Pepper Hamilton
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Firm leaders at Pepper Hamilton blamed double-digit declines in revenue and profits last year on a temporary drop in demand in the firm’s health effects practice, and said the financial trend lines are skewed by a particularly strong 2015.

But sources with knowledge of the firm said changes in the health effects litigation practice and a number of lawyer defections had eroded the firm’s performance. Combined with the firm’s failed merger talks with Reed Smith, they said, the situation is driving additional lawyers to leave the firm.

Pepper Hamilton saw a 10.6 percent decline in revenue in 2016, to $347.5 million. Profits per equity partner (PPP) dropped 28.8 percent to $730,000. Average compensation for all partners was $610,000, a decline of 23.3 percent.

The firm had revenue of $388.5 million in 2015, and PPP broke $1 million for the first time that year.

Managing partner Tom Cole said that in 2015 the firm benefited from some nonrecurring contingency fee recoveries, and that lower demand last year in the health effects practice, which focuses on pharmaceutical and medical device litigation, was tied to the resolution of two significant matters during the first quarter of the year. The firm expects demand in the practice to recover, he said.

Meanwhile, a string of partners has left the firm over the past several months. Most recently, three employee benefits partners joined Blank Rome, and four lawyers who focused on institutional response to sexual misconduct, led by partners Gina Maisto Smith and Leslie Gomez, departed for Cozen O’Connor.

Sources also said lawyers were unsettled when a key rainmaker in the firm’s health effects litigation group, Nina Gussack, scaled back her practice.

Gussack said she has adjusted her role for succession planning purposes. As a result, she did scale back her billable hours by about one-third to make more time for “complex strategic issues.” However, she said her own hours did not have an impact on revenue.

Firm chairman Tom Gallagher said Gussack remains active and would soon assume the role of chair for the firm’s health sciences department, which will launch as a multidisciplinary group including the health effects lawyers. Gussack will continue to work directly with clients, Gallagher said, but has also been asked to begin elevating the practices of others in her group.

“I really wanted to model for the firm what succession planning looks like when you have a huge practice,” Gussack said.

Gussack once had a $65 million book of business, according to a 2013 article in Legal affiliate The American Lawyer. Sources said Gussack was also a major supporter of merger talks between Pepper Hamilton and Reed Smith, which ended abruptly last year, because her practice would benefit from an international platform.

Gallagher said the firm has regularly considered merger opportunities, and that its courtship with Reed Smith was notable mainly because it was public. He said the firm continues to evaluate potential combinations, but would not disclose what firms or attributes it was pursuing. He acknowledged that every suitor of Pepper Hamilton has the health effects practice “on its short list.”

Partner Exits

For the time being, sources said, the scuttled Reed Smith talks and the low 2016 numbers have some partners eyeing the exits. According to ALM’s RivalEdge, which tracks lateral moves, 20 partners have left Pepper Hamilton in the past year.

“When people start jumping ship, people panic and head hunters start circling,” one former Pepper Hamilton partner said.

Gallagher said there was no material impact from the departures, and that those who left did so for individual reasons. Cole said he has seen no evidence that the Reed Smith merger talks were a factor in any of the departures.

Cole noted that the firm added 14 lateral partners throughout the year in a variety of locations including New York, Pittsburgh, Washington, D.C., and Los Angeles.

Overall, the firm’s head count decreased by 1.8 percent to 485. The equity partner ranks shrank by 4.3 percent, to 132, and the nonequity partner ranks grew by 10.2 percent, to 97.

A group of corporate lawyers that left in April for Hogan Lovells—Steven Abrams, John Duke and Rachael Bushey—marked a notable loss to the firm. The departure of Smith, Gomez and the rest of their group earlier this month was another major hit, sources said.

Cole said the loss of Abrams’ group had no effect on the firm’s revenue, and Gallagher said the firm was able to keep a lot of the group’s clients. He said Pepper Hamilton also retained a lot of the work from Smith and Gomez’s practice, and has talked about collaborating with them in the future.

Earlier this month, Pepper Hamilton lost Pittsburgh partner James Barnes and Philadelphia partners Jonathan Clark, Andrew Rudolph and Michael Kadlec, all to Blank Rome. Clark, Rudolph and Kadlec were in the employee benefits practice and Barnes has a family office practice that expands beyond Pittsburgh.

Gallagher said the employee benefits bench nevertheless remains strong.

Last month, IP lawyer Paul Legaard left to join Stradley Ronon Stevens & Young. In December, life sciences partners Jeffrey Libson and Geoffrey Starr decamped for Cooley LLP. In October, tax controversy partner Kevin Johnson departed for a position at Baker & Hostetler.

For 2017, Cole said the firm has adjusted its attorney ratio to better match expected demand. But no layoffs were involved in that adjustment, Gallagher said.

“The market and the world should not be surprised that Pepper Hamilton, coming off its best year, that there was some dropoff,” Cole said.

Cole said the white-collar and transactional practices are expected to be busy in 2017, as well as IP litigation. The firm plans to seek opportunities to grow its existing offices, he said.

Contact Lizzy McLellan at lmclellan@alm.com. On Twitter: @LizzyMcLellTLI

Firm leaders at Pepper Hamilton blamed double-digit declines in revenue and profits last year on a temporary drop in demand in the firm’s health effects practice, and said the financial trend lines are skewed by a particularly strong 2015.

But sources with knowledge of the firm said changes in the health effects litigation practice and a number of lawyer defections had eroded the firm’s performance. Combined with the firm’s failed merger talks with Reed Smith , they said, the situation is driving additional lawyers to leave the firm.

Pepper Hamilton saw a 10.6 percent decline in revenue in 2016, to $347.5 million. Profits per equity partner (PPP) dropped 28.8 percent to $730,000. Average compensation for all partners was $610,000, a decline of 23.3 percent.

The firm had revenue of $388.5 million in 2015, and PPP broke $1 million for the first time that year.

Managing partner Tom Cole said that in 2015 the firm benefited from some nonrecurring contingency fee recoveries, and that lower demand last year in the health effects practice, which focuses on pharmaceutical and medical device litigation, was tied to the resolution of two significant matters during the first quarter of the year. The firm expects demand in the practice to recover, he said.

Meanwhile, a string of partners has left the firm over the past several months. Most recently, three employee benefits partners joined Blank Rome , and four lawyers who focused on institutional response to sexual misconduct, led by partners Gina Maisto Smith and Leslie Gomez, departed for Cozen O’Connor .

Sources also said lawyers were unsettled when a key rainmaker in the firm’s health effects litigation group, Nina Gussack, scaled back her practice.

Gussack said she has adjusted her role for succession planning purposes. As a result, she did scale back her billable hours by about one-third to make more time for “complex strategic issues.” However, she said her own hours did not have an impact on revenue.

Firm chairman Tom Gallagher said Gussack remains active and would soon assume the role of chair for the firm’s health sciences department, which will launch as a multidisciplinary group including the health effects lawyers. Gussack will continue to work directly with clients, Gallagher said, but has also been asked to begin elevating the practices of others in her group.

“I really wanted to model for the firm what succession planning looks like when you have a huge practice,” Gussack said.

Gussack once had a $65 million book of business, according to a 2013 article in Legal affiliate The American Lawyer. Sources said Gussack was also a major supporter of merger talks between Pepper Hamilton and Reed Smith , which ended abruptly last year, because her practice would benefit from an international platform.

Gallagher said the firm has regularly considered merger opportunities, and that its courtship with Reed Smith was notable mainly because it was public. He said the firm continues to evaluate potential combinations, but would not disclose what firms or attributes it was pursuing. He acknowledged that every suitor of Pepper Hamilton has the health effects practice “on its short list.”

Partner Exits

For the time being, sources said, the scuttled Reed Smith talks and the low 2016 numbers have some partners eyeing the exits. According to ALM’s RivalEdge, which tracks lateral moves, 20 partners have left Pepper Hamilton in the past year.

“When people start jumping ship, people panic and head hunters start circling,” one former Pepper Hamilton partner said.

Gallagher said there was no material impact from the departures, and that those who left did so for individual reasons. Cole said he has seen no evidence that the Reed Smith merger talks were a factor in any of the departures.

Cole noted that the firm added 14 lateral partners throughout the year in a variety of locations including New York , Pittsburgh, Washington, D.C., and Los Angeles.

Overall, the firm’s head count decreased by 1.8 percent to 485. The equity partner ranks shrank by 4.3 percent, to 132, and the nonequity partner ranks grew by 10.2 percent, to 97.

A group of corporate lawyers that left in April for Hogan Lovells —Steven Abrams, John Duke and Rachael Bushey—marked a notable loss to the firm. The departure of Smith, Gomez and the rest of their group earlier this month was another major hit, sources said.

Cole said the loss of Abrams’ group had no effect on the firm’s revenue, and Gallagher said the firm was able to keep a lot of the group’s clients. He said Pepper Hamilton also retained a lot of the work from Smith and Gomez’s practice, and has talked about collaborating with them in the future.

Earlier this month, Pepper Hamilton lost Pittsburgh partner James Barnes and Philadelphia partners Jonathan Clark, Andrew Rudolph and Michael Kadlec, all to Blank Rome . Clark, Rudolph and Kadlec were in the employee benefits practice and Barnes has a family office practice that expands beyond Pittsburgh.

Gallagher said the employee benefits bench nevertheless remains strong.

Last month, IP lawyer Paul Legaard left to join Stradley Ronon Stevens & Young . In December, life sciences partners Jeffrey Libson and Geoffrey Starr decamped for Cooley LLP. In October, tax controversy partner Kevin Johnson departed for a position at Baker & Hostetler .

For 2017, Cole said the firm has adjusted its attorney ratio to better match expected demand. But no layoffs were involved in that adjustment, Gallagher said.

“The market and the world should not be surprised that Pepper Hamilton , coming off its best year, that there was some dropoff,” Cole said.

Cole said the white-collar and transactional practices are expected to be busy in 2017, as well as IP litigation. The firm plans to seek opportunities to grow its existing offices, he said.

Contact Lizzy McLellan at lmclellan@alm.com. On Twitter: @LizzyMcLellTLI