Inroads in Asia : Law Firms Wage Wide Turf Battle

In the lobby of the oldest law firm in Los Angeles hang a half-dozen silk-screen and woodblock prints by a leading Japanese artist--a sign of the legal world’s growing interest in the treasures of the Orient.

A more obvious indication of that interest, however, was a recent trip to Japan by Warren Christopher, who returned with government approval to open a small branch office for O’Melveny & Myers in Tokyo.

The trip established O’Melveny as the first Los Angeles firm and one of only a few in the United States to crack the tightly controlled legal market of Asia’s most powerful trade nation.

But there are many rivals close behind. Perhaps two dozen--including such local O’Melveny competitors as Gibson, Dunn & Crutcher and Paul, Hastings, Janofsky & Walker--plan to open their own offices in Tokyo within the year.

The Japanese business is increasingly important for most of them. In O’Melveny’s case, legal work for Asian clients was 2% of the firm’s business in 1985. By the end of last year, it had risen to 10% of O’Melveny’s record $127-million gross income.

Two-Person Office

But O’Melveny’s new Tokyo branch will be only a two-man office at first, little more than a beachhead. The firm’s 381 other lawyers in Los Angeles and its larger branch offices in the United States are responsible for maintaining O’Melveny’s position as a leading U.Sa firm and producing most of its revenue.

For O’Melveny and the other major Los Angeles firms, the pace is faster and the competition is tougher than ever before. The legal profession has placed a sharp new emphasis on growth, tough management practices and ever-growing profits. Nowhere is the competition more intense than in Los Angeles.

With the nation’s top law firms crowding into the booming Los Angeles legal market, the city’s leading firms are fighting not only to protect their home turf, but to expand their own operations in the new competitive age of the 1980s.

Thus, while Christopher was traveling to Tokyo, O’Melveny lawyers were busy on hundreds of other major legal projects, from a bitter fight between the Gallo brothers in California over wine and cheese to a complex British financing plan for a $4.6-billion construction project in London.

In the firm’s 40-lawyer Century City office, a major project involves the 1988 Olympics in Seoul. In Newport Beach, a major priority for another 42 lawyers is the firm’s growing business with the Irvine Co., long a dominant Orange County economic power.

In Washington, home of another 34 O’Melveny lawyers, the firm is defending the safety of Ford truck transmissions in one pending suit and arguing dozens of regulatory issues for other clients. In the 41-lawyer New York office, O’Melveny is expanding its national labor practice and working on a geothermal development project for California’s Imperial Valley.

Overseeing the operations of O’Melveny’s expanding legal empire is a formal management structure, headed by Christopher and a 10-member executive committee. At the same time, however, the various offices and the lawyers in them operate with enough autonomy for the firm to regard itself as a democracy--with Christopher merely the first among equals.

Richard M. (Rick) Jones, 37, hired by O’Melveny from the University of Texas 11 years ago, is now one of the firm’s top municipal bond lawyers and leading recruiters. In describing how O’Melveny and most other major law firms operate, he begins by telling law students that lawyers generally are a difficult group for anybody to control.

“I compare us to a bunch of guys floating down a river on inner tubes,” Jones said. “Imagine that all the inner tubes are loosely tied together by ropes. So we all have some freedom to go where we want to go, but, at the same time, we’re all headed in the same general direction.”

While O’Melveny’s lawyers may be paddling their inner tubes in different directions, the firm’s focus in the 1980s has clearly been toward tougher management and increased revenues--the same path taken by most of the leading national law firms.

Expansion to the trade markets of Asia is only part of the overall strategy for Christopher and other rival law firm leaders. The bulk of any major firm’s business is still derived from the increasingly complex relationships with major corporate U.S. clients.

O’Melveny’s growth from a two-man firm in 1885 to an international megafirm is partly a story of contrast between old and new. It is the difference between a $175 damage suit over a dead horse--founder Henry O’Melveny’s first case--and a $13.8-million fee last year in the Baldwin United reorganization, one of the most complex bankruptcy cases in U.S. history.

Henry O’Melveny’s legal earnings in his first two years of business were carefully detailed--about $10,000. Last year the firm’s gross revenues were $127 million--an increase of $28 million in one year--making it the eighth richest law firm in the nation.

The average income of the firm’s 385 lawyers is $340,000 and O’Melveny’s 124 partners earned an average of $435,000 last year, up from $255,000 in 1985 and $78,000 in 1965. The partner spread ranges from $180,000 for the most junior partners to $650,000 for Christopher and other senior lawyers.

The economic transition began in 1980--the first year O’Melveny even bothered to draw up an operating budget--with the beginnings of the influx of rival firms from New York and elsewhere into Los Angeles.

O’Melveny traditionally operated on a 30% profit basis, spending 70% of its revenues on internal costs. Firms such as Gibson and Latham & Watkins, meanwhile, ran at a 50% profit basis, keeping half of every dollar earned as profit.

In 1984, as competition tightened and O’Melveny became increasingly vulnerable to raids because of its relatively low partner income, Charles W. Bender, a top trial lawyer, was named managing partner in charge of trying to operate O’Melveny more efficiently. Bender brought in a management expert, Charles Wharton, to bring O’Melveny up to date.

“There was no real need to think about the financial side for years,” Bender said. “We had wrung our hands from time to time, but that was about it.”

Wharton arrived at a time when O’Melveny’s partners were becoming acutely aware of the growing income gap between themselves and counterparts at other firms.

In 1985, The American Lawyer reported an average partner income of $445,000 at Latham, of $355,000 at Gibson and an almost embarrassing low $255,000 at O’Melveny.

Wharton’s first step was to eliminate about 100 temporary secretaries and word processors, along with 10 department managers and assistant managers, still leaving O’Melveny with a non-lawyer staff of 762 employees. He also installed a new client billing system. In his first year, he saved O’Melveny $2.2 million.

Most O’Melveny lawyers praise Bender and Wharton for raising profits. That assessment is not shared, however, by all of the firm’s secretaries, clerks and paralegals.

Still Falls Short

“Generally the staff is unhappy,” said one O’Melveny employee who has worked at the firm for more than a decade. “It’s changed a lot. This used to be a friendly place. Now it’s turned into a factory.

“O’Melveny made $28 million extra last year, the partners all got a small fortune and we got a 3% raise and were told that money is tight.”

Despite O’Melveny’s turnaround in 1986, its average partner income of $435,000 still falls far short of the average $570,000 earned annually by Latham & Watkins’ 118 partners. It now tops the average partner income of $410,000 at Gibson and is relatively immune to partner raiding.

O’Melveny lost three key partners to major rival firms prior to its economic reforms, something that had never happened before. While the initial surprise has faded, the firm’s partners maintain varying degrees of indignation that the firm could have ever come under attack.

“There was some initial shock at first when we lost a couple of people,” said Charles G. Bakaly, a leading Republican power broker who heads O’Melveny’s labor department and recently moved to New York to bolster the firm’s East Coast operations.

“But we’re in a very highly competitive business,” Bakaly added. “That’s something we’re going to have to get used to.”

Lowell C. Martindale Jr., a leading real estate lawyer in O’Melveny’s Newport Beach office, believes the current raiding policies of rival Los Angeles firms are not only harmful, but a poor reflection on today’s lawyers.

“I’m very troubled by anybody who would leave for more money,” Martindale said. “I also doubt that most of us are worth what we’re paid. Because of the price structure now, people are working tougher, longer hours and spending less time with their families.

“Let’s say somebody is earning $400,000 and they’re offered $500,000. Aren’t you at a stage where you can afford to have other values?3

Guido R. (Guy) Henry, the O’Melveny partner who left to head the new L.A. branch office of the Wall Street firm of Milbank, Tweed, Hadley & McCloy, said “money wasn’t a significant factor” in his departure. His primary motivations were an interest in a stronger management role combined with disillusionment at the changes within O’Melveny, he said.

“I had gone about as far as I could. This gave me a chance to have a little more influence on what I was doing,” said Henry, who was an O’Melveny lawyer for 23 years and head of the firm’s corporation and finance group.

“I didn’t feel I was part of the Christopher mainstream at O’Melveny,” Henry said. “But there was nowhere to go until all the New York firms came to town.”

One of O’Melveny’s strengths is the diversity of its lawyers and the firm’s depth in dealing with cases too big for most law firms. Even Gibson, with more lawyers, concedes that O’Melveny is the traditional “big-case” firm in Los Angeles.

“We probably have more medium-sized clients,” said Norman B. Barker, Gibson’s managing partner. “They would probably concentrate more on the bigger cases.”

Among the most historic and bitter of O’Melveny’s major court battles were a series of civil anti-trust cases in which the firm defended IBM in the mid-1970s against computer manufacturers charging that IBM was trying to monopolize the entire computer parts industry.

Partly because of Christopher’s reputation and O’Melveny’s ties to the New York firm of Cravath, Swain & Moore, which represented IBM on the East Coast, O’Melveny was retained to defend IBM against three West Coast computer manufacturers, California Computer Products, Memorex Corp. and Transamerica.

The lawsuits kept dozens of O’Melveny lawyers busy for almost two years in San Francisco. The litigation strained relations with Cravath, whose junior lawyers complained of having to constantly oversee O’Melveny during the long trial preparations. The general climate was so bitter that O’Melveny’s lead lawyer in one of the cases started job-hunting.

Won West Coast Cases

In the end O’Melveny won all the West Coast cases on behalf of IBM. The lawyer who considered leaving was Patrick Lynch, then a relatively untested 32-year-old who quickly developed a reputation for being as temperamental as he was talented.

“The IBM case had some real tough days,” Lynch said. “We were up in San Francisco for months at a time, away from our families. I had five kids then. (He has 10 now.) The head-knocking with Cravath didn’t help. There were times I thought about quitting the firm.”

“I love the adversary process,” Lynch added. “That can’t get too tough for my taste. I don’t mind getting shot at, but I don’t want to get fragged.”

After his triumph in the IBM litigation, Lynch represented the National Football League on the losing side of the long fight in Los Angeles federal court that ultimately resulted in the move of the Oakland Raiders football team to Los Angeles.

Nora M. Manella, now an assistant U.S. attorney in Los Angeles and one of the few former O’Melveny associates to openly criticize the firm, said working with Lynch on the Raiders case was one of her reasons for leaving to become a federal prosecutor in 1982.

“Pat Lynch was the senior partner on the NFL case. I was fourth chair,” she said. “It was not a pleasant experience. I just thought there was a bottom line of human decency that people should deserve and we had dropped well below that line.”

Lynch admitted that he is “pretty damn tough” to deal with at times.

In recent months, Lynch has spent most of his time in Modesto representing Ernest and Julio Gallo, the makers of Gallo wines, in a bitter copyright infringement case against their brother, Joseph Gallo, who makes Gallo cheese. The Gallo wine makers argue that their brother has no right to use the Gallo name on his dairy products.

Loyal to his clients, Lynch now makes a habit of requesting Gallo wine at restaurants and refusing to drink anything else if there is no Gallo available.

“It’s sort of become a cause for me,” he said. “Besides, I’ve always liked Gallo wine anyway.”

Lynch, easily the most outspoken of O’Melveny’s lawyers, made no effort to soften his criticisms of his own law firm on a recent Saturday afternoon, as he sat in a T-shirt in his Los Angeles office.

“You’re talking to the antediluvian fossil in all this,” he said. “I’ve always been resistant to branching into other cities. There’s a certain point at which you give up and go along, but I think life at O’Melveny has tarnished considerably since those halcyon days of the 100-lawyer firm I joined in 1966.

“Can O’Melveny survive without getting bigger?” Lynch asked. “At a philosophical level, that assumes the personalization of the corporation. A law practice for me is one that is much more person-oriented. Can O’Melveny survive? Who cares?”

Lynch’s boss, William W. Vaughn, is the 57-year-old head of O’Melveny’s litigation department and is generally recognized as O’Melveny’s top trial lawyer.

Vaughn, also involved in the IBM litigation, successfully defended CBS anchorman Dan Rather against a 1983 libel suit filed by a doctor branded as a participant in an insurance fraud and won the 1985 release to CBS of damaging government tapes showing John DeLorean, later acquitted of cocaine-trafficking charges, holding a suitcase filled with drugs.

Like Lynch, however, Vaughn also has suffered some major defeats. One came in the 1983 Big Rock landslide in Malibu, which damaged 200 homes and led to a suit against Los Angeles County for permitting septic tanks rather than sewers in the landslide area.

“The problem was the case that went to trial first was one of the most damaged houses,” Vaughn said. “The judge ruled for the homeowners and awarded over $2 million.”

The award was just the start of O’Melveny’s problems in the Big Rock case. Next came a public blast from county Supervisor Pete Schabarum that O’Melveny had billed the county $5.3 million for what turned out to be a losing effort, at least in advance of the appeals stage.

Vaughn’s position is that O’Melveny earned its money and may still win an appeal.

“The homeowners have now settled with the state, but not the county. We are handling the appeal,” he said. “In the end I think they (the county) will have dodged a big bullet.”

With the addition of branch offices in recent years, O’Melveny’s traditional casual California style has undergone some major adjustments. There is a sense of extra pressure on the New York staff and an emphasis on national politics that marks the firm’s Washington office.

O’Melveny’s New York office, which pays a $10,000 bonus to lawyers for working in Manhattan, prides itself on being less rigid and generally friendlier than the established New York firms.

“I definitely work much harder here than I did in Los Angeles,” said Kip Burgweger, an O’Melveny lawyer since 1970 who transferred to New York in 1985. “On the other hand, there’s more of a humaneness in our office than in some of the New York firms. There was an article in American Lawyer about a Cravath partner throwing an ashtray at a secretary. That wouldn’t happen at O’Melveny.”

Jane Hamblen, a new O’Melveny partner in New York who left the Wall Street firm of Davis Polk & Wardwell three years ago, said she finds O’Melveny friendlier than New York firms and more concerned with the welfare of younger lawyers.

“I find here that there’s more an expectation that people have lives outside of being lawyers. The uncanny experience for me was hearing people talking about families. In New York firms, it’s not done.”

New York Hub of Effort

While Los Angeles is the gateway to the Pacific Rim, New York remains the center of Japanese commercial activities in the United States. The most important move in O’Melveny’s expansion to the Pacific Rim was the acquisition two years ago of a small New York firm headed by a Chinese-born expert on Japan, Ko-Yung Tung.

Tung, 40, who escaped from Communist China with his family while an infant, was reared in Tokyo and later educated in the United States, graduating from Harvard Law School in 1973. He and David Drabkin, another Japanese expert, formed their own firm in 1976 and specialized in Japanese business.

“When we started, the major law firms were not servicing Japanese firms well,” Tung said. “In the 1980s, what happened was that the big firms caught up, because the Japanese are basically taking over the country . . . We could not keep up with business. We kept getting lots of offers to merge. We were an attractive morsel for any large firm.”

Tung said he settled on O’Melveny because it had a strong interest in international business, a bicoastal representation and sound management. O’Melveny also had strong labor and real estate departments, crucial to the Japanese and often missing in what Tung terms the “white glove” world of New York law firms.

While Tung and Drabkin will remain in New York, O’Melveny’s new Tokyo office will be opened by Greyson Bryan, another Japanese trade expert with a New York and Harvard background. Despite O’Melveny’s obvious interest in expanding business with the Japanese, the firm’s top experts say Japanese business will remain only a fraction of O’Melveny’s overall legal work.

“I doubt that the Japanese practice will ever be more than a small part of the work of the firm,” said Drabkin. “I don’t think our clients would be very happy if O’Melveny became just a Japanese shop.”

Underscoring the firm’s determination to resist overemphasizing the Pacific Rim trade was the recent move to New York of Bakaly, one of the firm’s leaders, to help run the Manhattan office. Bakaly, whose clients include CBS, Sears and other major corporations, is expected to add substantially to O’Melveny’s New York labor practice.

While the Japanese experts have been the heart of O’Melveny’s New York operation, the Washington office--like many Washington law firms--is dominated by lawyers who seem to spend their lives moving back and forth between government service and legal careers spent largely on arguing cases before federal regulatory agencies.

Hired in Washington, many of O’Melveny’s D.C. lawyers know almost nothing of the firm’s history and tend to view it more as a mid-sized Washington firm than a Los Angeles institution.

The legal superstar of the Washington office is William T. Coleman Jr., 67, former U.S. secretary of transportation in the Gerald R. Ford Administration, chairman of the NAACP Legal Defense and Educational Fund, and a member of the Council on Foreign Relations.

Coleman, one of the best-known lawyers in Washington, has more board directorships than any other O’Melveny lawyer, most of them acquired long before he joined the firm in 1977. He is a board member of companies that include Chase Manhattan Bank, IBM, Pan American World Airways and Pepsico Inc. He also is one of the most sought-after lawyers in the nation for arguing important cases before the U.S. Supreme Court, with an overall record of 16 wins and three defeats.

Won Bob Jones Case

One of Coleman’s best-known Supreme Court victories was in a 1982 case upholding Internal Revenue Service denial of federal tax exemptions for Bob Jones University on grounds that the school practiced racial discrimination.

Coleman was asked to argue the case by Chief Justice Warren Burger after the Justice Department had switched its position, supporting the premise that the university could practice discrimination.

“The Chief Justice called me and asked if I would be willing to accept an appointment because the government was changing its position,” Coleman recalled in a recent interview in his Washington office. “It was an important civil rights issue and an important case for us--I suppose our best-known pro bono victory.”

Coleman had his pick of law firms after leaving the Ford Administration in 1976. He says he chose O’Melveny because it was an opportunity to work with more than Eastern clients.

“I said this is ideal for me,” Coleman said. “Even though you are in the East, you’re exposed to the problems of the West. I hope I had the vision that the Pacific Rim was opening up. Finally, even though O’Melveny was a big firm, they seemed very interested in preserving individuality. I’ve never been in an institution where there’s so much democracy.”

O’Melveny’s Los Angeles office and its branches in Century City and Newport Beach, meanwhile, remain a mix of old and new. The three offices are the base for almost 300 of the firm’s lawyers, and the part of O’Melveny’s operation where history still counts.

In Newport Beach, for example, the newest arrival is Barton Beek, 63, a recent transfer from the Los Angeles office, but also a member of one of the old families of Orange County.

“My father was Joe Beek. He sold lots on Balboa Island,” said Beek, one of the top corporate lawyers in California. “The family still owns the Balboa Island Ferry.”

Beek’s key accounts over his 32 years with O’Melveny included Lear Siegler and Thrifty Corp., two of O’Melveny’s major clients. Like many senior O’Melveny lawyers, Beek regrets the fact that he no longer knows most of the lawyers who work in his same law firm and has never even met some of them.

“That’s the hardest thing,” he said. “The growth of the firm itself.”

Had Ties With O’Melveny

Even among the newest members of the firm, there are traces of history.

Kathleen Brown, 41, is among O’Melveny’s newest associates. She is the daughter of one former California governor, Edmund G. (Pat) Brown, and the sister of another, Jerry Brown, as well as a former member of the Los Angeles Board of Education.

“My father always said Warren Christopher was one of the wisest advisers he had, and my brother consulted with him, too,” Brown said. “Even on the school board, I had ties with O’Melveny. The firm handled our labor relations.”

A liberal in the Christopher activist mold, Brown declines to say if she will stay at O’Melveny or consider political options. She came to the firm’s Los Angeles office in early 1987, after her husband, Van Gordon Sauter, left his job as president of CBS News.

“I might stay here forever,” Brown said. “Being here gives a unique opportunity for trust. I also want to contribute in some way to government service. O’Melveny is one of the firms that encourages people to do that.”

“But I just got here,” Brown added. “I am a punk associate. When they say jump, I say how high. I’m in kindergarten now. The learning curve is very steep. It’s about two years before you can start suggesting your own things.”

Brown is among those willing to concede that she is sometimes bored by her new duties in the world of corporate law.

“If you introduce me to people who say they aren’t, I want to meet them,” she said. “That’s why they pay lawyers what they do.”

While new attorneys such as Brown are adjusting to the realities of corporate law, the city’s most sophisticated lawyers have learned some simple lessons from the most chaotic period in the history of the Los Angeles legal community.

One is that the city’s legal world--dominated for a century by O’Melveny & Myers and Gibson, Dunn & Crutcher--will never be the same. The 1980s brought dozens of rival national law firms to Los Angeles. Most are here to stay and will grow larger.

While the increased competition between the city’s major corporate law firms directly affects only a few thousand of the 35,000 lawyers in the county, the power struggle has an impact beyond the legal community--one that affects the very power structure of modern Los Angeles.

When Henry O’Melveny started his tiny law firm in 1885 and became one of the men to shape the city’s future, Los Angeles was a frontier town of 5,000. The city is bigger and so is the power structure that continues to guide the future.

Only a Few ‘Key People’

“In the early part of this century, you may have had 20 key people responsible for the directions the city took,” said James R. Ukropina, a former O’Melveny lawyer who is now president of the Pacific Lighting Corp., the holding company that owns the Southern California Gas Co. and Thrifty Corp.

“O’Melveny for many years was . . . very much a part of Southern California life,” Ukropina said. “Today the power structure is much bigger. But in terms of the power groups, the better law firms fit in the upper strata of the fabric of the society.

“The O’Melvenys, the Gibsons and the Lathams are part of Los Angeles history, and they remain very important to the city because of that history of good judgment and community leadership,” he added. “Those firms, in a quiet way, manage to make themselves felt politically.

“The major change is that they have more company now. The New York firms have come to town, and they intend to establish their own presence in the years ahead.”

Times research librarians Susanna Shuster and Tom Lutgen contributed to this story.

O’MELVENY & MYERS, AT A GLANCE

Chairman: Warren Christopher

Managing Partner: Charles Bender

Executive Director: Charles Wharton

Lawyers: 383

Partners: 124

Management Committee: 10-member group oversees firm’s policies

Non-Lawyer Staff: 762 employees, including 105 paralegals, 272 secretaries and 79 word processors

Lawyers Per Department: Corporation/Finance (132), Litigation (102), Tax (35), Labor (29), Real Estate (46), Entertainment (11), Bankruptcy (9), International Trade and Finance (19)

Lawyers Per Office: Los Angeles (220), Century City (40), Newport Beach (42), Washington (34), New York (41), London (4), Tokyo (2)