Patton Boggs, Washington, D.C. (Photo: Diego M. Radzinschi/ NLJ)
Nearly two dozen Patton Boggs partners will leave the firm in the coming months, while those who intend to stay have pledged allegiance to management as they tackle a possible merger and continue to revamp the Washington-based law and lobbying brand.
Edward Newberry, Patton Boggs managing partner, said Friday that his firm would survive—healthy and profitable. The firm faces a new round of 15 to 20 forced reductions in the partnership and a handful of defections.
Newberry spoke to The National Law Journal in a wide-ranging interview Friday night. The firm, he said, has rallied its partners after setting in place a strategy to trim down.
Newberry asked partners for a vote of confidence on Feb. 28. He wanted Patton Boggs’ equity and nonequity partners to tell him whether they would stick with the firm as it continues to transition into a smaller group, he said.
The vote occurred days after the firm announced the closure of its New Jersey office and layoffs there, and it acknowledged merger talks with Squire Sanders. This week, a federal judge ruled against Patton Boggs’ position in a multibillion-dollar dispute over pollution in Ecuador, and news surfaced that the firm had hired financial consultants to advise on restructuring.
When Newberry was asked about the vote of confidence, he said 90 percent of the partners said they would stay. Five or six attorneys, he said, indicated they would not commit to sticking around. Newberry said those partners were not producing enough or contributing to the firm’s profitability. He maintained that those lawyers are not the firm’s biggest rainmakers.
Patton Boggs has asked another 15 to 20 partners—about half equity partners and half income partners—to depart in the next few months. Those partners were not producing enough or contributing to the firm’s profitability, Newberry said.
In all, the firm will shrink to about 75 equity partners and 85 to 90 income partners. It will have about 360 lawyers then—25 percent fewer than it had at the end of 2012.
Gross revenue and net income shrank in line with the downsizing, according to Am Law 200 financial numbers. Gross revenue declined by about $40 million, or 12 percent, from fiscal year 2012 to 2013. Net income dropped from $77.5 million to $60 million, a 23 percent decline.
Profits per partner and revenue per lawyer, however, did not shrink as precipitously. Both declined by about 2 percent. Revenue per lawyer was $640,000 in 2013, and profits per partner were $720,000—$15,000 less than the previous year.
Not all the reductions will be layoffs—some partners may retire or change status within the firm—and the total decrease will include a few partners from the to-be-shuttered New Jersey office. Overall, the reductions are part of the strategy the firm crafted more than a year ago, Newberry said.
“It’s particularly difficult to do that in a place as collegial and bonded as our firm,” Newberry said of making multiple rounds of cuts. “The failure to make hard decisions endangers law firms.”
Patton Boggs partners demanded the changes, Newberry said, as the firm faced problems that any law firm would face in a stagnant legal marketplace.
Patton Boggs weathered the financial crisis, but when major clients including the World Trade Center’s insurance group settled their business after 2010, it ended $70 million in business.
Patton Boggs had to downsize, Newberry said. It laid off about 65 associates, staff attorneys and other employees in February 2013.
The firm continued to shrink throughout 2013, laying off another 45 in November. Twenty-three members of its Dallas office moved to Holland & Knight in July.
The number of Patton Boggs’ equity partners shrank from 105 to 83 throughout 2013. By the end of the year, the firm had 435 lawyers. It now has about 380 lawyers.
No partners have left the firm in the past two weeks. Three partners—Carol Van Cleef and Andrew Zimmitti in Washington and Robert Johnston in Dallas—left in February. Lobbyist Darryl Nirenberg moved to Steptoe & Johnson LLP in mid-January, and another 15 partners no longer worked at Patton Boggs as of early January.
Newberry said equity partners who have left don’t immediately take the capital they invested in Patton Boggs with them, but the firm will pay them back. The firm hasn’t asked partners to up their capital commitments during the downsizing.
“Because we’re much smaller and more efficiently run, our need for capital will decline,” he said.
A NEED TO MERGE
Part of Patton Boggs’ reorganization also prompted the firm to want to find a merger partner with which it could grow after it shrank.
Squire Sanders, a 1,300-lawyer firm with small presences in Washington and Northern Virginia, and Patton Boggs have been in talks since December, Newberry said. A combination would create a 1,700-lawyer firm that would rank among the largest 10 in the country.
Last summer, Patton Boggs made a decision to hand-pick law firms from among the Am Law 200 that would make sense in a merger. Patton Boggs started with a list of 27 possible partners.
Patton Boggs wanted a full-service corporate practice group and bigger footprints in California, Houston, New York and London to support its Middle East offices, Newberry said. The firm weighed profits per partner that would mirror its own—Squire Sanders’ partners make about $800,000—and focused on firms that would complement Patton’s litigation, lobbying and government-relations work.
Eventually, Patton Boggs whittled its list to five firms. Squire Sanders was among them. “That conversation has been ongoing and productive,” Newberry said.
A possible merger with Locke Lord fell through in December. After it broke apart, Squire Sanders approached Patton Boggs, Newberry said.
A spokesman for Squire Sanders said Friday that the discussions with Patton Boggs continue.
Patton Boggs has also been in merger talks with a boutique firm in New York, which Newberry declined to name. Those talks haven’t progressed recently because of Patton Boggs’ focus on Squire Sanders, he said, but the potential combination is not off the table.
Around the same time Patton Boggs began work on a merger, the firm had moved to change how it worked internally. During 2013, it hired advisers, including strategic planning consultant Pete Zeughauser and technology and billing consultants to revamp the way the firm functions.
Patton Boggs changed its billing structure and reduced the number of days for collecting payment by about 15. It set minimum productivity standards for partners, at 1,700 billable hours per year, and shifted its compensation system for nonequity partners toward a model not based on the firm’s tradition of “eat-what-you-kill” compensation. In May, the firm will hold a vote on whether to change its compensation model for equity partners.
Consulting firm Zolfo Cooper and Albert Togut, a corporate reorganization and bankruptcy lawyer, now advise Patton Boggs on how to become more efficient with its finances. That includes reviewing how the firm pays partners throughout the year, cash flows and how the firm uses bank debt and how it structures capital funds and investments. The consultants’ hiring isn’t connected to the merger talks, he said, although they are looking at how the changes would affect a combination.
Despite overtaking Akin Gump Strauss Hauer & Feld to claim the No. 1 spot on the NLJ’s Influence 50 last year, Patton Boggs may have difficulties holding that position on The National Law Journal’s annual survey of the lobbying industry.
Income that Patton Boggs gained from lobbying on behalf of foreign entities and other clients is down from 2012, according to an early analysis of key statistics for this year’s Influence 50, a special report that tracks lobbying revenue.
“When Congress gets more active, that will bounce right back up,” Newberry said.
The data were culled from congressional and U.S. Justice Department records, as well as Center for Responsive Politics information. It includes data from Patton Boggs affiliate Breaux Lott Leadership Group.
From its foreign lobbying clients, Patton Boggs in 2013 reported revenue of $5 million, a 39 percent drop from 2012. The firm said it ended its work last year for five of those clients, including Ecuador.
Patton Boggs in 2013 also disclosed that its other lobbying clients paid it $39.8 million, a 14 percent decrease from 2012. Last year, the firm filed lobbying termination reports for more than 75 clients, including Microsoft Corp. and Visa U.S.A. Inc., for which it finished a project on debit cards.
The firm has yet to file any paperwork on its 2014 lobbying income. But in the fourth quarter of 2013, Patton Boggs had lobbying revenue of $9.6 million, a 12 percent reduction from the same period in 2012.
Controlled reductions at law firms could always spiral out of control, a risk Patton Boggs faces. When a firm relies on its talent alone to bring in revenues, losses of talent could cause a run-on-the-bank mentality. The reductions at the firm have inspired rumors of bankruptcy for months. Newberry said the firm hasn’t considered bankruptcy in any form. “Absolutely, positively, categorically not,” he said.
“Whether it’s true or not, it has the possibility of spooking clients and partners,” Mark Sheridan, a Patton Boggs partner based in New Jersey, said.
A ruling from a federal judge in New York this week cast a deeper pall over Patton Boggs. The judge ruled in favor of Chevron Corp. in a case against a lawyer accused of racketeering violations. Patton Boggs had helped the lawyer, Steven Donziger, in his quest to pin blame on Chevron for pollution in Ecuador.
Patton Boggs and Chevron are tied up in a similar, separate case. The oil company alleges the firm contributed to fraud, deceit and malicious prosecution. But Newberry said he’s confident the courts will find his firm’s lawyers acted “zealously and ethically” in the matter.
James Tyrrell, the New Jersey office chief who helped tie the firm to the case against Chevron, is not among the names of departing attorneys that Newberry knows, he said.
Robert Luskin, a top white-collar defense litigator and a Patton Boggs partner, also said he was not looking to leave.
“If I were looking to leave, I would have plenty of opportunities. It’s not something I’m particularly worried about. It’s not a situation where I think there’s any risk,” he said. “It’s a f—ing no-brainer.”
Sheridan, who’s on the Patton Boggs team that represents Gov. Chris Christie’s reelection campaign amid fallout over the George Washington Bridge closures, sent his vote of sup­port to Newberry via email. He said he wrote: “I won’t belabor this any further than to say that my team and I are in and staying.”