Irell & Manella Is at a Crossroads, Once Again

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Irell & Manella Is at a Crossroads, Once Again

Departures have diminished Irell & Manella’s size and stature, leading familiar questions about the firm’s future to resurface.

Credit: Mr.Thanakorn Kotpootorn/Shutterstock.com

For the second time in a decade, Irell & Manella is at a turning point. Defections have chipped away millions in revenue, and rainmaker Morgan Chu is once again shouldering the weight of the Los Angeles-based intellectual property boutique.

It’s a story the firm has told before. In the mid-2010s, Irell strove to rebuild its transactional practice, bringing on high-profile attorneys including Joshua Grode. In response to questions in 2016 about the firm’s apparent overreliance on Chu, executive committee member David Siegel pointed to David Gindler, who led the firm’s life sciences litigation practice, and Craig Varnen, who is vice chair of the firm’s litigation group. Grode, Gindler and Siegel are no longer with the firm.

They are among dozens of Irell lawyers who have sought greener pastures in recent years. In 2014, the firm boasted $247.5 million in gross revenue and a complement of 159 attorneys. Last year, those numbers had fallen 39% and 48%, respectively, to just $151.6 million in revenue and 82 attorneys.

And so the firm is pivoting yet again.

“The writing was on the wall,” as one former Irell partner put it, when Jonathan Kagan, a member of Irell’s executive committee and chair of its hiring committee, wrote in an internal memo in early February that the firm would now focus solely on high-end IP and commercial litigation, abandoning most of its transactional practices.

It wasn’t an entirely deliberate pivot, as interviews with former partners, legal consultants and Kagan himself indicate. These sources describe a firm that has been struggling for years to define itself and trying to rebuild after a devastating spinoff that has led some partners to explore potential merger opportunities.

Kagan says Irell’s new direction isn’t the result of a “rash decision” that the firm arrived at overnight.

“For years we’ve been trying to evaluate what the options are for us,” he says. “There is a difference between exploring options and making actual decisions.”

He adds, “We’ve been gradually moving in this direction, then people figured out what we were doing.”

Past Is Prologue

Irell’s pivot was years in the making, with some sources pointing to the January 2015 spinoff of Hueston Hennigan as the beginning of the firm’s identity crisis. Over a two-day period, about one-sixth of Irell—seven partners and 25 associates—left to form their own high-end, Southern California-based litigation boutique. The group included John Hueston, who had been a critical rainmaker at Irell, along with his roster of deep-pocketed clients, including T-Mobile, GlaxoSmithKline, Amgen, Allergen, CoreLogic and Waste Management.

The spinoff put Irell at a crossroads of sorts, with three paths emerging: It could have grown its transactional and commodity litigation practices, merged with another firm or retrenched. At the time, Siegel hinted to The American Lawyer that there was disagreement among the firm’s partners about the right approach: “Some of us would prefer to focus now on growing but doing it in a careful way,” he said. “Most of us—but not all of us—have that mindset.”

Irell brought on entertainment litigators Robert Schwartz and Victor Jih in May 2015 in an effort to shore up its litigation offerings. Their hiring represented the first time in more than a decade that the firm had hired multiple lateral partners at once.

But Irell never strayed from its piecemeal approach to hiring. The firm never significantly increased its share of litigators who handled the type of bet-the-company IP work Chu was known for, nor did it reach the critical mass required to truly maximize a transactional practice, former lawyers say. Schwartz and Jih have since left Irell.

The firm also seemed to have mixed thoughts on the prospect of merging, with Siegel in 2016, saying there were “agitators” who were open to the idea. Sources indicate that, with Gindler at the helm, Irell held merger discussions with a number of firms, including Milbank.

It’s unclear how far the talks went. A former Irell partner says a firm merger was never broadly discussed or voted on. Others have noted that Irell presents a number of challenges for potential suitors—for one, the firm’s profitability, which its partners value much more than the firm’s overall revenue, would be diluted if it merged with a larger, less profitable firm. The firm had profits per equity partner of $2.68 million last year, even after a 9.9% decline.

Kagan shuts down the idea entirely: “We are not interested in rapid expansion, which is something that would happen in a merger.”

At a Crossroads

Meanwhile, Irell’s numbers have dwindled as the departures have continued. The firm cycled through three managing partners in three years. Andrei Iancu left in 2017 to lead the U.S. Patent and Trademark Office. His successor, Ellisen Turner, held the managing partner post for a year before stepping down. Gindler took his place at the beginning of 2019. Once merger talks with Milbank apparently failed, Gindler joined that firm last August, taking three IP litigators with him.

Other firm leaders began making their exits. Jason Linder, head of Irell’s global investigations and anti-corruption practice, and partner Glenn Vanzura joined Mayer Brown; Jeffrey Reisner, Irell’s bankruptcy practice head, left for McDermott Will & Emery; Turner joined Kirkland & Ellis; appellate co-chair David Schwarz joined Sheppard Mullin.

Things appeared to come to a head when two Irell partners, Gregory Klein and Michael Kaplan, approached the firm seeking additional resources for their burgeoning private equity and corporate practice. Klein had been Kagan’s summer associate.

“The firm was a crossroads,” Kagan says. “Does Irell want to invest in those resources? Or does it make more sense for Mike and Greg to go to a place where those resources have already been invested.”

Kagan doesn’t describe the requested resources, but other sources say Klein and Kaplan wanted to establish an outpost in New York, which Irell won’t do. The firm has only two offices, in Los Angeles and Newport Beach, California.

“Irell’s focus is to not open other offices and not expand,” Kagan adds.

Klein and Kaplan joined Simpson Thacher & Bartlett in early February. Their departure coincided with Harry Mittleman taking his commercial litigation practice to Hueston Hennigan. It was in the wake of those departures that Kagan sent the memo announcing the firm’s new direction.

“The firm is not telling any partners to leave,” Kagan says. “But we knew some partners would prefer to be at a national or a multinational firm. And those partners are able to find really good opportunities at firms that mesh with their interests and their career goals.”

Money Talks

The departures Irell has seen over the past decade have taken a toll on its revenue. In 2010, Irell had 184 lawyers pulling in $256 million, a mark that stayed relatively stable until 2015, when Hueston Hennigan spun off and took nearly 20% of the firm’s revenue with it. The firm’s head count has declined in eight of the past nine years, and its revenue fell 12% last year.

But Irell puts an emphasis on its profitability. Although the firm’s overall revenue and profits have dropped, its profit margins have continued to hover around 65%. Irell’s revenue per lawyer was flat year-over-year in 2019—it’s pegged north of $1.8 million—but it grew an average of 5% in the previous three years. Kagan predicts that Irell’s latest pivot will boost that figure.

The firm’s profits per lawyer have increased over the same period as well, but its profits per equity partner dropped by more than 25%—from $3.63 million in 2014 to $2.68 million in 2019.

Even with those declines, Irell is getting and winning cases with nine-figure outcomes. Kagan’s internal memo detailed three nine-figure jury verdicts that brought Irell’s winnings to over $1 billion in 2019. The largest of those verdicts was a patent infringement case led by Chu—his $752 million victory for the Sloan Kettering Institute for Cancer Research and Juno Therapeutics was increased to $1.1 billion due to a posttrial ruling.

“The awards are staggering,” California-based legal recruiter Larry Watanabe says.

Morgan Chu

The firm’s shift makes financial sense to former lawyers and legal consultants, who describe some of the departures that have occurred as bringing little business to the firm. But they wonder whether Irell has a future beyond Chu. Although Irell was founded in 1941 as a tax boutique, the firm has become synonymous with Chu, who joined the firm in 1977 as an associate and became a partner in 1982.

As the head of Irell’s litigation department, Chu brings in so much business for the firm that there aren’t enough bodies to handle all of it, Kagan says. And when the 69-year-old rainmaker does finally stop practicing law, some of that work won’t come back, he adds.

The American Lawyer has previously estimated Chu’s book of business to be worth $50 million, which Chu himself has previously called a “ridiculous figure” that he downplayed: “Everything we do ends up being a team effort.” Asked anew about the size of his book, Chu, who declined to speak for this story but answered questions over email, declines to comment.

Gindler was also a prolific rainmaker for the firm, whose book of business was eclipsed only by Chu’s. Sources close to the firm say Gindler brought in around $20 million in billings a year. Those with knowledge of the firm place books of business for Steven Marenberg, an entertainment and media litigator who departed for Paul Hastings earlier this year, between $5 million and $10 million, and Kagan at $10 million. Kagan declines to comment on his book or Chu’s.

Sources have given wildly different estimates of Chu’s book of business. Some say his practice has been slowly dwindling, with his book dropping closer to $30 million a year. While a book of business that size keeps Chu in rarefied air, some former partners question whether or not he alone would be able to sustain Irell’s position as an elite litigation boutique.

“Most everybody that works there wouldn’t describe him as at his peak,” one former partner says.

But not everyone agrees Chu’s practice is on the decline. One former Irell lawyer who left within the past year says Chu’s practice was on the upswing when he left, adding that he would be “shocked” if his book didn’t exceed $50 million.

“He’s still a supernova,” the lawyer says.

Regardless of its trajectory, Chu’s book of business gives him significant influence over the firm.

“In the end, all of the decisions are going to come back to what does Morgan think,” Watanabe says. “Honestly, he deserves that respect, because it’s worked. It’s made everybody millions upon millions of dollars, and they all respect that. They may not all like it, but it’s hard not to respect a leader like that. He doesn’t drive that law firm with an iron fist. Not at all. He’s quiet, subdued, but in the end they know he needs to be OK with pulling the trigger.”

Although Kagan says Chu doesn’t have de facto veto power, he acknowledges Chu’s influence on the firm’s decision-making, while noting there have been times where Chu has been “in the minority.”

Chu himself expresses similar sentiments: “Our firm is governed by an executive committee. I do not serve on that committee and cannot and do not veto its decisions.”

The Last Laugh?

Irell’s remaining partners are on board with the firm’s pivot, so much so that Kagan believes it will be at least a decade before anyone writes about Irell being at another crossroads.

The recent changes may leave the firm in a better position to weather the economic storm caused by the COVID-19 pandemic, sources say. As of early May, Irell had avoided cutting pay or staff like many larger, higher-grossing law firms have done. The pandemic has affected some of Irell’s cases—Kagan says one of his trials was postponed—but every attorney at the firm is busy, which might not have been the case had Irell kept its transactional practice, Kagan says.

“In light of the coronavirus and the dislocation of the economy, Irell might have the last laugh on this whole thing,” one former partner says.

One former partner alleges that Chu didn’t “have a vision of the firm that didn’t postdate his death.” Kagan pushes back strongly against that, saying Chu has been intentionally stepping back and pushing younger partners into assuming leadership positions. He adds that both Chu and the executive committee have been “planning for his transition and our long-term future for quite some time.”

“We have a broad and deep bench of highly trained, successful partners in place, several of whom have been trained by Morgan, who are leading our firm forward and delivering phenomenal results,” Kagan says.

In an email, Chu says he has worked with Irell’s executive committee to prepare for his inevitable departure, adding that he has no plans to retire.

“We have multiple generations of strong attorneys in place, and all are delivering exceptional results and prominent wins that have been the hallmark of Irell’s preeminence over the last 75 years,” Chu writes.

Chu has opened his book of business to his younger colleagues, allowing them to develop their own connections to clients, Kagan says. The future of Irell includes partners like Lisa Glasser and Benjamin Hattenbach, both of whom serve on the firm’s management committee and are vice chairs of its litigation team, and Jason Sheasby, whom Kagan describes as being too busy racking up court victories to have a leadership role at the firm. In a decade or so, the story of the firm will be those lawyers and the younger talent they’re cultivating, Kagan says.

“I expect that you will be interviewing us about the transition to the next level of leadership at the firm,” he says. “I’m hoping you’re going to ask a question, ‘Gee, what happens to the firm after Jon Kagan retires?’”

Email: dathomas@alm.com and djackson@alm.com

 

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2020-05-19T18:00:46+00:00May 19th, 2020|