March 3, 2010

THE DAILY JOURNAL

By Jill Redhage

In the game of law firm musical chairs, the song stopped last year for a notable number of Northern California’s crème de la crème, each of whom found a new favorite seat.

What prompted their moves?

Law firm profits declined in 2009, while a weak economy exacerbated the differences in performance between the strongest firms and their competitors. This “volatile mix” motivated some of the country’s most sought-after partners to find new firms, said Peter Zeughauser, a Newport Beach-based legal consultant who advises law firms nationwide.

With that danger in mind, law firms have gone to work revising their compensation systems to make sure they’re rewarding the partners they most want to keep. But that doesn’t necessarily mean those partners will want to stay.

Well over a dozen of Northern California’s most prominent names in Big Law jumped to new firms last year, highlighting the fact that firms’ “keepers” are still there for the taking. In fact, stealing those partners is now seen as one of the only ways firms can increase revenues; cost-cutting their way to profitability has already been played out.

“[Law firms] have cut all the fat out, so now they’ve got to grow revenue,” Zeughauser said. “That will cause the firms that can afford to grow through laterals to spend their money that way.”

Inherent to successful lateral recruiting is that new clients follow – a fact that gained importance as firms’ existing clients suffered from the recession and slashed their spending.

Several high-profile moves came early last year. Sean Pak, a patent litigator, jumped in February from Latham & Watkins to Quinn Emanuel Urquhart Oliver & Hedges in San Francisco. Also that month a team of five Keker & Van Nest partners led by intellectual property litigator Daralyn Durie decamped to hang out their own shingle as Durie Tangri. In March, Gibson, Dunn & Crutcher, a firm that seldom hires lateral partners, announced it had recruited Daniel Mummery from Latham’s well-reputed outsourcing practice for its Palo Alto office. Then in May, Peter Obstler, a litigator focused on mass torts, found his way to Bingham McCutchen from O’Melveny & Myers’ San Francisco office.

Typically, lateral movement slows when the economy sours, because law firms don’t have the money to invest in new partners and many lawyers lose too much business to remain attractive.

But some Northern California firms retained their age-old appetite for top-tier intellectual property litigators and corporate lawyers, even as corporate practices slumped in the downturn, because those lawyers are the keys to serving Silicon Valley-based technology companies. The firms viewed the down market as an opportunity to lure great recruits.

“The core for a lot of these firms in the Valley is being surrounded by technology companies. The economy is not up. But firms are making investments for the future,” said Larry Watanabe, a San Diego-based legal recruiter with a large practice in Northern California.

Even though the Bay Area hosted a score of blockbuster moves, legal recruiters said the total volume of lateral movement in 2009 was actually small: The market was nearly frozen in the first half of the year due to uncertainty among both law firms and lawyers.

“People were very scared to move because they weren’t sure what they were moving to, and they didn’t know what their book of business was,” said Alan Miles, a Santa Monica-based legal recruiter who has helped three law firms open Silicon Valley offices in the last few years.

The rate of movement picked up in the second half of the year, a time when lateral moves are typically less frequent as partners await fourth-quarter “super draws” and year-end bonuses.

According to recruiters, it took the exodus of two high-profile mergers and acquisitions partners from Cooley Godward Kronish to finally loosen up the recruiting market. In that move in July, Cooley’s M&A practice leader Richard Climan and fellow M&A star Keith Flaum leaped to Dewey & LeBoeuf’s Silicon Valley office with the well-known technology transactions partner Eric Reifschneider in tow. Two more Cooley corporate partners, John Brockland and Jane Ross, joined them in August.

“Climan’s move sparked and set the tone for a lot of the lateral movement that followed in the Valley,” said Watanabe, who was not involved with Climan’s move. “A lot of firms and lawyers paid attention to the kind of movement that was occurring and saw that there was demand.”

Climan said he and Flaum were impervious to the climate affecting lateral moves when they decided to jump to Dewey.

“We left because a unique professional opportunity was presented to us that we ultimately found too compelling to turn down. It’s as simple as that,” Climan said. He said their decision wasn’t motivated by compensation matters, but that Dewey’s international footprint and the leadership opportunities offered there were significant factors. He was adamant that his new firm didn’t want them just for their book of business.

“Dewey was not focused on short-term revenues. Dewey was well aware of our track record of institutionalizing our client relationships at Cooley,” Climan said. “Dewey was not looking for a portable client base when it brought us on.”

As it turned out, many of the M&A team’s clients did follow them, and Climan said they’ve gained new clients since the move, including Texas-based computer maker Dell Inc.

Flaum said the group has already handled more than four deals with an international bent since they arrived. On New Year’s Eve, they helped German pharmaceutical company Merz acquire San Mateo, Calif.-based BioForm Medical Inc. Around the same time, they guided San Jose-based optics company Oclaro Inc. in its purchase of a New Jersey company with operations in Israel and Korea. Currently, they’re working for a U.S. public company acquiring part of an European company with significant operations in Hong Kong, a deal that hasn’t been announced.

In the second half of 2009, nearly all of Northern California’s big-name defectors were either corporate transactional lawyers or IP litigators who moved in Silicon Valley.

On that list were three IP litigators: Jeffrey Randall, who moved from Skadden, Arps, Slate, Meagher & Flom in Palo Alto to Paul, Hastings, Janofsky & Walker to co-chair its global IP practice; Yar Chaikovsky, who moved from Sonnenschein Nath & Rosenthal to McDermott Will & Emery in Menlo Park; and Ginger Dreger, the first major partner to depart Goodwin Procter’s new Silicon Valley office, who joined Arnold & Porter in San Francisco.

On the corporate side, Matthew Berger left Morrison & Foerster’s Tokyo office in favor of Paul Hastings in Palo Alto. Joseph Yaffe, an executive compensation lawyer, departed Latham for Skadden in Palo Alto. And in December, Tom DeFilipps opted for a leadership position in Sidley Austin’s new Silicon Valley office, after many years at Wilson Sonsini Goodrich & Rosati, and he was joined by Deborah Marshall, an emerging companies lawyer from Howard Rice Nemerovski Canady Falk & Rabkin.

As the spring of 2010 approaches, the lateral market is again humming to life.

Martha Sellers Klein, a Palo Alto legal recruiter for Mlegal Consulting Inc., was one of several recruiters who said her law firm clients – who have renewed their interest in lateral recruiting this year – are especially keen on adding corporate lawyers and IP litigators. She said securities litigation is also an area of interest.

Watanabe echoed those sentiments, adding that he expects to see growth in San Francisco this year as well as in Silicon Valley. His team has already helped 18 lawyers switch firms in California this year – 14 of whom were in Northern California.

That’s a continuation of a trend. Watanabe said his legal search firm, Watanabe Nason, moves 50 to 60 lawyers each year, and last year nearly 80 percent of the firm’s revenue came from Northern California placements, in part due to law firms looking to open offices in Silicon Valley.

Lawyers who already made headlines in 2010 include IP litigation heavyweight Patricia Thayer, a former Heller Ehrman lawyer who jumped in January from Orrick, Herrington & Sutcliffe to Sidley Austin in San Francisco, and litigators Samuel Shepherd and Kenneth Steinthal, who departed Quinn Emanuel and Weil, Gotshal & Manges, respectively, to launch Greenberg Traurig’s new San Francisco office last month. Also in February, Palo Alto-based patent litigator James Elacqua switched his practice from Dechert to Skadden.

Zeughauser expects the high-caliber lawyer defections to continue.

“I think you’re going to see some significant moves all through this year,” he said.