End of the road for Heller?

End of the road for Heller?Fifteen-partner exodus proves last straw. By the time you read this, Heller Ehrman may be no more. Take a moment to absorb the news. Shed a tear, perhaps. As this column was being written last week, the beleagured firm was facing the prospect of liquidation as the rate of partners deserting the firm accelerated.

Eight days ago on Sunday 14 ­September, the West Coast firm’s merger talks with Mayer Brown ­collapsed. It is understood that one of the reasons for the talks’ failure was the imminent departure of a group of 15 IP partners to Covington & ;Burling ;(TheLawyer.com, 16 September).

One legal market expert who ­preferred not to be named said the exit of the IP partners could also have constituted a default in Heller’s line of credit with its bank, ­effectively triggering liquidation.

“It’s common to have provisions in law firms’ loan documentation that say if a certain number of ­partners leave the firm it could put the loan into default or turn the spigot off altogether,” says the commentator. “This could ultimately drive a firm into liquidation.”

The exit of the IP team to ­Covington, a group that included well-known stars Robert Haslam and patent litigator Robert Fram, also highlighted another of Heller’s most pressing problems: it had transformed itself from a ­leading litigation and IP specialist into a hunting ground from which ­acquisitive rivals could cherry-pick.

“It’s a total feeding frenzy,” says one legal market recruitment ­consultant. “There are groups breaking off here and there, while other firms are talking to individuals and groups. At least one group at Heller has told recruiters that they could avoid recruiter fees if they paid them their capital. The thinking is it will liquidate.”

The average partner capital at Heller is around $200,000 (£111,550) to $400,000 (£223,100). Several of the partners who have left the firm during the course of this year are understood to still be waiting for their money.

Meanwhile, the exits look set to continue, with the high-profile ­former Venture Law Group, which contains around 30-40 partners in Silicon Valley, believed to be talking to at least five firms, including Cooley Godward, Gunderson Dettmer, ­Morgan Lewis, Morrison & Foerster and ­Wilson Sonsini Goodrich & Rosati.

According to Harry Rubin, the former co-chair of the IP transactions group at Heller who joined Ropes & Gray in March 2007, the firm has two options. “Either they radically restructure and retrench to focus on the few geographical locations and practice areas where they’re the strongest – and they certainly have enough talented people to do that – or they dissolve,” says Rubin. “There’s really nothing else left.”

Heller chairman Matt Larrabee is thought to have told his colleagues last week that he had now given up on his attempt to find a merger ­partner and that the firm was preparing to “go it alone”. Many ­outside the firm have interpreted this as a sign that the firm is, in fact, preparing to dissolve. Larrabee did not return calls for comment.

Meanwhile, among former ­partners and the wider market ­generally, there was a sense of shock that such a formidable and ­prestigious firm as Heller may be facing the end of the road.

“Liquidations have happened before, but not at a law firm that was in such good financial shape only a year earlier and that had such a good reputation,” says one former partner. “Previously it had happened with firms that had made serious errors or were smaller and more dependent on one particular client or industry sector.”

Sadly, as last week’s events with Lehman Brothers proved, these days there is no such thing as an ­organisation that is too big, or too prestigious, to fail.