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Weakened by an anemic tech sector and fighting each other for precious litigation work, the Bay Area’s biggest law firms scored sallow returns in 2002 with only a few managing to post significant growth in profits or revenue, The Recorder‘s annual survey of firm finances shows. The best that most could hope for was single-digit revenue increases — and few achieved even that. Once high-flying technology players like Wilson Sonsini Goodrich & Rosati; Brobeck, Phleger & Harrison; Cooley Godward; and Gray Cary Ware & Freidenrich saw dramatic drops in their grosses, with Brobeck alone accounting for a nearly $100 million decline. Even firms that eschewed much of the late ’90s technology boom saw their usually recession-proof practices pounded by the dismal economy. Gross revenues at firms like Morrison & Foerster; Thelen Reid & Priest; and Littler Mendelson were flat, and they slid at Pillsbury Winthrop. Only public finance powerhouse Orrick, Herrington & Sutcliffe and litigation-heavy Heller Ehrman White & McAuliffe claimed bragging rights, with Bay Area-leading 9.5 percent revenue growth at Orrick and a 7 percent jump at Heller. But declining or flat revenues didn’t necessarily signal lighter wallets for partners. Despite dismal revenue returns, average profits earned by equity partners increased at seven of the 10 highest-grossing Bay Area firms. The key to maintaining profitability, firm managers said, was aggressive cost-cutting, particularly in lawyer and staff salaries, and holding the line on making new equity partners. The 10 highest-grossing firms employed 540 fewer attorneys than they did in 2001 — or a law firm roughly the size of Cooley Godward — and 14 fewer equity partners. In two cases — Pillsbury and Cooley — grosses dipped, but net income and per-partner profits actually increased. Both of those firms have significantly fewer lawyers than they did two years ago. “I suspect [the profit increase] reflects better management of overhead and management of lower producing partners,” said Peter Zeughauser, a law firm consultant with Newport Beach-based the Zeughauser Group. Orrick, Herrington saw the biggest boost in profits during 2002, increasing 18 percent, from $765,000 to $875,000. That jump was enough to earn the firm another laurel: the Bay Area’s highest profits per partner. “We expanded this year in IP, adding lawyers on both coasts,” said Orrick Chairman Ralph Baxter Jr. “We were able to reposition in an agile way, moving resources from where client demand was slower.” But that kind of success seemed to highlight the continuing spiral of the region’s tech specialists. In 2000, when firms were feasting on Silicon Valley’s fortunes, Brobeck scored profits of $1.17 million per partner — the highest for any big firm on the West Coast. Wilson Sonsini wasn’t far behind, with average profits of $930,000. Two years later, Wilson’s profits have slipped to $800,000 per partner, and Brobeck partners earned about $550,000 on average during 2002. “This was a terrible year,” said Gray Cary Chairman J. Terence O’Malley, whose tech-centric firm saw both revenues and profits drop in 2002. “And we’re going to work very hard to make 2003 a very profitable year.” Among the highest-grossing Bay Area firms, MoFo remained No. 1, hitting the $500 million mark for the first time. It was followed by Pillsbury Winthrop, which edged up to No. 2 despite losing $30 million in revenue. Orrick hit No. 3; Wilson landed at No. 4; and Heller bounded to No. 5. Rounding out the top 10 were Brobeck, which fell from No. 2 to No. 6; Cooley, No. 7; Thelen, No. 8; Gray Cary, No. 9; and Littler Mendelson returned to the top 10, taking the final spot from tech-heavy Fenwick & West. MORRISON & FOERSTER Morrison & Foerster sailed a steady — if unspectacular — course through the turbulent economy, slightly nudging up its profits and revenue, and maintaining its position as the top-grossing firm in the Bay Area. The firm’s $505 million gross represented a 3 percent increase over 2001, and per-partner profits climbed from $675,000 to $700,000. As in 2001, MoFo Chairman Keith Wetmore attributed the firm’s financial stability to its variety of practices and its geographic reach. “The important themes for our success continue to be diversity of practice and geography, and the importance our international operations — particularly in Japan — continue to play,” Wetmore said. Wetmore said the tech arena also remained important to the firm. Specifically, he cited work with sophisticated cross border transactions, such as the joint venture recently completed between MoFo client Hitachi and IBM Corp. MoFo also benefited from its busy patent prosecution and patent litigation practices and the continued strength of the biotechnology sector, Wetmore said. Among major litigation in 2002, the firm represented EchoStar Communications Corp., successfully defeating a patent infringement suit brought by Gemstar-TV Guide International Inc. before the International Trade Commission, and it continues to represent El Paso Corp. before the Federal Energy Regulatory Commission and state courts. While corporate work remained moribund, MoFo handled several deals during the year, such as representing Digimarc Corp. in its purchase of a division of Polaroid Corp. and the investors who acquired the San Jose Sharks hockey team. MoFo avoided across-the-board layoffs that other firms implemented. Instead, it trimmed its ranks through performance-related means, which affected both associates and partners. During an economic downturn “you have to use rigor” in evaluating partner performance and compensation, Wetmore said. “This can lead to a variety of outcomes, from counseling out to reconfiguration of compensation.” As for the future, Wetmore said he expects MoFo to have another office in China by the end of 2003. The firm already has offices in Beijing and Hong Kong, which helped MoFo win the beauty contest to represent the Beijing Organizing Committee for the 2008 Summer Olympics. Wetmore said the firm “continues to look at opportunities on the continent,” which include setting up a European outpost or acquiring a firm there. “Everything is on the table other than a merger with a Magic Circle firm,” Wetmore said. While MoFo once sought status as a go-to tech firm, it is now emphasizing its broader focus. “We have redefined who our competition is and are very much poised to be comparing ourselves against the new competitors” and disregarding the old competitors, Wetmore said. The new rivals, he added, are “big footprint national firms that can satisfy clients in a variety of geographic locations.” PILLSBURY WINTHROP The second year into its bicoastal merger has been a challenging one for Pillsbury Winthrop. The firm was swamped with unwanted press and a $45 million defamation suit as a result of the controversial press release it issued when partner Frode Jensen III left for Latham & Watkins. Meanwhile, the tough economic climate continued to take its toll on the firm. Gross revenues dipped 6.5 percent, to $415 million. Pillsbury shuttered its Northern Virginia corporate practice and its Orange County real estate practice, and laid off a number of staff members. It also postponed the starting date of its incoming associate class, and it has 10 fewer equity partners than it did in 2001. The net result: The firm ended the year with about 100 fewer attorneys. Of course, the diminished attorney ranks helped shore up the firm’s profits per partner, which averaged $700,000, up 5.2 percent from 2002. There were many more management challenges than in years past, acknowledged firmwide Managing Partner Marina Park. But among the high notes for 2002 were Pillsbury’s IP litigation group and its public finance group, which both had busy years, she said. And the firm’s litigation group chalked up some big victories, including its representation of railroad equipment manufacturer Bombardier Inc. and semiconductor manufacturer Hynix. Meanwhile, the firm integrated all of its offices onto a single technology platform, a milestone that marked the official completion of the 2000 merger between Pillsbury Madison & Sutro and Winthrop, Stimson, Putnam & Roberts. “The state of the economy and some of the difficulties that our clients are facing made it more of a challenge than some of the other years,” says Park, “but I think we’re pretty happy with how we came out and our position for 2003.” ORRICK, HERRINGTON Partners at Orrick, Herrington can now boast that they have the highest income among Bay Area firms. Orrick’s profits per partner shot up 14 percent in 2002, to $875,000, while its gross revenue increased 9 percent, to $400 million. It was one of only three Bay Area firms to reach the $400 million mark in 2002. Orrick’s Baxter attributed the firm’s strong financial performance to its diverse practices and national and international offices. Baxter said the firm’s structured finance and public finance practices both had record years. Other strong practices included project finance and high-stakes litigation. For the past several years, Orrick has attempted — with only limited success — to emulate tech law firms like Wilson and Brobeck. This year, that may be a blessing, given the firm’s stellar returns. However, Baxter isn’t willing to concede that tech is dead. “We’re focused on the technology sector, but it’s balanced,” he said. “We’re very focused on San Francisco and Silicon Valley, but it’s balanced.” In addition, he said, the firm was able to shift attorneys from slower practice areas — such as corporate technology work — to other corporate and restructuring assignments. Orrick handled a number of significant transactions and litigation matters over the year, including structuring work for WorldCom Inc. and US Airways Group Inc. It also served as national coordinating counsel for the Dow Chemical Co. in asbestos litigation in West Virginia. Orrick incurred substantial expenses over the year in opening an Orange County office, a Paris office and its so-called Global Operations Center in Wheeling, W.Va. It acquired an Irvine office when intellectual property boutique Lyon & Lyon shuttered its doors at the end of August. Orrick hired the Irvine partners, as well as attorneys from other Lyon offices. Similarly, Orrick gained a presence in Paris through the acquisition of the 42-attorney Paris office of London-based Watson, Farley & Williams. Baxter said Orrick would continue to add lawyers in its California, New York and European offices. He said it is foreseeable that Orrick would add one or more offices in Europe in 2003 and beyond. “Most likely there will be expansion of existing offices,” he said. “We think we’re in the right places now.” WILSON SONSINI Wilson Sonsini Goodrich & Rosati may have managed to fight off a steep plunge in revenue in 2001, but the firm isn’t likely to pull off the same maneuver a second year in a row. With technology companies languishing through a recession in 2002, Wilson is bracing for an estimated 18 percent drop in revenue. The firm is expecting to collect $360 million in revenue for 2002 by the time its fiscal year ends Jan. 31. In fiscal 2001, the firm grossed $438 million. The outlook is better on the profit picture. Firm managers expect to stave off a disastrous drop in profits, holding the decline to 8 percent. Wilson estimates its 139 partners net $111.2 million, or an average of $800,000 per partner. Donna Petkanics, Wilson’s managing director of operations, said the firm was strict about controlling costs in light of the falling demand for legal services. “We’ve maintained the net income by carefully managing expenses to be in line with the demand for our services,” Petkanics said. Wilson managed to unload some excess office space last year, subleasing about 30,000 square feet in San Francisco to Clifford Chance and in Palo Alto giving back a building it had subleased from Genencor. The firm also trimmed its staff and lawyer ranks. As of Aug. 31, the firm had 670 lawyers, a 5 percent decline from 708 lawyers on the payroll in 2001. But when compared with the 812 lawyers on the firm’s rolls in 2000, the firm shows a 17 percent decline in lawyers. In August, Wilson staged its first big layoff of staff, cutting 100 workers, 11 percent of its 900-member support and administrative staff. Also in the summer, the firm said it had cut under-performing associates and would further trim its associate ranks to deal with the poor economy. The firm did not divulge, however, how many associates that entailed. On the revenue side, Wilson was still collecting in 2002 for its work on the merger of longtime client Hewlett-Packard Co. with Compaq Computer Corp., which closed in May. The firm’s 170 litigators also worked on a wave of securities litigation and several intellectual property battles. “We still have had significant fees in the general corporate and general business [departments],” Petkanics said. HELLER EHRMAN Buoyed by its strong litigation department and a diversified portfolio of practices, Heller continued to evade the ill effects of the recession. The San Francisco-based firm booked $354 million in revenue for the year, up 7 percent from 2001. Average profits per partner jumped 10 percent, to $710,000. “We continued to develop our national profile, and we were able to successfully attract the kind of work we want to do across a range of practice areas,” says Chairman Barry Levin. Real estate proved a reliable engine of growth in 2002, particularly Heller’s work for luxury hotel chains like the Four Seasons Hotels Inc. According to real estate group co-chair Brian Smith, Heller handled about 10 deals in the $100 million to $250 million range during the year. And the litigation group had a busy year with securities, antitrust and IP litigation. To be sure, Heller was hardly immune to the effects of the nation’s economic malaise. The firm’s growth was much more modest than in prior years — 2002 was the first time in five years that Heller hasn’t experienced double-digit revenue growth. In October, the firm pulled the plug on its Montgomery County, Md., office, conceding that the life sciences market it had hoped to tap into hadn’t materialized. The firm slowed down its rate of growth, says Levin, because of the uncertain economic outlook. Nonetheless, the firm added nine lateral partners in 2002 and ended the year with 535 attorneys, compared with 500 at the end of 2001. BROBECK The firm that topped the charts in 2000 continued to sink like a rock when it came to revenues and profits in 2002. Brobeck reeled from partner defections and the poor economy, suffering the greatest drops in revenue, net income and per-partner profits last year among Bay Area firms. Gross revenue fell 21 percent, to $353 million, and following the loss of a quarter of its equity partners, the firm’s net income plunged 37 percent, to $68 million. Profits per partner also declined from $660,000 in 2001 to $555,000 in 2002, a 16 percent slide. Brobeck management declined to answer questions about the firm’s financial performance. The firm’s director of communications said Chairman Richard Odom and firmwide Managing Partner Richard Parker were not available for comment despite repeated requests for interviews, nor was any member of the firm’s management committee available. Instead, Parker issued a statement in which he cited the poor economy and the downsizing of the firm as major issues facing the firm through the year. “Due to the weakness in the national economy, 2002 was a challenging year for Brobeck. This was particularly true given that the economic environment disproportionately impacted technology companies, the public equity markets, merger activity and private equity financing of new technology companies — areas in which Brobeck has a long-established leadership position,” Parker said. “The general economic environment and several highly publicized departures resulted in a significant downsizing of the firm during the year.” Brobeck is half the size it was two years ago when the firm had more than 900 attorneys. As of August 2002, the total lawyer count dropped to 493, a 38 percent decline from the previous year. During the first eight months of 2002, the firm lost 40 equity and 15 non-equity partners. It also trimmed its associate ranks through a voluntary buyout program and two rounds of layoffs. The turmoil at Brobeck began following the expulsion of former Chairman Tower Snow Jr. in May. Seventeen partners subsequently joined Snow at Clifford Chance. A number of additional partners then defected to other firms, including 11 intellectual property partners who jumped to Dewey Ballantine. In November, Brobeck initiated steps to stem the tide of partner departures, reportedly making it financially painful for anyone who opted to resign. The plan has apparently been effective, as no partners have left in the past month. It’s unclear how much business the partners who’ve left Brobeck took with them, although the big drop in net income gives some indication. The firm also incurred significant expenses from lease obligations it took on when the firm was in the midst of a growth spurt, and it is understood to be carrying a heavy debt load. In light of its changed fortunes, Brobeck has been shopping for a merger partner. The firm began talks with Philadelphia-based Morgan, Lewis & Bockius a few months ago after negotiations with Hogan & Hartson broke off. COOLEY GODWARD Cooley tried to maneuver to stable ground in 2002, and succeeded to some extent: While gross revenue declined 15 percent, to $301 million, its net income held steady at $103 million, and profits per partner rose 3 percent, to $735,000. “We feel it’s a respectable outcome, and we continue to be well positioned for the future,” said Mark Pitchford, Cooley’s chief operating officer. “To see an increase in net income is a satisfying result given what we and our competition in the tech market have had to endure.” Pitchford said the firm was able to maintain profitability by controlling expenses and reducing head count. “Expenses were heavily monitored and we tried to maintain capacity in line with available work flow,” Pitchford said. The firm laid off 27 associates and 19 staff members in November. Pitchford said that since the reduction occurred late in the year, the severance packages would not have much of an effect on the firm’s 2002 finances. The firm also cut seven associates and about 19 staff earlier in the year. Cooley had four fewer equity partners in 2002 and six more non-equity partners compared with the previous year, and that helped profits per partner. Like other firms, Cooley’s litigation department helped boost productivity averages across the board. Among its major cases, Cooley represented Walter Hewlett in his unsuccessful effort to kill Hewlett-Packard Co.’s merger with Compaq Computer Corp. The firm also represented AT&T Corp. in a patent infringement suit against Microsoft Corp., assisted PG&E Corp. in its bankruptcy trial, and served as lead counsel for PacifiCare Health Systems in a class action brought against the major national managed care companies. While there was less transactional work this year, Pitchford said the firm was involved in some of the biggest deals of 2002, including Emeryville toy maker Leapfrog Enterprises Inc.’s initial public offering. He said the firm’s life sciences licensing transaction group was very busy, and the fund formation group is projected to close 30 deals. Through the year there was much speculation in the legal community that Cooley might be looking for a merger partner. But the firm broke off merger discussions with New York’s Pennie & Edmonds in October. While another suitor has not approached Cooley, Pitchford suggested that the firm might still opt to tie the knot at some point. “Our major focus is to ensure our firm is run as well and efficiently as a profitable business as we can,” whether alone or as a combined entity, Pitchford said. “If we are comfortable being independent, fine. If something intriguing comes along with regard to a combination, we want to be as well positioned as we can to evaluate that.” THELEN REID & PRIEST Thelen managed to eke out a 3 percent increase in revenue last year thanks in large part to some of the turmoil in the nation’s energy industry. The firm logged $209 million in revenue in 2002, up $7 million from 2001. It’s a small hop in revenue, but being on the plus side was good news for any Bay Area firm this year. Thelen, however, couldn’t pull off a similar boost in per-partner profits. While the firm’s overall net income increased by 7 percent, to $60 million from $56 million, its ranks of equity partners swelled by 20 percent, to 120 from 100. Because more partners took a slice of the profits, average profits per equity partner fell 10 percent, to $500,000 from $560,000. The firm hired 11 lateral partners in 2002, including nine from Washington, D.C.’s Arent Fox Kintner Plotkin & Kahn. The remaining new partners were elevated from the firm’s ranks of non-equity partners, which last year stood at 70. “While we understand that growth in our ranks had a negative impact on profits per partner, we looked at 2002 as a year of investment,” said Richard Gary, Thelen’s chairman. Another big investment the firm made in 2002 was new offices for the firm’s San Jose, Los Angeles and New York satellites, Gary said. The firm absorbed about $20 million in increased expenses related to the move, he said. And the firm acknowledged that added expenses weren’t the only things affecting profits. The sluggish economy wasn’t helping matters either. “We did not predict the impact of the continuing economic uncertainty and political uncertainty as well,” Gary said. The good news for the firm came on the revenue front. Thelen was the beneficiary of fallout related to the construction boom in the past decade and the turmoil in the nation’s energy markets. Gary said in the wake of the building boom, the firm’s construction litigation practice took off. And while capital markets work was off for most firms, Thelen’s New York finance lawyers were busy working for clients in the business of producing energy or supplying it to large utilities. For the most part, these companies were facing falling energy prices and were forced to restructure or undo financial transactions, said Mark Weitzel, head of Thelen’s utilities practice. GRAY CARY Gray Cary bore the full brunt of the economic downturn. The 400-lawyer firm logged declines in both revenues and profits because of the lagging demand for corporate legal services. The firm’s gross revenue dropped by 9 percent, to $205 million, down from the $224.5 million the firm logged in 2001. The profits picture was grimmer, with profits per partner dipping below the $500,000 mark. The firm logged $460,000 in profits per partner last year, a 10.6 percent decline from the $515,000 it scored in 2001. Gray Cary’s equity partners haven’t seen such a low payday since 1999, when the firm logged $440,000 in profits per partner. With an overall 20 percent decline in total net income, the firm’s per-partner profits could have shrunk even further. Gray Cary logged $40.8 million in total net income last year, compared with $50.8 million the prior year. However, the firm managed to shed nine equity partners, shrinking its ranks by 9 percent, to 89 partners. The firm’s total lawyer headcount dropped by 10.7 percent, from 448 lawyers. J. Terence O’Malley, firm chairman, didn’t mince words about 2002: “These are terrible numbers,” O’Malley said. O’Malley said he’s trying to look on the bright side and that the worst may be over. Gray Cary ramped up during the boom and has had to undo some of the growth. That included axing 46 lawyers and 68 staff on Jan. 3, 2002, and another 22 associates and 33 staff on Aug. 29. “We spent a lot of money in 2002 on compensation and severance, but our overhead will be at least $10 million lower this year, and that will drop to the bottom line,” O’Malley said. The firm relied more heavily on litigation than in prior years for revenue, O’Malley said. While the corporate group typically racks up about 55 percent of the firm’s revenues, last year the reverse was true, with litigation generating more than corporate, he said. The firm’s litigation group generated revenue with an increase in intellectual property work involving clients like Maxtor Corp., Honeywell Inc., Microtune Inc. and Samsung Corp. LITTLER MENDELSON As employers continue to feel the sting of the economic downturn, employment specialist Littler Mendelson is feeding on the steady stream of resulting work. “The second and third wave of layoffs has resulted in companies running out of severance money, so you’re seeing more and more need for assistance,” says President and Managing Director Wendy Tice-Wallner. But while this work has allowed Littler to remain stable, it has hardly propelled the firm to new heights. Gross revenues for the year were $163 million, up 4 percent from the year before. And while Littler has never been known for drastic growth in its average profits per partner, the firm’s meager 1 percent increase, to $370,000, represented its smallest gain in five years. Head count remained relatively unchanged at 375 attorneys. And Littler did not open any new regional offices, compared to 2001 when it launched two offices in Pennsylvania. The firm continued its push into non-billable-hour services, such as marketing Littler-branded legal information and books. According to Tice-Wallner, the firm is pursuing a number of ventures with other companies to publish its content. Reporters Brenda Sandburg, Alexei Oreskovic, Senior Writer Renee Deger and Assistant Managing Editor David Brown contributed to this story. Related charts: The 10 Highest Grossing Firms in the Bay Area Rankings by Profit per Partner Compensation for All Partners Rankings by Revenue Per Partner The Bay Area’s 10 highest grossing firms, ranked by percentage loss of total lawyers in 2002

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