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Inside Testa Hurwitz's Flameout

March 03, 2005 | The American Lawyer

A bubble burst, a founder died, and Testa, Hurwitz & Thibeault gradually went up in smoke. Alarm bells began to sound at Boston's Testa, Hurwitz & Thibeault almost four years ago. But most partners at the firm ignored them -- until it was too late. After hobbling along, the 250-lawyer firm finally voted to dissolve in January.

Testa Hurwitz was inextricably linked to the evolution of the Boston area's technology industry. When the bubble burst, IPO and venture work dried up. Testa's profits per partner sank, from $825,000 in 2000 to $500,000 in 2003.

Along the way, the firm suffered a more grievous loss, when founder and chairman Richard Testa died in December 2002. "I think Dick Testa's death affected us in ways we didn't realize [at the time]," says Roger Lane, head of litigation at Testa and now a partner in the Boston office of Greenberg Traurig. Testa, who founded the firm in 1973, was a fixture in the Boston legal and technology communities, and had represented startups that grew into important high-tech companies, among them Digital Equipment Corp. and Teradyne Inc., for decades.

Suddenly Testa had to transform itself from a first-generation firm under its founder to a second-generation firm led by others. It couldn't. "That's when they needed Mr. or Mrs. Right to come in and say, 'This is what we are doing,'" says Jeffrey Coburn, a legal consultant in Boston. "The solution would have been to do a merger back then."

By coincidence, the Boston legal market was starting to change dramatically. Large local firms began shopping for and finding mates across the region and the country. And national players began trolling for local talent. In these roiling waters, Testa stood still, suffering from inertia -- and perhaps some denial. F. George Davitt, who took over as managing partner in September, says that "2002 and 2003 were challenging years for Testa. But the view was to stay the course."

Testa partners spoke about opening new offices -- like one in California -- or diversifying the practice. "The issue was: Would we become a national firm with more diverse practice areas and more offices? Or would we remain a one-office firm in Boston with a specialty?" says Carl Metzger, now a partner at Goodwin Procter. But, says Metzger, "there was not enough momentum among the partnership to make [these things] happen."

The firm's management did not foster change. It had a three-partner managing committee, headed by Testa's successor, William Asher Jr. But former partners say the committee was plagued by indecision. (Asher declined to comment.)

Complicating matters further was the firm's eight-tier lockstep compensation system, which did not reward business getters. This caused tension when there was less money to go around, say former Testa attorneys.

But that was only an incremental problem: "In truth, there were never big fights or contentious meetings. It was more an issue of people drifting away," says Metzger. That was a significant change, says Mark Kwatcher, a Boston legal recruiter, at "a firm where partners never left." But last year, 12 left, most to larger national or local firms.

Finally, last September, the firm tried to change course. The partners elected Davitt, a skilled M&A partner, to take over as managing partner. Davitt dissolved the management committee, hired a law firm consultant, and began to look for a merger partner.

But it was too late. In early December 10 partners announced they were leaving -- seven to the Boston office of New York's Proskauer Rose and three to Bingham McCutchen. Their announcement was the final blow.

The partners heading to Proskauer were members of the firm's fund formation group, a flagship practice. Fund formation was at the core of the firm's business model of representing venture capital firms and the companies they spawned in every phase of legal work. The group was started by Dick Testa himself, and counted more than 100 fund clients.

Proskauer was one of the newcomers to Boston; it had opened its office in early 2004 with three Testa intellectual property partners. It wanted to expand that office -- which had already reached 60 lawyers -- says Proskauer's chief operating partner Robert Kafin, and to beef up new practices, such as private equity. And where better to look than at Testa? "These folks were one of the premier fund formation groups in the country," says Kafin. Proskauer began talking to the group last September, when a headhunter provided a tip that the group was looking to move, says Kafin: "They were shopping around. We decided we should enter the competition for them." Kafin declines to say how much Proskauer offered the partners to win the competition.

The departure announcements set in motion the final, frenzied weeks at Testa. Tensions rose, and some Testa partners, speaking anonymously, say they felt betrayed by the loss of a crown jewel of the firm. A firm that was usually known for its courtly manner began to erupt. "There was a gamut of emotions you don't usually see at law firms," says a former associate. "It was very minor-league stuff. Nobody threw a lamp. But people .... made passing comments that they were not pleased."

"Some people resented [the announcement]," Davitt admits. "Personally, I think that's just business." Davitt struck back at the defectors, invoking a clause in the firm's partnership agreement that required the departing partners to stay until March 31. Then he accelerated his quest for a merger. Throughout December, he says, Testa talked to various firms: local, national, tech and general practice. (Davitt declines to name any suitors.) "There was a lot of interest in Testa," he says.

But individual partners also began to fend for themselves, interviewing with other firms on their own or in groups. "People found themselves thinking seriously about what will happen to them," says Douglas Kline, a former Testa partner now at Goodwin Procter. Ultimately, says Davitt, "People had looked to see what else was out there, and they preferred that to my continuing merger efforts." No merger candidate ever came to a partner vote, says Davitt. Instead, on Jan. 14, the partnership voted to disband.

No sooner did the partners vote than the announcements of hires at other firms began to roll in. That very day, Greenberg Traurig, Goodwin Procter, and Boston's Choate, Hall & Stewart all announced they were scooping up Testa partners. Choate Hall, for example, brought in 10 partners and 10 associates, including former managing partner Asher and founder Stephen Hurwitz. (Hurwitz did not return repeated calls seeking comment.) Ultimately, Goodwin Procter took the biggest haul -- 25 partners, three counsel and 63 associates -- including members of Testa's private equity, intellectual property, securities and white-collar groups.

Testa, says Goodwin Procter chair Regina Pisa, had "a national brand among emerging companies."

Now it only has alumni.