Though the epicenter was in San Francisco, Seattle’s legal community felt the shockwaves when 118-year-old legendary firm Heller Ehrman, renowned for its culture of tolerance and community service, collapsed last fall. Chairman Matthew Larrabee announced in September that an orderly dissolution of the firm would be completed by Nov. 28.
The reality was a bit more traumatic. More than 500 people in the firm’s California headquarters lost their jobs. Likewise for hundreds elsewhere. Heller had more than a dozen offices from Silicon Valley to Singapore. Several laid-off employees have sued the firm, claiming it failed to give a 60-day notification of layoffs.
Many Heller refugees have settled into other firms. In Madison, Wisc., 13 ex-Hellerites didn’t even have to move, since the branch was acquired lock, stock and barrel by Perkins Coie. About 80 Heller refugees were still looking for work in mid-December, according The National Law Journal.
In Seattle, where Heller opened an office a quarter-century ago, merging with two smaller local firms, about 140 employees were laid off. Nearly half were attorneys, of which Davis Wright Tremaine picked up about 20—including Brendan Mangan, Heller’s Seattle managing shareholder, and heavy-hitter Bruce Bjerke. Cooley Godward Kronish, based in San Francisco, took advantage of the opportunity to open a Seattle office, staffed with about 15 tech-savvy ex-Hellerites.
Three former Heller attorneys in Seattle went to Stoel & Rives, which also picked up Heller’s entire Anchorage office. A few other refugees were picked up by Seattle offices of firms including Orrick, Herrington & Sutcliffe and Wilson Sonsini Goodrich & Rosati.
Wake-up call
The rapid demise of the esteemed firm caught much of the local legal community off guard. It was a sober reminder of what can happen during a teetering national economy.
“Obviously, there’s a concern about the legal industry when you see that,” says Nancy Williams, managing partner at Perkins Coie’s Seattle office, which did not hire any Heller lawyers in Seattle. Brad Marten, founder of Marten Law Group, hired one Heller refugee. Marten was equally surprised at Heller’s downfall: “It was regarded as a very fine, established and well-run firm.”
Heller was a San Francisco institution, deeply imbedded in that region’s culture. The firm survived the 1906 earthquake and fires, collaborated on the financing for the Golden Gate Bridge and most recently represented plaintiffs in the suit that overturned California’s same-sex marriage ban (later reversed by Proposition 8).
In Seattle, Heller Ehrman threw a party just last summer to celebrate the branch’s 25th anniversary. Environmental attorney Matt Cohen worked at Heller just shy of that quarter-century.
“It was in many ways a sad day for all of us, particularly in Seattle, because we enjoyed working with each other and really enjoyed the firm’s culture,” says Cohen, who quickly found a new home at Stoel Rives. “A lot of my colleagues I miss greatly. But I’ve been very warmly welcomed here.”
A CRIPPLED GIANT
Many of Heller’s problems were independent of the difficult economy. Writers such as Drew Combs, writing on Law.com’s blog, noted several risky moves, among them the 2003 acquisition of California-based Venture Law Group. That, according to Combs, was an attempt to “build a corporate practice that would match the luster of its litigation reputation.” But Heller suffered a 3 percent drop in reported earnings in 2007 and lost more than 60 partners in the last two years. Complicating factors included a partially credit-based operating system, which proved especially problematic in the current economy. Weakened, Heller collapsed.
“The ultimate demise was due to the fact that we had lines of credit with a couple of banks and they called them in,” says Cohen. “We had big aspirations and bet a lot on being a major international firm, so we were vulnerable to any kind of economic downturn.”
A report by Hildebrandt International agrees the struggling economy wasn’t the sole reason for Heller’s downfall, but it certainly exacerbated existing problems. The Hildebrandt report issues a serious warning: “Poorly performing firms whose problems were previously masked by thriving economic conditions will now find themselves in a stark new reality.”
CRYSTAL BALL
Analysts say some practice areas—such as bankruptcy—should actually benefit from the downturn. Another strong practice area is environmental law, including Clean Air Act compliance, Cohen’s area of expertise.
“Heller Ehrman in its last few years was not as excited about environmental work because it was not as lucrative [as other practice areas], but Stoel Rives is very interested in environmental law, and that’s a great place to be,” he says. “Stoel Rives has a different philosophy. Heller Ehrman wanted to be a major financial-capital kind of firm.We’re [Stoel Rives] not recession-proof, but we have a pretty broad range of practice areas.”
In fact, Stoel Rives expanded its Seattle office by 20 attorneys in 2008.
Small boutique firms may also be equipped for adversity, according to some experts, because of their adaptability and typically low debt and overhead.
“I think part of the problem [for large firms] is that a lot of lawyers really don’t understand about the details of the business—things like the loan-equity relationships, the cash-flow standing,” says Marten, whose small (10-lawyer) Seattle firm focuses on environmental law. “In a big firm, there’s a sense of security that can be unreal. Big doesn’t mean you can’t be laid off. Big doesn’t mean you’re safe.”
As Heller Ehrman was preparing to shutter its doors, three big Chicago firms—Jenner & Block, Sonnenschein Nath & Rosenthal, and Katten Muchin Rosenman—announced significant layoffs. Firms from Charlotte to New York City to Los Angeles are cashiering associates and partners. Bonuses are being forgone, raises postponed and holiday parties deep-sixed. Job offers to some law students have been rescinded, firm retreats have been moved closer to home, and, in some cases, partners asked to put capital back into their firms.
With large-scale problems plaguing the nation’s economy, in addition to local turbulence—Washington Mutual’s demise, real estate stagnation, Boeing layoffs, retail struggles and staggering state budget deficits—observers such as Mark Long, managing partner at Schwabe, Williamson & Wyatt, are being cautious. “We haven’t seen a tailing off of business thus far this year,” he says, “but it is a possibility, and we are bracing for it.”
For Long, memories of the dotcom crash (which he calls “dot-bomb”) are still fresh in his mind: “Some things the industry did well, and some things not so well.” But, he adds, “there are also opportunities. For instance, financial regulations are changing, and we are positioning ourselves to handle that.
“We’ve continued on a growth path that’s ambitious, though we might become more circumspect.” There’s a precedent: During the difficult post-dotcom time, Schwabe hired high-tech and intellectual property lawyers.
CHANGING TIMES
Perkins Coie’s Williams says, “None of us knows for sure what is going to happen … however, we are doing things to limit our expenses. We’ve made plans to not use our line of credit next year, which keeps us debt-free and strong.” She believes her practice area, employment law, will remain robust. Reflecting on Perkins Coie’s acquisition of Heller Ehrman’s Madison office, she says, “It was an intellectual property practice located near the University of Wisconsin. We are bullish about that area of work.”
Still, tough times make law firms rethink their business models; it is a given that an economic slowdown will turn up the volume on the unending discussion of billable hours. In an article in The Washington Post, writer Dion Haynes notes that firms are tightening their belts by measures such as assigning more work to lower-paid staff attorneys and negotiating fixed fees for certain clients. Part of this is driven by in-house corporate lawyers having tighter budgets for outside counsel.
“We are certainly hearing from clients with concerns about rates,” Perkins Coie’s Williams says. “We always do, but we’re hearing it more now.”
“We’re sensitive to the fact that our clients are struggling,” says Long. “We need to be open to a number of things.” Schwabe is exploring a number of “alternate fee arrangements” with clients—such as volume discounts and fee structures that mix hourly rates and fixed payments. If a client is willing, Schwabe will even develop a fee structure that sets fees for specific mileposts, such as pleadings and court appearances.
Fees are not the only aspect of customer relations up for examination. Long says this is a time to stay in touch with clients. “Law firms do great when times are good, and OK when times are bad. But when things are changing, businesses tend to hold back.” Left to their own devices, Long says, “lawyers will not call clients when the economy is bad. We need to resist that [inaction] so that we are there when things pick up.”
Marten has his own approach. “In my view,” he says, “you shouldn’t be wasting money when times are good, and you shouldn’t not be hiring good people when times are bad. I happen to be in a practice area that is doing relatively well—so I’m lucky. I’m in environmental law with a president who says that one of his top three priorities is the environment.” But, he says, this is a time to “send your people and your clients a message about who you really are. … Around here, I tell people, ‘Everyone’s nervous. Put yourself in your clients’ shoes.’”
For the first time in 25 years, Marten’s firm is not raising its rates this year. “What kind of message would that be sending our clients, who are going through hard times?” he asks. Marten is even offering a rebate to clients who increase their business with the firm this year. “These are extraordinary times and we need to take extraordinary measures.”
Everyone is nervous. “I’ve been practicing in Seattle since 1981,” says Williams. “I’ve weathered a few recessions. But this seems different. It’s so unpredictable—it’s hard to say exactly what we’re dealing with.”
“Am I more nervous than normal?” asks Long. “Yes. But I can still sleep at night.” L&P
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