Barbarians At The K&L Gates?

Partner departures, staff layoffs, and an office closing, oh my.

We’ve been hearing rumblings about partner attrition and other issues at K&L Gates for several months now. So we weren’t shocked by an article that appeared in Law360 earlier this week, K&L Gates Faces Tough Road As Future Leaders Exit (sub. req.). The piece quantifies the level of partner attrition from the firm:

Flat profits and spreading concern about the firm’s ability to keep talent are among the reasons more than 80 partners have K&L Gates LLP since the beginning of the year, an exodus that includes many up-and-coming leaders who had been seen as key to the firm’s future, according to some partners who recently left and other experts.

Those leaving the 2,000-lawyer firm include rising partners in prized corporate and financial practices and a number of high-profile veterans, including intellectual property litigation heavyweight Michael Bettinger [who moved to Sidley in San Francisco]. Litigators Greg Jackson and Danny Ashby joined veteran Steve Korotash, a former U.S. Securities and Exchange Commission associate director, in a jump to Morgan Lewis & Bockius LLP’s white-collar group in Dallas in March.

Ah, Dallas. Just like the famous prime-time soap opera of the same name, the Big D has no shortage of Biglaw drama. Across the entire K&L Gates empire, we’ve heard the most about Dallas departures. In addition to the Morgan Lewis defectors, a five-attorney real estate team left K&L Gates for Holland & Knight in February and March, and in June, three M&A partners and three technology/outsourcing partners lateraled over to McDermott Will & Emery (including prominent dealmaker Wilson Chu).

One tipster of ours estimated that if the six partners who moved to McDermott last month are joined by a dozen or so of their associates, then the Dallas office will have lost more than 30 attorneys since January 1. Other lawyers at K&L Gates in Dallas are said to be exploring their options. The Dallas office has also seen some involuntary departures on the staff side: one source advised us that earlier this year the office laid off two out of three IT folks, a paralegal, and the HR director for Texas.

But the departures aren’t limited to Dallas. Here’s what a San Francisco source shared:

No story on the recent departures [from K&L Gates in S.F.]? Heavyweights like Mike Bettinger [to Sidley] and Mark Perlow [to Dechert]? Others include Curt Holbreich, Jeff Bornstein, Paul Lacourciere, Jon Michelson, Linda Usoz, Irene Yang, Jeff Ratinoff, Holly Hogan, Rachel Davidson, Steve Everett, to name a few. Down to 29 lawyers from almost 50 in the last two years or so. The empty offices are now occupied by staffers.

The Law360 piece, by Andrew Strickler, mentions Bettinger and Perlow as notable losses. Strickler also explores what might be driving the departures:

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The partners and others pointed to growing trepidation about K&L Gates’s ability to jump-start flat profits and attract a new generation of leaders in corporate transactions, intellectual property and financial services, and a growing sense that the firm’s biggest single merger — a deal with Australia’s Middletons two years ago — has failed to bear fruit.

“There were a lot of people who thought there wasn’t a very deliberative process around the decision, and a lot of people wondering how it would help us,” one partner said. “And when it didn’t go well, there were a lot of people who thought it was a bridge too far.”

Firm finances definitely seem to be part of the issue, per Law360:

In its latest annual report — K&L Gates is the only major partnership to publicize detailed financial statements — it characterized its financial performance in 2014 as flat, with a dip of 1.2 percent in gross revenue primarily due to currency fluctuations.

Revenues per all lawyers and net income per partner were also essentially flat, as revenue per full-equity partner dropped slightly to $829,078. Cash and cash equivalents were down 16 percent to $1.75 billion.

Net income available for all equity partners as a percentage of revenues dropped for a second year, from 27.6 percent in 2013 to 25.6 percent last year. In 2012, the figure was 30 percent.

The firm’s full equity head count also fell last year from 272 to 255, with partial equity partners at 483, down from 540.

What to make of these financial results? One source of ours provided these thoughts:

The bottom line is that the profits per partner aren’t good enough. A lot of folks who are leaving have great books of business but are subsidizing an expensive platform. Given that K&L mainly services mid-market clients, a global platform simply hasn’t been that helpful to most attorneys, and a lower-cost regional or national firm is just fine. If they do need a global platform, they can move to a firm that has one, but hasn’t dumped a ridiculous amount into expensive mergers.

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In addition to the partner departures and financial flatness, several Above the Law sources have shared other less-than-golden K&L Gates news:

  • Raises for junior associates in certain offices have been below the market (e.g., roughly $5K below market in Dallas).
  • Last summer, K&L Gates gave out an unusually high number of no-offers to summer associates, including at least four in Pittsburgh, three (out of around eleven) in New York, and additional no-offers in Texas and North Carolina.
  • Staff layoffs have taken place in offices other than Dallas, as the firm has gone with the trend of moving to a “shared services” model of secretarial assistance.
  • “The New York office is still a mess – the office-wide utilization rate is less than 60 percent for associates, meaning they are billing about 1100 hours a year. Many associates have left this year to great firms.”
  • “The Charlotte office has been bleeding folks to Troutman Sanders for a while now and nothing is letting up.”
  • “Firm wide, they are also starting to get aggressive about cutting costs, so junior partners are being let go if they don’t bill enough or bring in enough work.”
  • Speaking of cost-cutting, the Dallas office “decided to ‘go green’ and replace all the paper products with dishwasher-safe plates, etc. They literally returned paper plates and cups to the vendor for what I assume was a $20 refund. That’s the level of cheap they have gone to.”
  • In the Seattle office, “Word has it K&L Gates hasn’t paid their bills to their Xerox paper provider (among other vendors), thus telling employees to ration their printing.”
  • The Spokane office is shutting down entirely at the end of the year.

Not good. But several points should be noted in defense of K&L Gates.

First, as chairman and global managing partner Peter J. Kalis noted in his spirited defense of the firm back in 2012 (also in response to negative coverage from Law360 — there’s a history here), turnover is a natural and healthy thing in law firms. The firm has lost some partners this year, but it has also added some partners — about two dozen, including a six-partner team that came over from Nelson Mullins in Boston.

Second, not all partner departures are created equal — sometimes departures are disappointing to the firm being departed from, but sometimes they are welcomed, even encouraged. The group of eighty or so defectors presumably includes both stars and slackers (e.g., the aforementioned junior partners who don’t generate enough revenue). K&L Gates has what could be described as a “retrospective” compensation system that pays partners based on their production — so it would be understandable to see underperforming partners head for the exits after getting dinged on comp, especially in a robust lateral market like the current one.

Third, as noted by Law360, K&L Gates carries no debt. As Kalis emphatically stated in his barn-burning 2012 memo, “At K&L Gates, we have never used a single dollar of bank line of credit and indeed have never had any bank or other third-party debt. Never. No short term debt. No long term debt. We distribute only our earned profits to our partners and do not engage in the Deweyesque charade of paying partners out of debt. Even if we were tempted, which we’re not, we have no debt out of which to pay them.”

Of course, a “no debt” policy isn’t a panacea for law firms or a guarantee of success. As noted by Biglaw managing partner turned law firm consultant Edwin Reeser in two articles (here and here):

Both the debt and no-debt business models can wind up on the same trash heap of failure. If the enterprise does not generate sufficient distributable cash on a sustained basis to carry the enterprise, then all that a heavy [partner] capital program has done is underwrite the inefficiencies for a longer period of time until the quotient of rate of return on assets invested that is tolerable has been reached or exceeded…. Strong operating margins generated by sustainable income flows and cash balances are what make winners, not per se whether they use debt or equity to deliver it.

At the same time, the advantages of K&L Gates’s “no debt” approach shouldn’t be ignored. The firm’s fiscal conservatism — no outside debt, significant partner capital contributions — might hurt the firm in terms of recruiting laterals and keeping its own partners from getting poached, but it does insulate the firm against a super-fast, Dewey-style downfall. Recall how Dewey, Howrey, and Brobeck all collapsed, quite quickly, under outside debt. It’s hard to imagine K&L Gates ever suffering such a fate.

Yes, having to return capital to departing partners can hurt a firm’s cash position (and note how K&L Gates ended 2014 with 16 percent less cash than 2013). But partnership agreements typically — and increasingly — provide for return of capital over a period of years as opposed to immediately, so a rash of partner departures won’t drain the K&L Gates coffers. Over the next few years, K&L Gates could gradually decline in terms of profitability and prestige — but due to its “no debt” policy, it won’t fall apart in a matter of months, a la Dewey.

We reached out to K&L Gates for possible comment on these various developments. The firm declined to comment, except to confirm the closing of the Spokane office (a small office, with about a dozen lawyers):

Global law firm K&L Gates LLP has reached the decision to close its Spokane office based on a combination of factors that include a lack of synergy of the office’s practice areas with those of the firm’s platform, the approaching expiration of the office lease, and a limited market for lateral lawyers who synergize with the firm’s platform. While there is no definitive timeline at this point, the firm expects that the office will fully cease operations on or by December 31, 2015.

If you have information to share from inside the K&L Gates, we’d love to hear it. Please feel free to email us, subject line “K&L Gates,” or text us, at 646-820-8477 (texts only, not a voice line). Thanks.

UPDATE (7/30/2015, 9:00 p.m.): Peter Kalis has issued a scathing response to the Law360 article.

K&L Gates Faces Tough Road As Future Leaders Exit [Law360 (sub. req.)]
K&L Gates Ends 2014 With Less Cash, Fewer Partners [Law360 (sub. req.)]
McDermott Poaches from K&L Gates in Dallas [WSJ Law Blog]
Law Firms Take Shears to Debt Loads [Wall Street Journal (sub. req.)]

Earlier: Partners Streaming Out Of The K&L Gates?
Everything Is Great, K&L States: Peter Kalis Comes Out Swinging

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