Pepper Hamilton.

Though it shrank in size for the third year in a row, Pepper Hamilton called 2018 a success, pointing to its goal of increasing per-lawyer productivity.

The Philadelphia-based firm saw gross revenue decline by 2.2 percent, to $334.36 million. But on a lower head count, its revenue per lawyer (RPL) increased by 3.8 percent, to $789,000.

Managing partner Thomas Cole said that RPL is a record high for the firm.

“We're a little different firm than we were a few years back,” Cole said. “Our revenue and head count is much better matched now.”

Profits per equity partner (PEP), at $830,000, showed a decline of 0.8 percent, as net income decreased by 5.8 percent, to $95.45 million.

The firm increased rates by about 3 to 3.5 percent for the most part, Cole said, though the average rate increase was likely lower, in the 2 percent range, because of the smaller increases at the associate level. Realization improved by about 1 percent, he said, “an indication that we got the rate increase right.”

About 14 percent of the firm's revenue comes in on an alternative fee basis. Gallagher said there's been no uptick recently, but Pepper has had a pricing team in place since 2012. “We were early in the game for fixed fees” because of the firm's pharmaceutical-industry background, Cole said.

The 115-person equity partnership was smaller by six lawyers in 2018, compared to 2017. And the nonequity tier shrank by 6 percent, to 78 lawyers. Overall head count also declined, by 5.8 percent, from 450 in 2017 to 424 in 2018.

It was the third straight year of head count declines for Pepper Hamilton as well. Before that, in 2015 the firm had its best year in terms of PEP, surpassing $1 million for that metric.

But departures in 2018 were budgeted for, Cole said. They included some retirements, as well as some associates who went in-house with clients. The latter “was welcome news,” chairman Thomas Gallagher said.

One lawyer who went in-house was Shirley Kuhlmann, who took a position at Collegium Pharmaceutical Inc. after serving as its outside counsel at Pepper.

Still, several Pepper lawyers made lateral moves to other large firms. Early in the year, the firm saw three litigators join Blank Rome in Philadelphia and Pittsburgh, including a former federal judge who had been planning to retire before switching gears and joining Blank Rome instead. The head of Pepper's alcoholic beverage industry group made a move to DLA Piper, seeking an international platform. And a co-chairman of the firm's securities and financial services enforcement group headed West from Pepper's Washington, D.C., location to Snell & Wilmer's Salt Lake City outpost.

But Pepper made its own additions as well, completing 11 lateral hires in 2018, the firm said, as it aimed to grow outside Philadelphia.

They included two white-collar defense partners in Boston who joined the health sciences department—former assistant U.S. attorney Miranda Hooker, and Callan Stein, who had been at law firm Barrett & Singal. The firm also made several IP partner hires; added a duo of transactional partners and a securities litigator in Orange County, California, from three different firms; and brought on an employee benefits and executive compensation partner in New York from midsize firm Morrison Cohen.

A group hire of two dozen IP professionals in Rochester and a new office there, which Pepper officially brought on this month, was in the works throughout the second half of 2018. But the related expense did not hit the firm's budget until this year, Cole said.

Turning from key hires to key engagements, Cole noted that the firm represented the White House Correspondents' Association in its support of CNN reporter Jim Acosta when his press pass was suspended; argued on behalf of New Mexico Health Connections in a challenge to the federal government's risk adjustment formula, involving $10 billion in risk adjustment payments; and represented another Philadelphia-based large law firm, Duane Morris, in a $625 million malpractice suit where Pennsylvania appellate courts affirmed dismissal of the claims in 2018.

The firm said it closed more than 90 deals in 2018, with a total of more than $10.5 billion in deal value, though Cole noted that some of the fees for those transactions came in 2019.

Evolving Industries

Asked how the firm is different in 2019 from the middle of the decade, Cole and Gallagher noted the creation of Pepper Hamilton's multipractice health sciences department, formed in 2017. That combined its health effects litigation group, which had been a marquee practice, with other services for health care industry clients, such as IP and white-collar defense.

In the past, Cole said, more of the firm's revenue could be traced to a small group of “behemoth” clients. Those clients still turn to Pepper for significant matters, he said, but not for every legal need.

“All of those folks working collaboratively and together have replaced that revenue,” Cole said, referring to the health sciences department.

“The industry we serve changed dramatically,” Gallagher added. “We've changed because the industry we serve has changed.”

As for 2019, Cole said the firm is aiming to grow RPL at a better rate than the average for the Am Law 50 to 100. “The addition of Rochester will be a nice boost,” he noted.

If there is any downturn in the economy, he said, the firm has no debt and well-balanced practices to see it through.

“We're cautiously optimistic,” Cole said.

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