Southbound Traffic
Petra Pasternak
December 17, 2010
SAN FRANCISCO — San Francisco isn't the financial center it once was, nor the one it was once hoped to be.
So perhaps it shouldn't have been a surprise when Skadden, Arps, Slate, Meagher & Flom announced this month that it would close its doors here and move its lawyers to its larger office in Silicon Valley.
Skadden became the third New York-based firm to do that in recent years, following White & Case, which consolidated its offices in 2006, and Dewey & LeBoeuf, which did so last year.
In March, Kaye Scholer chose Palo Alto for its first Bay Area office. It has no plans to open in S.F. All told, 19 Am Law 100 firms have opted for the Valley over an S.F. address.
"The San Francisco market just isn't a relevant data point anymore," says White & Case partner Bijal Vakil. "It really is the Valley — at least for the type of work our office focuses on."
"If you look at where there's more growth, where there are more companies and more capital formation, it isn't San Francisco," Skadden's Kenton King explained earlier this month.
But the city isn't dead yet. A number of big firm leaders — from both indigenous firms and newcomers — still see San Francisco as an essential address for certain practices, like high-end litigation and hedge fund work. And there is growth for those who look for it: Jones Day, a firm that opened its S.F. office in 2003, now has about 80 lawyers here.
The city's central location, and its cultural and lifestyle amenities, make it a major recruiting draw, which is not lost on people like Morrison & Foerester Chairman Keith Wetmore. Asked whether he thought Skadden's move would prompt other firms to consider pulling out of the city, the answer was succinct: "We hope they do."
The type of work being sought is the key for firms assessing the two locales. Corporate work, and the lawyers who pursue it, have been moving to Silicon Valley for the past seven to 10 years, said Major, Lindsey & Africa recruiter Natasha Innocenti. Skadden, in fact, moved its corporate practice to the Valley four years ago. Innocenti said the recession, which didn't produce the expected burst of countercyclical litigation work, is forcing the hands of some firms.
"When litigation experienced an unforeseen slowdown it just threw into relief the fact that most San Francisco offices aren't as countercyclically balanced as they used to be," Innocenti said. "Pushing corporate to Silicon Valley is smart, it just makes good business sense. But when you do that and suddenly litigation slows down, then you have a different cost analysis."
FOLLOWING THE CLIENTS
When Dewey arrived in San Francisco in the early 1980s, it found a bustling banking and commercial hub. The firm's initial focus was insurance work, and it expected that it would branch out from there. "The expectations of a lot of law firms was that San Francisco would continue to be more of a financial center," said Dewey Chairman Steven Davis, who's based in New York. "The reality is a lot of the banks have moved out."
Over the past few years, Dewey concluded its lawyers could handle much of the San Francisco work out of Palo Alto, where the firm now has 25 lawyers. But the firm's focus is clearly on Valley corporate work: Last year, it lured Richard Climan's M&A group from Cooley.
White & Case opened its San Francisco office in 2001. Back then, the focus was employee benefits work tied to dot-com stock options. Five years later, White & Case announced it would shutter the office and focus on Silicon Valley, where it now has 28 lawyers. The firm's Northern California work now centers around IP litigation and M&A work, and that client base is in the Valley, Vakil said. About 75 percent of the work in the Palo Alto office is generated in Silicon Valley, he said.
For Kaye Scholer, choosing Palo Alto , where it now has 13 lawyers, was a matter of landing where its patent litigation and private equity practice could thrive most quickly.
William Coats, managing partner of Kaye Scholer's Palo Alto office, said the Valley is home to the kinds of clients that need sophisticated work and could afford New York rates. Companies in the Valley are growing fast and their legal services needs are increasingly sophisticated, allowing lawyers to charge a little more, he said. "That's why I think the New York firms are focusing here and doing well," he said, citing Davis Polk & Wardwell (which has never had a San Francisco office), Simpson Thacher & Bartlett and Skadden. "I don't want to jinx us, but we've just doubled our space in Palo Alto," added Coats, who left White & Case in March to help open the office.
Coats said living and working where the clients are makes a statement — and provides the opportunity to bump into potential clients out at restaurants or while dropping the kids off at school.
SPLIT PERSONALITIES
Firms that seem committed to both offices are building very different practices in each. Sidley Austin has been adding laterals to its S.F. and Palo Alto offices, with San Francisco seeing new partners in white-collar and compliance matters, IP and general litigation and hedge funds. Thomas DeFilipps, the head of Sidley's Palo Alto office, cites the litigators' need to be close to the state and federal courts in San Francisco.
In Palo Alto, Sidley's adding corporate, IP litigation, and tech transaction lawyers. "From our perspective, there's certainly enough work of the kind we want to do in both jurisdictions that we continue to make an economic commitment to both of them."
Morgan, Lewis & Bockius' San Francisco managing partner, Franklin Brockway "Brock" Gowdy, said he's virtually certain that Skadden's move won't unleash a wider exodus of firms from the city. From where he sits, he said, Skadden's decision was driven by its particular cost and personnel considerations. He and other observers say the firm — with just four partners here — never built a meaningful competitive presence in San Francisco.
Gowdy says San Francisco, with its place among the top five commercial centers in the country, is a strategic market for Morgan Lewis, which has 136 lawyers in the city and just under 50 in Palo Alto. He said about 70 percent of the work done here is for Northern California clients, many of them large tech companies like Google Inc., Hewlett-Packard Co. and Cisco Systems Inc. and financial institutions like Wells Fargo and Charles Schwab. "I think it's increasingly possible to do work from one office in Northern California," Gowdy said. But with the exception of a firm like Skadden, which is exclusively focused on the highest-end work, "I think it's plainly preferable to be in both places."
Then there's the recruiting advantage that S.F. boosters see. Some associates prefer living in S.F. and aren't interested in a daily commute. And it can be hard to persuade partners who live in San Francisco, Marin or Berkeley to head south.
"At the partner level, if you have a family or you own a home, especially in this economy, it's not so easy to uproot and move yourself," said San Francisco legal recruiter Avis Caravello. "That's the advantage of having dual offices."