It all started with the whales.
They were Richard Kendall’s main preoccupation for most of the summer and early fall of 2008. The entertainment litigation partner at Irell & Manella was preparing for argument before the U.S. Supreme Court, representing the Natural Resources Defense Council in a suit that accused the U.S. Navy of failing to protect marine mammals from its use of sonar in training exercises. During the months Kendall spent getting ready for his high court appearance, he admits with a lawyer’s characteristic understatement, he was “a bit distracted.”
When Kendall returned to Los Angeles after the October 8 argument (the case ended in a mixed result for Kendall’s client), he found that the world had changed. While he’d been immersing himself in the arcana of environmental regulation, the economy–and the legal industry–had been battered by a financial crisis and a grueling recession.
Kendall’s clients, which are virtually all in the entertainment and media sectors, had been hit hard. They pressured him for discounts on the firm’s hourly billing rates, but Irell wouldn’t budge. “I came back to a client world that was rapidly changing and a law firm that I really loved, but wasn’t showing quite as much flexibility in dealing with [my] clients and their pressures as I would have liked,” Kendall says.
That’s when he began thinking about starting his own firm. Today Kendall Brill & Klieger (KBK) is a six-month-old, nine-lawyer litigation shop that’s off to a promising start: 43 new matters since the boutique opened in May, including eight from new corporate clients, in addition to work that the partners brought from Irell. “Our clients have been so supportive,” Kendall says. “We made a living in our first month in business.”
Kendall’s move reflects a small but growing trend of rainmakers with price-sensitive clients leaving large law firms for mid-to-small-size firms and other, more flexibly priced large firms, says law firm consultant Peter Zeughauser. “The driver of these moves tends to be pressure on billing rates,” he says. “It’s a normal part of being in a recession.” For instance, when a group of IP litigators split from Keker & Van Nest last February to form Durie Tangri Lemley Roberts & Kent, the group immediately let potential clients know that they were taking 20 percent off Keker’s billing rates.
Businesses are also getting smarter about using different kinds of firms to handle different kinds of work. “Clients are starting to realize that they don’t need a huge firm with huge overhead and huge costs to handle the bulk of their work,” says Association of Corporate Counsel president Frederick Krebs. Although clients will gladly pay $1,000 an hour for the “incredibly good, strategic and thoughtful advice” of a top-notch partner, Krebs says, “that’s a lot different from having reams of associates racking up hours.” As pressure mounts to reduce legal costs, more clients are turning to regional firms and boutiques, where they can get “high-quality work at substantially reduced costs,” he says.
Founded in Century City in 1941, Irell has long been known for its entertainment practice. Kendall, who joined the firm as a partner in 1997, was one of the three big rainmakers in its entertainment litigation group, along with Henry Shields and Steven Marenberg. It’s easy to see why clients like him. Though he originally hails from New Jersey, with his tanned, rugged features, Kendall looks the part of the quintessential Southern California lawyer. His manner is affable yet earnest, and he’s generous with his compliments of others. His clients include Viacom Inc., Paramount Pictures Corporation, MTV Networks Co., Black Entertainment Television LLC, CBS Corporation, Showtime Networks, Inc., CBS Outdoor, Clear Channel Outdoor, Inc., and Simon & Schuster, Inc.
When Kendall’s clients began pressing the firm for discounts on billing rates, however, Irell saw no reason to accede. The 220-lawyer firm is incredibly profitable. Led by bow-tie-wearing superstar IP litigator Morgan Chu, Irell’s patent litigation practice has exploded in recent years–its 67 IP litigators constitute close to a third of the firm–and according to Kendall, patent litigation is still relatively price-insensitive. Irell’s financial numbers certainly support that notion. Last year, the firm’s profits per partner placed it nineteenth among The Am Law 200 (it’s 120th based on total revenue). Last year, while profits at most firms fell, Irell’s actually rose 2.9 percent.
Kendall says that, on the strength of its IP practice, Irell had raised its billing rates several years in a row. At the same time, he says, “my clients’ profits were declining.” Kendall wasn’t the only one feeling the heat. Henry Shields, who’d been an entertainment litigator at Irell for more than 30 years, left in August 2008 for the Los Angeles office of Epstein Becker & Green, taking all of his clients with him. Shields says that his move stemmed from the same considerations that Kendall was grappling with: client pressure to provide more flexible billing arrangements and discounts. (Steve Marenberg, Irell’s remaining entertainment litigation rainmaker, disputes any suggestion that Irell is not flexible in its billing arrangements with entertainment clients. “That notion is just not correct,” Marenberg says. “We have various financial arrangements with entertainment clients other than the traditional nondiscounted hourly billing arrangements.”)
For his part, Kendall says he wasn’t interested in going to another law firm. He’d already done that twice as a partner, switching from Munger, Tolles & Olson to Shearman & Sterling in 1988, and then to Irell in 1997. With a son at the University of Southern California’s Gould School of Law, Kendall had been thinking about the future of the legal industry, and he was intrigued by the old-fashioned notion of creating what he calls “a really elite but small” litigation boutique. “When I started practicing law, there were a lot of spin-offs,” Kendall says. “Now that doesn’t happen nearly as often.”
But Kendall wanted company. One of the keys to a successful launch, he says, was “having partners whom you really like and respect, and who have complementary ambitions for the firm.” He floated the idea of a spin-off with Laura Brill and Robert Klieger, two younger partners on his team at Irell. “They were both really interested,” Kendall says.
Klieger says he was “floored” when Kendall first approached him. Here was a 56-year-old rainmaker thinking about leaving a highly profitable firm to hang up his own shingle. “I don’t think of [Kendall] as a risk taker,” Klieger says. But when Klieger thought more about it, he realized that a spin-off wasn’t as big a risk as it seemed, given Kendall’s roster of loyal clients.
Klieger, who is 37, says the move “made perfect sense for me.” He estimates that 80 percent of his work at Irell was entertainment litigation, much of it for Kendall–and that most of the work he liked best was for Kendall’s clients. Plus, the thought of working at a small shop appealed to him. He’d actually given notice more than five years ago, planning to start his own practice with another Irell entertainment litigation partner, David Codell, but Irell persuaded Klieger to stay. Taking ownership of a small firm and building it into something bigger “kind of has always been in my blood,” Klieger says.
Brill, who’s quiet and thoughtful, and chooses her words with a litigator’s precision, admits that she was nervous about leaving a place that was her “happy professional home for 12 years.” A specialist in First Amendment law who headed the firm’s appellate practice, the 44-year-old Brill was highly regarded at Irell, where she’d made partner after just six years, a year ahead of schedule. If she went with Kendall, she knew that, at least at first, she wouldn’t be making the big bucks she made at Irell. (The firm’s profits per partner in 2008 were $1.96 million.) The logistics of running a firm also concerned her. “I was worried administrative issues were going to take a huge chunk of my time,” Brill says.
But a spin-off was tempting on several levels. Brill had enjoyed the small-firm atmosphere as an associate at New York’s 30-lawyer Howard, Darby & Levin (since merged with Covington & Burling). The chance to keep working with Kendall was also a major draw. Finally, Brill liked the idea of building a stand-alone appellate practice–something that’s harder to do at larger firms like Irell, she says, where “a big chunk of the appellate work is internally generated.”
Clients were the other key element of a successful spin-off. Kendall told several clients, some of whom he’d had for 20 years, what he was contemplating. “They were really excited,” he says. In late April, with Brill and Klieger on board, Kendall informed Irell’s management of his plans. They weren’t thrilled, but “it was very professional,” Kendall says.
Kendall’s first step in forming KBK was to discuss financials with a banker at the Law Firm Group at Citi Private Bank. The three partners invested a total of $500,000 toward initial capital expenses, including computer hardware and software, telephone, art and furnishings, initial rent, and operating expenses for the first four months. Through his contact at Citi, Kendall hired Sandi Behar as a part-time office manager, and over three weeks in April, they hustled to get the office up and running.
“The biggest thing we lucked out on,” Behar says, “was the space.” KBK’s new offices in Century City are leased from Loeb & Loeb, which had built out the floor a couple of years earlier but never fully occupied it. It’s the quintessential law firm office, clean and modern. Kendall and his wife, Lisa See, decorated the reception area and halls with an eclectic collection of modern and Chinese art, orchids, and bamboo plant arrangements. (See is a best-selling author of literary and mystery novels set in China.)
Kendall’s staff hires were few. He brought over his secretary from Irell, and also hired a paralegal and two file clerks/legal assistants, one of whom also doubles as receptionist. The firm manages on a lawyer-staff ratio of 2:1 because the lawyers do much of their own support work. “They are the most self-reliant group of litigators I have ever encountered,” Behar says. “Nobody here thinks it’s beneath them to get the mail or make copies.”
Structurally, Kendall describes the new firm as “Law Firm 2.0.” The model, he says, is Irell and Munger in their early years, the kind of high-caliber litigation shop that sprang up in Los Angeles after World War II. His aim is to create a firm that scores low on bureaucracy and staffs matters leanly, where young litigators have “a chance to actually be lawyers–taking depositions, arguing in court.” He adds: “We don’t want [our lawyers] to be overhead looking for hours to bill.” KBK has shaved 20 percent off the lawyers’ old billing rates at Irell. (Kendall and Irell both declined to comment on his billing rates at Irell.) The firm is also open to alternative billing arrangements that are not based entirely on billable hours (although Kendall says it has yet to accept any such matters). If a big case lands on the doorstep, Kendall says, it might pair up with a bigger firm or hire contract lawyers.
For their part, Kendall’s clients seem to be happy with the new arrangement. Jonathan Anschell, general counsel of CBS Television, says the firm is “really a great platform” for Kendall and Klieger, with whom he’s worked for a number of years. “There’s fewer conflicts than at Irell, and they can be more nimble and creative in terms of [pricing],” he says. Anschell has several pending matters with the firm and says he expects to send it more work in the future. Viacom GC Michael Fricklas calls KBK “a great fit” for his company: “They provide first-tier legal work at a price that’s reflective of a small firm.” Viacom has several pending matters with the firm, including a major litigation in which KBK is teamed with a larger firm.
In fact, Kendall says that all of his Irell clients followed him to KBK, and that the firm has also landed several new clients, including MGM Studios, Inc., CBS Interactive Inc., and Electronic Arts Inc. Most of the 43 new matters that have come in since May are general commercial disputes, but there are also several class actions, copyright cases, and an antitrust appellate case in the mix. Kendall is defending Simon & Schuster in a class action over a marketing campaign for Stephen King’s novel Cell, and is representing MTV in a class action over allegedly defective plastic drum pedals for the first version of its video game Rock Band. The firm is also representing a new client, BayTSP, in connection with a third-party subpoena it received in Viacom’s massive copyright lawsuit against YouTube.
“It turned out, there’s never been a better time to start a new firm, because clients are so receptive to finding lawyers who are able to deliver services with a lower price structure,” Kendall says. “We’re significantly busier and have much more sophisticated matters than I really had any right to expect” after just a few months of being in business, he says.
Kendall originally brought over just two Irell associates, ninth-year Philip Kelly and fourth-year Richard Simon, but the firm has been busy enough to hire four more associates–or attorneys, as the firm prefers to call them–which brings its total head count to nine. KBK is paying its associates 80 percent of the top of the market in base salary, Kendall says, and plans to pay bonuses this year based on profitability and market rates. Starting next year, the firm expects to include midlevel and senior associates in profit sharing.
The economics of a spin-off have been better than Kendall expected. “I didn’t appreciate how well you could keep overhead down,” he says. Expenses in July and August averaged about 28 percent of revenue. Kendall says he’d like to get expenses below 26 percent of revenues, primarily by increasing billable hours. Even though the firm has cut fees “substantially,” Kendall says he expects profits per partner “at the Am Law 50 level” by next year. (Forty of The Am Law 50 have PPP of $1 million or more.)
As with everything else at the firm, associates are welcome to join in business-getting efforts. Within a couple of months of his arrival, senior associate Philip Kelly had landed a new matter representing the regional director of a restaurant chain in a dispute with a franchisor. After hearing Kelly’s pitch–big-firm lawyers, small-firm rates–the client told him, “Your firm is exactly what I’ve been looking for.” Kelly says: “It was the easiest pitch meeting ever. It confirmed that this place was perfect for me.”
“My goal was never to be a rich lawyer, but rather, a fulfilled lawyer,” Kendall says. He appears to be moving in that direction. For most of August, Kendall was nowhere to be seen at his new firm, having already taken advantage of one major benefit of having your name on the door: the opportunity to spend more time outside of it. In this case, it was a three-week “working vacation” in Aspen.
When was the last time Kendall took three weeks off? He grins. “You’re looking at it,” he says.
Photo by Max Gerber