Doing Business with the City

Chart: Seeking Expertise Chart: Going Outside If you’re aiming for a piece of San Francisco’s outside counsel business, find a specialty. And if you want a particularly big target, home in on airport, energy or public finance law. Lawyers with those specialties got the bulk of the city’s legal business during the last four fiscal years, according to a Recorderanalysis of outside counsel contracts and contract amendments obtained from the city attorney’s office under a public records request. From July 1, 2000, through June 30, 2004, the city attorney awarded work worth up to $19.8 million to a total of 60 firms. About 24 percent of the potential fees were for work related to San Francisco International Airport. Bond counsel got 22 percent of the pie. Another 22 percent was designated for energy-related work, nearly all of it in one contract with Skadden, Arps, Slate, Meagher & Flom. Each agreement reflected maximum fees, though the city could end up paying less to complete a job, or more if a contract is amended in the future. The potential worth of eight contingency contracts is also difficult to gauge, because they call for firms to collect a percentage of any settlement or judgment. City Attorney Dennis Herrera and his predecessor, Louise Renne, articulate philosophies of doing as much work as they can in-house. Both said the city looks to outside counsel in limited situations. Herrera, who took office in January 2002, says his 176-lawyer office has a written protocol on when and how his office should choose outside lawyers. There are times the city needs more expertise, or when there may be a conflict of interest, according to office spokesman Matt Dorsey. The city also looks for outside help when it can minimize cost and risk by entering a contingency agreement, for example. There’s an absolute policy behind all the bond counsel hiring. Investors want independent specialists to sign off on sales of bonds and the like. So the city hires outside lawyers whenever it needs to issue debt, such as bonds or certificates of participation, to supplement in-house lawyering, Herrera said. But unlike many local governments such as San Diego, where County Counsel John Sansone relies on one firm for most bond counsel work, Renne and Herrera said they’ve made a conscious effort to spread their public finance work around. The office periodically goes through an application process to find a qualified pool of bond firms and picks from that pool when jobs arise, according to Dorsey, Herrera’s spokesman. More than half of the 27 bond counsel contracts over the last four years were assigned to pairs of firms that split the work, and fees. Often, the city attorney paired a large firm with a small local or minority- or women-owned firm, Herrera said, in order to give work “to a diverse pool of folks.” When it comes to winning other work, attorneys say the process can be as formal as responding to a request for proposals, or as informal as getting a phone call. Herrera’s policy is to personally review and approve any hiring, though it is attorneys in charge of the office’s legal teams who typically recommend whether to use outside counsel, and whom to pick, according to Dorsey, the office spokesman. There seems to be “a fair degree of discretion” given to the deputy city attorneys, said Robert Thompson, a San Francisco partner in Sheppard, Mullin, Richter & Hampton’s real estate and land use group. “I don’t think that it’s a very political process,” Thompson said. That sentiment was repeated by lawyers from other firms, some of which — like Sheppard, Mullin — got contracts under one city attorney but not the other during the last four years. For the four years beginning in July 2000 the city’s outside counsel contracts climbed from a maximum annual value of $3.9 million to $7.7 million in fiscal 2002-03, before sharply dropping to $1.7 million in the final fiscal year that ended in June. The surge in 2002-03 owes in part to a $3 million extension with a trio of firms for bond counsel work that began in 1997 and will presumably continue through 2005. Another of the biggest contracts went to Farella Braun & Martel. It calls for up to $2.6 million in hourly fees plus a contingency fee. The firm is serving as co-counsel in a federal suit against Tutor-Saliba Corp. that accuses the Southern California contractor and related companies of fraud while working on construction projects at SFO. But the largest contract over the four-year period went to Skadden. The deal called for Skadden to help review and renegotiate energy contracts, and litigate over them if necessary, toward the end of California’s energy crisis. The New York- based firm’s agreement for up to $4.2 million accounted for about 97 percent of the potential work for energy assignments over the four-year period. Ultimately, Skadden was paid about $2.9 million under the contract, according to a spokeswoman for the city attorney’s office. Herrera says the city reached settlements that resulted in “significant savings.” “They do charge a lot, there’s no doubt,” Renne said of Skadden, which listed hourly attorney rates from $340 to $675 in its contract. “I had been told by a number of people that Skadden, Arps had some of the best energy lawyers in the country.” DONORS LARGELY ABSENT Over the years, there hasn’t been much noise over San Francisco’s use of outside counsel, although the city attorney maintains a lot of discretion in deciding when to look outside and whom to award contracts. James Lazarus, one of the candidates who ran against Herrera in 2001, recalls turning down campaign contributions in one situation that struck him as inappropriate. While it wasn’t unusual to be invited to speak after-hours to lawyers at a firm, at one such event someone handed him an envelope with contribution checks, he said. Although no one said anything about helping the firm get city business, “I said that I really couldn’t accept them since the firm was doing business with the city attorney, and would probably continue to do business with the city attorney,” Lazarus said. Herrera said he never encountered a similar situation on the campaign trail. The 82 lawyers who signed outside counsel contracts over the four-year period included 11 of Herrera’s political supporters. For example, his campaign got $450 from Arthur Hartinger, a former deputy city attorney now at Oakland’s Meyers, Nave, Riback, Silver & Wilson. That firm received contracts and amendments over the four-year period worth up to $60,000 under Renne, and up to $991,000 under Herrera. Another $500 came from Morrison & Foerster partner Zane Gresham, who over the four years signed contracts and amendments during Renne’s term worth up to $1.45 million, and during Herrera’s term up to $610,000. But checks from the 11 people and their firms added up to $8,350, compared to the nearly $440,000 Herrera had raised for political campaigns through June 2004, according to an analysis of campaign finance records. Two law firms that stood out in campaign contributions received relatively little in the way of work from Herrera. Milberg Weiss Bershad Hynes & Lerach, which had previously partnered with the city on its tobacco litigation, and 30 of the firm’s attorneys, gave a combined $11,550, according to information from the city’s campaign finance database. In the last four fiscal years, Milberg received one contingency contract with the city during Renne’s tenure, and another with the city’s employee retirement system during Herrera’s term. Sixteen lawyers from Cotchett, Pitre, Simon & McCarthy gave $7,950 altogether, but that firm had no contracts during the four-year period. “The fact of the matter is that we make our decisions based on people’s specialized expertise, our need to minimize conflicts, and what is going to minimize exposure to the taxpayers,” Herrera said, adding that the overwhelming percentage of contracts during his tenure have gone to people who didn’t contribute to his campaign. “Whether one gave money to me or not plays absolutely no role.” Harvey Rose, who’s been the budget analyst for the Board of Supervisors since 1971, has reviewed individual contracts that have gone before the supervisors, but said he doesn’t recall the board ever asking his office to do a broader review. And though San Francisco Controller Edward Harrington completed an audit of the city attorney’s office at the end of Renne’s tenure, it didn’t examine the use of outside counsel. The topic “didn’t rise to the top as a concern” among the city attorney’s clients his office interviewed, Harrington said. “The firms that they typically end up picking are just really well known firms that have some specific expertise,” Harrington said. “It’s kind of above reproach in some ways.” Though the audit came out largely complimentary, Harrington strongly urged the city attorney to go to the county supervisors and mayor to seek consensus “before committing city resources to risky, lengthy affirmative litigation.” Renne opposed the suggestion when the audit was completed, four days before she left office. Herrera says the city attorney has to get the Board of Supervisors’ approval on large contingency contracts anyway. The city attorney pays some but not all of the cost of outside counsel. Sometimes the money comes from the city department being served, Herrera said. AIRPORT POWER STRUGGLES When it comes to outside counsel, there have been some power struggles between the city attorney’s office and the city’s airport, where legal work accounted for up to $4.8 million of the outside counsel contracting over the last four years. Deputy city attorneys make up the airport’s on-site legal department. Renne said she sometimes disagreed with the airport’s director or commission on whether outside counsel were necessary. “But under the charter, the airport did have a certain amount of independence in hiring outside counsel, and they had hired outside counsel for years,” Renne said. “To this day it still sticks in my craw a bit that they hired as many outside counsel as they did. I thought it was excessive,” she added. “There were a lot of battles over it.” Mike McCarron, the airport’s director of community affairs, characterized them as “nothing other than reasonable people disagreeing on an issue.” Until a couple of years ago, said Herrera, the airport and the city’s Public Utilities Commission could hire outside counsel directly, with the city attorney’s office just approving the contracts as to form. But toward the end of his first year in office, Herrera began insisting the city attorney sign as a party, he said. “We’ve essentially taken more direct control of the contracting.” “What I recognize is that certain [firms] the airport hired in the past had a great deal of expertise,” he said. But to keep costs as low as possible, “going forward I’ve tried to promote competition at the airport.” “Competition is good, but you also need the expertise,” McCarron said, adding that the airport’s a particularly complex arena where federal, aviation, bankruptcy and noise-related laws are all part of the mix. Noting that the airport pays for its contracts with revenue generated at SFO, he added, “We use the city attorney for other things all the time. It’s just in these particular areas the Airport Commission is more comfortable using outside counsel.” It’s tough to tell if Herrera’s tug on the reins has had an effect. Due to the progress of major construction projects, Herrera says, the airport hasn’t needed as much legal work since he came into office. The breadth of legal contracts at SFO touched on a variety of work, from bankruptcy to environmental law. Not counting the Tutor-Saliba case, or the $3 million bond counsel contract extension, there were 31 contracts for airport-related work. And one firm — Morrison & Foerster — signed up for more than 40 percent of the potential $4.8 million in fees. MoFo partner Gresham, whose eight contracts added up to $2.1 million in potential fees, has a history with the city that reaches back decades. When airlines sued San Francisco in the early 1980s, accusing it of misusing funds generated at the airport, then-City Attorney George Agnost turned to Morrison & Foerster litigator James Brosnahan to help defend the case. Gresham, a young partner at the time, pitched in. In the course of settling, the firm drafted the airport’s lease agreement — and a niche was born. “That launched what has become for us a national practice in advising airports,” said Gresham, now co-chair of the firm’s airports and aviation group. Mara Rosales, who as a deputy city attorney acted as the airport’s general counsel from 1992 to 2003, says that during her tenure she was committed to developing and relying more on in-house talent, as well as diversifying outside counsel. And she thinks she succeeded. As for Morrison & Foerster, they’re “incredibly qualified attorneys,” she said — and no other firm in California had a similar full-service airport practice. Gresham said his firm has “had to demonstrate our continued value,” going through a competitive process for some recent work related to construction, as well as a plan to realign runways. McCarron, in turn, says the airport has developed trust and confidence in Gresham over the years. “No one is, obviously, indispensable. But if you develop any type of a relationship, you like to keep it going.” If Herrera is looking to encourage competition for the airport’s business in the future, though, Rosales could be among the beneficiaries. After her long stint as GC, she spent a year as the airport’s deputy director. And she left SFO in January to start an airport practice group at Meyers, Nave, taking with her some work she’d already begun at the airport. Rosales says she expects to look for work at SFO, among other airports, but she’s not going after Morrison & Foerster with guns blazing. In fact, she notes, her firm has already paired up with Gresham’s for a project in Los Angeles. “I don’t want to take anything from [Morrison & Foerster],” said Rosales. “But at the same time, I think what I offer is in some ways a more comprehensive perspective on airport problems,” because most of Meyers, Nave’s clients are public agencies. “If you look at our price structure, it’s more than competitive. I’m cheap,” she said. “We’re trying to be like the JetBlue of the airline industry.”