N.Y. Challenge : Legal Boom Ends Calm at L.A. Firms
The leading law firms of the Los Angeles legal community, which enjoyed a clubby, well-ordered serenity for decades, are facing the greatest period of crisis and challenge in their 100-year history.
Los Angeles, the gateway to the trade markets of the Pacific Rim, has become one of the world’s emerging financial centers and a boom town for the major U.S. law firms.
As dozens of highly competitive firms have crowded into the Southern California market, the historical calm of Los Angeles’ legal establishment has been shattered.
Suddenly the giants of the legal world--including dozens of major New York firms--are raiding the most prestigious Los Angeles firms for top partners at salaries of $500,000 to $1 million.
New Giants
The city’s biggest corporate law firms have doubled and tripled in size to stay competitive, emerging as international giants themselves and among the biggest winners in the unprecedented legal gold rush.
But there is a growing casualty list, too.
Some smaller law firms are struggling just to stay alive. Three major Los Angeles law firms, each with more than 100 lawyers, have already folded and others have been swallowed up in mergers with larger, national firms.
For both the winners and the losers, the financial stakes are enormous: Among the 50,000 lawyers in Southern California, an elite group of several thousand forms the blue-chip world of the 100 or so firms on the upper rungs of the Los Angeles legal hierarchy. The top 15 firms alone have billings of more than $1 billion a year.
In this new era of combat in the real world of the law, there are few valid comparisons to the fictionalized “L.A. Law” of television, where love affairs and quarrels over the corner office frequently rate more concern than million-dollar cases and billion-dollar clients.
The new legal competition has parallels in the cut-throat climate and obsession with growth of U.S. business generally. It is partly the story of law firms following their clients around the world to avoid losing them to rivals. It is also the story of the most powerful law firms emerging as global businesses themselves.
A general restructuring of corporate law firms is under way throughout the United States, with a sharp new emphasis on ever-larger profits. But nowhere is the transformation so dramatic as in Los Angeles.
“Los Angeles is a maelstrom. Right now the competition is feverish,” said Steven Brill, publisher of The American Lawyer, a New York-based monthly magazine that reports on the business of law.
“Every New York firm has discovered L.A. as a market and they are running around hiring anybody who ever went to law school,” Brill said. “On the other hand, you have the biggest Los Angeles firms emerging not just in L.A., but all over the place.”
Robert M. Talcott, one of Los Angeles’ most prominent criminal defense lawyers and head of a seven-member firm, predicts continuing chaos:
“We are seeing prominent firms go out of business, which was unheard of in the past. There’s going to be a continuing winnowing out, almost a survival of the fittest. The weaker firms will either be eliminated or consolidated.”
The most vulnerable firms have different strategies for survival. Some say it is time to simply cut costs and wait the crisis out. Others see rapid growth as the best guarantee of survival, sometimes by merger with one of the larger national firms seeking a California base.
For example, Hahn, Cazier & Smaltz, a 45-lawyer firm that once included Sen. Pete Wilson (R-Calif.), was absorbed by the 500-lawyer Philadelphia firm of Morgan, Lewis & Bockius.
‘Bigger Playing Field’
“Today’s economics make it hard for a mid-sized firm to compete for the business of the large international firms,” said Donald C. Smaltz, one of the firm’s senior partners. “So we were approached by Morgan, Lewis, and we got swallowed up. For me, it means I get to play on a bigger playing field.”
The increased competition for business, as well as the raids, mergers and preoccupation with profits, has sparked debate among lawyers over whether the profession of law has become just another business, with the “bottom line” as the new measure of a law firm’s stature.
Many leaders of the Los Angeles legal community view it as a time of crisis, and some are alarmed by the escalation of lawyer salaries and law firm profits.
“It’s like the NFL draft. I’ve never seen anything like it before,” said U.S. District Judge Dickran Tevrizian, a former associate of two of the best-known Los Angeles firms. “The law has become a major business. It’s not a profession anymore.”
The transformation of the Los Angeles bar has its roots in geography and technology as well as economics.
Before the arrival of the jet airplane in Los Angeles in 1959, transcontinental air travel was both time-consuming and difficult. In an even earlier age, it took days to reach the city by train. Because of the time factor, New York law firms historically referred much of their West Coast business to Los Angeles firms.
In a sense, Los Angeles was cut off from the mainstream of the law profession for most of its history, viewed by many New York firms as a sort of legal backwater. The advent of jet travel changed that dramatically. Southern California’s thriving economy did the rest.
New York banks and brokerage houses were the first to move into the Southland, a trend that accelerated in the 1970s. The region’s diverse economy, built on real estate, entertainment, aerospace and high technology, was part of the lure. Increased foreign investment by Japan and other Asian nations pulled East Coast financial institutions westward.
Banking Clients Followed
Once the New York banks arrived in town, the law firms followed. Wall Street firms and others pursued their banking clients to Los Angeles to make sure they did not forfeit the business, worth millions of dollars annually.
The mass influx of firms from New York and other major cities began in the early 1980s, and because of aggressive recruiting and the raiding on Los Angeles firms, the local branches of some of the invading firms are already bigger than many mid-size Los Angeles firms.
The newcomers are employing tactics never before used by law firms in the city, paying public relations firms to promote themselves, wooing clients with seminars to show off their legal expertise and hiring executive search firms to approach potential recruits--from senior partners to young associates--at the city’s leading firms.
“I’ve been called by headhunters at least two dozen times in the last year,” said one third-year lawyer. “If you say you aren’t interested, they ask if you know anybody else who would be.”
Many newly arrived firms start out with only a handful of lawyers, but they lease entire floors of the skyscrapers that tower over Bunker Hill, the city’s new legal and financial center. Even before they unpack their law books, some firms begin recruiting.
The most successful of the New York firms in luring top talent away from leading Los Angeles firms has been Skadden, Arps, Slate, Meagher & Flom, the nation’s richest law firm, with 712 lawyers and revenues of $228 million in 1986.
Skadden’s Los Angeles office, opened in 1983, has grown from six to 80 lawyers, most of them hired from other firms. Two high-priced recruits, litigators William Masterson and Frank Rothman, former president of MGM, are among the premier trial lawyers in Los Angeles.
Dramatic Raid
“You have to put Skadden in the big leagues in Los Angeles just because of Masterson and Rothman,” said Maxwell M. Blecher, another of the city’s leading trial lawyers. “Overnight, that makes them certainly one of the top litigation firms in town.”
But Skadden’s most dramatic move was a raid last year on the city’s oldest and most aristocratic law firm, O’Melveny & Myers, to lure away Richard S. Volpert, the head of O’Melveny’s real estate department, at a reported salary of $1 million.
“The move Volpert made was viewed as more significant just because he had left O’Melveny,” said Michael H. Diamond, Skadden’s managing partner in Los Angeles. “For decades, O’Melveny was one of the firms in town that wouldn’t dream of one of its partners even thinking of going to a rival firm.”
Diamond, a specialist in hostile corporate takeovers, does not believe the leading Los Angeles firms are a match for some of the newcomers--an attitude shared by many transplanted New York lawyers.
“I do think several of the New York firms feel L.A. firms don’t have the financial and business sophistication, and in fact that’s true,” he said. “We are expecting to do very well here.” He predicts that Skadden’s office will grow to 200 lawyers.
Many Los Angeles lawyers disagree that they are outmatched by their New York counterparts. Among those challenging Diamond’s assessment is Warren Christopher, head of O’Melveny & Myers.
“One can’t generalize like that,” Christopher said. “We have great respect for the long experience of the leading New York firms. But I don’t think O’Melveny or the other leading firms of the West lack the sophistication to service their clients anyplace in this country or elsewhere.”
Fatal Cycle
In the new competitive age, the loss of a top-flight lawyer can often start a law firm’s troubles and trigger a fatal cycle. Because of the rise of what some lawyers call “the legal gossip press,” virtually every major raid is now reported. Then more headhunters descend, stepping up the pressure on lawyers to leave.
“They certainly played a role in what happened to us,” said Stuart L. Kadison, one of the founding partners of the 100-lawyer firm of Kadison, Pfaelzer, Woodard, Quinn & Rossi, which went out of business last month.
Kadison’s troubles began in a partnership dispute over whether the 20-year-old firm should expand to stay competitive with larger firms. The trouble escalated beyond repair after reports that nine partners were leaving to start their own firm.
As headhunters and raiding law firms descended, Kadison, a former president of the Los Angeles County Bar Assn., struggled to keep his firm together. But the remaining lawyers began leaving so fast that Kadison himself was forced to join the exodus.
One group of Kadison lawyers pulled out to join the local office of Rogers & Wells, a New York firm. Others were hired away by the 265-lawyer Los Angeles firm of Paul, Hastings, Janofsky & Walker, now the city’s fourth-largest firm. Kadison and another group went to the 100-lawyer branch office of Sidley & Austin, a 485-lawyer Chicago firm.
“Our lawyers were targets of headhunters for years,” Kadison said. “The calls certainly increased after the first report of trouble. The story was out on the street and there was no way to contain the interest of other law firms.”
The demise of Kadison’s firm also illustrates the sharp philosophical split among lawyers on how mid-size firms should respond to periods of economic uncertainty.
“Stuart espoused the philosophy that firms to survive today have to be national,” said John J. Quinn, another former county Bar president, who left Kadison along with eight partners and now heads the 22-lawyer firm of Quinn, Cully & Morrow.
“My view is that it’s a time to retrench, become price-competitive and not try to compete with the giant firms by expanding just for reasons of expansion ego,” Quinn said.
The spectacular rise and fall of another Los Angeles firm, Memel, Jacobs & Ellsworth, demonstrates other forces--including lawyer greed--that can contribute to the sudden destruction of a seemingly prosperous law firm.
Sherwin L. Memel, 57, one of five partners who founded the firm in 1975, said it had grown to 145 lawyers with offices in San Francisco, Sacramento, Newport Beach, Washington and Dallas by 1985, when the firm began to self-destruct amid a bitter internal squabble over lawyer salaries.
“We took a firm that was making millions of dollars, and by vote of the partners we closed it,” Memel said. “We never had a loss year, but the perception was we were not going to generate enough money fast enough.”
Concern Among Young Lawyers
“There is a very high degree of concern among young lawyers today over their compensation,” Memel said. “The income-level expectation of lawyers at a very early age is now so high that I don’t know how the economics of the profession will adjust.”
Many leaders of the legal profession share the view that soaring salaries are a threat to all but the largest and richest law firms, triggering a spiral in expenses passed on to clients. Most firms, however, keep pace with annual salary increases to remain competitive.
The salary spiral began in 1969 when one of New York’s leading firms, Cravath, Swaine & Moore, doubled the starting salary for first-year associates to $15,000 to gain a recruiting edge. The advantage was lost when other firms matched the increase, but Cravath has continued to raise salaries each year, with the rest of the legal profession in pursuit.
The starting salary at New York firms in Los Angeles is now up to $67,000 for first-year lawyers, and top Los Angeles firms are paying $52,000. With the growth of major firms in the past few years, the competition for new legal talent has grown so intense that the largest Los Angeles firms are also paying up to $1,000 a week to law school students hired as summer clerks.
“Prices are too high,” said Joseph A. Ball, 74, former president of the State Bar of California and head of a 65-lawyer Long Beach firm. “The young person starting to get these salaries can’t earn that much money for his firm. . . . If you charge the clients to get even, the clients get robbed.”
The high earnings of young lawyers--combined with average partner incomes now well beyond $400,000 at the largest Los Angeles firms--have contributed to such sharp increases in legal fees in the last decade that many corporations have expanded their own legal staffs in self-defense.
“I believe the law firms are pricing themselves out of business,” said Atlantic Richfield Co.’s general counsel, Francis X. McCormack. “The normal charge in Los Angeles today is $90 an hour for associates, $150 to $200 for junior partners and up to $300 for senior partners. That’s just too much.
“With few exceptions, we now do all our legal work in house other than major litigation,” McCormack added. “The problem is there’s a lot more litigation today than there used to be. If legal demand goes down one of these days, there will be a collapse of legal prices. The demand has to go down or the country will go broke.”
Despite the problems of some mid-size firms and the troubles besetting the legal profession, the biggest Los Angeles firms are growing faster and making more money than they ever anticipated and the best-managed middle-size firms of 50 to 150 lawyers are also prospering.
The success of several leading mid-size Los Angeles firms amid the general tumult of the profession is attributed to tight financial controls and solid management practices.
‘Keeping Up With Joneses’
Two firms flourishing despite the chaos are the 126-lawyer firm of Irell & Manella and the smaller, 80-lawyer corporate litigation firm of Munger, Tolles & Olson.
Building slowly from a 10-lawyer firm in 1965, Munger, Tolles has established itself as one of the leading litigation firms in Los Angeles despite its relatively small size. Managing partner Ronald L. Olson said the keys to the firm’s success include recruiting top trial lawyers from government and resisting expansion simply for the sake of growth.
“I think there is a lot of keeping up with the Joneses among law firms today,” Olson said. “We want to be the best law firm we can be here in Los Angeles. We do not want to be a multioffice national and international firm.”
Los Angeles’ three largest firms--Gibson, Dunn & Crutcher, O’Melveny & Myers and Latham & Watkins--made decisions to expand nationally before the first outside firms moved into Los Angeles, opening branches in Washington in the 1970s and then in New York and other cities.
Today--partly out of competition, possibly from sheer momentum--the three big Los Angeles firms have continued to grow dramatically and now are ranked among the top 10 richest law firms in the nation.
Gibson, with 538 lawyers and 11 branch offices from San Jose to Saudi Arabia, is now the largest firm in Los Angeles and the country’s fourth-richest firm in 1986, with gross revenues of $156 million.
In an annual survey by American Lawyer, O’Melveny, with 383 lawyers, was in eighth place nationally with revenues of $127 million, and Latham & Watkins, which has grown from 10 lawyers in 1950 to 360 lawyers, was just a step behind with an income of $121 million.
Both Gibson and Latham positioned themselves early for the high-stakes economic struggles of the 1980s by adopting fast-growth policies and tough management practices during the 1970s.
F. Daniel Frost, 65, who took over as Gibson’s managing partner in the 1960s when the firm was in second place behind O’Melveny, was the man primarily responsible for transforming Gibson into the city’s most powerful firm.
Frost, who joined Gibson as one of 35 lawyers in 1950, became Gibson’s youngest senior partner in 1962, when it had grown to a firm of 64 lawyers with annual gross revenues of $3.8 million.
By the time he was succeeded by Norman B. Barker, 58, as managing partner in 1984, Gibson had passed the $100-million mark in revenues and had opened branches in Century City, Newport Beach, San Diego, San Jose, Denver, Dallas, New York, Washington, London, Paris and Riyadh, Saudi Arabia.
In a 1984 speech to Gibson’s partners, Frost predicted that the firm will reach $200 million in gross revenues by 1990, its centennial year, and ultimately will have “at least” 700 to 800 lawyers.
“Gibson, Dunn & Crutcher is now not only a large law firm, it is also a big business,” Frost said. “One has to wonder how many industrial firms in the Fortune 500 have as many officers and employees being paid $200,000 a year as we have in this firm.”
With average income of $410,000 for the firm’s 173 partners in 1986, Gibson escaped the partner raiding by New Yorkers that decimated some smaller Los Angeles firms.
Counterattack
As hard charging as any of its East Coast rivals, Gibson led a counterattack in New York, engaging in its own raiding of Wall Street firms.
Ironically, one recent problem for the firm is linked to the no-nonsense business approach that produced its economic supremacy. In May, 18 lawyers in Gibson’s Newport Beach office left in an unprecedented mass departure to start their own firm, explaining that they wanted more time for their personal lives.
Latham and Watkins’ success is also based on hard work and a penny-pinching approach by management. One lawyer describes the firm as “the legal profession’s equivalent of the Marines,” and its chairman, Clinton R. Stevenson, 63, is viewed as one of the pioneers of tough law firm management.
Stevenson boasts of both his penny-pinching and the long hours his lawyers work. He points out in interviews that he shares a secretary with another partner--unlike rival law firm leaders.
“We stay busy,” he said. “I think our lawyers work harder than the average lawyer in the firms we regard as our competitors.” (The firm is notorious for posting the number of hours each associate works to increase productivity.)
For O’Melveny & Myers the adjustment to the new legal economics of the 1980s was much more difficult.
For most of its 102-year history, O’Melveny almost prided itself on its lack of interest in profits. Its lawyers valued their collegiality and reputation for excellence. They knew they might make more money elsewhere, but that was not a major concern.
Then came a series of embarrassments in the 1980s.
First, Gibson overtook O’Melveny as the city’s largest firm. Then, the trade press began reporting that the firm was paying partners half as much as major rivals. Finally, O’Melveny began losing partners to other firms.
The first key partner to leave was Girard E. Boudreau Jr., an O’Melveny lawyer for 20 years, who resigned as head of the firm’s Newport Beach office in 1985 to head the West Coast offices of Jones, Day, Reavis & Pogue, a 700-lawyer Cleveland firm.
Volpert, regarded as one of the leading real estate lawyers in Los Angeles, was the next to go, jumping to Skadden. The head of O’Melveny’s corporations and finance group, Guido R.(Guy) Henry, left early this year to head the new Los Angeles office of Milbank, Tweed, Hadley & McCloy, another New York firm.
Initially reluctant to tamper with tradition, O’Melveny finally moved to make itself less vulnerable to raiders in 1985, hiring a management expert to run the firm’s business operations, cutting non-legal staff and tightening collection procedures.
The result was one of the most spectacular turnarounds of any law firm in the country. In just one year, O’Melveny trimmed operating costs by several million dollars and raised $28 million in new revenues, increasing average partner profits from $255,000 in 1985 to $435,000 last year.
O’Melveny’s new business approach, however, was only part of the comeback story of a law firm that some rivals had begun to dismiss as out of step with the modern legal world.
Under the direction of former U.S. Deputy Secretary of State Christopher, who took control as chairman of the firm in 1982, the firm regained its diminished prestige by becoming an international leader in the race to Tokyo and the markets of the Pacific Rim.
“We’ve got a lot of momentum right now,” Christopher said. “There are rhythms in the legal profession. Resurgence is the word that comes to mind when I think of O’Melveny today.”
Times research librarians Susanna Shuster and Tom Lutgen contributed to this story.
10 LARGEST LOS ANGELES CORPORATE LAW FIRMS
Total Lawyers Lawyers in L.A. 1.Gibson, Dunn & Crutcher 538 345 2.O’Melveny & Myers 383 309 3.Latham & Watkins 360 213 4.Paul, Hastings, Janofsky & Walker 265 171 5.Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey (Headquartered in New York) 603 157 6.Irell & Manella 126 126 7.Sheppard, Mullin, Richter & Hampton 180 138 8.Haight, Dickson, Brown & Bonesteel 129 129 9.Wyman, Bautzer, Christensen, Kuchel & Silbert 129 127 10.Lillick McHose & Charles 219 106
Source: “Of Counsel: The Legal Practice Report,” April, 1987 (Figures do not reflect recent personnel changes.)
TOP 10 RICHEST U.S. LAW FIRMS IN 1986
1. Skadden, Arps, Slate, Meagher & Flom (New York)
Gross Revenues $228 million Lawyers 712 Partners 140 Partner Profits $780,000 Revenue Per Lawyer $320,000
2. Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey (New York)
Gross Revenues $158 million Lawyers 603 Partners 198 Partner Profits $265,000 Revenue Per Lawyer $285,000
3. Baker & McKenzie (Chicago)
Gross Revenues $157 million Lawyers 807 Partners 307 Partner Profits $240,000 Revenue Per Lawyer $195,000
4. Gibson, Dunn & Crutcher (Los Angeles)
Gross Revenues $156 million Lawyers 538 Partners 173 Partner Profits $410,000 Revenue Per Lawyer $335,000
5. Davis, Polk & Wardwell (New York)
Gross Revenues $155 million Lawyers 306 Partners 83 Partner Profits $730,000 Revenue Per Lawyer $505,000
6. Shearman & Sterling (New York)
Gross Revenues $137 million Lawyers 407 Partners 110 Partner Profits $480,000 Revenue Per Lawyer $335,000
7. Jones, Day, Reavis & Pogue (Cleveland) Gross Revenues $129.5 million Lawyers 700 Partners 233 Partner Profits $195,000 Revenue Per Lawyer $185,000
8. O’Melveny & Myers (Los Angeles)
Gross Revenues $127 million Lawyers 383 Partners 117 Partner Profits $435,000 Revenue Per Lawyer $340,000
9. Latham & Watkins (Los Angeles)
Gross Revenues $121 million Lawyers 360 Partners 118 Partner Profits $570,000 Revenue Per Lawyer $410,000
10. Weil, Gotshal & Manges (New York)
Gross Revenues $120 million Lawyers 327 Partners 81 Partner Profits $605,000 Revenue Per Lawyer $365,000
Source: “The American Lawyer: The Am Law 100,” August, 1987 Figures do not reflect recent personnel changes.
