligence, analyzed various aspects of those loans. They found that 42 Am Law 200 law firms obtained loans of $5 to $10 million and five firms received loans valued from $2 to $5 million.
The Executive Briefing also shared insight from law firm leaders about the factors that went into decisions regarding PPP loans:
In conversations with several law firm leaders over the past few weeks, it’s clear deciding whether to take the loan wasn’t always easy. Most said their accountants recommended they take it–free money after all and for the noble purpose of saving jobs. Some went through the loan approval process but ultimately didn’t take or returned the funds. Others simply decided it wasn’t for them.
One of the reasons some didn’t go for the loans was the potential PR ramifications and scrutiny from clients. “Do we want to take millions in funds and also show millions in per-partner profits at the end of the year,” several firm leaders recounted. We have heard from in-house counsel that it would matter to them how their outside firms used the funds, with the hope being it wouldn’t go to pay partners. They also take into consideration the financial health of firms when selecting outside counsel.
The other area where some firms may face additional scrutiny is when they accepted loans but still conducted layoffs or salary cuts. All in all, the PEP figures for the 2021 Am Law 200 will be telling.
The Uncertain Road Forward
It is now mid-July, and the coronavirus pandemic in the United States shows no signs of waning. As the pandemic drags on, and continues to drag down the economy, law firms that received stimulus funds are running out of money.
“The problem is that [PPP] is a short-term fix,” Paul Hastings partner Christopher Austin, who advises on PPP applications, told Law.com in a story entitled With PPP Money Dwindling and Cases Rising, ‘Substantial Uncertainty’ Remains for Firms. “Anytime you can get funds in the door in a time of uncertainty, it gives the people more opportunities to get people employed. Whether or not that will last will depend on how people are doing now.”
If the nation’s largest banks are an indicator of the road ahead, it doesn’t look promising. On July 14, The New York Times reported that JPMorgan Chase, Citigroup and Wells Fargo collectively put aside $25 billion in the second quarter “to cover potential losses on loans, signaling that they don’t expect consumers and corporations to be able to pay their debts in the coming months as the pandemic continues to gut employment and commerce.”
Additionally, banks are at risk for class action lawsuits related to the PPP loan. Lawsuits have been filed against JP Morgan Chase, Wells Fargo, Bank of America, and US Bank alleging unfair practices in their processing of PPP loans. Another class action lawsuit has been filed against Bank of America, Wells Fargo, Truist and other banks, alleging that they failed to pay accountants for their work related to preparation and filing of PPP applications.
As they are bound to do by journalistic ethics, the media will continue to pay close attention to how taxpayer funds are being used for Paycheck Protection Program. As Congress urgently debates and proposes the next round of coronavirus relief, it will likely remain a controversial government program. Any business owner or law firm leader asked about a PPP loan must be transparent and clear about how the funds were used to help their employees survive this continuing crisis. We will keep a close eye on those discussions, the media coverage on PPP loans, and the public perception of the program. Stay tuned.
