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Palo Alto, Calif.’s Cooley Godward and New York-based intellectual property firm Pennie & Edmonds have broken off merger discussions, industry insiders say. Individuals close to Cooley said the deal breaker was Pennie’s policy of accruing accounts receivable to partners who’ve left the firm. A former Pennie partner said partners don’t have to put much capital into the firm, instead deferring their pay. Once they leave, the former partner said, “they continue to get payments owed them from their years of service to the firm.” Pennie partners did not return phone calls, and Cooley’s chief operating officer Mark Pitchford declined to comment on the matter. “We never comment on specific discussions that may or may not have happened,” Pitchford said. Partners at other firms said such a partnership agreement is unusual in today’s market as it places a big financial burden on the firm. “A long time ago firms used to give a percentage of accounts receivable to a lawyer who left the firm,” one industry insider said. “They were huge payments. A partner who put in $5,000 when he came in to the firm might be owed $300,000 when he left. “Eighty-five percent of firms have gotten rid of the system,” the insider said. “They ask ‘why the hell would we ever go back to that?’ It destroyed a lot of firms.” Keith Wetmore, chairman of San Francisco’s Morrison & Foerster, said accounts receivable and work in progress accounts for about one-third of a firm’s yearly income. If Pennie partners, rather than the firm, own the accounts receivable and are unwilling to waive their property interest, he said Cooley would face a hefty financial liability. “It’s like paying one-third of income to partners someday when they leave the firm,” Wetmore said. “It introduces inequities,” he added. Cooley would be “donating to the merged firm all their accounts receivable and work in progress while Pennie would be holding [onto theirs]. It would be a hard thing to sell.” The British legal paper The Lawyer reported last week that five influential partners in Pennie’s New York office, who each bill upwards of $3 million a year, questioned the integration of the two firms, particularly how their accounting practices would work together. Rumors that Cooley and Pennie were talking to each other surfaced two weeks ago. Legal consultants said a marriage would benefit both, giving Cooley a long sought after presence in New York and boosting Pennie’s ranks, which have been depleted by the defection of several partners. Pennie has 123 lawyers in New York, plus 29 in its Palo Alto office and 20 in its Washington, D.C., outpost, with its practice equally divided between litigation and prosecution. Cooley has about 35 patent and trademark prosecutors and 40 to 60 intellectual property litigators. This is the second time Pennie has pulled out of marriage discussions. Six months ago, the firm talked with Jones, Day, Reavis & Pogue but ultimately decided the two were not compatible. It’s likely the firm will continue to seek another suitor. In an interview two weeks ago, Paul DeStefano, a partner in Pennie’s Palo Alto office, said Pennie was being courted by a number of firms. “Every partner in the firm would say we can continue without a merger,” he said. Whether the firm will do so, he added, “I honestly don’t know.” “The way IP litigation is parceled out by clients has changed dramatically,” he continued. “A merger may be one of the things that’s necessary.”

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