- Irell & Manella, an elite California law firm that's arguing a case before the US Supreme Court, has experienced an exodus of partners after entering and exiting merger discussions in recent months, Business Insider has learned.
- Since August, Irell has seen the departures of its managing partner as well as the heads of its global investigations and restructuring practices.
- The situation marks a tumultuous period for one of the US's most prestigious litigation firms, where lawyers are known for charging as much as $1,750 an hour. Its swashbuckling leader, Morgan Chu, is considered one of the most prolific trial lawyers, with clients including United Talent Agency, Warner Brothers, and Uber.
- The revelations help explain how the firm, where partners earn more than $3 million a year, on average, is squinting to see a clear picture of its future.
Little more than a decade ago, it seemed that nothing could stop the undeniable momentum of the swashbuckling lawyer Morgan Chu, who made a name for himself in the 1990s by convincing a federal jury that Microsoft made a $120 million blunder by infringing on a patent.
With his reputation as a major rainmaker in Los Angeles, Chu had built a dream team of legal talent at the California firm where he was managing partner: Irell & Manella, which in 2009 staffed as many as 220 lawyers and was best known for its litigation prowess.
The firm was stacked with former federal prosecutors who represented computer chipmaker Broadcom in stock options backdating charges by the Justice Department, and went about wooing even more clients with a splashy new hire: one of the lead prosecutors who investigated fraud at Enron.
Today, while the firm still advises major companies like United Talent Agency, Warner Brothers, and Uber, its momentum has taken a turn.
Chu, now 68, works at a notably smaller firm, which lately has been hemorrhaging lawyers, including some of its most senior members.
In August, the firm's newest managing partner left with three others to the New York firm of Milbank LLP, after talks to merge Irell with a larger firm fell apart. A month later, three more partners jumped ship, including the heads of its global investigations and restructuring practices. Now, Irell is the talk of the town in the Los Angeles legal community, but for reasons its lawyers would prefer not to discuss.
In the balance stands Irell's fate as a high-end, standalone boutique with partners charging as much as $1,750 an hour for their time. The firm now has roughly 90 attorneys, working across Newport Beach and Los Angeles.
The situation unfolding at Irell highlights the challenges midsize law firms face in today's environment. Big companies are global and can prefer to work with law firms that have overseas offices.
At the same time, some of the firm's shrinking is tied to Chu's own management decisions, such as not letting colleagues take on matters with lower billing rates and refusing to promote certain lawyers to partner, common disputes in large law firms that can be more problematic in a firm with fewer lawyers, according to interviews with seven people familiar with the matter.
The revelations help explain how one of the country's most prominent law firms, where partners earn more than $3 million a year, on average, is squinting to see a clear picture of its future.
Jonathan Kagan, an executive committee member at Irell, told Business Insider that the majority of its partners are committed to maintaining its independence.
"You can be an extremely successful, extremely profitable firm, by remaining smaller, independent, and highly focused on your clients," Kagan said.
Kagan also objected to criticism of Chu's management, saying Chu has placed lawyers into management roles, and that while it can be frustrating to some partners, the firm must make tough decisions about what kind of work to handle.
"To build the kind of firm we want to build, there are just some matters where we are going to have to say no," he said.
A notable departure and merger talks
All the latest buzz at Irell started when David Gindler, a top litigator who was named managing partner last December, decided to leave the firm in August after nine months in the role. The move came as a shock to legal observers, given that he had spent his entire career at Irell, starting there as an associate in the 1980s.
One person with direct knowledge of the matter said Gindler was frustrated with what was a difference of opinion with Chu, who was no longer managing partner of the firm but still held outsized influence, given the size of his practice, with a book of business in the tens of millions.
Irell's headcount had dropped over the years, with at least some departures linked to personal clashes with Chu, several sources said. Gindler felt the firm should seek a combination with a larger outfit to support the practices of lawyers who could benefit from more offices, and a big corporate practice, to feed referrals for litigation work.
"There was strong interest in being acquired by another law firm that had a more balanced practice," said the person with direct knowledge.
In the first half of this year, the New York law firm Milbank presented itself to Irell as an attractive merger partner, several sources told Business Insider. But talks were short-lived. It became clear that Milbank wanted only a certain number of Irell's partners, not the entire firm. Irell was also said by sources to be exploring discussions with other firms, but their identities could not be verified.
Instead, Gindler left the firm and joined Milbank, along with three partners - a move that set a backdrop for a series of subsequent departures, including the heads of Irell's global investigations and restructuring practices.
Gindler and Milbank chair Scott Edelman both declined to comment.
Morgan Chu and Irell's rise
For Chu, the fate of Irell is personal; he's worked there his entire career and his own identity is inextricably tied to the firm's success.
The Chinese-American son of World War II immigrants joined the firm as an associate in the 1970s after convincing Harvard Law School to grant him a JD after only two years of classes.
It marked the fifth degree Chu would receive by the time he was 25, including a doctorate from Yale, establishing a reputation for brilliance at an early age.
It was in the halls of Irell that Chu picked up his first patent case as a junior associate - a matter that he handled successfully for Barbie-maker Mattel, which led to more representations. In 1986 he defended Candle Corp. in the first computer-software patent dispute ever, winning over a jury that a competitor's patents were invalid when they sued his client for infringement.
From there, the cases kept coming, picking up clients such as Hewlett Packard and Compaq Computer.
One case, in particular, proved consequential.
That was when Chu and his team convinced a jury that Genentech Inc. should pay $300 million to a medical center for work that helped create the biotechnology industry. News of the landmark verdict catapulted Chu and his firm, not only financially but also reputationally, with legal publications hailing him as one of the most prolific US trial attorneys.
The press reached the desk of John Hueston, one of the prosecutors who brought charges against executives at Enron for financial fraud.
Hueston, who was in his early 40s, was aggressive. He did push-ups and pull-ups in his office when investigating the personal finances of former Enron CEO Kenneth Lay. Later, at trial, he provoked an emotional outburst from Lay when grilling him on the witness stand over charges he lied to shareholders, employees, and banks about Enron's finances.
It was 2006 when Hueston decided to join Irell, seeing it a great place to build a practice.
That view would change as his relationship with Chu soured.
High standards, high rates
Chu, who likes wearing bow-ties, is affable to many and known for having ultrahigh standards. He is often brimming with ideas about how to argue a case and simplify complex information for a jury.
People who have worked with Chu say it's in his blood to push himself and those around him to deliver nothing short of excellence.
While that has produced great results for clients, it could wear down those around him, these people said.
Often Chu would sit at the head of a U-shaped table during partner meetings. From his commanding perch, he would challenge motions to make associates partner, even if it seemed as if the majority of the partnership was onboard with the decisions.
"It was like, whoa, it feels everyone in this room wants this person to be partner, except one person," said one person who attended the meetings. "At any other firm that person would be made a partner. But not here. Because that one person is Morgan."
Other times Chu refused to give clients discounts on fees.
Partners who wanted to take on work in practice areas outside lucrative patent cases, like general commercial litigation, became frustrated because clients would not shell out Morgan Chu billing rates, especially not for a junior partner.
Chu recognized this and allowed lawyers to charge lower rates on some matters, but not all. Yet it wasn't enough to keep everyone happy.
Early on, one of these people was Richard Kendall, who left Irell in 2009 to launch a boutique and brought with him two partners and some major clients, including CBS.
Later that year, Juliette Youngblood, chair of the entertainment transactions group, felt that her practice, too, had been stifled by Chu, but for what she believed to be different reasons: She filed a sexual-harassment lawsuit against Irell in 2011, saying Chu had made inappropriate remarks to her at a happy hour in his conference room.
When she called him out on it, he stormed out of the room, she claimed in her lawsuit. He later lowered her pay and refused to approve new client work she brought to the firm, her lawsuit said. The matter concluded in arbitration, a closed-door venue where law firms and corporations settle disputes with employees out of the public eye. There, a judgment came in favor of Irell, and Youngblood's claims were dismissed.
Enron prosecutor butts heads with Chu
The departures that marked the 2000s did not amount to an existential moment for Irell.
After all, as Chu had already said in the press, when a lawyer left the firm, it was a great compliment to Irell that other firms would scoop them up.
In 2015, Chu would face a not-so-amicable departure.
Hueston, the Enron prosecutor, was not getting along with Chu, according to people with direct knowledge of the matter. He didn't like how Chu's management decisions - such as restricting promotions and refusing to accept client matters outside his own practice - had affected his team's morale, these people said.
The discontent had built for years and he had had enough.
In January 2015, Hueston announced that he would take 30 lawyers from Irell to start his own boutique. Big clients including Amgen and T-Mobile would follow him.
Hueston would go on to double the size of his firm, to 60 lawyers, and represent Elon Musk in a legal tussle with the SEC over his tweeting.
After Hueston left, there was some soul searching within the firm: Some felt Irell should seek a merger, while others - notably Chu - felt Irell should continue to be their own firm.
Chu's Choice
Chu's camp prevailed, and he seems to be doing fine.
Just last week, he made an appearance before the US Supreme Court, where justices questioned him about his latest IP case - an arcane dispute over attorneys' fees between the federal government and a company that sued it, unsuccessfully, after being denied a patent.
Irell could very well continue to thrive, with Chu's millions padding the salaries of the firm's remaining lawyers. He continues to have active cases, including representing United Talent Agency in a huge battle with TV writers over pay.
Plenty of other prominent lawyers are by his side too.
One of the most prominent is Steven Marenberg, the head of the firm's entertainment litigation group, who has represented a who's who of Hollywood power brokers such as director Peter Jackson and some of the largest studios on the lot: Disney, Warner Bros., HBO, and Universal.
What will happen to Irell hangs on the coming months as the firm looks to close the books on 2019 and partners consider what they want to do next.
"They're hanging tough right now," one legal headhunter said. "But it's a fluid situation."