(Photo: Diego M. Radzinschi/NLJ.)

UPDATE (7:22 a.m.): Squire Sanders says the merger vote resumed overnight and is set to conclude today. Check back on The Am Law Daily for more on this developing story.

The potential merger between Patton Boggs and Squire Sanders was thrown into chaos Thursday when leaders at the latter halted voting on the tie-up after the former was hit with a court filing meant to upend its settlement of a suit that had posed a major obstacle to the pair joining forces.

The day began with Squire Sanders suspending its partnership vote on the merger just hours before it was set to end, according to firm partners and others familiar with the process. Patton Boggs partners had cast their votes Tuesday. As of Thursday, the results had not been announced.

By day’s end, according to one Squire Sanders partner, the firm’s executive committee was debating how to proceed. Among the options under discussion were starting the vote from scratch in a few days after partners had considered the latest developments, or restarting the suspended vote in the next day or two, but giving those who had already cast ballots the chance to change their minds.

Neither firm would comment publicly about where the merger now stands.

Thursday’s events marked a dramatic turn in what has been a roughly six-month negotiation between the financially struggling Patton Boggs, a Washington, D.C.-based firm with about 325 lawyers that is known in large part for its lobbying prowess, and 1,227-lawyer Squire Sanders, a global player with roots in Cleveland. A combination offered something substantial to both: for Patton Boggs, a fix for its fiscal woes; for Squire Sanders, a major boost for its D.C. presence.

Early Thursday, however, Squire Sanders leaders announced the suspension of voting in response to a late Wednesday filing by attorney Steven Donziger related to a suit brought against Patton Boggs by Chevron Corp.

Chevron had accused Patton Boggs in that litigation of aiding Donziger in a fraud he has been found to have committed on his way to winning a $9.5 billion judgment against the energy giant on behalf of the Ecuadorean plaintiffs he represents in the Lago Agrio toxic tort litigation.

The accusations—and the potential financial liability they represented—had hampered Patton Boggs’ efforts to enter a tie-up. So when it was announced on May 7 that the firm had reached an agreement with Chevron under which it would pay the company $15 million and exit the Lago Agrio case, the main impediment to the merger with Squire Sanders appeared to have been lifted.

By moving to intervene in that settlement and have the court reconsider it, Donziger effectively put that impediment back in place, at least temporarily, though he said through a spokeswoman that was not his goal.

“While we did not take this action to block the merger, our concern is about the plight of the Ecuadoreans and their unfair treatment by Chevron in U.S. court, not about the future of two law firms,” the spokeswoman said.

In his motion, Donziger claims Patton Boggs “sold its clients down the river” in settling the suit brought by Chevron. He further claims that the firm, which his team brought on board in 2010 to provide the legal and lobbying muscle to help enforce the $9.5 billion judgment by an Ecuadorean court, is guilty of “flagrant ethical violations,” including breaching its duty of loyalty to the Ecuadorean plaintiffs, in part by announcing the settlement to the press with no prior consultations with the clients.

“There’s no way to sugarcoat it: Patton Boggs has put its own interests above those of the people it was supposed to represent, switched sides in the middle of a hotly contested legal dispute, unceremoniously abandoned the clients without so much as notifying them, and publicly expressed regret at having taken on their representation in the first place,” Donziger said in Wednesday’s filing. “And it has even agreed to cooperate with Chevron in discovery, so that Chevron may use what it finds against the firm’s former clients.”

Donziger and a trio of Ecuadoreans, Hugo Gerardo Camacho Naranjo and Javier Piaguaje, are now asking Southern District Judge Lewis Kaplan to scuttle the agreement between Patton Boggs and Chevron, which Southern District Judge Loretta Preska effectively approved on May 7 by accepting a stipulation of settlement between the parties and dismissing the case. As part of its agreement, the firm issued a statement saying, “Patton Boggs regrets its involvement in the matter.”

Those “regrets,” Patton Boggs said in its May 7 statement, were based on factual findings Kaplan made in a March decision where he found that the $9.5 billion award against Chevron in Ecuador was procured by fraud and that Donziger and others had worked to corrupt the Ecuadorean judiciary and had engaged in a pattern of racketeering activity. Kaplan’s decision is being appealed.

Patton Boggs is represented in the settlement with Chevron by Elkan Abramowitz of Morvillo Abramowitz Grand Iason & Anello. Chevron looked to Gibson, Dunn & Crutcher and to Stern & Kilcullen in Florham Park, N.J.

Late Thursday, Abramowitz filed a letter with Kaplan asking that he expedite his consideration of the Donziger motion. Abramowitz said the intervention request should be dismissed as moot. “It seems clear that the objective of the motion is simply to generate publicity and cast a cloud over Patton Boggs,” he wrote.

INSIDE THE FIRMS

It is unclear how the merger vote would have come out at Squire Sanders if it ended as scheduled Thursday. Several people at the firm say that while many partners supported the idea of combining with Patton Boggs, others were less enthusiastic.

Firm leaders typically do not ask partners to vote on mergers until they are nearly final and certain to win approval. In 2006 a proposed merger between Squire Sanders and Bryan Cave came close to a vote—so close that partners had received details about the proposed management that would lead the combined entity. The merger ultimately didn’t happen. (Squire Sanders went on to merge with British firm Hammonds in 2010.)

Some outside observers noted that even absent Donziger’s motion, a merger between the two firms was no certainty.

“These things are incredibly complex with a lot of moving parts, you just never know [how a vote] will turn out,” says Ward Bower, a law firm merger veteran with legal consulting firm Altman Weil, which is not involved in the merger talks. “Timing can be so critical.”

Multiple groups of attorneys boasting many millions of dollars in business are exploring whether they should jump from Patton Boggs to other firms, according to sources in Washington who have seen partners’ resumes in recent weeks.

But following a steady stream of partner departures over the past year, none of Patton Boggs’ partners have announced plans to leave the firm this month amid the pending merger vote. Not all of the firm’s partners are expected to join the merged firm if the tie-up is completed. Among those likely to be left behind: James Tyrrell Jr., who had pushed for Patton Boggs’ involvement in the Chevron case.

At Squire Sanders, on the other hand, several partners have said they are moving on, including four health care lawyers who are joining Jones Day.

According to the most recent Am Law 100 report, Squire Sanders and Patton Boggs had somewhat similar financial profiles last year. Squire Sanders’ equity partners took in an average of $810,000 in profits last year, a 1.3 percent increase over 2012. Patton Boggs’ equity partners earned $720,000, a 2 percent drop from the previous year. Squire Sanders’ revenue per lawyer stood at $630,000, while Patton Boggs’ stood at $640,000.

Patton Boggs’ lobbying brand was key to Squire Sanders’ interest—so much so that a postmerger firm would take the name Squire Patton Boggs.

Squire Sanders has built itself into one of the world’s largest firms through a series of mergers in recent years and now operates under the Swiss verein structure. This year, its Washington office pursued expansion through lobbying. The firm hired American Conservative Union chairman Alberto Cardenas and another lobbyist in February.

On May 7 the Washington office celebrated with a cocktail toast to promote its expansion into government relations. Earlier this week, Cardenas stepped down from his role at the ACU, the county’s oldest grassroots conservative group, to focus on lobbying.

Squire Sanders’ leadership was serious about combining with Patton Boggs’ lobbyists, too. Thomas Hale Boggs Jr., the firm’s namesake, would be an asset at the new firm, as would be former U.S. senators Trent Lott and John Breaux. Patton Boggs acquired the pair’s lobbying group in 2010, and the two were likely to join the new firm, sources said.

Despite the banner names, Patton Boggs’ reputation had suffered since it began shedding more than 100 attorneys throughout 2013 and 2014.

Cash flow problems initially started in 2012, after a major account involving insurance settlements from the 2001 World Trade Center attacks dried up. At the same time, Boggs, now 73, was aging along with his most powerful colleagues. The firm had long relied on using a strict formula for compensation that awarded origination credits to partners, according to partners who have left the firm.

“People were eating heartily and barely killing,” one former partner said.

The compensation structure continued to reward older partners even as their billable hours dried up, the partners and others said. Newer partners, billing thousands more hours, received less because they hadn’t originated the accounts. Half of the partners were billing less than 1,000 hours a year and, some billed less than 100 a year, according to two people familiar with the partnership.

Once the downsizing began, rainmakers departed, including lobbyist Jonathan Yarowsky, who joined Wilmer Cutler Pickering Hale and Dorr, and government contracts group leader Robert Tompkins, who went to Holland & Knight.

In Dallas, where Patton Boggs had dozens of lawyers, a group of 23 attorneys left for Holland & Knight, including the managing partner of the office. In April, a group of six partners in Dallas opened an office for McGuireWoods.

Patton Boggs faced its toughest months around March of this year. Cash flow was tight, and the firm had little room to wiggle. Partners were asked to be patient with their draws as Newberry and Boggs volunteered to suspend their own, sources said. The partners received their paychecks one day late at one pay period. Around the same time, managing partner Edward Newberry and Boggs personally contributed between $3 million and $4 million between them to carry the firm through, according to the sources.

While some partners who have left since 2012 have received money from the firm, not all have. Some former partners say they have not received the capital they put into the firm as equity. They haven’t heard from Patton Boggs, and most aren’t sure how much they are even owed, they said. The partners expected payment about six months after they had left, per their partnership agreements.

NOW WHAT?

It is not only Squire Sanders and Patton Boggs partners who are interested in what becomes of the merger negotiations.

Dentons, which publicly proclaimed its interest in merging with Patton Boggs earlier this year, has remained on the sidelines while the latter pursued exclusive talks with Squire Sanders.

Now that Squire Sanders has suspended its merger vote, groups of Patton Boggs partners who had stuck with the firm until it could find a savior may be poised to move elsewhere, says a source knowledgeable about the matter. And while those prospective laterals could be headed to any number of firms, Dentons, which earlier this year took on 46 lawyers in Canada from crumbling Heenan Blaikie, remains keen on making new hires.

And while a Dentons spokeswoman declined to comment on the firm’s interest in Patton Boggs partners, it has been known to take advantage of a competitor’s inability—or unwillingness—to close a merger deal.

In 2008 King & Spalding was engaged in exclusive merger talks with New York’s Thacher Proffitt & Wood. When those discussions stalled and Thacher Proffitt folded that December, Dentons predecessor Sonnenschein Nath & Rosenthal swooped in and hired 100 former Thacher Proffitt lawyers.

Meanwhile, in yet another twist, one Squire Sanders partner said Thursday that questions were being raised within the firm about whether Patton Boggs had been completely forthcoming about what it knew about what Donziger and the Ecuadoreans were planning.

Specifically, this partner cited a letter dated March 19—two days before Donziger filed his motion and a day before Squire Sanders kicked off its merger vote—that was addressed to Newberry and Patton Boggs general counsel Charles Talisman.

In the letter [PDF], one of the named Lago Agrio plaintiffs and and the Ecuadorean counsel in the litigation threatened Patton Boggs with legal action over what they deemed the firm’s unlawful and invalid action in reaching the settlement with Chevron.

The three individuals who signed the letter threatened Patton Boggs with “a very substantial claim against you for damages” in the event that the decision by the federal district judge in New York approving the settlement was overturned.

According to the Squire Sanders partner, leaders at that firm were not alerted to the threat until early Wednesday morning, hours after the Ecuadoreans and Donziger filed their motion asking the federal district judge to undo the Chevron settlement. The letter was attached to the motion as an exhibit.

Newberry, asked via email to respond to the suggestion that his firm had withheld any information about a looming litigation threat, strongly refuted the idea.

“Not true,” he wrote. “We had no indication the filing was coming, learned of it this morning, and we informed Squire Sanders as soon as we learned of it. The letter you cite, which is dated May 19, but I am not certain when we received it, contains no information that had not been previously discussed.”

Contact National Law Journal reporter Katelyn Polantz at kpolantz@alm.com and American Lawyer reporter Julie Triedman at jtriedman@alm.com. Am Law Daily reporter Brian Baxter and and New York Law Journal reporter Mark Hamblett contributed to this report.