AmLaw Feature Story - Afer
MAY 2009www.americanlawyer.com
Big wins on contingency cases pushBoies, Schilleronto The Am Law 100.Don’t Bet againstThe HouseBy Andrew LongstrethDyear. In February hechecked into the Encore, the newest hotel developed by Steve Wynn (a client)on the Strip. Boies had some legal business in town, but he was mainly there torelax and gamble.avid Boies makes it out to Las Vegas a few times aCraps is his game. Boies enjoys the social aspect of chatting up fellow gamblers and cheering on the dice roller. But for the celebrated litigator, who reasonsrelentlessly about everything, it’s also about the odds. Craps offers the only bet—theso-called odds bet—in which the house does not take an edge.At the craps table, Boies shows off his internal risk calculator. He’s never tooexcited after a winning roll or too distraught after a losing one. “What’s critical in ahand is to get at least one pay [or win],” he says. “If you get one pay, it’s not goingto be a disaster when you lose. You want to have plenty of bets out there, but youwant to collect one. You don’t want to lose them all. If you lose them all, it gets veryexpensive.”Expensive, of course, is relative. In the course of a few hours, Boies puts thousands of dollars in play. But he is always acutely aware of how much money is atstake. After a shooter rolls a seven and wipes out hundreds of dollars of his bets,Boies calculates that he actually netted 1,600 since the shooter began rolling.It quickly becomes clear why Boies gives summer associates a lesson in craps. It’snot just to entertain them. The game also teaches risk management, and at Boies,Schiller & Flexner, that’s a required way of thinking. The firm takes a big chunk ofcases on contingency, and associates—not just partners—can share in its profits.One of Boies, Schiller’s bets—representing American Express Company in anantitrust case on partial contingency—helped the firm crack The Am Law 100 forthe first time in its 12-year history. While 27 firms saw zero or negative growth inrevenue in 2008, Boies, Schiller’s revenues increased 18 percent, to 295 million,which was the fifth-largest jump for a firm that wasn’t part of a merger last year.Boies, Schiller’s 3 million in profits per partner were also the third-highest on TheAm Law 100.In this economic environment, where the billable-hour model is under pressure,and clients are increasingly asking their outside firms to share in the risk of litigation, the Boies, Schiller strategy—mixing plaintiffs cases with defense matters, picking clients whose work fits with the firm’s long-term goals, and employing creativebilling methods—looks built for the times. Over the last five years, the firm says, 48The cover has been modified from the May 2009 edition of The American Lawyer for the sole use of Bois Schiller & Flexner.Photographs By Steven Laxton
Donald Flexner, David Boies, and Jonathan Schiller (from LeFT) Grew the firm from a boutique into a litigationpowerhouse with 295 million in Revenue last year.
percent of its revenue has come from purecontingency fee cases and alternative fee arrangements.“We are probably the largest, most diversified law firm that has a long history andextensive experience with alternative feearrangements,” says Boies. “You get a firstmover advantage if you’re persistent, buteventually people begin to catch up. And Ithink that . . . people are at least catchingup in their thinking, if not in their practice.And if they’re catching up in their thinking,catching up in their practice is not going tobe that far behind.”Boies has a history of taking risks.Leaving Cravath, Swaine & Moore in 1997to start his own firm was a big one. The wayhe tells it in his autobiography, Courting Justice, he was at a craps table (naturally) in Ve-last year the firmhired 50-year-oldWilliam Ohlemeyer,a former associategeneral counsel of AltriaGroup, who isexpected to be asignificant businessgenerator.gas when he made the decision.Boies bolted because of a simple but intractable client conflict. Cravath’s biggest client at the time, Time Warner Inc., parent ofthe Atlanta Braves, objected to Boies’s representation of the New York Yankees in a suitagainst Major League Baseball over its “revenue-sharing” rules. Boies decided to stickwith the Yankees and set up his own shop.He and Jonathan Schiller of Kaye Scholercofounded the firm with eight lawyers. Boiesset up an office in Armonk, New York, andSchiller opened one in Washington, D.C.Their initial budget was around 4 million.It was the perfect size. Or at least Boiesthought so. He figured that he could avoidadministrative headaches and take only thecases that interested him.But the firm proved to be a magnet forbusiness. Clients like the Yankees, E.I. duPont de Nemours and Company, Philip Morris International, Inc., and CBS Corporation,and new ones like Napster, Inc., and CalvinKlein, Inc., kept calling. Along the way, therewas also that small government case againstMicrosoft Corporation and an election dispute between George W. Bush and Al Gore.The firm expanded rapidly to meet demand. In 1999 Boies, Schiller brought onanother name partner—Donald Flexnerfrom Crowell & Moring. Between 1999 and2002, the firm tripled in size, from roughly50 to 150 (it now has 250 lawyers and 32equity partners). Through lateral hires andfirm acquisitions, it also opened offices scattered across the country from Hanover, NewHampshire, to Oakland.But while the firm has grown, the modelhas stayed roughly the same and proven remarkably durable. It was and remains builtaround the idea of representing a core groupof clients who need high-end legal work on aregular basis. The firm is also highly selectiveabout which clients it takes on. If a companyis not likely to come to them for their biggestand most complicated pieces of litigation,the firm will often take a pass. To make surethat a new matter is worth it, Boies, Schillercharges new clients a minimum engagementfee, which has ranged from 250,000 to 5million, on top of the time billed. (This doesnot apply to contingency cases.)There’s a practical purpose for turningdown work: It frees the firm to take on moreprofitable matters in the future. That’s beenespecially true in the financial industry. Although the firm has a small but growing corporate department, it doesn’t depend on allthe major banks for work—unlike many NewYork firms. As a result, it can be strategicabout which financial institutions it represents. According to Schiller, the firm has de-outside of the threesenior partners,Christopher Boies,David’s 41-year-old son,brings in the mostbusiness. He headsthe 26-lawyercorporate department.clined to take certain assignments from somebanks, so that it can be free to sue them inthe future. And its clients don’t seem tomind. At the same time that it has represented The Goldman Sachs Group, Inc., BarclaysPLC, and Bank of New York Mellon Corporation, the firm has sued UBS AG over thesale of auction-rate securities and CitigroupInc. over its failed merger with WachoviaCorporation. “That says to me that they docutting-edge legal work for big clients,” saysMatthew Biben, deputy general counsel forthe BONY, who says he doesn’t have a problem with the firm suing other banks.When they started out, Boies and Schiller had a business plan that called for 40percent of the firm’s time to be devoted torepeat clients; about 30 percent for one-offengagements; and about 30 percent allotted for plaintiffs class action suits, where the
firm could reap 30 percent of a settlementor verdict. The firm never ended up devoting that much time to pure contingency feecases, but the fees reaped from them havegenerally increased over the years.Both Schiller and Boies had developed ataste for plaintiffs work before they startedtheir firm. While at Cravath, Boies had represented the government against financierMichael Milken on partial contingency, andSchiller had taken on a company called McCaw Cellular Communications, Inc., in aclass action breach-of-contract suit. Havingtheir own shop allowed them to be moreaggressive in filing class actions. “The ideawas that we wouldn’t have to be as highlyleveraged if we were able to achieve somepremiums over the hourly rate through contingency cases and some of those one-shotmatters,” says partner William Isaacson, whocame with Schiller from Kaye Scholer.Among the first suits Boies, Schiller filedwas an antitrust class action against bulkvitamin manufacturers. The first call hadcome to Schiller when he was at Kaye Scho-ler. A lawyer had asked Schiller if he wouldinvestigate whether Hoffman–La RocheLtd.—which Schiller had sued before—wasengaging in a conspiracy to fix the prices ofvitamins.There was considerable risk involved.The government had not initiated an investigation, which meant that much of thegroundwork—finding informants and locating key documents—had to be carried outand financed by lawyers at what was thenBoies & Schiller. Ultimately the firm spent 10 million in attorney time and 2 millionin out-of-pocket expenses. But the returnpaid off royally. After the suit was filed in1998, most of the defendants agreed to settlethe case two years later for more than 1 billion. As cocounsel, Boies, Schiller took homeattorneys’ fees estimated to be between 45and 55 million.Today, the class action suit remains central to the firm’s model and helps distinguishit from most of The Am Law 100. In theupper echelons of corporate defense firms,filing a class action is still considered taboo.Compensation: Think DifferentWhen David Boies and Jona-than Schiller started their firm12 years ago, they envisioneda practice and a compensationsystem that would set themapart from many firms in TheAm Law 100. They wanted tostrip away some of the subjectivity of partner compensationand increase the ability to payassociates on performance.Although the compensationsystem has been modified overthe years, those ideas are stillin place. At the associate level,performance is measured mostly by billable time. Asso ciates atBoies, Schiller are paid salariescomparable to those of othertop law firms. Where they candistinguish themselves fromtheir colleagues is through theirbonus, which is calculated witha formula that’s based on hoursspent on billable matters. Fortypical associates, it goes likethis: Their blended rate is multiplied by their total hours for theyear, which is then multipliedby 0.3. An associate’s startingsalary is then subtracted fromthat number, and that’s his orher bonus. Under that formula,an associate making 160,000who billed 1,800 hours at ablended 250 hourly rate mayend up with no bonus (althoughexceptions can be made). Butan associate who billed at thesame rate who worked 3,000hours can make a 65,000 bonus. Associates who participatein successful contingency feecases can do even better.The same principles apply to partner compensation.A portion of a partner’s takehome pay is also determinedin part by a formula: a blendedrate times annual hours timesa multiple of up to 0.4. A partner—nonequity or equity—canalso receive financial credit forclient matters. There are threeopportunities to earn a percentage of the annual revenuebrought in from each matter:originating partner (2.5 percent)And while some firms will take on a contingency fee case periodically, Boies, Schillerseeks out opportunities every year. The firmis currently acting as co–lead counsel in a securities fraud case against a Madoff “feeder”fund, an antitrust action against Chinesemanufacturers of vitamin C, and a RICOsuit against Amway Global.Filing the suits is partly philosophical.Seeing a case from a plaintiff’s side, theBoies, Schiller lawyers argue, informs theirwork as defense lawyers. They can bettersize up a case from the start and know whatcosts will be involved. Then there’s the potential economic upside. “The core clientskeep the lights on, but the contingency feesprovide a turbocharge to our revenues,” saysBoies, Schiller partner Richard Dru bel, Jr.,whose docket includes nearly 90 contingency fee cases.Boies, Schiller lawyers who do this workhave a taste for risk, a talent for sizing up theodds, and the ability to impress well-placedattorneys who can refer cases. A few Boies,Schiller partners have become widely knownin the highest stratosphere ofthe plaintiffs bar. Stuart Singer,for example, has teamed up withwell-known plantiffs lawyer Willie Gary. And Isaacson regularlyworks with Michael Hausfeld,one of the country’s leading anwho first brought the client totitrust lawyers. As a result, theythe firm, billing partner (5 peroften get referrals for the bestcent) who brings in a specificcases.matter, and responsible partnerBoies, Schiller doesn’t have(5 percent) who runs the matset rules for taking contingencyter day to day. There are alsocases but follows guidelines thatopportunities to participate ininclude: a solvent defendant,a contingency fee case. If themore than a 40 percent chancecase is successful, partnersof winning a settlement, and atcan receive a percentage ofleast 50 million in damages.the premium—the amount reA contingency fee committeeceived over the normal rates—made up of four partners—Singin proportion to the hours heer, Isaacson, Drubel, and Steor she worked on the case.phen Zack—takes an initial voteThere is one additional ason whether the firm should takepect of the compensation systhe case. After they weigh in, ittem—the equity assigned togoes to the three name partnerseach equity partner every year,for their review.which is based on a point sysThen it all comes down totem. Most partners start withconfidence. In a 2000 price-fixhalf a point and work their waying case against auction housesup. According to a lawyer at theSotheby’s and Christie’s Interfirm, a point in recent years hasnational plc, Manhattan fedbeen worth around 400,000.eral district court judge LewisAs part of a transition to theKaplan asked firms seeking tofuture, Boies says that some ofbecome lead counsel to bid forthe firm’s older partners havethe job. How much would theybegun a “slope” down of theirguarantee the class of Sotheby’sequity stakes. —A.L.and Christie’s customers before
attorneys’ fees?Drubel had planned to work with his oldcolleagues at Susman Godfrey, who had firsttold him about the case. But lawyers at Susman felt that Boies, Schiller’s bid was toohigh, and that there wouldn’t be enough forattorneys’ fees. That turned out to be wrong.The case, which ended up settling in monthsfor 512 million, netted Boies, Schilleraround 26 million in fees.But not every case hits. Last July thefirm, acting as cocounsel in an antitrust caseagainst computer chip makers, lost a criticalclass certification motion. The case subsequently settled for around 1 million, butBoies says he estimates that the firm willonly recover around 25 percent of its lawyertime. “If you’re going to lose a case, it’s better to lose it early,” he says.At Boies, Schiller, there’s a built-in incentive for picking winners and losers: It has adirect impact on a lawyer’s income. Part ofa partner’s compensation at the firm is tiedto hours billed, so for a partner who devotestime to a contingency fee matter, there canbe some lean years before the case settles.Year to year, a partner’s income can swing by 1 million, say some at the firm.Historically, the financial fates ofBoies, Schiller associates who worked on contingency matters had also been tied totheir outcome. The hours associates billedon those cases were not counted towardtheir yearly bonuses. But after hearing complaints from associates who felt unfairly tiedto the outcome of contingency fee cases,the firm changed its policy. In 2007 it begangiving associates the option to either counttheir contingency work as billable time forcompensation purposes, or share in the profits when the case settles.The arrangement is set up nicely forthe house to win either way. If an associate chooses to bet on a contingency matter, heor she must be around from start to finish ona case to collect any money. That can be along wait. This policy tends to weed out thetrue believers in the firm’s long-term goalsfrom the get-rich-quick types. On the otherhand, if the associate chooses to count his orher contingency hours as regular hours eachyear, the firm will incur that short-term cost.But it also means that there’s more money togo around if a case hits.Boies, Schiller lawyers say that theSome Boies, Schillerpartners have becomeknown in the higheststratosphere of theplaintiffs bar.Stuart Singer hasteamed up withwell-known plantiffslawyer Willie Gary.firm’s experience with contingency casesmade them more comfortable with alternative billing structures for their core groupof clients. When the firm represented TycoInternational Ltd. in securities class actionsuits following its accounting scandal in2002, Boies, Schiller was willing to submitto a holdback on a certain percentage of itsfees pending a review every 90 days. Afterthe review period, Tyco and Boies, Schillerlawyers would sit down to negotiate whatpercentage of the holdback the firm wouldreceive. And if certain goals were reached—a case was settled within nine months, orthere was no discovery of management—thefirm was eligible for a “success fee.” GardnerCourson, the former deputy general counselfor Tyco who negotiated agreements withBoies, Schiller, recalls that few firms werewilling to accept an alternative fee deal.Other large, traditional firms “weren’tcomfortable [that the arrangement] wasgoing to be fair,” says Courson. “They said,‘You’re in trouble, we’re fabulous, and hereare our rates.’ . . . To David’s credit, he putmoney at risk.”Boies, Schiller’s comfort level with riskallowed it to share in the upside of one ofthe largest antitrust settlements in history.Acontingency feecommittee made up offour partners, includingWilliam Isaacson,takes an initial voteon whether the firmshould take a case.In 2004 the firm filed an antitrust suit onbehalf of American Express against VisaInc., MasterCard Incorporated, and eightbanks, alleging a conspiracy to keep American Express out of the credit card business. Within four years, the case resulted inmore than 4 billion in settlements. Someof the money has already come in. According to a Securities and Exchange Commission filing last year, American Express hasreceived 1.49 billion in pretax paymentsfrom the settlement.American Express chose Boies, Schilleras its firm in May 2003 following a beautycontest. Both the client and firm are mumabout what exactly the fee arrangement entailed, although David Boies acknowledgesthat it involved a flat fee and a contingencyfee. According to a lawyer familiar with thedeal, Boies, Schiller received a 5 millionannual fee during the four-year case and is
due to receive north of 150 million as partof a contingency formula, some of which waspaid to the firm last year.Flexner says that the fee negotiation,which came after the firm was picked, wasquick and uncomplicated. He also confirmsthat Boies, Schiller, which at one point had90 attorneys and paralegals on the case,could have been burned if the case didn’tturn out well. “We could have lost a lot ofmoney,” says Flexner.The firm has lost money so far on TheSCO Group, Inc.’s doomed litigation againstInternational Business Machines Corpora-on the matter.But Boies, Schiller continues to put downbets. Patent litigation is one of the newestareas where it’s pushing alternative fee arrangements. Two years ago, patent litigatorsD. Michael Underhill and Eric Mauer joinedthe firm from McDermott Will & Emeryand Morgan, Lewis & Bockius, respectively,where they spent most of their time defending companies by the hour. But at Boies,Schiller they have exploited a wide range offee arrangements. Along with Isaacson, theyare currently representing a three-employeesoftware company, ROY-G-BIV Corporation,in a patent case against a jointventure between the Japanesecompany Fanuc Ltd. and General Electric Company.The c
ler had a business plan that called for 40 percent of the firm’s time to be devoted to repeat clients; about 30 percent for one-off engagements; and about 30 percent allot-ted for plaintiffs class action suits, where the o utside of the three senior partners, Christopher Boies, David’s 41-year-old son, brings in the most business. He heads
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