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Big out-of-town law firms still see gold in Silicon Valley and they’re rushing in to open offices. Local firms say they’re not scared. The question is: Who’s the fool? Last week, Kirkland & Ellis’ plan to open an office in Silicon Valley came to light and Atlanta’s King & Spalding made its entrance by picking off eight lawyers from Perkins Coie. Next up is Texas-based Baker Botts, which has rented space in Palo Alto and expects to open by mid-year. L.A.-based Sheppard, Mullin, Richter & Hampton could be on the horizon. That firm has said it is actively talking to partners who could open an office. With the addition of Baker, 49 of the 100 biggest firms in the country will have offices in the tech capital, according to the 2007 Am Law 100 list. The region has surpassed the original Northern California destination for national firms, San Francisco, which has attracted about 40 of the top 100 firms. The influx has caused the Silicon Valley legal market to loosen since the early days when a handful of firms did most of the work. Those firms — which include Wilson Sonsini Goodrich & Rosati; Cooley Godward Kronish; and Fenwick & West — still control a large part of the market, but out-of-town firms like New York’s Davis Polk & Wardwell and Los Angeles’ Latham & Watkins have made serious inroads over the last decade. “Eight or 10 years ago, there were five or so law firms that did all the work — now it’s a much more fragmented market,” said William Kelly, a Davis Polk partner in Menlo Park who counts Oracle Corp. and KLA-Tencor Corp. among his corporate clients. Even with a looser market, many of the invaders have failed to get beyond the handful of lawyers they brought in to plant the flag, and others have simply flopped. New York’s Dewey & LeBoeuf, for instance, once had as many as 25 lawyers in East Palo Alto, but now has only two partners (one of them splits time in New York) and three associates. “Over the last 15 to 20 years, I’ve seen a lot of firms come into the Valley — some have succeeded and some haven’t,” said Darryl Woo, who heads Fenwick & West’s litigation practice. “It’s very hard to just get a bunch of people and be successful.” Barton Showalter, who heads Baker Botts’ 140-lawyer IP practice, said his firm will build the new office around IP lawyers. “California is a real natural place for us to be,” Showalter said. Natural, he said, because the firm already does work for local companies like Cisco Systems Inc. Showalter expects the office to be a mix of Baker lawyers from other offices and local talent. “This is a long-term strategy for us,” Showalter said. “In the long term, we expect our presence in California not be an outpost. It’ll be a real office.” Peter Zeughauser, founder of the Zeughauser Group law firm consultancy, said that 750-lawyer Baker’s IP practice makes it a good fit for the Valley. He said the same goes for Kirkland & Ellis, which also does work for Cisco and already has a strong San Francisco office. Whether the economy is a factor in the new firms’ success remains to be seen. The tech industry hasn’t suffered the way the rest of the economy has in the last six months, but local lawyers are still wary. “I think there’s a question about how the current economic slowdown will affect the local legal market — that’s a big question mark,” said Wilson Sonsini veteran Steven Bochner. “A prolonged period of economic slowdown has to have an effect on the tech market.” THE PEOPLE WARS The ingredients for a spicy new Valley office are simple, but hard to get: local lawyers with good books of business. Avis Caravello, a Bay Area legal recruiter, said that out-of-town firms will inevitably pay a high price if they want to enter the market with a bang. “If you want to bulk up quickly in the Valley and you want to reach a certain critical mass, then you do have to overpay,” said Caravello, adding that it can be a risk worth taking. “I think, if a firm’s revenues are up and it’s looked on as a strategic investment, and the firm can weather the financial hit it will take in getting the office up and running, then it will be a good thing,” Caravello said. Boston-based Goodwin Procter marched into Silicon Valley last summer and stole a number of well-regarded lawyers from local firms like Wilson Sonsini;, Townsend and Townsend and Crew; and Morrison & Foerster. The legal market was awed by the assault, but competitors continue to whisper that Goodwin overpaid its new hires. Kevin Dennis, who heads the Goodwin office, said the firm didn’t overpay anyone. “You have to bring in people at the level they should be paid at in your organization,” Dennis said. “Sometimes I think that does mean, because we’re profitable and successful, that it can be a little more.” Goodwin’s profit per partner was higher than any native Valley firm at $1.43 million in 2006. That could bode well for Kirkland & Ellis, whose PPP was $2.27 million, if the firm decides to recruit. King & Spalding, at $1.3 million, and Baker Botts and Sheppard, Mullin, each at around $1 million, may have more difficulty topping the local firms’ pay packages since the big Valley firms had similar PPP in 2006. Wilson Sonsini, with its masses of well-connected lawyers on Page Mill Road in Palo Alto, is often a target of newcomers. Those who succeed in luring one away often wear it as a badge of honor. “Sometimes we’ll lose young people because of that factor,” Bochner said. “They’re going to say, ‘We’ll overpay a Wilson lawyer to get our toe in the water.’” In recent years, recruiters say firms have had more luck with that, as in the case with Goodwin Procter, which dislodged Wilson’s entire fund formation unit, headed by Jonathan Axelrad. Wilson lost a few partners over the last year, including Axelrad, veteran litigator Robert Feldman to Quinn Emanuel Urquhart & Hedges, and life sciences lawyer David Saul to Boston’s Ropes & Gray. But industry observers say they don’t think it’ll hurt the firm. “Even though Wilson has suffered some lateral defections, they’re largely impregnable,” said Zeughauser. THE TECH PLAY In Silicon Valley, there are essentially two practices: IP and corporate. Baker Botts and King & Spalding, with its lawyers from Perkins Coie, are making the IP play and Kirkland & Ellis is expected to do the same. Recruiter Gary Davis of Patterson Davis Consulting said it can be easier to get an IP litigator with business than a corporate lawyer with business, because corporate work is more entrenched at the established firms. “There’s not the same barrier to entry on the litigation side if you have some strong relationships,” Davis said. “It’s more individual personality and on the corporate side there’s more institutional stability.” But Jean Fordis, managing partner of IP shop Finnegan, Henderson, Farabow, Garrett & Dunner, said it’s still not an easy task to build an IP presence in the Valley. Her Washington, D.C., firm entered the Valley in 1997 with a half-dozen lawyers and now has 44. “We came out with an international reputation in IP, but it still took us a long time to really get established,” Fordis said. “Having a foothold with six or eight attorneys is nice, but it’s not ‘established.’” Like Finnegan, other out-of-town firms with an IP emphasis have been able to bulk up and some have been very successful, like New York’s Weil, Gotshal & Manges. But few have been able to add an equally powerful corporate practice. Even with all the competition, hardly anyone expects big law firms to stop streaming into Silicon Valley. New companies are born every day and the existing companies continue to thrive. Even with some uncertainty on the horizon, it’s where the action (and money) is. “The biggest ‘why’ reason for firms is that this is probably the largest collection of public companies in the United States,” said Davis Polk’s Kelly. There’s still room in the market, but only a combination of deep pockets, proper practices and persistence can prevent firms from playing the fool. “I don’t think [the Silicon Valley legal market] will get saturated soon,” Zeughauser said. He added, “That doesn’t mean that everyone there belongs there.”

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