After a banner year, much of the U.S. legal industry is staring at an uncomfortable question: how long can the momentum last?
Large and mid-sized law firms closed 2025 with enviable numbers. Client demand was strong, billing rates climbed sharply, and profits swelled at double-digit rates. Transactional teams were busy. Litigators stayed occupied. For once, even traditionally countercyclical practices joined the upswing.
But beneath the glow of record earnings, warning lights are beginning to flash.
A new industry assessment suggests that firms may be drifting toward a familiar trap — expanding costs just as clients begin tightening their wallets. History offers a cautionary tale. Law firms, the report notes, tend to scale up rapidly in good times, only to find themselves exposed when economic conditions shift.
Expenses are already climbing at an unusual pace. Technology spending jumped by nearly 10% last year, while lawyer compensation rose close to 8%. Those increases were manageable while billing rates surged and demand stayed buoyant. The risk is what happens next.
Clients, particularly corporate legal departments, are showing signs of fatigue when it comes to paying ever-higher rates. In the latter half of 2025, work increasingly flowed toward lower-cost mid-sized firms. Those firms posted demand growth of nearly 5%, while the very largest firms saw growth struggle to reach 2%.
The difference points to a subtle but meaningful change in client behavior: value is back under the microscope.
Economic uncertainty, regulatory churn and geopolitical tensions are expected to persist into 2026, which could keep legal work flowing. But demand growth is widely expected to cool. In that environment, billing rates — not workload — may determine who prospers and who feels the squeeze.
Technology, particularly generative artificial intelligence, sits at the center of that debate. If firms can persuade clients that AI makes every billed hour more efficient and more valuable, rate increases may still be tolerated. If not, AI could become a lever for deeper scrutiny — and sharper negotiations — over legal fees.
There is also a longer-term risk. As in-house teams grow more sophisticated and adopt the same AI tools used by elite firms, entire categories of work could shift away from external counsel altogether. Well-equipped corporate legal departments may decide they no longer need outside firms for routine or even moderately complex matters.
In a downturn, the dynamic could flip quickly. Legal budgets shrink. Talented lawyers migrate in-house. Rate pressure intensifies. The same firms that looked invincible at the peak suddenly find themselves overextended.
Meanwhile, recent financial disclosures from senior U.S. Justice Department officials have offered a glimpse into just how lucrative private practice remains at the highest levels. Former partners from leading firms reported multi-million-dollar earnings tied to corporate clients across industries ranging from technology and finance to energy and consumer goods — a reminder of the financial stakes involved as firms jockey to preserve premium pricing.
Looking ahead to 2026, lawyers can expect no shortage of activity. Litigation pipelines remain full, regulatory disputes loom, and questions around AI, copyright, class actions and mass torts continue to multiply. But activity alone may not guarantee prosperity.
The coming year may hinge on a single, uncomfortable test: whether clients still believe the bill is worth the price.
