Freedom Lawyers of America

A GIANT FALLS
Brobeck, Mighty During the Internet Boom, Crashes Like a Dot-Com

BY MARTHA NEIL

Too much debt. Too little practice diversification. And a lack of effective leadership. Sound like another failed Internet startup? Actually, it�s what observers say caused the planned dissolution of Brobeck, Phleger & Harrison.

Renowned as a legal adviser to the technology world, the almost 80-year-old San Francisco firm announced Jan. 30 that it would be closing its 11 U.S. offices, due to ongoing partner defections and a difficult economy. At the end of 2002, Brobeck had fewer than 500 attorneys, half the number it reached at its zenith in 2001.

Brobeck�s sudden demise evoked exclamations of surprise from coast to coast, not least among those closest to the firm. But Brobeck isn�t the only one suffering from the recession. More law-firm dissolutions are on the horizon.

On Tuesday, partners at Peterson Ross voted to dissolve. A Chicago firm known for its insurance work, its attorney roster has shrunk from a high of 300 or so to some 60 names. And, on Monday, Skjerven Morrill, a 70-lawyer intellectual property firm in San Jose, Calif., announced it would wind down, too.

"I think we are seeing more and more dissolutions and breakups, and will see more and more, particularly as this recession goes on, because it�s the rare firm where there�s a strong sense of mutual loyalty," says David H. Maister, a legal consultant based in Boston. He declined to comment on specific firms.

Without a loyal cadre of attorneys following a trusted leader, law firms are vulnerable to market downturns�particularly if they have borrowed extensively, Maister says. At that point, "If too many people jump ship, the underlying financial structure is horribly exposed."

Brobeck�s fall is just such a cautionary tale, especially given the heights to which the firm soared only a few years ago.

"If you want to lay blame, you have to lay blame with the people who ran up the debt," says Steven M. Zager, the head of litigation at Brobeck until just before the vote to dissolve.

During the past 12 years, the firm opened offices in six cities throughout the country, in addition to the five in California. Published reports talked of competition between litigators and transactional lawyers, as well as friction over decisions made by former managing partner Tower Snow. He was deposed in 2001, after the Internet crash, and defected in 2002 to establish a San Francisco office for London-based law behemoth Clifford Chance.

Zager says his former firm is folding for a number of reasons, but "I wouldn�t say it was a lack of leadership." Zager is now a partner in the Austin, Texas, office of Dallas-based Akin Gump Strauss Hauer & Feld.

"I think the existing leadership was left with a real pickle. The economy turned. Tower had been a proponent of growth, and he�d used debt to make that growth possible. So the debt and space issues were large issues. Had the economy rebounded more quickly, as most people expected it to, I don�t think they would be the large problems they eventually became."

Brobeck failed to make first-quarter 2003 income payments to partners in order to fund a $26 million loan repayment to Citibank, says communications director John M. Pachtner. The bank and Brobeck are still in negotiations over outstanding debt.

Meanwhile, profits per partner plunged from more than $1million in 2001 to just over $500,000 last year. The end came when merger talks with Philadelphia-based Morgan, Lewis & Bockius halted Jan. 29, Pachtner says.

It remains to be seen whether Brobeck can pay its bills, or�in what would be an unusual development for a dissolving law firm�be forced into bankruptcy.

David M. Neff, a partner at Piper Rudnick in Chicago who represents Peterson Ross, says any Brobeck bankruptcy could be legally significant. It would likely help define the extent to which partners in a limited liability partnership are protected from personal liability for firm debts. (See "Partners at Risk," August 2002 ABA Journal.)

"What I can tell you is that in any bankruptcy case, they will face challenges," Neff says of Brobeck lawyers. "It will test the LLP structure. We expected Arthur Andersen to be the big test case. It looks like it will be Brobeck instead."


�2003 ABA Journal