From the outside, Morgan & Finnegan's future looked bright.

It was January 2004, and the venerable IP firm had just signed a 20-year lease to take over the twentieth and twenty-first floors at Three World Financial Center in lower Manhattan. The lease wasn't cheap -- $327,000 a month in the first year -- and the firm had been lured back downtown in part by a $1.5 million state grant aimed at reviving a neighborhood still reeling from the events of Sept. 11, 2001.

Relocating from the Park Avenue offices it had inhabited for 35 years marked a homecoming for Morgan & Finnegan, which, throughout much of its early history, had been located downtown. But the firm's partners didn't see the move as just a chance to reconnect with the past. "This is an important move for our firm," partner John Sweeney said at the time, "one that brings us back to our roots in lower Manhattan, and one that offers us more space for future growth."

It made sense that growth was on the firm's collective mind. In 2003 a survey of senior IP officers at Fortune 100 companies published by IP Law & Business ranked Morgan & Finnegan number two among the firms hired for IP work, behind only Foley & Lardner. Companies that cited Morgan as lead counsel included AT&T, Citigroup, Exxon Mobil, Fujitsu, Procter & Gamble, and Sumitomo. "Reports to the contrary, we're still alive in New York," partner James Gould told Entrepreneur. "I'm sure the general firms like to say that we're dying, we're disappearing ... . But, you know, I love to go to court against a general firm, beat 'em up, and win."

Six years after Gould uttered those words, Morgan & Finnegan isn't dying. It's dead. After bleeding partners for several years, it dissolved in February, when Locke Lord Bissell & Liddell snapped up most of what was left of it. Among those moving over: Sweeney and Gould, who, according to offer letters leaked on the blog Above The Law, are to receive target compensation of $1.6 million and $1 million a year, respectively. In March, Morgan & Finnegan filed for bankruptcy.

So what happened? According to court documents and interviews with a half-dozen ex-partners, what wasn't visible from the outside was that, by 2004, the firm's foundation had been shaky for several years -- and would only get shakier as the world kept changing.

IP BOUTIQUES AN ENDANGERED SPECIES?

When it comes to the viability of intellectual property boutiques, a particular piece of received wisdom has long dominated the conversation: In a market that tends to favor scale and one-stop shopping, an IP firm is an endangered species. Ultimately, this thinking goes, larger firms will lure away the best partners with promises of heftier profits, top-drawer associates and the chance to build a bigger practice.

The Morgan & Finnegan saga, it appears, supports that hypothesis. But that doesn't mean that specialty shops can't compete. They can, but only through some combination of growing in size, retaining their talent and bringing in a critical mass of patent litigation.

Former partners say that Morgan & Finnegan largely failed on all three fronts. And, these sources say, a laid-back management style that initially attracted some lawyers ultimately drove much of the best talent away. A dearth of young star litigators, the continuing push by big firms to add to their own IP practices, and an overabundance of patent prosecutions, according to these and other legal observers, also helped bring the firm down.

Morgan & Finnegan's history dates back to 1893, making it one of the country's oldest IP firms. At its peak, which extended into the turn of this century, it employed about 100 lawyers, about a third of whom were partners. Of its big-ticket clients, the relationship with Procter & Gamble was particularly fruitful, and led to some memorable cases. In 1989, for instance, a Morgan team won a $125 million settlement from Nabisco, Keebler and Frito-Lay, which stood accused of infringing P&G's Toll House cookie patent. Firm luminaries included Sweeney, a gray-haired litigator with a three-decade-long list of bench and jury trials and appeals that few in the patent bar could match, and Gould, who had a reputation for scoring big damages against his clients' competitors.

Then, toward the end of the 1990s, the ground began to shift. New York's large general practice firms started to pursue IP work more aggressively, plucking patent specialists from one another and dipping into the boutiques for talent. When Milbank, Tweed, Hadley & McCloy decided to launch an IP practice, it set its sights on a young Morgan & Finnegan litigation partner named Chris Chalsen.

Within Morgan & Finnegan, Chalsen, 40 at the time, was something of a star. Having decided in high school that he wanted to be a patent attorney, he earned a master's degree in computer science at Boston University before going on to George Washington Law School. He joined Morgan & Finnegan in 1983 and became a partner in 1990. His specialties were electrical and computer issues, and by the time Milbank came calling, his roster of clients included Fujitsu, Hitachi, Canon, Raymond Weil, Dai Nippon Printing, and Tokyo Electron Limited. All of them would follow him to Milbank in January 1998.

Chalsen says the international cast of his client list -- and his desire to expand it even more -- made moving to Milbank an attractive option. "Not all lawyers have a strong entrepreneurial inclination," he says. "But if they do, then they want to be at a place where that can flourish." While he won't explicitly say Morgan & Finnegan wasn't such place, it's an easy conclusion to draw when one hears him talk about what he thought was best for his career. "If you have lawyers looking to expand their opportunities and grow their practices, then, if the firm wants to retain those people, it has to be willing to expand and grow with them," he says. "Some firms are willing to accommodate those growth preferences, and some, it seems, are not."

In hindsight, former partners there at the time say, the failure of the executive committee to retain Chalsen was an early sign that Morgan & Finnegan's future might not be assured. "Instead of making things happen for Chris -- giving him greater income share and greater management control -- professional jealousy got in the way," says one former partner who now practices at a large general practice firm. "Management should have squelched that right away and encouraged a meritocracy. Instead, management let partners who weren't pulling their weight have too much say."

While Chalsen's departure may have been significant, it didn't start a wave of defections (though one Morgan partner did join him at Milbank). Still, the firm took few steps to prepare for the future. Three ex-partners cite this culture of complacency as crippling the firm's prospects. One of these ex-partners says he eventually lateraled to a larger firm because of doubts that Morgan & Finnegan had a plan to survive the eventual retirement of senior rainmakers like Sweeney and Gould. "No one was coming up the pipe to take over and keep the firm alive," this attorney says.

This former partner and several others also complain that the firm's executive committee was characterized by an overall lack of clear rules. "If I really understood the politics better, it would have been a better situation," says the former partner. "But there was a lack of transparency about how decisions were being made."

THE EXODUS

The exodus started slowly, with Chadbourne & Parke hiring partners Joseph Calvaruso, Walter Hanchuk, and Kenneth Weitzman in April 2005. In November 2006 Crowell & Moring hired three more -- Bruce DeRenzi, Dickerson Downing, and Andrew Riddles -- who shared a common client, E.I. du Pont de Nemours and Company. A couple of months before that, Kenneth Sonnenfeld, a 16-year Morgan veteran coming off what he called a "very expensive" divorce, had left to start a patent prosecution practice for King & Spalding. Sonnenfeld said he needed the financial stability that a general practice firm would offer.

The prospect of better pay surely enticed at least some to leave. Though Morgan & Finnegan was not big enough to qualify for sibling publication The American Lawyer's Am Law 100, in 2008 James Gould estimated the firm's profits per partner as comparable to The Am Law 100's 2007 average of $1.3 million. While impressive, the figure nonetheless pales somewhat next to, say, King & Spalding's $1.4 million that year, or Milbank's $2.5 million (both of those firms saw their PPP drop in 2008).

One former Morgan & Finnegan partner says that financial concerns did indeed play a role in chasing talented attorneys away: "As IP got more competitive, with bigger firms coming, we didn't learn that we needed to become a more hard-nosed business. Because with lots of people, if you throw money their way and feed their ego, they'll go, even if it means going to a less hospitable place."

As of mid-2007, the firm's partner head count stood at 31, and the trickling out was continuing, with trademark litigator Kathleen McCarthy, like Sonnenfeld, leaving for King & Spalding.

Sensing perhaps that the trickle was about to turn into a flood, Morgan & Finnegan sought a tourniquet. The firm altered its partnership agreement to create financial barriers for partners seeking to leave. The move came just days before one of its top rainmakers, Christopher Hughes, left for Cadwalader, Wickersham & Taft, according to a filing by the firm in a sealed lawsuit Hughes brought against it last October seeking what he claims is an unspecified amount of unreturned capital. (While the amount is not available via the sealed suit, it is listed as $275,000 in the law firm's bankruptcy filing.)

The filing in the Hughes suit alleges that during the summer of 2007, Morgan & Finnegan began "exploring ways to discourage departures from the firm." To that end, management decided to amend its partnership agreement. A member of the Morgan executive committee told Hughes about the proposed changes on August 9 -- eight days before Cadwalader announced that he had joined that firm.

The amendments, approved on August 13, changed how partner capital was calculated. Though the filing doesn't describe the changes in detail, Hughes, it says, clearly understood that they "created several disincentives to withdrawing as a partner from Morgan & Finnegan." Among other things, the new rules barred a departing partner from receiving any deferred or contingent fees the firm obtained, and required that a departing partner return any bonus he or she received in his or her final year with the firm. In Hughes's case, that would have included a $275,000 bonus he got in January 2007.

(Hughes, whose suit remains active, was not the first ex-partner to sue Morgan & Finnegan over allegedly unreturned capital. In October 2007 Sonnenfeld sued the firm, claiming it should have returned to him at least $227,000 instead of the $14,000 it actually said he was owed. The case settled within a month for an undisclosed sum.)

Once Hughes -- who, according to James Gould, had pushed for Morgan & Finnegan to merge with a larger firm -- left, the floodgates opened. Before long, the departures included: six partners who followed Hughes to Cadwalader; four who moved to Dickstein Shapiro, and a patent partner who jumped to Day Pitney.

One of those those left for Dickstein Shapiro, John Gallagher, told this magazine last year that he expects "few if any IP boutiques [will be] around" in the future.

Meanwhile, no new blood was coming in. Morgan's only lateral hire in 2008 was Jeremy Pitcock, former head of IP at Kasowitz Benson. But he proved to be an embarrassment and was quickly let go when his former firm issued an unusual press release in which it said he had been fired for inappropriate conduct (Pitcock subsequently filed a defamation suit against Kasowitz Benson.)

Thanks to the defections, revenue fell sharply -- from $60.63 million in 2007 to $36.99 million in 2008. As of January 2009, only 17 partners remained, according to one court filing. In February, Locke Lord took 30 lawyers, including senior partners Sweeney and Gould, with an expectation that the group would bill a combined $28 million this year, according to the leaked offer letters. Locke Lord also took over Morgan & Finnegan's World Financial Center space.

In its Chapter 7 bankruptcy petition, Morgan & Finnegan listed assets of $6.4 million and liabilities of $10 million. The list of creditors includes the names of 22 former partners, many now at Locke Lord, who, according to the filing, are collectively owed about $3.8 million. (Sweeney, now the deputy managing partner of Locke Lord's New York office, did not return calls seeking comment.)

CHALLENGES FOR IP BOUTIQUES

To some extent, Morgan & Finnegan was hit by a wave that has wiped out a chunk of the IP boutique market. Lawyer defections killed Lyon & Lyon in 2002. Pennie & Edmonds dissolved in 2003. And Fish & Neave merged with Boston-based Ropes & Gray in 2004.

One of the big problems is that boutiques have deep roots in patent prosecution, which brings in lower fees than litigation and is generally handed out by a company's chief patent lawyer. When it comes to patent litigation -- an increasingly high-stakes proposition for companies that can mean big money for the law firms that get hired -- the decision about which firm wins the work has moved from the chief patent lawyer's office to the general counsel's suite.

The challenge for IP boutiques is to find the right balance of work to make their specialty practices successful. "To be more profitable, they need to have more go-to patent litigation and less prosecution work," says law firm consultant Peter Zeugheuser. "When the decision was left to in-house patent lawyers, they often went with a technical litigator to lead a big case. That might favor boutiques. But GCs tend to want star trial lawyers. And many patent boutiques don't have enough of those people. Morgan & Finnegan didn't."

Some patent shops seem to be finding that balance. Of those that are, many have grown to keep up with the competition. Take Fish & Richardson. In 1999 it had 165 attorneys in seven U.S. offices. Today it has 450 attorneys in 12 offices (11 in the United States; one in Germany). Even in the 1990s, when it was still going strong, Morgan & Finnegan had only about 100 lawyers total. (In addition to growing, Fish & Richardson, which had 2008 profits per partner of $1.1 million and ranked seventieth on The Am Law 100, has taken on non-IP matters that account for about 6 percent of its work.)

"The scale has definitely been a big help," says Peter Devlin, Fish & Richardson's longtime president. "It's allowed us to have a broad-ranged IP practice that's not just focused on transactional work or on one industry. That puts us in good shape to compete with big firms that are also now chasing IP work."

Being geographically diverse, he adds, also helps for recruiting talent. Morgan & Finnegan's only offices outside of New York were in Washington, D.C., and San Francisco.

As for that New York office, the decision to take it on haunts Morgan & Finnegan, even in death: J.P. Morgan has sued the firm for defaulting on a $4.1 million letter of credit it obtained in 2008 to help pay the rent on the World Financial Center space, which by then was up to $362,000 a month. The judge in the case granted the bank's motion for an injunction that bars Morgan & Finnegan from selling, transferring or using any assets -- including partner capital accounts, cash and accounts receivable -- without an agreement from J.P. Morgan. He also appointed a receiver to take control of Morgan & Finnegan's books, which, for all practical purposes, is all that's left of the once-proud firm.

Additional reporting by Nate Raymond

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