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December 2, 2008 5:47 PM

Sealed Document Reveals Morgan & Finnegan's Defection Woes

Posted by Nate Raymond

A filing in a sealed lawsuit against troubled intellectual property boutique Morgan & Finnegan sheds light on how far the firm has gone to stop what's become an exodus of partners.

Morgan & Finnegan, one of the oldest IP boutiques in the country, has suffered a series of partner defections during the last few years to larger general practice firms looking to beef up their patent litigation offerings.

To stop the exodus, the filing in question shows, the boutique rushed in 2007 to alter its partnership agreement to create financial disincentives for partners looking to leave--just a few days before one of its top rainmakers departed for Cadwalader, Wickersham & Taft. 

The revelations are contained in a suit filed in October against the firm in New York state court by Christopher Hughes, who joined Cadwalader last year. Details about the suit have remained murky so far, since the complaint and subsequent filings have been under seal since the case's inception. But an apparent administrative error allowed for public viewing and downloading of Morgan & Finnegan's answer to the complaint.

Hughes declined comment, and his lawyer, Ronald Minkoff of Frankfurt Kurnit Klein & Selz, didn't return a call seeking comment. Lawyers for Morgan & Finnegan referred specific questions on the case to the firm, where partners and a spokeswoman didn't return calls or e-mails seeking comment.

"It all should be under seal," says Thomas Hyland, a lawyer for Morgan & Finnegan at Wilson, Elser, Moskowitz, Edelman & Dicker. "It's obviously a disagreement between partners and former partners. It's obviously very sensitive."

The document sheds light on the IP boutique's efforts during the last two years to prevent what has turned into a tsunami of partner defections. Morgan & Finnegan had 31 partners in mid-2007; today, its website lists only 17. Former partners have gone to firms including Goodwin Procter, King & Spalding, Covington & Burling, Cadwalader, and Dickstein Shapiro. Morgan & Finnegan's only lateral hire this year, Jeremy Pitcock of Kasowitz, Benson, Torres & Friedman, lost his job at the boutique a few weeks later after the lawyer's former firm said it fired him for inappropriate conduct.

Two other partners, Keith McWha and Arnold Rady, appear to be on the move, sources say. Their biographies have recently been removed from Morgan & Finnegan website. There is no word on where they will land, and they could not be reached for comment.

As for Hughes, a Cadwalader spokeswoman says he began speaking to the firm in February 2007. He joined in August 2007, and by January 2008 had been followed by six other Morgan & Finnegan partners. One of Morgan & Finnegan's top rainmakers, Hughes had a book of business valued at around $10 million. Before leaving, Hughes tried to convince his partners to consider a merger, The American Lawyer reported in June.

A month or two before Hughes left for Cadwalader, Morgan & Finnegan began looking at ways to prevent  defections. The firm's court filing, dated November 25 and downloaded last week from the New York Supreme Court's online records library, reveals that in June or July 2007, Morgan & Finnegan was looking for ways to "protect the firm including exploring ways to discourage departure from the firm."

To stop the bleeding, management settled on amending its partnership agreement, the filing says. A member of the firm's executive committee told Hughes about the proposed changes August 9, 2007, the document says--eight days before Cadwalader's August 17 announcement that he had joined the firm.

"[Hughes] opposed amending the [agreement] because it created several disincentives to withdrawing as a partner from Morgan & Finnegan," the firm says in the filing.

The amendments, as approved August 13, 2007, changed how management calculated partner capital, going from a management book method to a tax basis. 

The document doesn't specify how Morgan & Finnegan defined "management book method," making it difficult to determine what would be different. "Tax basis" refers to a firm's federal tax returns and is usually calculated on a modified cash basis, says Altman Weil consultant Jim Cotterman.

Under the amendments, a departing partner is also not eligible to receive any deferred or contingent fees that Morgan & Finnegan obtains. On top of that, a departing partner now has to return any bonus he or she receives in his or her last year, the document says. That would have included a $275,000 bonus Hughes received in January 2007, according to a counterclaim filed against Hughes by Morgan & Finnegan. 

Normally, amendments to the firm's partnership agreement would have required a 14-day notice, the filing says. Drafts of the proposed revisions circulated among the partners, though the filing is unclear as to when everyone got them. Only four days passed between when Hughes learned of the proposed changes and the scheduled vote.

The day before the vote, Hughes gave authority via e-mail to another partner to vote by proxy against waiving the 14-day notice and the rest of the amendments, according to Morgan & Finnegan's filing. Despite Hughes's efforts, partners voted to waive the notice requirement and amend the partnership agreement.

Hughes resigned from the firm three days later, "as quickly as he could in an unsuccessful attempt" to avoid the amendments, the firm claims.

Based on Morgan & Finnegan's answers, Hughes appears to be suing for the return of his capital. Because a judge ordered the case sealed the day it was filed, the sum at issue is unclear.

Hughes wouldn't be the first partner to sue Morgan & Finnegan over allegedly unreturned capital. In October 2007, Kenneth Sonnenfeld, now at King & Spalding, sued the firm, claiming it should have returned to him $227,672 rather than the $14,000 it actually said he was owed. The case settled a month later for an undisclosed amount. (Sonnenfeld declined comment.)

Morgan & Finnegan says Hughes's "capital contribution was properly calculated" under the new method approved under the amended partnership agreement. The firm also says the suit belongs in arbitration, and is asking the court to force Hughes to return his $275,000 bonus and pay additional damages for breaching the 2007 partnership agreement.

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