Climbing the Charts: The Top Grossers

For the first time since the dot-com bust, all 10 of the Bay Area’s highest-grossing firms recorded revenue gains in 2005. Four firms saw double-digit increases, but most showed more modest improvement. Two firms reported leaps in revenue per lawyer. A handful of firms dramatically boosted profits per partner, but much of the boost came from shifting partners from equity to non-equity status. Three firms saw PPP decline.

Morrison & Foerster, the revenue leader, saw its top line grow 16 percent. Orrick boosted revenue 14 percent. Pillsbury Winthrop reported a 33 percent gain in revenue, but it came from its merger with 350-lawyer Shaw Pittman. Pillsbury’s revenue per lawyer remained flat, and profits per equity partner dipped, even though the firm ended up with fewer equity partners after the merger than it had before.

Pillsbury wasn’t the only one shrinking its equity ranks. MoFo more than doubled the size of its non-equity tier this year, a move that goosed its profits per equity partner above $1 million for the first time.

Heller Erhman reported 19 fewer equity partners and 27 more non-equity partners than in the previous year. With revenue up just 1 percent, the move helped the firm report a 3 percent increase in profits per equity partner. Average compensation for all partners, meanwhile, fell 3 percent. Still, Heller led the pack in revenue per lawyer, a key measure of a firm’s financial health.

Perhaps the biggest story of the year is at Thelen Reid & Priest where revenue was up 16 percent, revenue per lawyer up 22 percent, and profits per partner up a whopping 44 percent, to $850,000. Thelen, too, shrank its equity partner class.

Wilson Sonsini’s fiscal year doesn’t end until Jan. 31, but the firm expects to lift revenue 8 percent, its first increase since the bust. Wilson also reported fewer equity partners, helping push profits per partner up 13 percent to $975,000. It doesn’t have a non-equity tier.

Law firm leaders attribute the generally positive results to a surge in corporate work and continued strength in litigation practices.

Cooley Godward Chief Executive Officer Mark Pitchford said Valley firms were finally seeing their practices fully engaged across the board.

“If firms were telling you that on the business side [a few years ago], they were blowing smoke. Litigation was the steady-state driver,” he said. “Now what you’ve seen is litigation staying engaged and the business practices, over the last 18 months, recovering to a nice level.”

Still, the three tech-centered Silicon Valley firms posted only slight gains in total revenue and revenue per lawyer. At Cooley and Fenwick, revenue was up 3 and 4 percent respectively.

The Bay Area top 10 saw a few changes this year. Pillsbury shot from No. 4 to No. 2. Gray Cary Ware & Freidenrich, which was No. 8 last year, fell off the chart after becoming part of international behemoth DLA Piper Rudnick Gray Cary. That allowed Sedgwick, Detert, Moran & Arnold to sneak into 10th place.

MORRISON & FOERSTER

Morrison & Foerster grossed $687 million in 2005, making it once again the leader among Bay Area firms.

But the big story at MoFo is its profits-per-equity-partner numbers, which shot through the roof this year, crossing the $1 million mark for the first time. In 2004, Orrick, Herrington & Sutcliffe was the only top Bay Area firm to record million-dollar PPP.

Chairman Keith Wetmore said that an uptick in corporate, M&A and government and corporate investigations work helped drive the firm’s stellar performance.

But he volunteered that profits per equity partner were aided by a transfer of approximately 50 equity partners into non-equity ranks. The shift involves more than 15 percent of MoFo’s overall partnership.

Wetmore said that for these partners, the firm chose to increase the percentage of pay that is guaranteed rather than dependent on the firm’s performance, one of the factors used by The Recorder and American Lawyer magazine to determine equity status.

“[The non-equity] partners make lower capital contributions and have different participation in profits,” said Wetmore. “We give non-equity partners a vote. There is no sense of disenfranchisement.”

Wetmore said the changes weren’t controversial, explaining that MoFo has long had a non-equity tier, and the move last year simply expands its size. He said the result was to place his firm’s financials on a similar footing with other firms that he perceives as having stacked their non-equity ranks with a greater number of partner-level lawyers.

Wetmore said that under the old system at MoFo, the firm’s profits per equity partner would have been $950,000 in 2005.

“Firms have adjusted their non-equity ranks and criteria for going on 10 years,” observed legal consultant Peter Zeughauser. “[MoFo] is probably late in the game for firms that have done that.”

He added that MoFo was probably among the firms that are “trying to produce an accurate picture of PPP relative to other firms. And that’s difficult to do.”

MoFo increased its total number of lawyers by 6 percent, gaining 53 lawyers year over year.

During the 2005 calendar year the firm gained 30 lateral partners, including a group of lawyers led by Stoel Rives environmental partner Edgar “Ned” Washburn and a seven-partner group in Northern Virginia led by emerging companies partner Jack Lewis of Shaw Pittman.

PILLSBURY WINTHROP SHAW PITTMAN

In April 2005, Pillsbury Winthrop married 350-lawyer Shaw Pittman, expanding its footprint and giving it a major office in Washington, D.C.

Pillsbury Winthrop Shaw Pittman emerged from the year with gross revenue of $574 million, a 33 percent increase over what Pillsbury Winthrop by itself generated in 2004.

Average compensation for all partners, however, dropped 10 percent, from $605,000 to $545,000. The amount of revenue generated by each lawyer dipped too, going from $670,000 to $665,000.

The merged entity has 10 percent fewer equity partners than Pillsbury alone had at the end of 2004.

Pillsbury Winthrop Shaw Pittman Chair Mary Cranston said the firm didn’t de-equitize partners, but “streamlined” the lower tiers, mostly reflecting increases in the amount of guaranteed compensation paid to partners.

Cranston put a positive spin on the year’s results, stressing the firm’s busy practices.

“We expect a return to our normal profitability curve in ’06,” said Cranston. “The underlying business was very robust.”

She noted energy, M&A, real estate, technology and global sourcing were strong, and said that the firm’s sixth-largest practice, real estate, saw the greatest pickup in activity.

And she talked about large, one-time costs that the overall firm incurred as a result of the merger. “You need to convert one firm to the systems of the other,” she said. “There is a lot of cost and distraction.”

Among its costs, Pillsbury paid out severance payments to staff who were laid off because of job overlap and duplication.

Cranston said the merged firm shed 100 lawyers in 2005 due to client conflict issues. She suggested other lawyers were pressured to leave, though she declined to offer specifics. “We have very high standards for performance, so every year some partners are counseled out,” Cranston said.

As part of the merger transition, Cranston said, the firm spent money on moves and double rents in Northern Virginia, Washington, D.C., New York, Palo Alto, Los Angeles and London.

“A merger is expensive � you can ask anyone,” Cranston said. “If it is a rising boom market, you can cover the whole thing in one year, without seeing a drop. We were very rigorous about having those costs put into 2005.”

In 2005, Pillsbury continued to bring new blood into the firm, taking on a small Houston-based firm and hiring lawyers from now-defunct Coudert Brothers.

Pillsbury said it closed 75 M&A deals in 2005 worth $30.8 billion. Among them, the firm represented Chevron Corp. in its face-off with Chinese oil company CNOOC over the acquisition of energy giant Unocal Corp.

ORRICK, HERRINGTON & SUTCLIFFE

In what Orrick Chairman Ralph Baxter Jr. described as “a year like none other,” the firm pulled off a double-digit percentage-point gross revenue hike and added some 35 lateral partners and three new offices in 2005.

The firm grossed $554 million last year, 14 percent more than the previous year. In 2004, Orrick’s revenue increased 8 percent.

“The real reason this all happened is a deliberate strategy focused on high-value engagements, consisting of sophisticated financial transactions and high-stakes litigation,” Baxter said.

Highlights of 2005 included the acquittal of the former CFO of McKesson Corp. in the largest securities fraud case brought by U.S. attorneys, acting as bond counsel for a $15 billion bond package at the center of the state of California’s economic recovery plan, and obtaining a settlement for client EMC in a dispute over intellectual property with Hewlett-Packard.

In 2005, Orrick opened a new office in Taipei, poached eight partners from Heller Ehrman’s Venture Law Group, doubled the size of its London office by bringing on 10 partners from Coudert Brothers, acquired all of Coudert’s lawyers in Moscow, opened an office with former Coudert lawyers in Hong Kong, and doubled the size of its Tokyo office.

The firm’s overall lawyer count grew almost 9 percent, to 723 attorneys.

Baxter said the firm spent between $15 million and $30 million on the additions of lawyers. He said the firm does use capital contributions and debt to fund capital expenditures, such as building out new offices.

Orrick has a “very healthy balance sheet as related to debt and equity,” he said. “We don’t borrow to finance growth.”

HELLER EHRMAN

Two years after it brought close to 100 new lawyers into its fold, Heller Ehrman has shrunk.

The firm’s total number of lawyers declined 6 percent in 2005, from 628 to 590. And despite increased productivity, the firm posted $475 million in gross revenue, barely a percentage point more than it posted the year before.

Firm leaders said Heller let go of at least 20 off-track associates, including contract attorneys and special counsel, who had been hired to work on specific matters that were winding down.

Other departures included the defection of some nine partners from the recently merged Venture Law Group to competitor Orrick. (One later returned to Heller.)

The firm’s new chairman, Matthew Larrabee, remained positive: “We worked very hard this year to align our practices with our strategy and still produce the 10th record year in a row for revenue, the 10th record year in a row for net income, and the 10th record year in a row for profits per equity partner,” he said.

Heller brought on 15 new lateral partners over the course of last year, many of them in IP. And thanks to the firm’s past investments, Larrabee said, Heller has a healthier balance of corporate and litigation lawyers.

Accounting giants kept Heller lawyers busy as they defended Deloitte Touche Tohmatsu over claims related to the bankrupt Italian company Parmalat, defended Ernst & Young in suits filed by real estate company Cendant Corp., and worked on matters related to Ernst & Young’s audits of AOL Time Warner.

WILSON SONSINI GOODRICH & ROSATI

Wilson Sonsini Goodrich & Rosati projected a healthy 8 percent revenue hike for its 2005 fiscal year, which ends Jan. 31.

The firm estimates it will gross $406 million, giving it its first revenue gain since 2001.

Revenue per lawyer also is expected to grow by 6 percent, from $700,000 to $740,000, despite a virtually flat head count.

“The main story is that the corporate practice is back in full swing,” said CEO John Roos. “Companies are being formed; they are growing; they are being financed.”

As M&A activity returned to the Valley, Wilson completed 138 deals worldwide, representing more than $14.5 billion in deal volume, according to Thomson Financial. Thomson ranked Wilson as 20th among law firms based on the number of deals handled, with no other Silicon Valley firms among the top 25.

Despite the return of corporate practices, Wilson was a revolving door in 2005.

The firm’s lawyer numbers, measured between September 2004 and August 2005, reflect just a percentage point increase. But Wilson’s leadership says that during the last calendar year the firm has hired close to 100 lawyers, most of them associates in Palo Alto.

Among the hires are six new partners, including Carmen Chang, who returned to the firm after a stint at Shearman & Sterling to launch the firm’s office in Shanghai.

Wilson said goodbye to a string of partners, including a trio led by M&A partner Michael Kennedy, that departed to O’Melveny & Myers.

COOLEY GODWARD

For Cooley Godward, 2005 began with uncertainty about the firm’s future course, compounded by a string of partner defections.

But a year later, the firm has publicly declared its intent to remain independent, has opened an office in Washington, D.C., and, for now, seems to be gaining more lawyers than it’s losing.

The firm posted its first revenue increase in four years. Cooley grossed $298 million in 2005, just 3 percentage points more than in the previous year.

“We had a very good year in terms of productivity of lawyers across departments, across all offices,” said the firm’s chief operating officer, Mark Pitchford. “I have to believe that productivity was at the highest since 2000.”

Like other Silicon Valley firms, Cooley benefited from an uptick in M&A activity. The firm lists among its highlights its representation of Siebel Systems in its $5.85 billion purchase by Oracle Corp., and navigating client eBay through a $2.6 billion acquisition of Internet communications company Skype Technologies.

“We didn’t enter 2005 with a great deal of momentum,” says Pitchford. “We feel just the opposite this year. We are fully engaged and most of the partners can see a nice pipeline.”

THELEN REID & PRIEST

Thelen Reid & Priest’s lawyers were among those that worked the hardest in 2005, boosting the firm’s revenue per lawyer an eye-popping 22 percent, from $580,000 to $710,000.

The firm’s recently elected chairman, Stephen O’Neal, attributed the growth in productivity to “a lot of partners in a lot of practice groups having a good year.”

The firm did raise billing rates “like everybody else,” said O’Neal, but says it didn’t do anything out of the ordinary. Thelen generated more contingency income than the previous year, although contingency income accounted for less than 10 percent of revenue.

In particular, the firm got paid last year for a matter that has lasted seven years, representing the Department of Insurance in a federal suit against Credit Lyonnais. Thelen recovered more than $900 million for its client.

Still, O’Neal was proudest that its partner compensation, not taking into account contingency income, increased 20 percent from 2004. Overall, some 12 partners throughout the firm increased collections by more than $1 million each over last year, O’Neal said.

LITTLER MENDELSON

Employment class actions kept lawyers at Littler Mendelson working hard in 2005, and that made for another year of consistent growth.

The firm’s gross revenue jumped about 6 percent, to $199 million, slightly under the 8 percent increase that was seen the previous year. This figure doesn’t count an additional $12 million of revenue the firm generated through its joint venture with Phoenix-based Bacon & Dear.

Littler’s profits per equity partner grew just 2 percent, from $435,000 to $445,000. Overall, the firm’s head count increased by nine lawyers, or 2 percent.

An expense came as Littler changed its fiscal year so that it now ends at the end of December rather than at the end of January. The firm ended up with fewer tax deductions last year as a result.

FENWICK & WEST

A slew of technology deals kept Fenwick & West’s corporate engines revving in 2005, generating healthy revenue at the firm for the second year running.

Fenwick posted $159 million in gross revenue last year, a 4 percent jump over 2004. Revenue per lawyer was $695,000, up 2 percent from the previous year.

“Generally, this is the most robust time that I have seen in Silicon Valley in five years,” said firm Chairman Gordon Davidson. “It just feels good, and I am very optimistic.”

The firm handled 63 deals valued at $20.1 billion in 2005. By comparison, the firm handled 46 M&A deals valued at $6.5 billion in 2001, according to the firm’s records.

Despite its healthy revenues, Fenwick saw the departure of litigators to larger firms last year, including star partners John Fox (for Manatt, Phelps & Phillips), and IP litigator Daniel Johnson (for Morgan, Lewis & Bockius).

SEDGWICK, DETERT, MORAN & ARNOLD

Sedgwick, Detert, Moran & Arnold wrapped up the year with gross revenue of $156 million, a 6 percent increase over the previous year’s $147 million.

Much of the work for the litigation firm came from ongoing Merck Vioxx drug trials and a growing number of insurance class actions.

Chairman Kevin Dunne said the firm was involved in 40 class actions nationwide, up from 30 the previous year.

The firm is also representing the San Francisco archdiocese and other clients in priest molestation cases.

Petra Pasternak contributed to this report.