Legal Industry Outlook
California Lawyer

Legal Industry Outlook

November 2012

As one testament to the weak economy, half of California's 50 biggest law firms are smaller than they were last year. Still, lawyers have plenty of work to do. Billions in venture capital continue to be invested in the Golden State, keeping corporate lawyers busy. Employment litigation flourishes, especially wage-and-hour cases. Energy and environmental attorneys are busy with renewable energy work. And intellectual property practices are booming. Attorneys expect continued growth in these practice areas in 2013. Here's our report.

CORPORATE: Done Deals
by Leslie A. Gordon

On the heels of LinkedIn's successful initial public offering last year, several big tech companies - including Groupon, Zynga, Yelp, and, most famously, Facebook - launched their own IPOs. Share prices disappointed, to put it mildly.

Yet despite volatility in the capital markets, corporate lawyers in California, especially those representing tech companies, say they're swamped, with no sign of letup.

The numbers certainly bear that out. According to Dow Jones VentureSource, U.S.-based companies raised $8.1 billion in 863 venture deals in the second quarter of 2012, a 31 percent increase in dollars and a 20 percent increase in the number of deals compared to the first quarter. More than half of all venture capital was invested in California in the second quarter, with 42 percent in Northern California.

The growth-company sector, in particular, is keeping corporate lawyers busy with financing and M&A deals, says David Hernand, who left Gibson, Dunn & Crutcher to open Cooley's Santa Monica office. The firm opened there in July to handle work from the burgeoning start-up scene in "Silicon Beach."

Multiple generations of venture capitalists and entrepreneurs in Silicon Valley pour money back into the community and also mentor local up-and-comers. So Silicon Valley still has the geographic advantage, according to Hernand. Even so, Southern California, which sits at the epicenter of content, entertainment, and technology, is "riding a media wave," he adds. Hernand cites young companies such as Machinima, a video entertainment network for gamers, which recently raised $35 million (led by Google), and celebrity-driven start-ups like Jessica Alba's The Honest Company, a baby-products company that raised $27 million.

Ruth E. Fisher, a corporate lawyer at Gibson Dunn, says that although the Silicon Beach branding may be new, L.A.-based corporate lawyers have been busy with tech deals for a while. "We've been a tech community for years," says Fisher. "Hollywood is the source of a lot of new technologies - back to the talkies and television. We're the hub of the aerospace industry. Cal Tech and UCLA are here." An area that's especially active is joint ventures and consolidation deals. For example, UltraViolet, which allows consumers to view entertainment across multiple devices, is forging partnerships with a number of entertainment and technology companies.

M&A is arguably the busiest practice area for corporate lawyers. Fenwick & West alone has done more than $20 billion in deals so far this year, including Cisco's $5 billion acquisition of video-software maker NDS Group, social media marketing company Wildfire's sale to Google, and Facebook's acquisition of photo-sharing company Instagram.

A notable trend in M&A is "hiring by acquisition" or "talent pickup" deals, in which companies that need developers simply acquire whole companies, particularly in the social networking, gaming, cloud, and enterprise software spaces. Tencent's $400 million acquisition of Riot Games is one example, says Gibson Dunn's Fisher.

Certainly, the tech industry is more mature than it was in prior cycles, with many companies demonstrating sustainable revenue and profits. But the political climate is still uncertain, and the European economy remains unstable, making next year hard to predict. It's also unclear whether social media's current popularity, sparking a number of start-ups and M&A deals, represents a lasting, fundamental change for the tech industry.

Douglas N. Cogen of Fenwick & West, for one, believes that 2013 will be another big year for M&A. "It's both a cyclical and countercyclical practice area," says Cogen, who heads the firm's M&A group. "Companies will be doing deals when valuations are high and when valuations are low."

And what about those IPOs? Despite the Facebook fiasco, other tech companies - including Proofpoint and Infoblox - still went forward with public offerings that proved successful.

A former lawyer, Leslie A. Gordon is a legal affairs journalist in San Francisco.


EMPLOYMENT: Busy Work
by Mike Rosen

Employment law continues to be an active and growing practice area, bearing out the conventional wisdom that more employment lawsuits are filed in a down economy. Employers are shopping for lower rates for employment legal work, making it a busy practice area for mid-market firms.

"A midsized firm that can manage cost extremely aggressively is in a good position to profit," says Thomas W. Turner, managing partner at San Diego's Procopio, Cory, Hargreaves & Savitch, which acquired seven full-time employment lawyers from Luce, Forward, Hamilton & Scripps earlier this year. "Clients are more sensitive to price now because of the bad economy."

Employment firm Ogletree, Deakins, Nash, Smoak & Stewart, which added 15 lawyers to its Los Angeles office over the past two years, reports it has been able to keep its rates in line with the market. "General practice firms have a harder time targeting pricing because they have to charge for employment work the same rate that their other practice groups charge," says San Francisco managing shareholder Douglas J. Farmer.

California has long been a national leader in wage-and-hour litigation, and attorneys do not expect that to change anytime soon. In 2011 more than 7,000 cases, mostly class actions, were filed in federal court alleging wage-and-hour violations under the Fair Labor Standards Act; 45 percent of aggregate settlement payments stemmed from California cases, well above the 28 percent observed in 2009.

Discrimination claims for age bias and illegal retaliation are also up. Last year Californians filed more than 7,100 cases with the Equal Employment Opportunity Commission, behind only Texas and Florida. Of those claims, 45 percent allege retaliation.

Employment attorneys are watching to see how the Ninth Circuit court will apply the Supreme Court's decision last year in the sex-discrimination case Wal-Mart Stores, Inc. v. Dukes (131 S. Ct. 2541 (2011)), which could affect California's flood of wage-and-hour litigation. "The language used by [Justice] Scalia seems to indicate that the Dukes decision on class-certification requirements is just meant to be restricted to Title VII discrimination claims and not extend to wage-and-hour cases," says David A. Lowe, a partner at Rudy, Exelrod, Zieff & Lowe in San Francisco. "How Dukes will be applied in the wage-and-hour context is the next big question." The Dukes plaintiffs have filed an amended complaint in district court in San Francisco; in September that court allowed the case to move forward, ruling that the refiled case may comply with the new requirements. The ultimate issue of class action was thus deferred for another day.

An employee-classification case currently before the Ninth Circuit, Wang v. Chinese Daily News Inc., could clarify the class-certification issue as it pertains to wage-and-hour cases. The Supreme Court last year remanded the case to the Ninth Circuit with instructions to reexamine it in light of Dukes. A finding that the stricter class-certification requirements of Dukes also apply to wage-and-hour cases could curb California lawsuits.

But some lawyers are skeptical that Dukes will ultimately have much impact. Anthony J. Oncidi, a labor-and-employment partner at Proskauer Rose in Los Angeles, predicted that the decision in AT&T Mobility v. Concepcion (131 S. Ct. 1740 (2011)) may prove the bigger victory for employers, who can now argue that the Federal Arbitration Act preempts California state law, allowing defendants to force many of these disputes into arbitration.

"In the wake of the Wal-Mart opinion from last year, 'trials by formula,' which feature evidence created by statisticians ... have been curtailed," says Oncidi. "But the plaintiffs bar has been largely undeterred. There still are dozens of new wage-and-hour class actions filed every day in California."

Mike Rosen is a legal reporter and frequent contributor to California Lawyer.


ENERGY AND ENVIRONMENT: Solar Heats Up

The Golden State is generating mountains of work for energy lawyers, thanks to legislation such as the Global Warming Solutions Act, which mandates reductions of greenhouse gas emissions, and California's Renewables Portfolio Standard, which sets minimums for renewable resources procured by municipal and investor-owned utilities.

Recently, solar projects have far outpaced wind projects, which have "shut down from [a] legal perspective," explains Edward W. Zaelke, co-chair of Akin Gump Strauss Hauer & Feld's global project finance practice. "Financing has dried up because the industry isn't sure if tax benefits are going to be renewed. Congress is in a stalemate. It's a political football."

Solar tax credits, in contrast, are locked in until 2017. As a result, "there is a lot of work for lawyers," Zaelke says.

But they're not all mega deals. For energy lawyers, the size and scale of projects can be measured in megawatts. Capacity for large utility projects can run more than 200 megawatts. But many of the most active companies specialize in projects of fewer than 20 megawatts, which typically have simpler permitting and other regulatory requirements. Federal and state governments even offer subsidies and incentives for some small projects, such as rooftop and carport systems of less than 1 megawatt.

What's sure to keep energy lawyers busy well into 2013 is the proliferation of distributed-generation deals. In these transactions, clean-energy companies sell power (often generated by solar, and lately, fuel-cell technologies) directly to commercial or industrial customers. In many cases, any excess power is net-metered, or credited at the retail rate, to the host's utility for at least a portion of the electricity its system generates. In a traditional power deal, a company installs a utility-scale solar or wind system and then sells power to a utility under a long-term purchase agreement. However, some California utilities already have enough agreements for renewable energy to satisfy their obligations under the state's Renewables Portfolio Standard requirements of 33 percent by 2020. As a result, lawyers practicing in the energy sector expect that distributed-generation projects will become more popular, according to Christine A. Kolosov, of Winston & Strawn in Los Angeles.

When new projects get delayed or even halted by environmental challenges, such as one brought under the California Environmental Quality Act, it creates legal work for energy and environmental specialists, according to Martin A. Mattes, a public utilities regulation lawyer at Nossaman. "Most energy projects of significant magnitude will be the subject of environmental objections," he says.

For example, the Audubon Society has sought to protect hawks and falcons, which can run into wind-turbine blades. Environmentalists have also sought protections for desert creatures such as tortoises, which solar projects can disturb. To reduce bird kills, wind developers worked out a complicated settlement with endangered-species advocates to replace many small wind turbines with fewer, larger ones, and to limit their times of operation in the Altamont Pass of Contra Costa County.

Similarly, environmental advocates have objected to solar-thermal projects that rely on scarce water supplies for cooling. As a result, these sorts of hurdles increase the attractiveness of smaller-scale distributed-generation projects - which, Mattes adds, can include those net-metering deals. - L.A.G.


INTELLECTUAL PROPERTY: No End to Litigation

This was a boom year for intellectual property law in California, with Los Angeles and Silicon Valley remaining hot spots for tech and patents. The Central District of California continues to be the nation's third-busiest venue for patent cases (336 in 2011), after the Eastern District of Texas and the District of Delaware. Further south, growth in San Diego's life science and pharmaceutical companies has created more IP work for law firms.

As a result, some firms' IP practices have expanded. For example, Sheppard Mullin Richter & Hampton added 15 IP attorneys over the past year, including three partners. "We have been focused on expanding our patent litigation capabilities to better represent our clients in the district courts and before the U.S. International Trade Commission," says Steve Korniczky, cochair of the firm's IP practice.

Patents remain in demand. High-tech giants will continue their defensive acquisitions and offensive use of enormous patent portfolios, says Richard Sybert, a senior partner with Gordon & Rees in San Diego. "You're going to see more and more of this, and inevitably a reaction that this use of patents is anticompetitive and is stifling innovation," Sybert predicts.

The highly publicized smartphone wars have also been a boon to IP lawyers (e.g., the ongoing Apple-Samsung patent-infringement case). As courts struggle to understand how traditional rules of intellectual property apply to new mobile technology, lawyers expect to see inconsistent rulings across jurisdictions. This uncertainty should make the area fertile ground for the foreseeable future. Notes Anne M. Cappella, a partner at Weil, Gotshal & Manges in Silicon Valley, "4G technology is just starting, so we'll see more [patent] litigation about that."

IP lawyers are also watching to see the effect of last year's America Invents Act (AIA) (Pub. L. No. 112-29), which overhauls the patent system with the aim of discouraging lawsuits by nonpracticing entities and avoiding protracted litigation. Some expect that the new post-grant review proceedings it creates for discrediting weak and infringing patents will put the brakes on patent suits.

"It's possible we'll see less litigation," says Darryl M. Woo, a patent litigator at Fenwick & West in San Francisco. "The AIA lays more clear lines of demarcation between the patent office and courts. As a result ... we may see an uptick in post-grant review proceedings in the patent office."

Meanwhile, the constant tension between brand drugs and generics is escalating. In July the Third Circuit Court of Appeals split from three other circuits in K-Dur Antitrust Litigation (686 F.3d 197 (3d Cir. 2012)), ruling that payments from a pharmaceutical patent holder to delay the entry of a generic equivalent into the market constitute evidence of an unreasonable restraint on trade. In October, Merck and the Federal Trade Commission filed cert petitions with the U.S. Supreme Court.

Also this year, the Eastern District of California indicated a more international direction for patent law when it issued a preliminary injunction in Seed Servs., Inc. v. Winsor Grain, Inc. (212 WL 1232320 (E. D. Cal.). After selling its U.S. trademark to the American plaintiff and committing to not sell alfalfa seeds in Saudi Arabia, the U.S. defendant began selling the seeds in Saudi Arabia under an identical trademark registered in Australia. The ruling suggests that, going forward, federal courts could enjoin the extraterritorial use of trademarks owned by U.S. companies.

"The extraterritorial application of IP law is going to keep coming up with the drastic expansion in international trade, where American IP owners are manufacturing overseas," says Thomas T. Chan, a partner at Fox Rothschild in Los Angeles. "California is certainly in the forefront of [these cases], and I expect more to come." - M.R.

Reader Comments

Angela Kopolovich - November 7, 2012
I would also add that with Obama's re-election and the unions' promises, the Employee Free Choice Act (lovingly known as "card check") will be on the table again soon. If it is enacted, we're going to see a huge (!) demand for labor lawyers in the next few years.

We welcome your comments!

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