By Amanda Becker
Capital Business Staff Writer
Saturday, February 26, 2011; 5:20 PM
In the infancy of the recession, the Washington law firm Howrey was widely regarded as an industry success story, a hometown firm that had managed to shed its inside-the-Beltway pedigree and turn itself into a global player in antitrust, litigation and intellectual property law.
But just two years after reporting its most profitable year ever, the 55-year-old law firm now stands as a cautionary tale, its towering success all but undone by powerful forces transforming the legal establishment.
The stable of talented lawyers who turned the firm a powerhouse are defecting en masse to rivals. The firm's once-robust European outposts are nearly empty, its California offices shells of their former selves. The bulk of the partners - a law firm's top revenue producers - who remain have been extended offers to join Winston & Strawn, based in Chicago. And the firm has had to address reports that its collapse is imminent.
The venerable firm is unraveling at a speed that once was unthinkable in the city's staid legal community. Yet its rapid dismantling follows a familiar pattern - lackluster financial results, failed merger discussions, large-scale defections - seen in the dissolution the California law firms Brobeck, Phleger & Harrison; Heller Ehrman; and Thelen in the past decade.
Even as large firms collapsed across the country, Howrey expanded.
"Howrey grew very quickly, and there is sometimes a price to pay for growth," Sean F.X. Boland, Howrey's vice chairman, said in an interview. "We're not a large firm anymore. We lack that balance that you need. . . . Now what we want to do is combine our practices with a firm or firms and get our balance back and move forward."A D.C. firm gone global
In many ways, Howrey was the quintessential Washington firm, fundamentally linked to the federal government since its founding in 1956 by Jack Howrey - a chairman of the Federal Trade Commission during the Eisenhower administration - and three partners. The firm made its mark by specializing in antitrust cases, and its base in Washington gave it a natural advantage.
In more recent times, as commerce became more global, corporate clients hired firms with international reach. Howrey responded by acquiring practices around the world, adding outposts to its letterhead that included Dusseldorf and Taipei. At its height, it boasted 700 lawyers in 18 offices, bringing in more than $570 million a year in revenue.
But the same forces that made it easy for Howrey to cherry-pick practices and build its wheelhouse of top lawyers also were instrumental in its slide.
The genteel days when a lawyer might begin and end a career at a single firm - and loyalties were forged with camaraderie and partnership - are largely over. Law firms in Washington and beyond have taken a page from their Wall Street counterparts, becoming as much a big business as the clients they represent.
Lawyers are increasingly transient - loyal to their clients, not their firms. When they walk, they take the clients and leave the firm locked into obligations and real estate leases.
"Law firms are a funny animal. They're very fluid - it's all about the people," Boland said. "As long as you can practice with the right people in the right environment, a little change isn't necessarily bad."
But when talent is your most valuable asset, any crisis in confidence can shake a once-stable firm to its core. Rivals are quick to seize on perceived vulnerabilities.
"If there are rumors that a law firm is under stress, there can be a run on the bank," said James D. Cotterman, a principal at the legal consultancy Altman Weil. "You start to lose partners, first those with the best practices, the best clients. . . . If you don't catch it very early in that cycle, it's almost irreparable harm."Rapid growth
At Howrey, few saw it coming. After Howrey & Simon joined with Houston intellectual-property powerhouse Arnold, White & Durkee in 2000, chairman Robert F. Ruyak guided the firm through a period of rapid expansion as its lawyers landed blockbuster verdicts.
In 2003, a California jury awarded $475 million to Howrey clients International Paper and Masonite. That was followed by a $350 million settlement for 170,000 tobacco growers in an antitrust case against Philip Morris.
Even in 2008, the worst year on record for many of the nation's largest firms, Howrey pulled off a coup. It won $76 million for Fifth Third Bank in a gargantuan contingency case, boosting the compensation paid to top partners by nearly a third.
"The problem with the firm was not the practice areas," said former vice chairman Henry Bunsow, who joined Dewey & LeBoeuf in January. "Until the end, Howrey had some of the very finest lawyers in the country."
Emboldened, Howrey continued on its growth spree even as other firms scaled back, hiring more than 40 lawyers in late 2008 from Thelen, the now-defunct San Francisco law firm that focused on construction-related work and itself had overreached with a run at rapid expansion.
"Now," Boland said, "we look back and say, what happened after that fantastic year? In hindsight, we should have probably cut back some. Buying a construction practice in the middle of the recession, I think people could legitimately look back and criticize that. We just didn't see how long the recession was going to last and how bad it was going to be."
At the end of 2009, Ruyak tried to prepare the ranks for lackluster returns for the year, telling partners that the firm would pull in roughly 90 percent of its budgeted profit, according to former Howrey lawyers. When the receipts were in, revenue had tumbled nearly $100 million from its peak in 2008, with profit per partner declining 35 percent to about $846,000, according to statistics compiled by the American Lawyer, a publication that tracks law firm revenue.
At the time, Ruyak attributed the drop to Howrey's embrace of alternative billing arrangements that were contingent on winning cases. He pointed out that $35 million of the firm's revenue in 2008 had been in the form of contingency payments that could not be expected to occur each year.Morale deteriorates
The explanation did little to satisfy the ranks.
Some lawyers, particularly those in the firm's far-flung offices abroad and on the West Coast, complained about a lack of transparency in decision making. When the firm's partners convened in Florida for Howrey's annual partnership meeting in spring 2010, they wanted to know how management intended to right the ship. But several complained that, instead of presenting a grand plan, the leadership offered minor fixes, such as installing a more accurate accounting system to track the firm's alternative billing arrangements.
As lawyers began defecting, Ruyak characterized the departures as part of a larger plan to scale back operations and say goodbye to up to 10 percent of the partners whose practices no longer fit within the firm's mission. However, the lawyers who began trickling out were not excess fat but key income producers, including those from offices in Amsterdam, Madrid, Brussels and Paris who left in October to form a new firm headed by Howrey's former managing partner in Europe.
"Some people, including some fairly high-level people, sort of bailed on us when they didn't get exactly what they wanted," Boland said. "You have to ask your partners to be patient until it pays off, and not everyone is patient enough."
Realizing the firm was set to post another disappointing year, a group of junior-level partners approached Ruyak about the firm's future, demanding a turnaround plan. Others hoped for a shake-up in management.
"They were about to enter the prime of their careers, and they decided to lock arms," Boland said. "The message was, 'Look, we have to make whatever changes are necessary so that we can continue to practice together.'???"
Ruyak declined to comment for this story, referring questions to the firm, which made Boland available.The floodgates open
The attempt to expand control of the firm came too late for many. By late fall, many of Howrey's top performers were already negotiating with other firms. As Howrey explored a merger with Winston & Strawn, the departures hastened, significantly diminishing Howrey's offices in Irvine, Calif., and San Francisco.
The Winston merger "was going to be a very good match," said William C. Rooklidge, who formerly co-chaired Howrey's intellectual-property practice and left for Jones Day in Irvine. "Unfortunately, I couldn't hold my office together long enough to be able to take advantage of it."
By the end of January, merger talks between the two firms had failed. Instead of reaching a deal, Winston extended personal offers to more than three quarters of Howrey's remaining partners.
The bulk of the firm's core antitrust practice in the District remains intact, as does the firm's Houston office. Boland said that those two groups "are the strongest parts of this firm" and that the situation, though fluid, could "congeal very quickly."
Dan K. Webb, chairman of Winston & Strawn, declined to discuss the specifics of a process he called ongoing. He said he remains excited about the prospect of hiring Howrey lawyers to his firm.
At Howrey, they're left to assess the damage.
"Thelen had a good name and it didn't survive," Boland said. "I think the Howrey name is even stronger and will survive in one form or another, though I can't tell you what it's going to be."