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When telecommunications partner Brad Mutschelknaus was recruited to Kelley Drye & Warren in 1996, the New York-based law firm charged him with the formidable task of turning its nine-person D.C. outpost into a noticeable force in the nation’s capital. Five years later, Mutschelknaus, a former partner at Wiley, Rein & Fielding, was nearing that goal. The office’s Washington-area head count had jumped to 70 attorneys. Its telecommunications specialty included a prime list of high-tech startups. And the firm was readying for the launch of its Northern Virginia office, which opened in March 2001. The heyday, however, was short-lived, and like many of the area’s law firms, Kelley Drye took a plunge when the dot-com boom went bust. But in recent months law firms have begun to respond to an uptick in the economy by bringing more lawyers on board. Overall lawyer head count among this year’s Legal Times 150 grew about 2.4 percent to 14,524, and among some of the up-and-coming firms the pace was even faster. That growth was spread more broadly as well, with nearly 60 percent of firms posting an increase in head count compared with 44 percent of firms in 2004. Among those with the largest increases are Hunton & Williams, Holland & Knight, Latham & Watkins, and King & Spalding, which have grown their ranks at least nine times the average of all the firms surveyed. Yet while many of Washington’s legal shops have crafted strategies to pull up their numbers, Kelley Drye has continued to slip — and this year dropped off the Legal Times 150 list entirely. The firm’s two Beltway-based offices had 47 attorneys at the time of the survey and just 29 in the District. The saga of Kelley Drye’s Washington-area offices offers a glimpse of how the shocks of the market, coupled with a few personality conflicts and the departure of key practice groups, can whittle a firm’s numbers down even when the economy is on the rebound. The firm certainly is not alone, nor has its decline been the most precipitous. Some of the city’s biggest powerhouses have struggled to keep pace as well. Arnold & Porter saw the largest dip among the city’s top 10 firms with a 9.5 percent drop to 417 attorneys. Swidler Berlin, which has been roiled by the fallout from a failed merger, posted an even steeper decline of 13.5 percent to 148 lawyers. New York-based Sullivan & Cromwell’s shop fell 17.4 percent to 38 lawyers. Of course, a decrease in head count does not always mean a firm is in jeopardy of closing down. In Kelley Drye’s case, for one, profits have increased firmwide. And at firms such as Arnold & Porter and Sullivan & Cromwell, much of the loss has been within the associate ranks, which saw slower-than-normal attrition over the past few years because of the slackening of economic activity. Still, these examples are a reminder that even while business is picking up, hiring remains tight. “Firms are really counting heads,” says Steve Nelson, a legal recruiter at the McCormick Group in Arlington, Va. “Everything is profits per partner and revenue per lawyer; so if there is a way to cut head count — particularly if it is nonrevenue-generating attorneys — they’re going to do it.” LATE FOR DINNER The New York-based firm had come to Washington in the 1980s as an offshoot of its largely litigation- and corporate-based practice. With roots going back to the 1830s, Kelley Drye — now with 271 attorneys nationally — counts major corporate entities among its clients, including JP Morgan Chase, for whom it is handling some Enron-related work. At its peak the firm had offices in Miami and California and even a few satellite offices in Hong Kong, Bombay, and Brussels, among others. But the firm has shuttered a handful of locations, and its seven offices remain largely concentrated in the New York area, Chicago, and Washington. Slimming down in this region was on Mutschelknaus’ mind when, one by one, Kelley Drye’s high-tech clients began slipping into bankruptcy. It was 2002 and the firm had only just settled into its new Northern Virginia base. The firm’s D.C. office had never been larger, and the move to Tysons Corner relieved some of the crowding in the firm’s downtown office. The Virginia outpost also seemed like a chance to pick up new corporate work from high-tech companies. “Corporate had begun to mature and obtained some attraction with clients out there,” says Mutschelknaus. “So we were hopeful that with locating them there, it would help it to grow.” Instead, Kelley Drye’s clients kept going out of business: E.Spire Communications, Net 2000 — the parade continued. Looking back, it was clear that the firm got into the Northern Virginia market a bit too late. So as the office’s revenues dropped, attorneys in Kelley Drye’s 43-lawyer telecommunications practice began to depart, some not by choice. The downturn hit Kelley Drye’s D.C.-area offices particularly hard because more than half of their attorneys were from the telecommunications group. Though the D.C. office had a litigation and small environmental team, the firm lacked broad-based regulatory practices — such as securities, antitrust, and government relations work — that are standard fare in most District law firms. This was just the start. In March 2002 the office took another blow when its approximately six-lawyer litigation practice walked out the door. The group’s only partner, Douglas Lobel, had won significant business for a new client, Qwest Communications. The problem: The Baby Bell company conflicted with the firm’s largely competitive local exchange carrier clients. Mutschelknaus wanted to keep Lobel, but the choice was either leave the client or leave the firm, and Lobel chose the latter, jumping ship to Morgan, Lewis & Bockius with a few million dollars in business and three other attorneys, according to lawyers familiar with the dispute. (Lobel later left there for Arnold & Porter.) His departure meant an end to the firm’s litigation practice. The few other associates were left without a partner to work for and headed to other places. The parting also left a sour taste in the mouths of many lawyers, who witnessed what one former attorney called a “slamming-door fight” between Lobel and Mutschelknaus. Mutschelknaus accused Lobel of shirking responsibilities to clients, a charge Lobel denies. Both parties confirm the details of the dispute. Lobel wasn’t the only partner whose departure led to a fight. William Wilson, former head of the Asia practice group, sued the firm in 2004 to get back pay and his $106,531 capital contribution. He joined Kelley Drye’s Washington office in August 2000, after starting the firm’s Hong Kong outpost, but less than a year later, he left for WilmerHale. On top of the capital payments, he alleged in a complaint filed in D.C. Superior Court that the firm had switched his partnership status and “retroactively” reduced his compensation by about $400,000. The firm fired back that it could not return the payments because Wilson had not released all claims against it, and accused him of using firm resources to develop business while he was planning to leave the firm. The suit was settled confidentially. There were other battles between departing attorneys. But it was in February 2004 that the firm faced its next substantial loss: its five-person environmental group, which jumped ship to Baker Botts. Lead partner Daniel Steinway declined to comment, although at the time, he told Legal Times that he wanted to join a firm with a bigger and broader environmental practice. The fights, however, four former Kelley Drye attorneys say, hurt morale. There were also lingering questions among associates about whether the partnership track, never a shoo-in at any firm, would be even tougher at Kelley Drye. And, says one former partner, “a lot of folks are concerned about the long-term consequences” of the office’s head count drop. Mutschelknaus, for his part, sees the departures as nothing out of the ordinary. “Some people have left that we were very sorry to see go,” he says. “Others have left that we knew that we would not miss. Overall, it is pretty much a wash.” WEIGHT WATCHERS As Washington went through this shake-up, Kelley Drye’s management was taking a harder look at its numbers. Although the firm has a list of high-profile clients, not every office was making its cut. The firm had shut down its money-losing Miami office in 1999, and then shuttered Hong Kong. And in 2003, Kelley Drye let go of its Los Angeles outpost. Though the closures helped boost firm revenues, which this year hit $905,000, they remain well below the more than $1 million-plus levels of firms such as Sidley Austin Brown & Wood and Skadden, Arps, Slate, Meagher & Flom. And many challenges remain. The D.C. region’s telecommunications group is now 29 attorneys, and revenues are still down 10 percent to 15 percent from their peak four years ago. Despite the recent hires, the litigation group has “not fully recovered” from Lobel’s departure, Mutschelknaus says. Kelley Drye also faces the long-term question of how to maintain a telecom practice at a time when the industry is consolidating and old business looks like it may dry up. Mutschelknaus says he isn’t worried, and points out that the firm has started hiring again. The firm made telecom partner Glenn Manishin, formerly of Patton Boggs, head of the litigation group. And it hired former Virginia Gov. James Gilmore to start a homeland security practice. In recent months, Kelley Drye has also been shuffling around attorneys. Five telecommunications lawyers were sent to Chicago and New York. A few of the Northern Virginia attorneys have moved to the D.C. office, although Mutschelknaus says that the firm has no plans to shutter its Tysons Corner branch. Mutschelknaus has built the D.C. office up once before. The past few years may have been a setback, he says, but the firm has no intention of dropping out of the race.” These bankruptcies tend to be hiccups, and they can be troublesome,” Mutschelknaus says. “But if you stick with it, you can manage it through them.”
Emma Schwartz can be contacted at [email protected].

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