Editor's Note: The following is the first of a two-part series on the rising litigation practices in the Silicon Valley. This week, senior writer Renee Deger gives an overview of the new issues litigators are wrestling with as a result of the economic downturn.
Out of the spotlight during the past several years of dramatic growth in Silicon Valley's corporate practices, litigators are claiming center stage as Silicon Valley's busiest lawyers.
Disputes over busted deals, deflated valuations and shuttered companies are fueling demand for advice from litigators at Silicon Valley firms. They're spending more time quelling people's fears, counseling them on grounds for potential disputes or mediating actual ones. It's only a matter of time, they say, before all their talking turns into a flurry of lawsuits.
The bump couldn't come at a better, or a more predictable, time. While corporate and transactional work boomed in recent years, litigators were on the sidelines. Sure, they had plenty of work with securities class actions and intellectual property disputes, but the bulk of law firm profits was pumped in by corporate groups.
Now, corporate transactional work is at its slowest pace in recent memory, and litigators are poised to take the lead in profit generation. The number of actual securities-related cases handled by Valley firms has risen. But litigators on all other fronts -- complex business, employment, IP -- say their workload is also increasing.
At Wilson Sonsini Goodrich & Rosati, litigators have opened up eight new cases defending companies hit by class actions over stock allocations in their initial public offerings. At Brobeck, Phleger & Harrison, class-action securities lawyers have opened up more than 20 securities stock-drop class actions.
Throughout the Valley, corporate lawyers point to litigators as the heavy lifters. By just how much appears to depend on the firm and the lawyer.
At Palo Alto's Gray Cary Ware & Freidenrich, for example, litigation billables on all fronts are up some 20 percent this year over last year.
IP and securities litigation has been booming in the Valley for the past several years and this year is no exception. Companies are fighting harder to protect their assets, and fending off more class actions as their stock prices fall.
But in the wake of the tech boom's bust, litigators are seeing a rise in seemingly mundane contract disputes -- except they involve busted merger deals or venture capital investors crying fraud.
Robert Brownlie, co-chairman of Gray Cary's litigation practice, devotes about 30 percent of his practice to counseling disgruntled investors. Last year, he said, the number was zero.
"When returns were a little easier to come by and the market was more robust, you can pass on a deal gone bad even if you thought you were defrauded," Brownlie said.
VCs are claiming they didn't get the whole story from some of the entrepreneurs they funded, or they were fed misinformation, Brownlie said. While he hasn't yet filed a lawsuit on behalf of a VC, he said it's only a matter of time before such a dispute heads to the courtroom.
HELPING HAND: Molly Moriarty Lane, a Brobeck, Phleger & Harrison partner in Palo Alto, says "pre-litigation" counseling for ailing companies is now consuming a third of her time.
Photo: Jason Doiy
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For Molly Moriarty Lane, a Brobeck, Phleger & Harrison partner in Palo Alto, such "pre-litigation" counseling also consumes a third of her time.
"A lot of people are out there looking for individuals to blame," Lane said. "They invested a lot of money in companies they hoped would go public or be acquired and make them millionaires overnight."
She's fielding angry queries from investors, employees and sometimes the companies themselves -- all leveling accusations of breach of contract, fraud and mismanagement.
In one matter, Lane's client, an investor, is accused of reneging on a promise to pony up the cash for an investment round in a company desperate for the money.
At Wilson Sonsini, partner David Steuer is fielding a flood of similar queries from investors about worst-case scenarios. Investors who participated in early investment rounds at high valuations worry their stake in a company will get wiped out if the company starts selling shares for less money. They want to know if they can sue, he said.
Other investors, Steuer said, worry about whether they will become a lawsuit target if they're the ones who buy stock at a lower valuation and end up diluting the earlier investors' holdings.
So far, Steuer's clients haven't yet ended up named in a suit. "I'm doing a lot of consulting on that but not litigation," he said.
Steuer said that fueling the fear among VCs is a well-known court battle between the founders of networking equipment maker Alantec Corp. and its venture backers. The Santa Clara County suit, Kalashian v. Advent VI LP, 739278, went to trial in 1997, but the investors ended up settling for $15 million. The company's founders were fighting the dilution of their stake in the company, which was later sold to Fore Systems Inc.
That dispute is often misunderstood by many VCs to mean they are liable if a company loses value from one investment round to the next, but that's not the case, Steuer said.
Still, a great many other disputes are still in mediation, said Daniel Bergeson, a partner at San Jose's Bergeson Eliopoulos, who is often tapped for advice on big-ticket litigation matters in the Valley.
Bergeson is doing more mediation, plus representing Pogo.com Inc. in its suit against At Home Corp. for dropping its plan to buy the company.
"There's more litigation in general," he said. "When you have a downturn in the economy, you have more people seeking deep pockets to try to collect from."
