Legal Boom Brings Pain With Growth : Law Firms Multiply, Compete Intensely for Clients, Talent
It started innocuously enough.
The prestigious Los Angeles law firm of Gibson, Dunn & Crutcher plunked just one of its lawyers into a trailer on the Irvine Co. ranch to do a little local business 23 years ago.
No big deal.
Then local business got better. Really better.
So much better that Gibson, Dunn now has 80 lawyers in Orange County and at least a dozen other major Los Angeles law firms have local outposts competing with home-grown firms and spinoffs of their own law firms.
Where once stood orchards and bean fields, there are lawyers and companies that need legal services. And the result has been an explosion of legal business in the county.
But that growth has not been without its costs: large-scale defections of attorneys from their firms, intense battles for clients and star lawyers, and an invasion of “carpetbagger” attorneys. The go-go law firm climate has also produced its share of firms that misread the economic picture and folded.
Classic Example
What happened at Gibson, Dunn is a classic example of those growing pains: 17 lawyers left the firm’s posh (the trailer went years ago) Newport Center office eight weeks ago to form their own firm in Irvine. The move left Gibson, Dunn with 10,000 square feet of excess office space.
It was the sort of spinoff that has become typical as the Orange County law business has boomed along with the local economy.
Since 1972, the county’s population has increased almost 50% to 2.2 million. County employment has grown at a rate of nearly 3% annually for the past five years, more than twice the national average. Today, the county has a $50-billion annual economy that would rank about 30th in the world, according to James Doti, dean of the school of business at Chapman College in Orange.
The number of law firms, meanwhile, has increased 67% to 670 from 400 since 1980. The number of lawyers has similarly jumped to about 7,500 from about 4,500 and is expected to continue growing by 500-plus a year for at least several more years. The Orange County Bar Assn., which 15 years ago met in a local Elks Lodge, today has 4,000 members who meet in their own 5,500-square-foot building--now being renovated and expanded.
To underscore the growing importance of the county’s legal business, O’Melveny & Myers, another Los Angeles-based giant, this month moved Barton Beek, perhaps the blue-chip firm’s top corporate securities lawyer, to its Newport Beach office. “We feel we need a stronger corporate presence” because “Orange County is a potentially powerful economic community,” said Warren Christopher, O’Melveny’s managing partner.
Large firms from other cities, including Dallas, Houston, Cleveland and Minneapolis, have also set up local outposts. Two San Francisco-based firms--Morrison & Foerster and Brobeck, Phleger & Harrison--plan to open branches in the county this summer.
Business Grows
One reason for all the legal activity is that local law firms have found their business growing along with the firms they represent. The increased client base draws in outside firms and encourages attorneys who already are here and working at a big firm to set up their own offices.
“A million-dollar deal used to be considered a sizable transaction. Now multimillion-dollar deals are pretty much the standard,” said Stephen C. Drummy, a senior partner with Costa Mesa’s Drummy, Garrett, King & Harrison. Carl Mitchell, an estate-planning expert at Costa Mesa’s Paul, Hastings, Janofsky & Walker, said most estates he plans these days are valued at more than $1 million--about 30% to 40% higher than a decade ago.
That kind of business breeds competition--not only for lucrative clients but also for lawyers who can attract the work.
Last year, for example, the Newport Beach branch of Los Angeles’ Latham & Watkins was able to entice Jeffrey Pero--a 15-year O’Melveny veteran--to jump ship and defect. Pero denies rumors that an annual draw of $600,000 was the bait. Instead, he said, Latham was better geared toward his speciality: securities work with emerging growth companies. Pero did admit, however, to receiving a sizable raise.
Raids by competitors are not the only danger. The human assets have a way of walking off on their own.
Among the rash of lawyer defections was the 17-lawyer split from Gibson, Dunn’s Orange County office, led by partner Alan W. Pettis, a securities specialist who had managed the branch and is reputed to be one of the best business-getters in the county. He and four other partners formed Pettis, Tester, Kruse & Krinsky in Irvine.
Stunning Split
The split was stunning because it marked the first time in Gibson, Dunn’s 97-year-history that a group of partners had defected from the 650-lawyer firm.
The lawyers walked away with a sizable amount of Gibson, Dunn’s legal work, including such Orange County clients as Comprehensive Care Corp., the Santa Margarita Co. and the Geneva Companies.
Pettis and partner Bruce A. Tester deny that the break was motivated by money. “We’ve watched Orange County grow as an entrepreneurial community and want to be part of that in our own entrepreneurial firm,” Pettis said.
The independent nature of Orange County’s up-and-coming businesses is a major reason lawyers decide to hang their own shingles. The county’s entrepreneurs are “less tied up with old-line professional ties than a lot of firms in L.A.,” said Jerry W. Carlton of O’Melveny’s Orange County office. And those entrepreneurs can, and do, pay well for legal services.
The Pettis, Tester partners, for example, project first-year revenues of $6 million with profits of 45% to 55%.
The partners’ departure from Gibson, Dunn was far from unique. Since the big influx of out-of-town law firms began 10 years ago, Orange County has had more than its share of spinoffs, including:
- Five lawyers who early this year left the Santa Ana branch of Parker, Stanbury, McGee, Babcock & Combs, a Los Angeles-based insurance defense firm. The freshly minted Howard, Moss, Loveder & Strickroth took more than half of the branch’s cases, said partner Robert J. Moss.
- Seven lawyers who split in January from the Orange County and Century City offices of Wyman, Bautzer, Christensen, Kuchel & Silbert, a large, Los Angeles-based firm. The new firm of Case, Schroeder, Knowlson, Mobley & Burnett has 10 lawyers in Newport Beach and a three-lawyer outpost in downtown Los Angeles.
- The departure 13 months ago of the entire 24-lawyer Orange County office of Kindel & Anderson, a 34-year-old Los Angeles firm. Partners with the new Newport Beach firm of Palmieri, Tyler, Wiener & Wilhelm project gross billings this year of $7.5 million--partly from such ex-Kindel & Anderson clients as Warmington Homes, Covington Technologies and Shiley Laboratories.
Money a Factor
Money, it seems, is still a prime factor in the formation of new law firms in Orange County.
“It’s like taxation without representation,” said a partner who recently left a major firm’s branch here.
“If six lawyers are in a branch and that branch is very profitable, you might as well be in business for yourself rather than sending the profits to Los Angeles,” explained another local lawyer, who asked not to be named.
For that matter, why send the money to other parts of Orange County?
The 100-lawyer Costa Mesa firm of Rutan & Tucker--the oldest, largest and most successful of Orange County’s home-grown law firms--has given up branch offices entirely because of communication problems and because, with branch offices, the home office tends to “worry that all they’re doing is financing the growth of a satellite” that could “realign itself and change the sign on the door,” said managing partner John B. Hurlbut.
But even the home office isn’t safe. Rutan, for instance, has developed a sizable alumni club over the years. Two of its progeny have grown into sizable competition: the 50-lawyer firm of Stradling, Yocca, Carlson & Rauth in Newport and Costa Mesa’s Drummy, Garrett, with 40 lawyers.
The competition is equally fierce among Orange County’s firms for top law-school graduates.
Raised Salaries
After Manhattan’s Cravath, Swaine & Moore boosted starting salaries from $53,000 to $65,000 last year, major Southern California firms began following their lead.
This fall, Orange County firms that want their pick of graduates are paying an eye-popping $52,000 to $54,000.
Still, partners with most of the large local offices privately admit that Orange County is a hard sell when it comes to luring the top Ivy League graduates. “On Wall Street, we’re still perceived as an orange grove,” one partner noted.
The image isn’t a drawback for everyone, however.
Jerry Carlton, the bearded, Texas native who opened O’Melveny’s Newport branch in 1979, feels comfortable enough to wear cowboy boots to work. And now-retired Justice Robert Gardner, a Superior Court judge here for 23 years, still spends part of every day body surfing.
There is a more relaxed professional schedule in the county. Associates with smaller local firms typically bill about 1,800 to 1,900 hours per year, contrasted with 2,200 to 2,400 hours for associates at the giant, big-city firms.
The county’s relatively slower pace does have a price, however.
For one thing, many big-city lawyers believe that Orange County does not offer the most complex deals or really first-rate business. A senior partner with a New York-based firm who asked not to be named estimated that “80% to 90% of Southern California’s best mega-deals will be handled by firms in downtown Los Angeles.”
Some Exceptions
Of course, there are exceptions: Legal work on the $1-billion Koll Center Newport was handled by Jerome Miles, who is now with the Orange County office of Pettit & Martin, for instance. And the $340-million sale of Fluor’s 137-acre headquarters in 1985 was handled by Ralph C. Wintrode of Gibson, Dunn’s Newport Beach office.
But Orange County still does not have a base of Fortune 500 companies--so law firms here battle fiercely for bigger pieces of a market characterized by smaller clients.
Unlike larger cities, relatively small transactions are a substantial portion of the legal business here, most attorneys note.
Bargain-Basement Rates
To get their fair share of the local trade, many of even the blueblood firms here use marketing gimmicks or offer bargain-basement rates.
Rutan & Tucker, for instance, has several newsletters that tell clients about new cases and laws. That firm also is among several that try to drum up more business by hosting free seminars for lucrative, corporate clients.
Wyman, Bautzer, Christensen, Kuchel & Silbert charges less for some securities work at its Newport outpost than for the same work in the Century City home base. “We’ve tried to structure our fees in the securities area to more effectively compete in this marketplace,” said partner John F. Della Grotta. His 20-lawyer branch here last year netted $1 million--up 30% from 1985.
And with all the legal business there is, some law firms have not made it.
If a firm has incorrectly read the economic picture, a branch’s life span can be short. At least half a dozen branches of major firms have opened and closed their doors here since 1980.
Closed Office Doors
In October, 1981, for example, a New York-based mega-firm--Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey--shut the doors of a four-lawyer office in Newport Beach after only seven months. The firm reopened a branch here in June, 1984, but it was shut down last November--just six weeks after moving to larger offices in Irvine.
Former partners privately say that Finley, Kumble was unable to meet its budget here because of its image as a carpetbagger that charged sky-high, Manhattan rates. “It’s not an easy marketplace to walk in and start doing business because there’s a built-in loyalty to Orange County lawyers,” said Gary Mobley with Case, Schroeder.
Still, Finley, Kumble is again giving Orange County a try, albeit on a smaller scale: the firm just opened a drastically scaled down office in Newport Beach.
Musick, Peeler & Garrett, a large Los Angeles firm known for representing the J. Paul Getty estate, also found that success isn’t necessarily there for the grabbing.
Three years ago, in an effort to save its sinking five-lawyer office in Orange County, Musick, Peeler recruited former U.S. Rep. Charles E. Wiggins, who had longtime ties to the county, to help snare local business. Wiggins, now a judge on the 9th U.S. Circuit Court of Appeals, recalled that he made no headway because the choicest local clients already had longstanding ties with major law firms.
But the lawyers still come, and will for some time.
“The legal community mirrors the business community. It’s a dynamic marketplace,” said Mobley, of Case, Schroeder. The county, he said, will be “a growth area for ‘80s legal work.”
