Mark Hennigh, managing partner of San Francisco’s Greene Radovsky Maloney & Share, recalls riding the BART a few years ago. He was accompanied by some lawyer friends, so naturally the conversation turned to law firm survival.
One of them, a partner in a large firm, asked Hennigh, “With all these mergers how are you going to make it?”
“This was a guy who I knew from college, and my response was that I still believe – and I believe now – that business legal relationships are established quite often on a personal basis, not on a firm basis,” Hennigh says. “Not withstanding the perceived large firm synergies, that is, the cross-selling from department to department, I still expected my practice to grow from word-of-mouth relationships and referrals from existing clients.”
Hennigh’s 28-lawyer firm is this year celebrating its 21st anniversary, and, so far, is untouched by large firms looking to merge.
Similarly Karl Olson, name partner in San Francisco’s Levy Ram & Olson, had lunch recently with his partners to mark the eighth anniversary of their six-lawyer firm.
“We were sort of saying to ourselves, ‘Who would have thunk when we started out that we would have outlived a Brobeck firm?'” Olson says.
San Francisco’s legal landscape has seen some dramatic restructuring in the past five years, from the dot-com layoffs in 2000, to Brobeck, Phleger & Harrison’s demise in 2003, to this year’s megamergers that have created 1,000-plus-lawyer law firms like Pillsbury Winthrop Shaw Pittman and DLA Piper Rudnick Gray Cary.
But an elite cadre of small San Francisco firms have found a way to stand strong amidst the turmoil. Leaders of small law firms, those with fewer than 70 lawyers, have found that if they focus intensely on one or two practice areas they can have staying power as well as more time to enjoy their jobs than their megafirm counterparts.
Mark Kenney, the managing partner of Severson & Werson in San Francisco, says not much has changed since the 66-lawyer firm opened its doors in 1945. He remembers in the late 1980s when publishing mogul Steven Brill predicted the impending doom of the small firm.
“That was his prognostication in the mid-1980s, and it didn’t come to pass. We knew that concept was wrong and there would always be a place for firms like us,” Kenney says.
Kenney says many of the firm’s lawyers have spent their entire careers at Severson & Werson.
“We haven’t grown, and we haven’t shrunk,” Kenney says. “We jealously protect our style of law. Big firms come in and take swings at things; some of them stay, some of them go.
“By no means do I take larger firms for granted. But as opposed to posing a threat to us I think they help to outline in distinct relief the unique package of benefits we offer.”
Danilo DiPietro, head of Citigroup Private Bank’s law firm group, annually evaluates law firm performance. Hundreds of law firms look to Citigroup to handle their banking needs. He says 2004 was a positive year for small firms.
In a national study of 143 of Citigroup Private Bank’s law firm clients, small law firms saw an average revenue growth of 7.8 percent in 2004. Net income for smaller firms increased by 9.4 percent in 2004, and profits per partner figures were up 5.1 percent.
“In general, small firms that are very focused strategically on what are their value-added areas, those types of firms can be very successful,” DiPietro says. “Those general practice firms that want to be everything to everyone are the firms that struggle to maintain profitability.”
Robert Bunzel, a partner with San Francisco’s Bartko, Zankel, Tarrant & Miller, says the 26-lawyer firm splits its practice equally between transactional work and litigation. The split allows the firm’s work to ebb and flow with economic changes, he says.
“It’s become, over the last 20 years or so, quite difficult for smaller firm practitioners to try to be full-service law firms,” Bunzel says. “If you want to have a full-service law firm, you need so many facets to it that you quickly become something larger than a smaller or medium-sized firm. You’re running counter to the globalization and consolidation that’s happening in all of the corporate sectors.”
Bob Friese, name partner with San Francisco-based Shartsis, Friese & Ginsburg, knows a thing or two about niches. Shartsis Friese touts its hedge fund group, real estate group and a 12-member securities group whose focus is enforcement defense and regulatory work.
In 2003, Shartsis Friese successfully defended England’s National Westminster Bank in the largest bank dispute in Europe. Rabobank Nederland, a Dutch bank, sued National Westminster over a $160 million loan agreement. Some of the firm’s other clients include Advanced Micro Devices Inc., Goldman, Sachs & Co., Home Depot U.S.A. Inc., Oracle Corp. and Yahoo Inc.
Friese says niche practices are most certainly the key to success.
“Especially if a niche practice is perceived as a commodity type of practice, it’s not as easily replicated and that can justify a premium that keeps up with your competitors,” Friese says.
Christopher Kearney, a partner with San Francisco’s Keker & Van Nest, and Michael Kahn, a partner with Folger Levin & Kahn, say their firms have built reputations on high-stakes litigation.
In 2003, Pleasanton’s Peoplesoft Inc. abandoned Gibson, Dunn & Crutcher to tap Kahn’s firm to defend it against Oracle’s hostile takeover.
In March, Keker & Van Nest lawyers defended Grokster before the U.S. Supreme Court. Grokster and fellow file-sharing software companies Morpheus and Kazaa have been accused of infringing on the products of dozens of old-line entertainment companies. The court has the case under submission.
“It’s a matter of being focused, having your niche and doing it well,” Kearney says.
Personal client relationships and historically deep practices are what small firms can offer above their larger counterparts, Kenney says.
“When we focus very keenly on certain practice areas, we have to compete routinely with firms 10 to 20 times our size. One of the ways to be able to do that is by not only having lawyers who do top-quality work but also the fact that our clients know we know them and we value them, and they trust us,” Kenney says.
Kenney says Severson & Werson is well known nationally for its financial institutions practice. The firm also has thriving practices in class-action litigation, insurance and construction design. He says large firms are trying to create practice areas in which Severson has traditionally practiced.
“No matter how bright a lawyer is, you can’t go to the library and teach yourself a practice that we’ve grown up with for 40 years,” Kenney says. “We’ve built an institutional memory for the industry itself, and you can’t just cloak yourself in that expertise overnight.”
Those are some of the reasons small firms are such hot commodities for an out-of-town firm looking for a Bay Area presence or for large firms trying to reach a particular client demographic.
David Thompson, the managing partner of Reed Smith’s San Francisco office, says he’s not surprised small firms are being wooed, but he’s not actively looking.
“Firms in that space have some exceptionally talented people and would be a great complement for a large firm,” Thompson says. “Shartsis, Greene Radovsky, Keker, there are extraordinarily talented people in those organizations.”
Thompson says Reed Smith is certainly looking to grow its San Francisco office and has added four partners in the last few weeks.
“But I wouldn’t go so far as to say we’re actively looking for firms,” Thompson says.
Leaders from Orrick, Herrington & Sutcliffe and Morgan, Lewis & Bockius say they’d be interested in acquiring a small firm.
Joseph Malkin, the managing partner of Orrick Herrington’s San Francisco office, says his firm would be willing to take in a group as big as 50 lawyers, if they proved a good match.
“It would take a lot of compatibilities to fall into place, including practice and culture and people,” Malkin says. “We’re about 750 lawyers right now and our plan is to grow from that. San Francisco is the place that we began, and we consider the Bay Area to be one of our premier markets.”
Malkin says the firm added more than 20 lawyers to its San Francisco office in 2004.
Brock Gowdy, managing partner of Morgan Lewis’ San Francisco office, says small firm acquisitions are part of a larger trend of law firm consolidation.
“Major firms are trying to obtain the best talent available,” Gowdy says. “And I think that large firms look at smaller firms and see where there may be constellations of quality lawyers, and they’re willing to acquire the balance of the firm in that strategy.”
Aggressive law firm consolidation dates as far back as 10 years, and the top-notch boutiques are a big firm’s first targets, Gowdy says.
“Time will tell which of the smaller firms will survive and which won’t,” Gowdy says. “The trend is happening, and it’s going to continue to occur.”
Like Orrick Herrington, Morgan Lewis’ plan is to grow significantly in the state.
“We have a strategy in California that is centered around growing our practice substantially,” Gowdy says. “We have 250 lawyers now. We’ve looked at and talked with a number of firms, and we’ll continue to do that.”
Kevin Dunne, chairman of Sedgwick, Detert, Moran & Arnold, says a boutique has to be highly specialized for his firm to court it. Though the firm does look to attract groups of lawyers, most of its recent hiring has been two or three attorneys from big firms, he says.
“It depends on how dear their specialty is. If it’s a small firm that just does small cases, there really would be very little interest,” Dunne says. “If it’s a special mergers and acquisitions firm or an intellectual property firm, that would be a different analysis.”
Leaders of small firms say merger propositions are increasing, and though flattered, most small shops would rather be left alone.
“You can’t not be aware that the opportunities are available,” Hennigh says. “That’s not to say we would completely discount some great offer. We’re just in the ‘If-it-ain’t-broke-why-fix-it scenario.'”
One of Hennigh’s specialties is wind energy work, and he recently closed a $150 million transaction along the Columbia River in Washington for Puget Sound Energy. For Grosvenor International, the firm has negotiated close to $1 billion in acquisitions, including a $240 million portfolio of properties in Washington, D.C., and a $200 million shopping mall in Florida.
When Hennigh split off from Bronson, Bronson & McKinnon 20 years ago, he says he was part of a profitable group of lawyers that were carrying overhead for the rest of the firm. He thought he could do just as well and be happier at a smaller post, and he’s reluctant to return to the large-law-firm model of business.
“Some of the pitches you get, sometimes people don’t realize what they’re saying to you,” Hennigh says. “One firm that talked to us recently said we have 25 or 30 empty offices you could move right into.”
“That’s nice,” Hennigh responded, “but why would you have 25 or 30 empty offices, and is that really a good sign, or are you carrying more overhead than you should be?”
For Friese, large firms tend not to have the familial atmosphere he loves about his own firm.
“I’m concerned that if you lose your sponsor in a larger firm it becomes more impersonal,” Friese says. “It’s just another profit center run by people you might not know, even if you knew the original group.”
But megamergers can offer small firms some solace. Some small-firm leaders say they’ve noticed an increase in referrals from law firms experiencing client conflicts.
“The midsized firms, in my view, are the ones that are merging into national and international firms at the highest rate, and it is, indeed, creating real conflict issues for the lawyers,” Bunzel says. “Look at Gray Cary and how big that is now. It is impossible not to have a host of conflicts, and that does create opportunity for referrals.”
Because of the size of large international law firms, Bunzel says, corporate clients in the United States have grown accustomed to being presented with conflict waivers and other conflict situations. The conflicts often can be resolved, but if it’s too big an issue, one client may bow out.
“We are seeing those types of cases coming to our firm and others that are similarly situated,” Bunzel says.
Thompson says Reed Smith sends work to small firms and lawyers he knows, including Hennigh.
“He’s an extremely talented real estate attorney, and if something does comes up we can’t handle, we’ll send it to him,” Thompson says. “It’s pretty personal, who you know, who you’ve worked with and had a positive experience.”
Orrick Herrington, Sedgwick Detert and Morgan Lewis all refer work to smaller firms because of conflicts or other reasons.
“If it’s something that we don’t have the requisite expertise because it’s in a specialized area or it’s of the magnitude that a smaller firm can do it more cost effectively for a client, we will refer the matter,” Malkin says.
Guy Calladine with San Francisco-based Carlson Calladine & Peterson says logic would dictate that his firm would receive work from large firm conflicts, but it hasn’t happened yet.
“The conflict situations with these large firm mergers are a significant problem that I see from the type of work I do in malpractice,” Calladine says. “It could [cause] the courts to look at what appear to be hard-and-fast conflict rules and to preclude mergers for people trying to maintain clients.”
Hennigh says the same conflict issues are arising for transactional lawyers.
“It doesn’t seem to me that it exists to quite the same extent that it does in litigation,” Hennigh says. “We know and we’ve heard from others that sometimes these conflicts are irreconcilable and pieces have to break off to find work.”
Hennigh’s firm also has gotten work when a large firm represents lenders and borrowers or landlords and tenants.
“I wouldn’t call it a great deal of work, but it’s more than what we got in the past,” Hennigh says. “Is it a factor? Yes. Is it a big factor? No, not really. It certainly makes us happy to get the work and that we don’t have a lot of conflict issues.”
Probably the most significant advantage small firms offer is being able to undercut large firm billing rates.
Marte Bassi with Bassi Martini Edlin & Blum says his firm’s rates are 25 percent lower than large San Francisco firms like Pillsbury Winthrop, where he used to be a partner. Their cases are staffed leaner, too, further decreasing costs, he says.
“Although our rates are good, they’re nowhere near the [bigger] firms,” Calladine says. “We have much lower overhead, and I think that if you would take any firm my size, the profit margin on each dollar in the door is going to be a good bit above the percentage of the profit margin at big firms.”
Tickets.com tapped Carlson Calladine to negotiate a $500,000 settlement in March over legal fees with former counsel Brobeck Phleger. Budget Rent-A-Car also looked to the firm to defend it from a surgeon who was allegedly hurt by police when he was stopped for driving a rented vehicle with stolen license plates. Los Angeles Judge Elizabeth A. Grimes tossed out the surgeon’s $33 million jury award in 2004, finding it excessive. The case is on appeal.
Kahn says he uses fewer lawyers per case than large firms.
“As San Francisco rates go, we’re omparable to top firms,” Kahn says. “But we’ve always felt that because of the way we staff cases, the net cost is probably less. If we put eight or 10 lawyers on a case, they might put 20.”
Gowdy says that while some lawyers in large firms might have higher rates than small shops, price competition comes into play when big firms use experienced junior lawyers.
“I think it’s generally true that the smaller firms’ most senior lawyers’ rates are lower than the larger firms’ senior lawyers,” Gowdy says. “It’s an issue of whether we can provide people at a comparable billing rate with the same or better skill sets as people in the smaller firms.”
Dunne says small firms can bill lower simply because they handle smaller cases.
As for small firms’ claims of leaner staffing, Gowdy dismisses the idea as a marketing strategy.
“Large firms, generally speaking, work on the largest litigation and transactional matters and by definition they require more people,” Gowdy says. “On a case that involves billions of dollars and is extremely complex and it involves fact issues around the world, you’re going to use more lawyers by definition. In an apples-to-apples comparison, I don’t think there’s any difference; large and small firms employ the same resources.”
For some small shops, large firm compensation packages prohibit lateral hiring because they can’t offer as much money, while others are quick to snatch up large firm alumni. Kahn and Bassi say they rarely hire laterals.
“It’s a big cost to bring on a fourth-year associate,” Bassi says. “I have not hired any lateral from large firms. The cost for me is just too great.”
Kahn says all firms are seeing much more portability than ever before.
“The number of people moving from big to small firms is much less than those moving from big to big,” Kahn says. “I think people make the idiosyncratic decision that they don’t fit quite as well in one firm and they’ll fit better in another.”
Hennigh says periodically, Greene Radovsky will add partners who are leaving large firms.
“We’re small enough that we’re not taking in any big groups, but we’ll bring in a dissatisfied partner or two,” Hennigh says. “They like not having greater overhead and having their book of business making a greater impact.”
For attracting associates, Hennigh says, large firm reputations are hard to compete with.
“The marquee firms and the big firms are going and interviewing at law schools. They have better name recognition,” Hennigh says. “But I find that there is still a segment of the law student population coming out that wants a better lifestyle and knows how difficult it is to become partner in a large firm.”
Hennigh says law students are attracted to the firm’s less intense environment and its lesser work hour requirements. The firm gets a steady stream of applicants from alumni referrals and relationships that Greene Radovsky lawyers maintain with law professors.
Olson says small firms offer more opportunities for young lawyers to cut their teeth on complex cases. For a coalition of media clients, his firm ensured public access to the Scott Peterson murder trial and to critical documents during Oracle’s January hostile takeover of PeopleSoft. Olson also successfully defended the San Francisco Chronicle in a libel case brought by a podiatrist who also sued Giants ballplayer Barry Bonds and retired San Francisco 49ers running back Roger Craig.
“Over the years it’s become really hard for younger lawyers to get good experience at the big firms. There are just so many people working on cases,” Olson says. “There’s more opportunity for young lawyers to get on-their-feet experience at smaller firms.”
D. Mark Jackson, an associate with Bassi Martini, says as part of a small firm he gets to be a more creative and effective lawyer.
“I am allowed a global view of a case. Seldom is my work on a matter confined to one discrete assignment,” Jackson says. “An associate needs to understand the client and the larger context of a case, and this opens the door for being able to really think things through.”
Jackson says he works with two seasoned trial advocates on a daily basis
“There’s no better learning opportunity than working closely on a case with a talented partner,” Jackson says. “I suspect that these kinds of relationships are more likely to develop in a small firm environment. Our firm’s atmosphere really facilitates these learning opportunities.”
By necessity, young lawyers at small firms are asked to handle more sophisticated depositions, Calladine says. They also may get greater opportunities to appear in court to argue important motions and sit second chair in trials, sometimes even first in a smaller case.
An area where all firms can improve is training young lawyers, Calladine says. Because the time isn’t billable, firms just need to informally commit to attorney training, he says.
“One of the things that drives us is not necessarily some form of altruism, it’s partly to make sure that in order to get the quality help, we’ve got to make sure that we invest the time,” Calladine says.
Training at the firm happens on an ad hoc basis, he says. During weekly meetings at Carlson Calladine, associates are assigned to attend bar luncheons or other events that have topical presentations in their areas of expertise. But the firm is too small for a formal training program.
“It’s up to the partners to try to develop these people the best we can,” Calladine says. “We do it by old tried-and-true methods, having associates tag along during depositions. Of course, we don’t bill it. We just try to give them as much feedback as possible.”
The biggest change to San Francisco’s legal community, according to some small firm leaders, is the increase in out-of-town law firms setting up shop in the Bay Area.
But it’s not a threat, they say.
“When the big firms are sending satellites here, I don’t think they’re competing with me as much as each other,” Bassi says.
Bassi’s firm represented the Port of Redwood City during litigation to clean up its above-ground storage tanks. They also helped prove that an oral polio vaccine, Simian Virus 40, can cause mesothelioma, a form of lung cancer.
For out-of-town firms, merging with or acquiring small or midsized shops is an immediate way to establish a local client base, Bunzel says.
In 2002, Boston’s Bingham Dana merged with McCutchen, Doyle, Brown & Enersen and is now the second-largest firm in the Bay Area legal market. Morgan, Lewis & Bockius merged its way into San Francisco in 2003 when it acquired 150 former Brobeck Phleger lawyers. And, Baltimore-based Piper Rudnick established a San Francisco beachhead in 2004 when it merged with 32-attorney Steinhart & Falconer.
In addition, in February 2003, 43 lawyers from San Francisco’s Murphy, Sheneman, Julian & Rogers folded into Chicago-based Winston & Strawn. Lillick & Charles added its 70 lawyers to Nixon Peabody’s 500 in August 2001. Thirty-four attorneys from San Francisco’s Washburn Briscoe & McCarthy merged with Portland’s Stoel Rives in October 2001.
“It certainly provides opportunities for small law firms to position themselves to associate with the big firms, but I don’t think it’s taking away business,” Bunzel says. “I think it would be interesting to look at the statistics on how many national and international firms in the Bay Area have closed those offices. It seems like there’s more volatility in the branch offices of some of the large law firms.”
Ohio-based Arter & Hadden closed all five of its California offices in July 2003, putting 317 lawyers out of work. Chicago’s 300-lawyer Altheimer Gray lasted only one year in the Bay Area before dissolving in June 2003, leaving 12 San Francisco lawyers adrift. Oppenheimer, Wolff & Donnelly packed up its 35-lawyer Palo Alto office in June 2003 to refocus the firm’s attention on its Minneapolis headquarters.
New York’s Coudert Brothers consolidated its San Jose and Palo Alto offices in 2002 and then closed its Silicon Valley shop in December.
Unlike large firms, small firm leaders say they don’t need more lawyers in several offices to have a national platform. Hennigh says the majority of his work is in California, but he has national clients and business in Canada and England.
“Large firms argue that as they have a base in all the various markets they can somehow service clients better,” Hennigh says. “We’re small, we only have one office, but that’s not caused us to lose business historically.”
Kenney says Severson & Werson’s class actions, financial institutions and insurance practices are national. The firm’s financial clients include Wells Fargo & Co., Countrywide Funding, Ford Motor Credit Co. and General Motors Acceptance Corp., several of which had retained the firm to work as their class action counsel.
Kahn also says that Folger Levin has had out-of-state clients that need representation in California courts since it opened its doors in 1978.
“We’ve seen an increasing demand to handle outside class-action litigation around the country,” Kahn says.
Hennigh attributes an increase in his firm’s work to a general up tick in San Francisco’s economic conditions.
“The economy has gotten stronger, the dot-com bust has passed, people who are active in business are becoming much more so,” Hennigh says. “It’s been robust.”
Hennigh says lawyers at his firm have had the same clients for 20 or 25 years. He and other lawyers predict more of the same.
“I’m not aware of any client we’ve lost to a large firm,” Hennigh says. “Client relationships, regardless of whether lawyers belong to small or large law firms, are built on a one-to-one basis.”
“We liked to suppose that we’d be having the same interview 30 years from now,” Friese says.
By Amy K. Spees