At the center of a high-tech legal storm

Stunned by the dot-com implosion, high-tech law firm Brobeck Phleger & Harrison wanted to diversify. But Chairman Tower Snow wanted to stay the course. That's when the sparks began to fly.

Paul Festa Staff Writer, CNET News.com
Paul Festa
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Paul Festa
9 min read
It may amount to the most significant realignment in the high-tech legal world since the Internet boom began.

On May 16, Tower Snow was expelled from Brobeck Phleger & Harrison, the San Francisco law firm that gained prominence and enormous profit from catering to the high-tech elite. The roster of Brobeck clients included the likes of Cisco Systems, Sun Microsystems, Broadcom, DoubleClick and Nokia.

Snow, Brobeck's chairman during the boom-and-bust years, was ousted after a long boardroom brawl with partners who opposed his advocacy for a continued focus on high-technology clients.

When word of the internal strife got around last year, the legal press heralded it as the end of an era.

"Often vilified, often envied, Tower Snow remains the pre-eminent example in the law firm universe of what John Doerr of the venture capital firm Kleiner Perkins Caufield & Byers often referred to (but has since retracted) as 'the greatest legal creation of wealth'--the Internet," opined the Corporate Legal Times in December.

In an e-mail interview, Brobeck Chairman Richard Odom said Snow had been expelled because he "breached the standards of conduct that Brobeck expects of its partners." That alleged breach is universally acknowledged to be Snow's flirtation--consummated last month, accompanied by nearly 20 other Brobeck partners--with U.K.-based legal behemoth Clifford Chance Rogers & Wells.

Snow will soon head up four high-tech-oriented West Coast offices for Clifford Chance, employing as many as 100 attorneys. Brobeck defectors are expected to make off with virtually all their current clients in high tech. That could set the stage for more legal fireworks. Odom has retained legal counsel with regard to the defections, but declined to comment on his intentions.

Born in 1947 in Boston, Snow attended Dartmouth College and law school at the University of California at Berkeley's Boalt Hall. Snow spoke to CNET News.com from his home in Napa, Calif.

How did the Internet boom and bust affect the practice of law?
I don't think it did affect the practice of law. I think it revealed something about the model of the high-technology (law) firms, and what was learned was this: The firms that focused on the high-technology market segment had--and continue to have, like their high-tech clients--enormous growth potential. The law firms' economics, however, like their clients', are more volatile. They have, so to speak, a higher beta.

Which means?
That means how volatile your stock price is. And so intellectually, everyone at the tech firms knew that their client base was more volatile, and thus, by definition, the economics of their firms were more volatile. What the downturn, particularly after 9/11, taught everyone was that intellectually understanding this and understanding volatility is different from emotionally accepting volatility. And at some point, the intellectual and emotional reactions diverged. The bottom line: If you want to practice in the technology sector, you'd better have a stomach for the downside volatility as well as an appetite for the upside economics.

There's been a lot of hand-wringing over the tendency of law firms to accept or even demand equity stakes in their clients, and some ethical criticisms of the practice. Did law firms including Brobeck start to get in on the gold rush mentality?

"If you want to practice in the technology sector, you'd better have a stomach for the downside volatility as well as an appetite for the upside economics."
Yes. But different law firms had different approaches to taking a share of client equity. At Brobeck and other large tech-focused firms, stock was not taken in lieu of fees. Rather, investments were made at an arm's-length basis. We were paid, and made investments on the same terms as anyone else. In contrast, some of the boutiques looked to equity instead of fees and demanded very substantial equity participation. In the hot market those equity stakes were very valuable, but in the ice-cold market they became worthless. With the benefit of hindsight, I would expect the boutique firms to be more conservative going forward in the balance between cash and equity.

When did you start with Brobeck, and why did you step down as chairman in 2001?
I started with the firm in 1995, and left because of a shift in strategic focus and cultural orientation. The firm has abandoned the focus on representing the high-technology sector, which was the cornerstone of my and (managing partner) Jim Burns' management platform. And the firm has taken a number of steps, including very substantial layoffs, which have fundamentally changed the culture of the firm. Reasonable people can differ over whether these moves make sense or not, but they were substantially enough different from our focus that we felt it better for all concerned to leave.

Did you step down or were you expelled?
I decided not to seek another term as chairman in 2001 but was expelled by vote of the policy committee this year.

Why did they expel you?
I was expelled apparently as a result of my discussions with Clifford Chance about moving with a group of my colleagues to Clifford Chance and setting up their West Coast practice.

How much did you have to do with the firm's specializing in high-tech, a vision that ultimately parted you from the firm?
As chairman, I was the point person, so my job was to set the strategic course...Brobeck had a presence in technology before I assumed the chairmanship, but we articulated what the firm's mission and goal should be to become the premier law firm in the world representing high-tech companies. And that was different before 1998.

There's been a lot of speculation that Brobeck is going to take legal action against you for your departure with other partners. Were your actions legal?

"The legal industry is undergoing a fundamental restructuring, similar in nature to what all other industries are going through."
There would be no basis for any legal claims. If anything, I and the other departing partners would have legal claims against Brobeck. I can't comment on what Brobeck might be contemplating, because I am not privy to those discussions.

So are you considering a suit against Brobeck?
Our interest is in building a powerhouse West Coast and U.S. platform for Clifford Chance, not in looking backward, not in litigation.

I'm trying to get a handle on how Brobeck and Clifford Chance compare in size and scope.
Clifford Chance is the biggest law firm in the world. They've got more than 3,600 lawyers in 32 financial centers. They're the world's highest grossing (law) firm. For their recently ended fiscal year, revenue will be approximately $1.5 billion, and in the prior year they were about $1.4 billion. Unlike many law firms that saw their revenues decline, Clifford Chance saw theirs continue to grow.

How much of Clifford Chance's work is in high-tech now?
I believe approximately 10 percent of the firm's revenues are derived from high-tech clients.

And they brought you and the others on in order to boost that.
That's correct. Because we're very focused on high-tech companies.

Can you say more about why you wanted to leave Brobeck?
The legal industry is undergoing a fundamental restructuring, similar in nature to what all other industries are going through, and clients understandably are requiring and indeed demanding value-added service.

And by that you mean...
They want to get great value from their lawyers and are looking for specialized expertise. An analogy: If you have knee problems and need surgery, you're going to go to a highly skilled orthopedic surgeon, not a general surgeon. Our belief was that it was important for Brobeck to focus on what it did best and not try to be all things to all people. And what Brobeck did well was represent high-technology companies in their most important corporate and litigation work. The new focus at Brobeck is to have a much more diversified platform and to be more oriented toward doing all things for all clients. In our view, that's not a recipe for success in today's legal environment.

And yet in an interview last year, you warned that firms that were not sufficiently diversified were bearing the brunt of the dot-com implosion.
Brobeck in 2001 had approximately 6,000 paying clients, primarily in high-technology, from start-ups to the most well-known big cap companies. And it had a balanced practice between litigation and corporate work. So on the one hand our focus was narrow, i.e. on the high-tech market segment, but on the other hand we were very diversified because we covered the whole spectrum of companies, from small to big, and with eight different practice areas. That gave Brobeck good balance.

When the downturn in technology came, it did not materially affect Brobeck, because the companies that were vaporized were the pure dot-coms with the small revenue flows and no profits. And those made up a modest portion of Brobeck's client base.

But between 2000 and 2001 Brobeck's revenues went down sharply.
The revenues went down modestly, less than 10 percent. Profits declined more substantially, but the profit decline was less a function of market dynamics than of year-end managerial decisions.

Which were?
That's not a level of detail I care to go into.

What exactly will you be doing for Clifford Chance?
We expect to have four offices for Clifford Chance on the West Coast--San Francisco, Palo Alto, Los Angeles and San Diego--up and fully staffed by the end of July. We expect to have somewhere between 80 and 100 lawyers on board with additional support staff. And we expect to grow the practices fairly quickly based on client reactions and our perceptions of market opportunities.

You've been credited with making Brobeck into what it was during your tenure there. What did you accomplish at Brobeck?
I'm enormously proud of what was accomplished at Brobeck between 1998 and 2001. We had the strongest growth in revenues and profits of any law firm in America, and its marquee and stature among firms increased dramatically. Those results were due to the hard work of many, many people within the firm, of whom I was only one.

How old was Brobeck?
It started 76 years ago with Wells Fargo and railroad clients. As the chairman, my job was to set the strategic progress of the firm, but the progress, including being named twice by Fortune as one of the 100 best places to work in America, was the result of the work of hundreds of people.

The legal press has called it a "devastating" departure, estimating that you and your fellow defectors are taking $50 million in annual revenue with you.
I don't want to comment on the revenue number, but the group of departing partners represents an illustrious client base and we hope to continue to represent that client base.

Is there any indication so far how many of your clients you'll be taking with you?
The partners in our group have represented their clients for years. We believe we have well served them for years, and we hope that we will continue to represent the clients for years to come.

In hindsight, what could the firm have done differently to retain you and the employees who departed?
I don't think anybody was looking to leave. But people want to work in an environment where divergent views can be expressed openly and discussed civilly, and it became apparent that our views were not welcome and nor were we. No one wants to work in an environment where they're not welcome.

The Daily Journal reported, and departing partners have agreed, that Brobeck has "bloated lines of credit and unwieldy real estate commitments, including more than 170,000 square feet of unused office space, resulting from years of expansion followed by a decreased demand for its services." Does the reported state of the firm have anything to do with your wanting to leave?
None. I spent four years building the firm. A lot of my personal life is invested in the firm's success. I very much want to see the firm do well. As do virtually all other people who are leaving. As for the real estate question, Clifford Chance offered to sublease from Brobeck a very substantial amount of real estate involving millions of dollars of sublease payments. But Brobeck apparently is not interested.

To what extent will Clifford Chance be competing with Brobeck? More than before?
Clifford Chance historically has not competed with Brobeck because there was little overlap in their client bases. Given our West Coast location and our focus on high-technology clients, there will certainly be competition in the future.