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In March 1986 lawyers and staff at Seattle’s Shidler McBroom Gates & Lucas took a break from their work and crowded into the firm’s tiny lunchroom. Amid the buzz of good-natured joking and chatting, name partner William Gates Jr., stepped forward and began pulling names from a hat. People at the 50-lawyer corporate firm cheered and clapped as Gates read the names of 13 winners. The prize? Each would get to buy 1,000 friends-and-family shares of a newly public company founded by the senior lawyer’s son. None of those chosen — partners, associates, and at least one consortium of secretaries who had pooled their money — had any inkling of what lay in store if they held on to their Microsoft Corporation stock. Some cashed out quickly and regretted it; others held on and bought homes or retired early as the stock’s value climbed relentlessly. Last year, when Microsoft was trading at its peak, those 1,000 shares (which cost $21,000 in 1986 and have split many times since) were worth $17 million. Those present at that raffle 15 years ago also had no idea how closely their firm’s future and fortunes would be tied to the fledgling software company. Today, Microsoft is the lifeblood of Shidler McBroom’s successor firm, Preston Gates & Ellis. Although Microsoft has kept the firm off the front lines in its current antitrust suit, it still showers Preston Gates with tons of legal work, including cutting-edge intellectual property issues. The relationship has helped make Preston Gates the most profitable firm in the Northwest, with profits per partner averaging close to $450,000 last year. Also in 2000, for the second straight year, the firm’s revenue grew a robust 25 percent to $150 million, although Preston Gates lags behind Seattle rival Perkins Coie by that measure. Still, when one client — even a beloved, rich client — absorbs so much of its resources, a firm should be nervous. In some recent years, Microsoft has generated upwards of 25 percent of Preston Gates’ revenue. Fortunately for Preston Gates, a court-imposed breakup of Microsoft looks unlikely under the Bush administration. And even though William Gates Jr., retired from Preston Gates at the end of 1998, the sense of a family connection to Microsoft remains strong — lawyers still refer to William Gates III, the software mogul, by his childhood nickname, “Trey.” Yet the 350-lawyer firm knows that it needs to diversify its client base and has been working to leverage its technology expertise to attract other clients. It’s a fine line to walk: Preston Gates must keep Microsoft happy while giving others enough attention, and it must expand its client base while avoiding companies that Microsoft views as competitors. Although Microsoft is Preston Gates’ most important client, the man who leads the firm hasn’t done much work for the company. Managing partner B. Gerald Johnson, 49, has made a name for himself in Seattle for his work on high-profile public-private civic projects, such as the Pike Place Market, the Mariners’ new Safeco Field, and the ongoing privately funded redevelopment of the city’s retail core. The tall, thin Seattle native is known for his natty collection of bow ties, but on this day in November he is dressed Northwest casual in an open-collar plaid shirt with a white T-shirt visible underneath. At the start of an interview, he reveals his bond lawyer’s eye for precision and order. Upon spotting a few crumbs on the opposite side of a large conference table, he apologizes and rushes over to brush them off. Johnson, who’s known as “Gerry,” came from the more button-down side of the firm’s lineage. In 1990 the Shidler firm, which served up-and-coming companies such as Starbucks Corporation, merged with old-line Preston, Thorgrimson, Ellis & Homan, which was known for its municipal bond work. “Microsoft was one of half a dozen significant [Shidler clients] that were attractive to us,” recalls Johnson. But the software company wasn’t the driving force for the combination, he says. (Preston Gates continues to have a strong municipal finance practice, handling more than 60 percent of the bond issues in the Northwest.) When Johnson took over as managing partner from David Tang at the start of 2000, the firm was coming off a successful decade, thanks to clients such as Starbucks (which Preston Gates took public in 1992); VoiceStream Wireless Corporation; Western Wireless Corporation; Waste Management, Inc.; Burlington Northern Santa Fe Corporation; and, of course, Microsoft. Financial progress didn’t seem to be compromising the firm’s culture, which values balanced lifestyles and diversity. Associates ranked Preston Gates one of the nation’s 10 best law firms to work at in a survey by the employment Web site Vault.com; and it has the highest percentage of women equity partners (25 percent) of any major firm in the nation, according to The National Law Journal. (The firm did not participate in last year’s American Lawyer midlevel survey.) Furthermore, Preston Gates was holding its own against the invasion of the San Francisco Bay Area firms and their fat wallets and stock portfolios. Only one partner, G. Scott Greenburg, has defected (to Palo Alto, Calif.’s Wilson Sonsini Goodrich & Rosati), and the blow was softened by Preston Gates’s ability to hang on to the lawyer’s biggest clients, Starbucks and VoiceStream. Still, Johnson, who was elected to a five-year term, believed the firm needed more strategic planning. He formed a task force of partners and associates and hired a consultant, Peter Zeughauser. (Zeughauser writes a management column for The American Lawyer.) What emerged was a mandate to establish Preston Gates as the Northwest’s premier full-service firm and develop a national reputation for its technology practices, including intellectual property and complex business transactions. In particular, Johnson believes that the firm can do a better job capitalizing on the expertise it’s developed on Microsoft assignments. Partner Holly Towle, for instance, who heads the firm’s e-commerce practice, has recently landed assignments from Minnesota Mining and Manufacturing Company and DaimlerChrysler A.G. “There’s probably no more powerful credential than having done work for Microsoft,” states Johnson proudly. Over the years Preston Gates has handled hundreds of deals for the exacting software giant. Last year it represented Microsoft in its $1.3 billion purchase of Visio Corporation (the company’s biggest acquisition to date) and in its purchase of smaller companies, such as Numinous Technologies, Inc. In 2000 Preston Gates also advised Microsoft in a software joint-development agreement with 3Com Corporation, a research alliance with the Massachusetts Institute of Technology, and acquisition of the rights to create Teletubbies “Actimate” dolls (whatever those might turn out to be). On the litigation front, Preston Gates is lead counsel in Microsoft’s skirmish with Sun Microsystems, Inc., over the Java programming language. It’s not just Microsoft that Preston Gates serves but also its progeny. Businesses spawned by Microsoft and its former employees have supplemented the firm’s diet. Expedia, Inc., the online travel service that Microsoft spun off in 1999, is a Preston Gates client. The firm also services businesses that Microsoft is developing with an eye toward future divestiture, including CarPoint (online car sales and financing) and HomeAdvisor (online real estate services). It has also maintained relationships with businesses started by ex-Microsoft executives, such as the Internet infrastructure company Network Commerce Inc. and the venture capital fund Ignition Corporation. When asked if Preston Gates is too dependent on Microsoft, Johnson pauses before answering. Choosing his words carefully, he says, “While we’re grateful for and proud of our relationship with Microsoft, we’re always looking for ways to diversify our business.” But one lawyer says attorneys in the firm’s Washington, D.C., office expressed concern. “I would hear complaints about how Seattle was becoming more and more dependent on Microsoft work,” says this lawyer. “D.C. went out of its way to keep the Microsoft work below a certain percentage.” (Preston Gates’s D.C. office operates as a profit center separate from the rest of the firm.) Preston Gates’ competitors maintain that when it comes to client development, Microsoft is an albatross. (Rival Perkins Coie, in fact, boasts that it stays clear of Microsoft so that it can offer a safe haven for competitors.) Says Preston Gates partner Lawrence Bailey, who manages the Microsoft account: “We don’t represent companies that have a product that competes with Microsoft or are developing a product that will compete.” Sometimes the software giant takes an expansive view of its territory. For example, Bailey recently informed Preston Gates lawyers in San Francisco that Microsoft didn’t want them to accept work from a major computer hardware maker. Bailey insists that Microsoft is reasonable about waiving conflicts and notes that other companies, including MCI Communications Corporation and AT&T Corp., have been more unyielding. The affable Bailey, 59, has overseen the Microsoft relationship since 1986, when his close friend and Dartmouth College classmate, William Neukom, left Shidler McBroom to become Microsoft’s first and only general counsel. (Bailey, by the way, was one of the lucky ones who received 1,000 shares of Microsoft IPO stock. He rode it for only six months. “My broker at the time said the stock couldn’t hold on,” he recalls. Bailey doesn’t sound too bitter; he bought more shares later at a decent price.) “We’ve tried to be a good client,” says Microsoft deputy general counsel Mary Snapp about the company’s conflicts policy. “We encourage Preston [to have] significant exposure [to other clients]. It makes them better lawyers for us.” Former partner Greenburg confirms that Microsoft only rarely wields its veto power. “It was almost always the other direction,” he says. “[Other] clients were the nervous ones. [They] thought, ‘You’ll tell Microsoft about us and put us at a disadvantage.’ ” Greenburg, who is now at Wilson Sonsini, says that such fears, as well as other conflict concerns, hindered his ability to attract new tech clients at Preston Gates. “ There are many companies that view Microsoft as a would-be purchaser,” he says. “They believe a conflict is likely to develop down the road.” Preston Gates’ biggest Microsoft problem may not be that the software giant scares away clients, but that it sucks up so many of the firm’s resources. “Preston Gates turns down an incredible amount of work every year to make sure they give Microsoft top-rate service at all times because they smartly view Microsoft as a franchise client,” says Mark Britton, a former Preston Gates partner who left in 1999 to become general counsel of Microsoft spin-off Expedia. The attention lavished on Microsoft is reflected in the firm’s client list. With the exception of a handful of recognizable names — such as LSI Logic Corporation, Seagate Technology, Inc., and VoiceStream — the rest of the firm’s tech client roster is filled with small companies that are not widely known. And when it comes to initial public offerings, Preston Gates lags far behind Perkins Coie and the San Francisco Bay Area firms. Since 1998, for example, Preston Gates has handled four IPOs; Perkins has worked on 15. (The nation’s leader, Wilson Sonsini, notched 206 in that time.) It’s only been in the last few months that Preston has formed an emerging companies group. “One of the primary focuses is to get the word out in the local community that we’re doing this work,” says partner Gary Kocher, who heads this group. “Everyone knows we do the Microsoft work, and after that it’s a bit sketchy.” Partner Connie Collingsworth, who represents venture fund Alexander Hutton Venture Partners and is the new contact partner for Starbucks, admits that it’s a tough niche to crack. “You do have to go through an initiation process almost like a fraternity,” she says. There is one gaping hole in the cozy Preston Gates-Microsoft relationship — the Justice Department’s antitrust suit. When the Federal Trade Commission investigated Microsoft for antitrust violations in the early 1990s, Preston Gates was cocounsel with New York’s Sullivan & Cromwell, but for the battle with Justice, Microsoft and Sullivan left Preston Gates out in the cold. Bailey tries to downplay any slight to his firm. “Some people might be disappointed,” he explains. “On the other [hand], we’re in Seattle, and the case is on the East Coast. It’s understandable.” Understandable, perhaps, but still, the exclusion must sting. (Microsoft declined to comment on its choice of counsel.) But Preston Gates hasn’t come away empty-handed. Although the firm has missed the prestige of seeing its lawyers on the front page of The New York Times, it’s making a handsome profit from the case. The Seattle firm managed to hold on to all of the document production work for federal, state, and private antitrust actions against Microsoft. To sift through this avalanche of paper and electronic messages, Preston Gates has enlisted a small army of temporary lawyers and paralegals. Martha Dawson, one of two partners devoted to overseeing this effort, says the firm can rally as many as 200 temporary workers at a time. It’s hardly glamorous work, but it’s been a nice cottage industry. One person familiar with the firm says that Preston Gates grossed $13.4 million on document review work in 1999. If these antitrust actions fizzle under the Bush administration, Preston Gates doesn’t plan to send all the temporary workers packing. It’s been marketing its document production service to other clients with some success. “I believe we have developed a good competency,” Johnson explains. In fact, he confirms that the firm has applied for software patents related to this business and is considering spinning it off. On a November afternoon, dozens of these temporary workers could be found behind several password-protected doors at Preston Gates’s downtown Seattle office. (Even most of the firm’s regular lawyers and staff are barred from these areas.) Many of the mostly young workers listen to music on headphones while they review documents on computers; a few study papers the old-fashioned way. Johnson declines to reveal what the firm pays the temporary workers, but the market rate for contract lawyers in Seattle is $40 to $80 an hour. Naturally, Preston Gates bills out its temporary lawyers at a higher rate; one former partner says that the firm takes a 40 percent markup on the temporary lawyers’ work. Some competitors sniff that Preston Gates’ profits are the highest in Seattle precisely because of this low-end document work. “Even if you back out those [temporary lawyer] profits, we’re still more profitable than Perkins Coie,” asserts managing partner Johnson. He notes that document production work was down in 2000, and that Preston Gates’ profits per partner still jumped nearly 10 percent. “You can disparage the source of the income, but it’s still revenue,” he says. “Money is money.” It may be that the only place where Preston Gates does not want to be known as Microsoft’s law firm is San Francisco. As part of its effort to expand its technology practice, Preston Gates opened an office there in 1997, staffed mostly with refugees from the struggling Graham & James. All out-of-town firms face a challenge breaking into insular Silicon Valley, but Preston Gates was moving into ground zero for Microsoft-haters. Perhaps that’s why the firm omits Microsoft from its list of representative clients in its San Francisco office’s Martindale-Hubbell law directory listing. (Microsoft gets first mention in Preston Gates’ Seattle listing.) San Francisco partner Lawrence Low, who sits on the firm’s management committee, smiles about the omission and claims that it’s not intentional. Still, by way of explanation he says, “The firm has really looked to us as … capable of diversifying the client base.” Preston Gates’s Bay Area clients include venture capital funds Rosewood Venture Group and Nokia Ventures. The firm is also handling intellectual property litigation for Seagate Technology and Siebel Systems, Inc. Low admits that at least one local client has said it wasn’t comfortable sharing a law firm with Microsoft; likewise, Microsoft made it known that it didn’t want Preston Gates to represent a startup that competes with WebTV Networks, Inc. (which Microsoft partially owns). But Low maintains that these situations are rare. If anything, he claims, the Microsoft connection has been more of a draw for new clients than he had expected. Preston Gates has taken space to triple its lawyer ranks in San Francisco, which now stand at 25. The firm keeps a “hotel” office in Palo Alto, but no one works there full time. Down the coast, Preston Gates is attempting to reposition its troubled Los Angeles office to emphasize its IP expertise, which it believes could attract entertainment industry clients. Last year, a few months after Johnson became managing partner, he flew down to Los Angeles and dropped the bombshell that the firm was disbanding most of that outpost, slashing six partners. Only two partners were spared: Jane Barrett, who heads Microsoft’s massive worldwide antipiracy efforts, and a lawyer who works with her. Johnson explains that the firm needed to “redirect” the office. Opened in 1993 when Barrett came from the Los Angeles office of Arter & Hadden and brought the lucrative Microsoft work with her, the office over the years evolved into a hodgepodge of general practices. “We concluded that was a mistake,” says Johnson. “It did not play to our strengths.” Former lawyers in that office charge that the drastic dismissals showed Preston Gates’s blatant Microsoft favoritism. The main problem in Los Angeles was personality conflicts, they maintain, and Barrett in particular had the conflicting personality. Still, they assert, Barrett was spared because of her close ties to Microsoft general counsel Neukom. Barrett says she doesn’t believe her relationship with Neukom had anything to do with her continued position at Preston Gates. Yet, she says, “I would hope in a successful law firm [a partner's client base] may play a role in these decisions.” This likely won’t be the last time that Johnson is forced to deal with delicate issues stemming from Preston Gates’s Microsoft ties. In fact, just how often do lawyers at Preston Gates worry about their dependence on Microsoft? “All the time,” says former partner Greenburg. “They’re very bright guys. Heaven forbid something happens to the client. But wouldn’t you rather have them than not?”

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