Former Dickstein Shapiro Chair Reflects on Demise, Blames Media

James Kelly leaned forward in his seat on the 12th floor conference room of what is now Blank Rome’s Washington, D.C. office, fielding questions from a reporter. Five days earlier, Dickstein Shapiro, the firm where Kelly was chairman, went out of business and the 100 or so lawyers that remained elected to join Blank Rome.

Earlier that day, Feb. 16, he almost decided to cancel the interview — frustrated by what he characterized as inaccurate media coverage of his firm’s business affairs; although the firm’s overall headcount had gradually declined during the previous five years, Kelly said many of the recent departures were the result of a planned and orderly transition — not the raucous rush for the doors that the media had presented.

“There was a negative perception in the marketplace fueled by departures,” said Kelly, 54. “The perception bore little or no resemblance to what was happening at the firm, relative to our underlying business fundamentals and our performance.”

In an era of increased lateral activity, Dickstein Shapiro stands out as a firm that died by a thousand cuts: At its peak in 2010, the firm had 400 lawyers and five offices and practices in lobbying, government contracts, insurance coverage and intellectual property. By the start of 2016, it declined to just over 100 lawyers in two offices — a shrinkage that occurred gradually, as large groups of partners, and sometimes individual partners, slowly trickled out the door. On Feb. 11, Dickstein announced it would no longer engage in the practice of law and its 100-plus lawyers joined Philadelphia’s Blank Rome in an asset acquisition.

The perception that the firm was facing headwinds, financial and otherwise, contributed to an unfortunate reality: Over time, it became more difficult to recruit top-tier talent, and simultaneously competitors increased their overtures to existing partners.

“There was an acknowledgement that sustained growth would be a challenge,” said Kelly.

The self-fulfilling prophecy phenomenon is not uncommon in Big Law as law firms become more willing to pay top-dollar for talent as legal demand remains flat and clients continue to find ways to reduce their legal spend.

Some firms have remained intact — at least for the time being — despite experiencing an exodus of partners, including Pillsbury Winthrop Shaw Pittman, Irell & Manella and O’Melveny & Myers, although too much turnover can destabilize a firm, especially when departures consist of the firm’s biggest business generators. Some Dewey & LeBeouf partners maintained their firm’s failure was accelerated by key partners exits, not fraud.

Looking back at Dickstein, Kelly said that he felt “bittersweet.”

“It’s not something I expected to transpire when I took over the job two-and-a-half years ago, but on the other hand, we had been presented with a wonderful opportunity and the vast majority of people at the firm can continue the practice of law with people who value the same things we do.”

[caption id="attachment_7522" align="alignnone” width="576"][Image “The Blank Rome brand appears on the 12th floor reception area at 1825 I Street.” (src=https://bol.bna.com/wp-content/uploads/2016/02/Blank-Rome1-e1455905437266.jpg)]The Blank Rome brand appears on the 12th floor reception area at 1825 I Street.[/caption]

Dickstein has hired a third-party lawyer, James Carroll, to serve as chief liquidation officer and oversee the winding down of the firm’s affairs, and ultimately, the payment of creditors.

As a result of the dissolution, Dickstein partners — current and former — will almost certainly lose their capital contributions, according to a letter circulated to partners last week. And because Dickstein did not finance its operations with a line of credit from a bank, instead calling on its partners to pay large capital contributions — as much as 80 percent of their expected earnings, according to two sources — some partners stand to lose hundreds of thousands of dollars.

Some former partners are considering litigation to recover their capital. Andrew Zausner, a partner who left Dickstein Shapiro for Greenberg Traurig in 2014, said he is “examining his options” as to whether he will retain counsel about payment, though he declined to specify the amount he has lost.

“It’s an unfortunate situation for everyone,” Zausner said. “It’s an unfortunate situation for me.”

In addition, litigation has surfaced over the New York office space Dickstein vacated. Sullivan & Worcester, a law firm that occupied space alongside Dickstein, sued the law firm on Wednesday for $8.4 million, saying that Dickstein broke a sublease agreement and put the firm on the hook for rent payment.

Some lawyers, however, point out that they believe Dickstein management made the best of the situation. “Knowing Jim Kelly and Kristan Morrell and the others at Dickstein Shapiro, I’m going to assume they did the best job they could do,” said Kirk Pasich, a former Dickstein partner who joined Liner LLP last year.

Kelly said he could not disclose details around particular aspects of the combination with Blank Rome, like how many Dickstein Shapiro staff members may have been laid off, but he stressed that firm management treated people fairly.

“All of the lawyers who were at Dickstein Shapiro were asked to join,” said Kelly. “There were some staff redundancies that resulted in not everyone being there, but the vast majority of the lawyers and non-lawyers were asked to join.”

The decision to join a larger firm was one that could be traced back to July when the firm’s leadership decided to embark on a “broader strategic examination” and held discussions with a number of other law firms, including Bryan Cave, he said.

When Kelly first became chair in early 2014, he said he intended to make it more focused around core practice strengths. The firm began to manage out practices and partners who were not viewed as additive to the firm’s overall business, but some of the resulting departures were perceived in the marketplace as a loss, fueling calls from headhunters and reporters, Kelly said. He declined, however, to provide specifics.

“Managing a law firm, which is a professional services corporation, I think is a lot more difficult now than it was five years ago because of the level of mobility in the marketplace and the willingness of firms to make considerable investments to buy market share,” said Kelly.

Adding to Dickstein’s problems were cases the firm accepted on contingency fee basis that didn’t pan out, according to former firm lawyers.

In one notable case, in 2010, the firm won a $482 million jury verdict for Dr. Bruce Saffran, who claimed Johnson & Johnson infringed his patent on heart devices. But it was overturned on appeal, depriving the firm of payment for its work. Another patent case against Boston Scientific Corp. for Saffran was similarly won in 2008 for a jury award of $432 million, before being appealed and then settled. Firm partners blamed a shift in the patent litigation landscape in which legislation and federal court rulings made it more difficult to successfully bring patent cases against large companies.

“The total recovery for the firm would have been well over $100 million,” said Steven Weisburd, an IP partner at Dickstein who joined Arent Fox in 2015, noting that if the cases had panned out, the firm would have received enough profits to extend its lifeline for years.

“If the firm had won on appeal, the firm would have done very well, but the firm put a lot of attorney asset time into those cases,” he said. “Indeed, a lot of people who might have thought of leaving may have stayed because there was this pot of gold they were hoping to get.”

Instead, the firm reset its strategy when Kelly came into leadership, cutting back on the number of contingency cases it took, and downsizing the total number of attorneys in the firm.

As Dickstein explored its options in 2015, one set of merger discussions failed. Despite a vote of approval from both Dickstein and Bryan Cave partnerships late last year, the deal fell apart because of “a small number of partners who could not commit to stay at Bryan Cave after the transaction closed,” said Kelly.

After the talks cratered, he met with Blank Rome’s chief operating officer Patrick Cavanaugh on Dec. 24 for breakfast, and later that afternoon, Kelly and Blank Rome’s chair Alan Hoffman had a discussion over several hours that led to a non-disclosure agreement over a combination.

“We had some very specific discussions about practice groups and clients and I think we were both making initial determinations about whether or not there was a transaction there that could be accomplished in a relatively quick period of time,” said Kelly, who called the negotiations “a relatively intense process.”

He noted, however, that lawyers who decided to join competitors leading up to the combination were not expected to stay with the firm. “Since July, with very few exceptions, all of our partner departures, not withstanding what one might take from the press articles, were programmed. They were not going to be part of a Bryan Cave deal and they were not going to be part of a Blank Rome deal.”

Kelly indicated that client-conflicts were the reason why some lawyers did not join, pointing to one of the firm’s premier practices of insurance recovery, in which lawyers sue banks and corporations over insurance claims. The practice conflicts with client interests at most major corporate law firms.

“For us, [insurance] coverage has always been a crown jewel [practice group] and I think there was a discussion that would lead to a more informed weighing of the pros and cons of that practice at Blank Rome,” said Kelly.

Asked what he learned from his time as Dickstein’s chair, Kelly said: “Communication to partners and other people in the law firm is absolutely critical to offset, if you will, some of the information that is put out in the marketplace that is not accurate.”

Leigh Abramson contributed reporting to this article.