A Dark Monday for Heller Ehrman

[WSJ_law_blog]

Heller Ehrman LLP seems to be in its proverbial 11th hour The firm’s merger talks with Mayer Brown, which we reported here, have broken down, according to a statement from Mayer Brown.

“A merger with [Heller] would have offered potential benefits for both firms,” Mayer’s statement said.* “In the end, however, various issues, including client and practice conflicts, could not be resolved, and we have ended our discussions.”

As if that wasn’t bad enough, it also surfaced today that some influential intellectual-property lawyers at Heller are leaving for Covington & Burling. The group includes shareholders Robert Haslam, Robert Fram, and perhaps a dozen other senior lawyers, according to a high-ranking Heller attorney. Neither Haslam, Fram nor Covington could be reached for comment.

After a string of partner defections and failed merger talks, Heller faces the grim possibility that it might have to dissolve the firm, according to lawyers and recruiters with knowledge of the matter, some of whom predict that judgment day could come in as soon as a week’s time. “There has been no decision by our governing body and no vote by our shareholders” to dissolve, firm chairman Matthew Larrabee told the Law Blog. He says the firm is “actively considering a number of strategic options” but declined to elaborate.

So what has happened to Heller, which has long ranked as one of the top firms in San Francisco and one of the top litigation shops in the country? For starters, the firm had many huge litigation matters settle in rapid succession last year, including its representation of Ernst & Young in securities fraud suits against AOL and Cendant. About one-fourth of its litigation business settled last year–a huge blow given that litigation makes up about 60% of the firm’s revenue, according to a Heller attorney. And that revenue has been hard to make up in a soft litigation market.

As Heller’s profits have lagged, competitors have increasingly been able to pick off their top talent by offering them fatter paychecks. Defections by partners–called shareholders at Heller — have begat more defections, creating almost a run-on-the-bank type scenario.

If Heller cannot pull out of the swoon, there may be a lot of pain in the Bay Area. This is a very tough market to be out of a job, especially for a partner who does not have a big book of business.