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It was the late 1990s. America was getting drunk on the “new economy.” Lawyers were eyeing a kind of wealth that law school had never promised. And Akin, Gump, Strauss, Hauer & Feld was investing in its bankruptcy practice. Yes, bankruptcy. Around the same time, consultants at McKinsey & Co. urged Wilmer, Cutler & Pickering to focus on its “competitive advantage,” says managing partner William Perlstein. Wilmer set deeper roots in regulatory practice, expanding its stable of lawyers with high-level government experience. Today, sobriety is paying off at both firms — and throughout the Washington legal market. D.C.-area revenue last year at Akin Gump, fueled in part by mergers with other firms, jumped 20 percent. Profits in the Washington office rose nearly 30 percent. And Wilmer Cutler set record per-partner profits in 2001 — $630,000, up from $573,00 in 2000. Interviews with managers and other partners at nearly two dozen of the highest-grossing law offices in the area found some clear trend lines in 2001 finances: Despite the recession, many firms thrived, thanks to legal work with long histories as Washington mainstays — litigation and representation of corporations and trade groups before the government — as well as some forward-thinking investments in countercyclical practices such as bankruptcy. The story of law firm economics in 2001 was a story about traditional values. For Akin Gump, that meant adding 13 attorneys to its bankruptcy group since 1999 — including an entire Houston-based boutique firm — bringing the practice group to nearly 50 lawyers. For a while, “we didn’t look so smart,” says managing partner R. Bruce McLean. “In 2001, we were looking brilliant.” At most of D.C.’s biggest offices, gross revenue was up, with some measuring double-digit leaps over their old figures. Steptoe & Johnson added $17 million to its gross revenue in its D.C. office, landing at $123 million. Firmwide, Arnold & Porter rose by $62 million to $372 million in gross revenue. At the same time, firms that bet too heavily on technology and telecom clients, particularly with corporate work such as start-up or early-phase financing, suffered a rocky year. Of course, with the economy in a trough, most firms faced extreme pressure on the expense side of their ledger books in 2001. If it was the year that saw revenue increase almost across the board, it was also the year when many firms were hit with huge increases in the cost of associates. Firms driven by dot-com hysteria not only had handed out big raises the year before, but also had staffed up for a boom in business that went bust. With the buildup came more office space. By the third quarter, the layoffs and cost-cutting had begun in earnest. For some firms, it wasn’t enough to prop up profitability. Shaw Pittman, which has seen its tech and transactional work drop off, is one firm that had grown fast. Its firmwide head count jumped by more than 100 attorneys in little over a year. While Shaw Pittman expects a nearly 20 percent increase in its firmwide 2001 revenue, profits per partner “will be roughly at our 2000 level [of $555,000], perhaps a little higher or lower,” says managing partner Paul Mickey Jr. The firm released 19 associates in December. At Arent Fox Kintner Plotkin & Kahn, per-partner profits dipped 3 percent from $430,000 in 2000, even though revenue increased from $107 million to around $117 million. Explains Mark Fleischaker, who chairs the firm’s executive committee: “On the cost side, it’s associate salaries, and we had significant expenditures in building out space” and building up practice areas. LITIGATION’S PAYDAY The Washington, D.C., legal market has long been known for its litigators. During the high-tech boom of the last decade, the cool practice was corporate law. Now, of course, corporate lawyers — particularly those with tech clients — are among the first to go when D.C. firms pare their payrolls. Litigation is cool again. Venable reports having had a very good year in 2001, at least in part citing litigation. The firm won double-digit increases in both profits and revenues for 2001. “Where we were very strong was in our intellectual property practices, including IP litigation,” says Venable’s firmwide managing partner James Shea. Venable, which had D.C.-area office revenue of $90 million and per-partner profits of $422,000 in 2000, expects increases of $18 million and $84,400 in revenues and profits per partner, respectively, for 2001. Intellectual property litigation was good for IP-focused Finnegan, Henderson, Farabow, Garrett & Dunner, says managing partner Christopher Foley. “Companies are investing in their intellectual property and policing their intellectual property,” he says. Revenue at Finnegan Henderson grew 20 percent to approximately $150 million, and profits per partner moved up to around $760,000. At Arnold & Porter, managing partner James Sandman attributes the firm’s healthy fiscal 2001 in large part to a spike in IP work, particularly patent litigation. Over the past year and a half, he points out, Arnold & Porter has added five IP partners and a number of associates in Washington. In the firm’s Los Angeles office, the IP group grew from 75 in 2000 to 88 at the end of last year. Patton Boggs managed profits per equity partner of $475,000 — just north of the partners’ take in 2000, says managing partner Stuart Pape. The Dallas office was able to capitalize on the surge in corporate bankruptcies last year. Patton Boggs has aggressively grown its Dallas outpost from six lawyers in 1996 to about 70 today. After making respectable, but unspectacular, increases in revenue and profit for the past few years, D.C.’s Steptoe & Johnson, like other firms with strong countercyclical practices, found that 2001 was its year. “Our litigation and bankruptcy workout areas clearly were up. Our international trade clearly was up,” says managing partner Lon Bouknight Jr. “I think we will be in the low $500,000s [in profits per partner] in the firm as a whole.” The home office did even better, with partner profits in that office reaching $555,000 for 2001, a $95,000 leap from 2000. Gross revenue and revenue per lawyer also shot up, reaching $123 million and $555,000, respectively. In 2000, those numbers were $106 million and $500,000. Hogan & Hartson chairman J. Warren Gorrell Jr. says his firm’s litigation practice was “as strong as at any time in the past 25 years.” One major matter in 2001 was the sprawling Gemstar-TV Guide case at the International Trade Commission. The firm racked up thousands of hours on the matter. But the firm’s robust growth — firmwide gross revenues jumped by 20 percent to $390 million — was also due in part to corporate work, Gorrell says. While corporate practices at many firms dozed, Hogan’s business and financial group — fully 40 percent of the firm’s lawyers — stayed busy on deals like an $8 billion acquisition for mega-REIT Equity Office Properties Trust. THE FEDERAL CITY Wilmer Cutler’s Perlstein says regulatory work, in particular regulatory litigation, proved to be an engine for profit-growth in 2001. He says the entire litigation group’s profits were up 4 percent to 5 percent over 2000. Key regulatory matters in 2001 included work for Qwest Communications International, Verizon Communications Inc., the UAL Corp., and Lufthansa. Late last year, Wilmer’s William McLucas was retained by a committee of the Enron Corp.’s board to investigate that company’s implosion. The regulatory-driven investigation has been keeping about a dozen Wilmer lawyers working long hours. The firm also represented Credit Suisse First Boston in the Securities and Exchange Commission’s investigation of alleged securities law violations involving the sale of shares in initial public offerings. On Jan. 22, CSFB agreed to pay a $100 million settlement. Work for energy clients fueled Dickstein Shapiro Morin & Oshinsky, which saw firmwide revenue rise to more than $150 million from $143 million in 2000, according to managing partner Angelo Arcadipane. Energy work accounted for about 20 percent of the firm’s revenue. Billings grew out of the California energy crisis and client Duke Energy, which accounts for 15 percent of the energy group’s work, says Kenneth Simon, co-head of the corporate and finance group. At Dickstein, the energy group is a section of the corporate and finance practice. Says Larry Eisenstat, head of Dickstein’s electric regulatory practice: “California has involved an enormous amount of resources; so many different proceedings, different issues, legislative, environmental, FERC, California Public Utilities Commission issues, a whole panoply of events.” Wiley, Rein & Fielding had a strong year, with solid performances from the firm’s major practice groups — telecommunications, insurance, government contracts and international trade, says firm leader Richard Wiley. The communications group, which makes up a third of the firm’s business, was kept busy before the Federal Communications Commission. “As rules change or the commission is considering new policies, we are usually involved in that,” says Wiley, who heads the group. Patton Boggs, a firm with a deeply rooted Washington presence, saw a spike in lobbying work related to the terrorist attacks on Sept. 11. Pape, the managing partner, points to bills dealing with airport security, bioterrorism, and the federal compensation scheme for victims of terrorism as matters that the lobbying group tackled in the fourth quarter. “Those more than replaced the matters that were put on hold because of nine-eleven,” Pape says. The tragic events of Sept. 11 and their aftermath created demand for legal services in other ways as well. The New York-based real estate team at Swidler Berlin Shereff Friedman saw a surge in deals as companies displaced from lower Manhattan scrambled to secure new offices. “The real estate group had been down slightly for the year,” says managing partner Barry Direnfeld. “Nine-eleven brought them up for the year.” That offset in part the slump in the firm’s New York capital markets and transactional practice, Direnfeld says. Fourteen lawyers from that group, including mutual fund expert Joel Goldberg, defected to Shearman & Sterling in May. Swidler’s largest practice — telecommunications — “was clearly soft,” Direnfeld says. Other D.C. practices held up well. The firm’s energy, antitrust, and insurance coverage groups had “banner years,” he adds. Direnfeld also points out that the firm’s government-affairs ancillary business, the Harbour Group, turned a profit in its first year. Launched last January with three professionals, the group now employs 14. Profits, Direnfeld says, are “in the hundreds of thousands.” HOW FIRMS ADAPTED At most firms, corporate transactional work fell off a cliff. So firms scrambled to adapt — reassigning associates to and squeezing profits out of busier practice areas and cutting expenses and payroll. At Venable, which reports having a strong year overall, corporate work is down. “We have a strong business group. It’s off a little this year. I’d say in the neighborhood of 5 to 10 percent,” says Venable’s Shea. “Because we’re 425 [lawyers] strong, these other groups made up the difference.” At Covington & Burling, where corporate law is a mainstay, business lawyers have been refocused on recession-related financial work, says partner and firm spokesman Andrew Friedman. After Sept. 11, he explains, “a lot of companies renegotiated their financial terms.” Overall, he says, Covington experienced an increase in revenue and profits of 4 percent to 6 percent over 2000. In 2000, Covington’s D.C. office counted $177 million in gross revenue and partner profits of $653,000. Firms across the D.C. area cut fat — and even some bone — from their budgets. Swidler Berlin took an ax to expenses in 2001, and managed to keep per-partner profits well above the norm for large D.C.-based firms. On average, a Swidler equity partner reaped an $820,000 profit last year, down from $848,000 in 2000. “We recognized late in the fourth quarter of 2000 that things were looking very soft in capital markets and transactional and telecommunications,” says managing partner Direnfeld. “All discretionary expenses stopped. We did a budget review and put department managers through the wringer” on their costs. The firm implemented a hiring freeze, and unwound its deals with about two dozen contract attorneys. “We had honest layoffs as well,” Direnfeld acknowledges. Including the 14 lawyers who defected from the firm’s New York office to Shearman & Sterling, Swidler reduced its head count by about 50 lawyers. The firm also moved its consulting ancillary and about 60 lawyers out of deluxe offices in the Washington Harbour complex and into about 35,000 square feet on Thomas Jefferson Street, N.W. Swidler leased the vacated 20,000 square feet to Foley & Lardner. The swap saves Swidler about $10 per square foot per year, Direnfeld says. That adds up. The head count reduction also means substantial savings, he claims. Direnfeld estimates that the firm reduced its payroll and benefits expenses by between $7 million and $10 million per year going forward. After spending and spending on associate salaries, office space, and practice area development, Arent Fox felt it in their bottom line with lowered profits per partner. This year, firm leaders say, will be different. “We are going to be trying to pay close attention to costs this year, without laying people off,” adds Mark Fleischaker. “We haven’t laid anybody off, either lawyers or staff.” There were associate layoffs elsewhere. The D.C. offices of Philadelphia-based Morgan, Lewis & Bockius undertook the largest associate reduction on the East Coast — 50 attorneys firmwide, and 15 in D.C. — but the move occurred after the firm’s fiscal year closed Sept. 30. The decision rested largely on the firm’s overestimate of client demand for 2001, D.C. managing partner Michael Kelly said last fall. Morgan Lewis’ revenues and profit numbers grew from 2000. Per-partner profits for the 70 equity partners in the D.C. area — three fewer than a year earlier — increased by $30,000 to $740,000. With 20 nonequity partners — twice as many over the prior year-partner compensation rose from $652,000 to $675,000. Revenue also leaped up, going from $147 million to $164 million. Rising expenses hampered fast-growing firms. Howrey Simon Arnold & White saw firmwide gross revenue climb from $241 million in 2000 to $292.4 million last year. Revenue per lawyer also jumped, from $554,000 to $579,000. But profits per equity partner still sagged slightly — drooping to $761,000 from $769,000 the year prior. The costs of growth hit the bottom line, explains managing partner Robert Ruyak. The firm opened offices in London and Chicago; office space in London doesn’t come cheap, and Howrey leased about 12,000 square feet of it. “We made big investments last year,” says Ruyak. “When you bring on new people it takes a while for them to be profitable for the firm.” WELCOME TO D.C. A hallmark of the Washington legal scene since the 1970s has been the branch office of the out-of-town firm. Today some of the strongest players in the area are firms that hail from afar — Cleveland’s Jones, Day, Reavis & Pogue; Chicago-based McDermott, Will & Emery; and L.A.’s Latham & Watkins, among them. The high-tech explosion of 1999 and 2000 also attracted heightened interest in the D.C. market from high-flying Silicon Valley firms Brobeck, Phleger & Harrision; Cooley Godward; and Wilson Sonsini Goodrich & Rosati. In 2001, the interlopers suffered. Firmwide, Brobeck’s profits per partner dropped an amazing 44 percent, down to $660,000. Cooley Godward’s partners also watched their paychecks get smaller and smaller; per-partner profits fell from a high of $905,000 to $715,000. Brobeck’s fledgling D.C. and Reston, Va., outposts were in some turmoil last year. Of the roughly 35 lawyers who began 2001 in Brobeck’s area offices, 23 remain, says managing partner Stephen Riddick, who adds that the firm remains committed to the offices. Riddick declines to detail the financial performance of the area offices. “They are in the black,” he says. He acknowledges that they are “investment offices” that are “not comparable,” in terms of profitability, with the firmwide performance. Mark Pitchford, Cooley Godward’s chief operating officer, declined to disclose the profits per partner and revenue of the Reston office, saying that the firm does not break the numbers down by location. “The general softness that affected the tech market affected our offices pretty evenly,” he says. Wilson Sonsini’s fiscal year ends at the end of this month, but partners forecast $425 million in firmwide revenue for 2001, a 6 percent decline from 2000. Net profit is expected to clock in at $117 million, down from $124 million in 2000. Partners stand to take home an average of $830,000, an 11 percent decline from $930,000 in 2000. Trevor Chaplick, managing partner of the firm’s McLean office, says the firm remains committed to the NoVa market. The firm has leased more than 50,000 square feet in a new office tower going up in Reston. Other out-of-town firms had good years. McDermott Will expects revenue to be up firmwide, but particularly high in its D.C. office. Partner-in-charge Timothy Waters expects a 10 percent increase from 2000. Such a boost would potentially raise the office from $109 million in gross revenue to over the $120 million mark. Waters points to growth in the intellectual property practice and strong antitrust work as reasons for why the firm “managed to survive the corporate downturn.” Partner profits at Pillsbury Winthrop — with main offices in San Francisco and New York — grew to $615,000 firmwide, a 6 percent increase from 2000. Part of Pillsbury’s answer may have been not placing as many chips on the tech market. Between its D.C. and Northern Virginia offices, the firm represented Chevron in its merger with Texaco, and successfully defended Kinko’s when a company tried to hold the copy center liable for defamatory material posted online by a customer using a Kinko’s computer. The aviation and aerospace group has seen a significant uptick since Sept. 11. “All of our lawyers are busy, with the exception of the transactional/technology area,” says executive director Michael Sikora. Jones Day’s D.C. office saw profits jump by about 20 percent last year, according to administrative partner Gregory Shumaker. That exceeded the firmwide increase by about 5 percent. Jones Day’s firmwide net profit was $225 million in 2000. “Everyone had concerns in the last quarter” of 2001, he says. “But we haven’t seen a slowdown in any of our practice areas.” Litigation and regulatory work-particularly antitrust and energy-related matters-held up well, he says. He points to the Bridgestone/Firestone litigation and Procter & Gamble’s antitrust matters as examples of major sources of D.C. work last year. Latham & Watkins may prove to be the envy of many D.C. firms — and some New York firms too. Latham’s revenue leaped by 20 percent in 2001, to $769 million. Partner profits surged by about 17 percent to about $1.15 million. “We’re very pleased with our strategy, which has been to be a global player with a very diverse practice base,” says Eric Bernthal, Latham’s D.C. managing partner. Latham now boasts about 1,400 lawyers in 19 offices. The firm expanded aggressively in Europe last year, acquiring 50 lawyers in Germany and 100 in Paris. The D.C. office grew last year from about 140 lawyers to 175. Bernthal points to litigation and project finance work as key contributors last year, while corporate finance work was soft. The project finance group, chaired by San Diego partner Andrew Singer and led locally by D.C. partner John Sachs, “exceeded the profit level growth for the firm,” says Bernthal. The project finance sector-made up largely of energy generation and distribution projects-remained robust despite the broad decline in the economy, he notes. Latham ranked first in project finance deals closed in the Americas in 2001 and second in global deals, according to Project Finance International’s annual rankings. Latham was the only U.S. firm among the top five for global deals. The firm’s expansion in Europe didn’t hit the firm’s profits because the lawyers acquired had “substantial books of business,” Bernthal says. “This wasn’t just a field of dreams thing.”

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