What Happened To Heller Ehrman — And Who’s Next?

Until very recently, Heller Ehrman LLP was a mainstay of the San Francisco legal community.  Today it is gone.  Virtually overnight, a firm that in 2007 grossed $471 million and spun off $1 million in profits per partner has vanished. 

I’m not an alarmist by nature, but what happened at Heller – just a block from my own office at Bush and Montgomery Streets — can happen again, in any major U.S. city, with little warning.  It can happen at another firm as venerable and successful as Heller.  It can happen during good economic times or bad.  Not only can it happen, I’m quite certain it will happen.  Just wait and see.

By any measure, whether financial or professional, Heller Ehrman was successful to the end.  Heller was the victim of a classic run on the bank.  It started slowly with a handful of departures, none alarming by itself.  The departures continued in 2007, which saw a modest 3 percent decline in revenues and profits per partner. 

Then a larger group — 14 intellectual property litigators — decamped together to Covington & Burling this year.  The remaining partners became increasingly anxious and started walking toward the exits.  Soon the walk became a run as a mob mentality gripped the partnership, and no one wanted to be the last lawyer left.  The snowball effect will destroy even a fundamentally healthy organization.

What did Heller do wrong?  Nothing – other than to succeed and believe the law firm consultants who seemed to know what they were talking about.  Heller hired and trained the best lawyers. It expanded into the best legal markets.  It excelled in the most profitable practice areas.  All the while, it gave back to the community through significant pro bono work and a commitment to diversity in its ranks.  Heller’s success begat growth.

The larger it got, the more business it needed to sustain itself. The feeding of the mega-firm that Heller became required large clients, deals and cases, which it successfully attracted.  Several big litigation cases wrapped up in 2007, resulting in a down year.  Still, revenues for the year were only down 3 percent.  Who would walk away from a $1 million-a-year partnership over 3 percent?  But looking at competitors who saw a boom year in 2007, Heller’s results felt meager to some partners.

It’s no secret that the professional services sector is inherently cyclical.  As the economy cycles through boom and bust, different practice areas rise and fall.  Litigation and bankruptcy, for example, typically outperform other practice groups in tough economic times.  One of the business advantages of larger law firms over smaller ones is that the diversity of practice groups can smooth over some of the ups and downs.  One year, the transactional lawyer may bring in a lot of business.  Next year, it’s the litigator. 

The irony of today’s legal landscape is that smaller firms – the ones with larger swings in revenue from year to year – may be more stable than larger ones.  That is because once a law firm gets big – as in one of the 100 largest in the country – the bonds between partners are too weak to support even modest economic stress.  The partner down the hall or three floors up or in a different time zone isn’t interested in carrying the load for a group of strangers in another practice group who happen to be having a bad year. 

Unlike in years past, when many lawyers spent their entire career at a single firm, the typical big firm partner today may be working at his second, third or fourth firm since law school.  In a revolving-door partnership, it’s no longer a virtue to suffer a down year for the good of the firm.  If your group is raking in the bucks today, someone else will take you, and if they offer you more money, why not?  Don’t wait around, because the offer won’t be there next year when your red-hot practice area cools down.

What are the lessons of the Heller Ehrman debacle?  For many out-of-work Hellerites, the lesson may be that the “Manahattanization” of big law is pernicious, some would say evil.  Heller, like all the rest, gauged its success by the standards of big New York law firms that raked in profits per partner double or triple Heller’s.  Heller looked to New York not out of greed, but simply because that is the yard stick used by partners at nearly all of the 100 largest U.S. law firms.

This is not a morality tale.  Big law is not evil, just a little misguided at times.  Big Law is also different from the native culture of the Hellers of the world (who were themselves misguided at times).  I worked as an associate at O’Melveny & Myers LLP from 1994 to 2001.  During that time, I saw the partnership make a strategic decision to keep up with the New York firms.  The law firm consultants said “You’re either growing or dying.  There’s no middle ground.”  O’Melveny drank that cool aid, and has done very well. 

Seeing the success of many California firms that have moved East, who wouldn’t agree with the consultants that “Bigger is better”?  Now we see there’s more to it than that.  Growth is no guarantee of survival.  Heller Ehrman was middle of the AmLaw 100 pack in 2007 – ranked 55^th in revenue per lawyer, a key metric.  It had improved its rankings over the past 10 years from the number 60 spot in 1998.  It did everything right, but ended up in the dust bin.

The Heller story is tragic in the ancient Greek sense.  Classic tragedy depicts the downfall of a noble hero or heroine, usually through some combination of hubris, fate, and the will of the gods.  I’m not sure which of these was Heller’s downfall, but that doesn’t matter.  I’m more concerned about the walking dead at other successful law firms suffering from the “Bigger is better” delusion. 

It’s time for some firms to take stock and figure out another route to success before they grow themselves into the ground.

What Every Litigator Can Learn from the Four Stages of a Marathon

People sometimes ask me what I think about while out on long runs.  Before the sore muscles and aching joints recede into memory, I thought I’d share some of my musings from the San Francisco Marathon on August 3, 2008. It occurred to me that long-distance running and litigation have a lot in common. So while bounding through Potrero Hill, on my way to Dogpatch and AT&T Park, I organized my thoughts into a list. I call it “What Every Litigator Can Learn from the Four Stages of a Marathon.”

The four stages are: Training, The Starting Line, Hitting the Wall, and The Finishing Kick.

1. Training. “Train how you fight.” I learned this phrase from an Army lieutenant, but the concept is universal. When soldiers train for battle, they don’t wear comfy sweats. They wear full battle gear, including those heavy backpacks. At finals time in law school, I used to see my classmates flipping through index cards with phrases like “Promissory estoppel” on one side, and definitions on the other.  Very useful if you’re taking a test about flipping flash cards.  But if you’re taking an essay exam, better to go into the library, pull out old exam questions, and start writing – with a timer, of course.  When you do it this way – when you prepare by doing the same things, in the same way, as you would during the race (or the test or whatever event you’re training for) - you take your preparation to the next level.  You learn the material at the muscular, maybe even cellular, level.

Training for a marathon?  Don’t do it at the track, do it on the course.  Come race day, I had run ever mile of the course multiple times.  It was useful, as I’ll explain in Stage 4, because I could visualize the road ahead.  For litigators, that means do moot courts and mock trials, or at least roundtable your case with a room full of colleagues.  When you set up the moot court, make it realistic.  Wear a suit – you will in court – and stand up.  You don’t learn to think on your feet while sitting in a chair.  Recruit three or more “judges” who’ve read the briefs and are ready to pepper you with smart, tough questions.  You’ll know you prepared properly when the real argument was easier than the practice one.

2. The Starting Line.  It’s a lot of fun when the starting gun fires and the spectators cheer you on.  You feel great!  You run faster! You can keep this up forever!  But most distance races like most lawsuits are not all flat and easy.  There are hills coming, especially in San Francisco.  But more of that in a moment.  For now, enjoy!  Celebrate your victories along the way.  You passed the 13.1 mile marker — half way done and ahead of pace?  Good job!  Congratulate the runner next to you and suck down a tasty Double Latte (the flavored PowerBar sports gel, that is).  Make sure to reward yourself – and your team –with recognition for a job well done at every stage.  Whenever possible, I celebrate the victories before learning the outcome.  You could lose that motion, and a “defeat” party just isn’t as much fun as a victory party.  If things are going really badly, I celebrate the small wins.  The judge granted my unopposed request for three extra pages on the brief!  Yahoo!

3. Hitting the Wall.  Now it’s mile twenty-something.  The adoring crowds are gone, along with your energy.  You’re passing through a gritty industrial district.  What seemed like a personal record in the making early in the race is turning into a disaster.  Or it’s well after midnight, your office staff left hours ago, your colleague’s relaxing on a beach in Hawaii, and the brief is due tomorrow.  Will you even finish?

Every runner reaches a point of exhaustion and fatigue where the temptation is to take the easy way out.  It happens in every race and this time was no different.  My desperation peaked at miles 20 to 22, when every inch of me was screaming to stop.  In the mind vs. body battle for dominion, it seemed like a palace coup was about to succeed.  My walking “breaks” became longer and longer until finally I was just walking.  I thought I had nothing left.

Runners call this “hitting the wall” – the dreaded point in the race when your muscle glycogen stores are depleted and a feeling of overwhelming fatigue engulfs you.  You almost cannot take another step.  Litigators don’t have a name for it, but the same feeling is known to develop over the course of a long case.

4. The Finishing Kick.  But wait.  Is that the 22-mile marker ahead?  Yes!  Because I know the course backwards and forwards, I know that I can almost see the Bay, which means I can almost see the Ferry Building – and that’s the finish line!  I look at my watch and note that I’ve been running for a little more than 4-1/2 hours.  I do the math, and realize that I can still make my projected finish time.  Somehow, somewhere, I find the energy to start running again.  I visualize myself on the winner’s podium.  I know the winners finished before I was half-way done, but logic has nothing to do with it.  In my mind, the theme song from “Rocky” blares.  This is my finishing kick.

And like the song that repeats over and over until I cross the finish line, it’s all in my head. And that’s the point.  Long-distance running and litigation are about mental challenge, mind over matter.  Sure, a marathon or a trial requires training and preparation.  You’d be an idiot to go out and run 26.2 miles if you haven’t run four laps around the track since high school.  But getting to the finish line is more about mental toughness than physical conditioning.  The tests come at every stage.  It may come before sunrise on a Sunday when the alarm clock goes off.  Do you hit the snooze button or do you get out of bed for your training run?  Do you settle for the brief that’s “good enough,” or do you keep searching for the winning argument?

It’s about overcoming the voices in your head telling you:  “It’s too hard,”  “You can’t do it,” “What were you thinking?”  The same mental toughness that powers you to the finish line helps you deal with cantankerous counsel, contrary judges, and demanding clients.

So that’s what I was thinking as I ran down from Potrero Hill toward the waterfront.  And by the way, I finished my third marathon in 5:28.  Not a time for the record books – unless you happen to be me, in which case it is 11 minutes faster than my best previous time.