Defections & Litigation Dropoff Led to Heller Ehrman Demise

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Heller Ehrman LLP, a 118-year-old San Francisco law firm, is shutting its doors after 118 years. Chairman Matt Larrabee broke the news to the firm's 500-plus employees on Thursday.

The firm's partnership was voting last Friday on dissolving the firm, according to many published reports. The chairman indicated that the vote is likely a formality and that dissolution is imminent.

A vote to halt the business would cap a tumultuous few weeks for the firm. A sharp slowdown in a variety of practice areas led to a recent wave of partner defections and left the firm struggling to find a viable merger partner.

A full dissolution would be a rarity for the world of big law firms, which often stay relatively busy in both up and down markets. Heller, which once employed more than 600 attorneys and ranked as one of the nation's leading litigation firms, has been buffeted in part by the recent market turmoil. It has undertaken costly efforts to build a more robust corporate-transactional practice in New York and other locales. But partly because of a drop in mergers and corporate-finance work because of the credit crunch, it hasn't landed enough deal flow to support those efforts, say lawyers with knowledge of the firm.

As of Sept. 1, the firm had more than 1,200 employees and about 570 lawyers.

Heller's troubles go beyond the current market downturn. The firm had some large litigation matters settle in rapid succession last year, including its defense of two securities-fraud class actions. In total, about one-fourth of its litigation business settled last year -- a huge blow, given that litigation makes up about 60% of the firm's revenue, according to a senior Heller attorney. That revenue, he says, has been hard to make up in what has been a soft litigation market.

Meanwhile, as Heller's profit has sagged, its lawyers increasingly have been poached by competitors with more stable balance sheets. Defections by partners -- called shareholders at Heller -- have led to still more defections, with the majority of lawyers now shopping their résumés, according to attorneys and recruiters with knowledge of the firm. Heller has lost at least 15 shareholders to other firms in the past two weeks, though not all of the attorneys have departed.

Formed in 1890, Heller grew to 14 offices world-wide and developed a reputation for defending big-scale litigation matters on behalf of Microsoft Corp., Visa Inc., and Ernst & Young LLP, among many other companies.

Bruce MacEwen speculates on what went wrong at his Adam Smith blog:

  1. First of all, they should never have absorbed the Venture Law Group. It made no sense. Would it have made sense for VLG to be absorbed by another firm, perhaps Morrison & Foerster or Orrick? Perhaps, and of course we'll never know. But my instinct is that VLG was a sui generis creature that would never really fit within any law firm with a conventional legal industry business model. So Heller may have been ill-advised to take on the VLG group to begin with. Did this kill Heller? Of course not. Was it a strained fit from the beginning? Sure. And strained fits entail costs, economic and intangible.
  2. Second, the Heller story should discredit, if more evidence or argumentation were needed, the notion of term limits for managing partners. Matthew Larrabee is of course the current, and final, managing partner, and Barry Levin was his immediate predecessor. What's wrong with term limits?


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