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When Brobeck, Phleger & Harrison boosted salaries for its first-year associates by a hefty $10,000 in January, one of the San Francisco Bay Area’s largest consumers of legal services decided enough was enough. Shortly after Brobeck’s boast that its associates would now sit at the top of the pay heap, in-house lawyers for Sun Microsystems Inc. fired off an e-mail to Brobeck and several other firms that had handled legal chores for the company. The message bluntly warned that any firm so much as thinking about foisting the costs of ever-pricier first-year lawyers onto Sun would find itself on a company blacklist. Bay Area law firms with a high-tech clientele have been on the defensive about their legal fees ever since. A rebound in battered technology stocks in the first few weeks of the year may have tempted some lawyers and clients alike to believe that the heady days of the 1990s tech boom had returned. But Sun must have known that the good times were not looming on the immediate horizon. By February, the slump in tech stocks, which began in the spring of 2000, had resumed in the face of continuing declines in revenue and earnings. As a result, technology companies throughout the Bay Area and elsewhere have become ever more determined to cut costs, and their outside lawyers haven’t escaped the knife. Brobeck, chastened by the salary rebuke, has taken Sun’s warnings to heart. Lawyers at the firm made sure to meet with Sun officials to emphasize the point, says James Burns Jr., Brobeck’s managing partner. One result, he adds, is that Brobeck is back in Sun’s good graces. “Salaries going up and up is a concern that everyone can understand,” he says. “We’ve certainly addressed that particular concern that was raised by one of our important clients, and we are working more and more with them.” Burns says that Sun turned out to be less concerned with specific associate salary levels — the firm went ahead with its pay hikes — and more concerned with how to get the best value for its outside legal expenditures. Michael Morris, Sun’s general counsel, confirms that the relationship between the company and the firm is now “fine.” Brobeck’s chairman, Tower Snow Jr., spent a lot of time at Sun explaining the justification for the pay hike, says Morris, which helped. But the downward sloping economy has helped even more. “Back when all of that happened everybody was scrambling like mad trying to find talent. Everybody was overwhelmed with work,” says Morris. “That was true for both general counsel and outside law firms. It was a pretty brutal environment.” But more recently, Morris has been “reading a lot of stories about law firms laying people off, including the bigger firms in the Bay Area, which doesn’t surprise me given the drastic downturn. So I think economic forces have taken care of that issue [of escalating associate salaries] more than anything we wrote.” Brobeck has been offering some of its clients a variety of alternative billing methods throughout the year. The alternatives are designed to lower clients’ legal bills and, in some cases, shift to the firm some of the risk when it comes to labor-intensive deals, such as mergers, that may not work out. Ironically, Morris isn’t interested in taking that route. “My theory is that I’ll never know as much as the outside lawyer I’m dealing with about the economics of the practice. So I’ll never be able to figure out with any degree of confidence whether or not an alternative that is proposed is better or worse for me in a given case,” he says. “I know there are a lot of general counsel who think they can do that, and if it works for them, God bless ‘em.” Several other Bay Area firms that handle large amounts of tech-related work — notably Cooley Godward, Fenwick & West and Wilson Sonsini Goodrich & Rosati — pointedly declined to follow Brobeck’s salary increases earlier this year. As a result they may have had less explaining to do in conversations with their clients. “Several of our clients expressed relief that the ratcheting up of salaries may have stopped or tapered off,” says Gordon Davidson, Fenwick’s managing partner. Even so, Brobeck is not the only firm that has been challenged by clients — whether delicately or bluntly — when it comes to legal fees. Both in-house and outside counsel say there’s nothing new about some give-and-take over legal bills. “All clients scrutinize bills carefully, and if they feel that something was done inefficiently they’ll typically ask for an adjustment, and we’ll obviously be responsive to that,” Davidson says. CHANGES IN ATTITUDES? But John Brigden, general counsel at Mountain View, Calif.-based Veritas Software Corp., says he has sensed an attitude adjustment among some of the outside lawyers with whom he’s worked recently. He’s pretty sure the change reflects the fact that the overall amount of legal work and the number of tech-related clients in need of outside counsel have dwindled. “We’ve always been a very vigilant, conscientious company on legal fees,” says Brigden. “But what we have found is that we’re able to get more attention and a better response on fees that we dispute.” Beyond holding the line on associate salaries, Fenwick has also been amenable to alternative billing arrangements that benefit its clients. “Occasionally, the amount of work done on a deal will not reflect the value to the client of the deal,” says Davidson. The Fenwick leader offers the example of legal services for a merger that ultimately doesn’t go through. In such a case, the firm might negotiate a “broken-deal fee” with the client. The assumption is that Fenwick will make up for the lost fees with future transactions involving the same client. Menlo Park, Calif.’s Venture Law Group, which prospered mightily during the tech boom, has come in for its share of suffering this year. With startup financing and IPO work drying up considerably, the once high-flying firm was forced to lay off support staff and lawyers in May. At the same time, the firm has received clients’ pleas for relief from steep legal fees. “We have seen companies that are cash-strapped being more aggressive about asking us for discounts on fees billed. That’s just the nature of the times in which we live,” says Donald Keller Jr., a Venture Law Group partner. “We are a for-profit business, but we try to work with our clients to the extent that we can. We have some level of flexibility in certain cases, but we believe that when we put in work we should get paid.” All in all, the current climate has changed dramatically from the old days — as in 18 months ago — when tech-focused law firms were turning away prospective clients and, in some cases, dumping existing clients. Back then, the only alternative billing method that some lawyers were interested in discussing involved pre-IPO equity stakes in their clients. EAGER TO PLEASE Nowadays, outside counsel are decidedly more eager to please their clients than they used to be, according to Brigden. “Some of the larger firms, in the interest of securing new business with the young enterprises that predominated in the marketplace over the last 18 months, may have given those clients higher priority in some cases than a large company like Veritas,” he says. “Now that those clients are no longer there for them, they are coming back and looking at us. “On one hand, we appreciate the greater attention and focus. On the other hand, it’s disturbing to have seen them not give our work the highest priority all along.” In deciding which firms to work with now, “we’re certainly looking at that,” adds Brigden. Davidson makes the same observation, while insisting that his own firm’s loyalty to its clients is paying off this year. “During the last two years of the dot-com craze and the Internet bubble, I think some law firms weren’t attentive to their clients,” he says. “Some fired clients. I know some of our clients who use other law firms have been sending us more work because we stayed with them during those times. Now that those other firms are coming back looking for work, the clients say, ‘You weren’t here for us in our hour of need.’ “ Fenwick’s willingness to offer concessions on fees for busted deals has also helped. Some of its clients are now giving Fenwick more work than ever, he says. “They know we’ll work with them and make appropriate adjustments if a deal doesn’t work out,” says Davidson. Brobeck may have gone further than other Bay Area firms in embracing alternative billing methods. They include fixed fees, blended fees and fees that are contingent upon the value of a deal’s final outcome. None of the alternatives is new to the firm. “But what’s different this year,” says Burns, “is the number of occasions in which those alternative arrangements are being made, as well as some of the twists that clients are coming up with to quantify value and determine what they would be willing to reward us for.” Clients are particularly interested in arrangements that give them greater control over the timing of payments for legal fees, Burns says. In some cases, Brobeck has agreed to defer payments until an acquisition is successfully completed or capital has been raised. “We will take part of the risk if the deal doesn’t go through,” Burns says. “In return, if the deal does go through, we will be made whole and sometimes even rewarded for having assumed the risk.” In other cases, Brobeck has agreed to charge on the basis of a blended rate, with partners and associates all getting the same hourly fee. “That results in a lower cost to the client but an acceptable return to us,” Burns says. Brobeck has also accepted fixed fees more often than in the past or has agreed to accept fixed fees for portions of cases, such as discovery. “All of those things are designed to allow the clients to manage their expectations about what the legal services should cost. If they get value that they can identify as superior, then they will be happy to pay a success adjustment,” Burns says. From the sound of it, some of these innovations born of hard times may be here to stay even after happier times return. Says Burns, “A lot of clients like the idea of giving the lawyers incentive to do a good job.” Brigden agrees. Traditionally, Veritas has tended to pay for its outside legal work on a straightforward hourly billing basis. But he now plans to place more emphasis on alternative methods, reflecting a harder edge in his attitude toward outside counsel. “I’m very interested in it and in fact will demand it, especially in the context of litigation and large transactions,” he says. The concept of success-based fees both in litigation and large transactions is very important and I’m very receptive.”

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