Correction to This Article
A earlier version of this story had an incorrect date for the e-mail leaked to the blog Above the Law.

Defections grow at Howrey

By Amanda Becker
Monday, February 7, 2011

The steady drip of attorneys leaving the law firm Howrey over the past year was at first characterized as a strategic restructuring, part of a larger effort to reset operations after a difficult financial year.

But in recent weeks, that trickle has swelled into a wave of departures. Howrey's vice chairman and managing partner of its San Francisco office, the managing partner of its Chicago office, the co-chairman of its white-collar group, the leader of its class-action litigation practice and more than a dozen others have left for competitors, leaving some industry watchers to wonder if the venerable Washington firm can stem the tide.

In what could prove to be a watershed moment for the firm, last weekend Chicago-based Winston & Strawn, which had previously examined the possibility of a full merger with Howrey, extended individual offers to more than three-quarters of the partners who remain, sources within Howrey confirmed. Though the attorneys have several weeks to make a decision, management at both firms have urged expediency, meaning the future of 55-year-old Howrey, which at its height employed more than 600 attorneys, could be determined in weeks, if not days.

Howrey declined comment for this story.

"When things go bad, there is very little opportunity to correct it," said Jonathan Landers, a restructuring specialist at Milberg who represents creditors in law firm bankruptcies but has no inside knowledge of the situation at Howrey. "Nobody wants to be the last person left to turn out the lights."

When the mass defections began overseas at the end of last year, Managing Partner Robert Ruyak said it was no cause for alarm, given Howrey's plans to shrink operations after revenue plunged more than 30 percent in 2009 and profit per partner dipped to about $846,000 from more than $1 million, according to statistics compiled by the American Lawyer. As recently as Jan. 21, Ruyak reassured the firm's attorneys that the departures were a "conscious decision to restructure," according to an internal e-mail leaked to the blog Above the Law.

First, European Managing Partner Willem Hoyng recruited the bulk of the staff in Amsterdam, Madrid, Brussels and Paris to form a new firm. Then, the managing partner of Howrey's London office joined Field Fisher Waterhouse and Howrey's team in Taipei was acquired by Kilpatrick Townsend and Stockton. Days later, the head of the Brussels office resigned before finding a new position.

But just days after Ruyak assured British publications that the firm's footing was sound, groups of key attorneys started jumping to competitors in the United States. All told, the number of partners who have left the firm over the past 12 months is now more than 60.

At the end of January, Howrey vice chairman and intellectual property rainmaker Henry Bunsow left the firm with several others to join Dewey & LeBoeuf in San Francisco. Over the next two weeks, Morgan Lewis & Bockius poached teams of Howrey attorneys in both Chicago and Irvine that totaled nearly a dozen. Then, the firm confirmed it would be closing its Salt Lake City office in February.

Partner defections on such a large scale are problematic because of the way firms are structured and financed, experts say. Attorneys are mobile, with the ability to take their business with them. The more business they have, the more options available to them. Yet key rainmakers are the very assets that allow firms to secure credit, meaning any departures of scale or significance can breach the terms of lending and lease agreements.

"All of these loans are probably going to have covenants that have different metrics you meet in order for the bank to feel comfortable that you can repay the loan. Even if a firm has enough partners, it might not have enough of the right kind of partners," said James D. Cotterman, a principal at the legal consultancy Altman Weil, who was not speaking about Howrey specifically.

Under the terms of a typical loan, a breach could be triggered by the departure of as little as 15 percent of the partnership, according to Andrew Johnman, the head of a Barclays division that specializes in law firm lending. Though banks will often rewrite the agreement, a concerned lender could call in the loan or demand repayment immediately.

"A supportive bank would listen to the story and rewrite the agreement to suit the new shape of the firm -- assuming the bank buys the story that the new shape of the firm has a sound financial future," Johnman said.

Adjusting for the absence of key partners -- and key revenue -- is tricky, given that the biggest expenses for law firms are labor and space. Most firms have grown to a size where a large-scale head count cut would require severance payments under federal law, adding costs to any plans for layoffs. Office space, typically 15 percent of a firm's budget or more, is also often a fixed expense, leaving firms in a position where it is difficult to trim expenses in a significant way while they figure out how to replace lost revenue.

In addition to Howrey's office at 1299 Pennsylvania Ave., where it has leased more than 300,000 square feet of space through 2018, the firm is also committed to large offices in Los Angeles, San Francisco and elsewhere, according to data from the real estate research firm Co-Star Group.

"At a law firm, your expenses don't proportionally go down as the number of lawyers decreases," Landers said.

Other firms have experienced a rapid downward spiral once defections started increasing. The firms Heller Ehrman, Thelen and Wolf Block all eventually dissolved in late 2008 or early 2009 after a year of low profit sparked merger discussions, then widespread departures.

"If you don't get on it really fast, it's like an avalanche: It gathers steam quickly as it goes downhill," Cotterman said.

© 2011 The Washington Post Company