News
Law Office Management
Jul. 2, 2007
Hot Practices
We take a look at some of California's busiest practices this year and areas of the law where the Golden State is at the forefront. Edited by Chuleenan Svetvilas
Fifteen years ago, this magazine ran its first hot-practice feature, titled "California's Hottest Practice Areas." That section contained articles on high-tech, environmental, entertainment, agricultural, wine, and international law. It also included two lists, "What's Hot" and "What's Not," and singled out corporate law, international finance, and mergers and acquisitions as sleepy practice areas.
Practice areas in California that were barely on the radar screen back then?such as corporate law and mergers and acquisitions?have been red hot over the past few years. This year private equity is one of the busiest practice areas, followed by biotechnology?a California industry in which millions of new patents are being filed and where many mergers and acquisitions take place. Our 2007 survey also highlights additional practice areas in which the Golden State is at the forefront: copyright, fertility law, and climate change. ?Chuleenan Svetvilas
PRIVATE EQUITY: FLUSH WITH CAPITAL
By Thomas Brom
Private equity is so hot it sizzles. It is the philosopher's stone that turns lead into gold, the catalyst that magically generates billable hours of transactional work. For the PE funds and the lawyers doing deals, it's the alchemy of the day.
Though corporate lawyers are involved in all aspects of private-equity financing, from the formation of funds to representing banks and other lenders, the real money is in putting together deals. According to Fenwick & West, private equitysponsored M&A in 2005 totaled about $340 billion; last year it was $600 billion. PE-financed deals in 2006 accounted for about 25 percent of U.S.-based M&A, and about 20 percent of deals worldwide.
Many of the PE funds, and the law firms that service the M&A work they produce, are based on the East Coast. But in rankings released in April by industry newsletter Dow Jones Private Equity Analyst, Latham & Watkins and Paul, Hastings, Janofsky & Walker topped the list for total number of PE deals in 2006. "Private equity is a strategic area for Latham worldwide," says Scott R. Haber, a partner in the San Francisco office. "Depending on the deal, we represent PE funds, lenders, or target companies."
Transactional work for financial buyers has some unique characteristics: a reliance on highly leveraged debt financing, a premium on speed in completing the deal, and a projected turnaround for the target company of three to seven years. It's not a practice for the fainthearted, but the rewards can be more than generous. "PE is the Holy Grail for California law firms," says Patrick W. Lawler, a partner who represents lenders at Chapman and Cutler in San Francisco. "The clients are not as fee-sensitive, so rates and billable hours are high. Typically, a lead partner will put together a team that includes banking, finance, tax, IP, real estate, environmental, and ERISA practices."
Shorter turnaround periods mean that PE funds can often outbid strategic buyers, who might be reluctant to take on huge amounts of debt and worry about such things as synergies and melding corporate cultures. The quick turnaround changes everything, making a good bet out of incurring vast amounts of debt?so long as the price of money is right and the market continues to grow.
"Banks are now making available to buyers different slices of debt with different liabilities," says Paul L. "Chip" Lion, a partner in the Silicon Valley office of Morrison & Foerster. "As a result, the buyers may acquire target companies at a much cheaper cost." Lion has what he calls an eclectic practice, representing buyers, sellers, or lenders in various Silicon Valley deals involving private equity as well as venture capitalists. "This," he says, "is a hot practice, no question."
Though private-equity funds have existed in California for years, "debt-financing capability was slow to arrive in Silicon Valley because of a culture that?since the early days?saw debt as bad," says Peter F. Kerman, global chair of Latham's corporate department, based in Menlo Park. "Tech is a scary place for PE investors. The perception of PE buyers was that technology companies presented the risk of rapid product obsolescence, and a risk that free cash flows were not stable. But as tech companies have matured, people are taking another look."
"It's inevitable that PE funds would become more interested in technology M&A deals," says David W. Healy, partner and cochair of the M&A group at Fenwick & West's Silicon Valley office. "PE firms' willingness to aggressively use debt is forcing non-PE-backed public companies to increase their use of debt to fuel growth and acquisitions, in order to compete." Healy cites a number of PE funds?including Silver Lake Partners, Golden Gate Capital, Francisco Partners, and General Atlantic-as examples of PE funds with local offices that are shopping for high-tech companies.
If there is a catch to all this highly leveraged activity, it is the cost of money. Should interest rates rise significantly or market conditions change, all bets are off. In addition, says Chapman and Cutler's Lawler, "One bad event could cause lenders to hold back money." Finally, as deals funded by private equity become more speculative, would-be government regulators have begun to encircle the edges of the party. Already Sen. Max Baucus (D-Mont.), chair of the Senate Finance Committee, and Sen. Charles Grassley (R-Iowa), the committee's top Republican, are gathering information for possible changes to the tax law governing private pools of capital.
"It's always good until it's not," Silver Lake Partners cofounder and Managing Director Jim Davidson told an M&A forum in April at San Francisco's Fairmont Hotel. "But we sure don't want the regulators to fix it, because the cure will be worse than the disease."
Thomas Brom (thomas_brom@dailyjournal.com) is a senior editor at California Lawyer.
BIOTECHNOLOGY: PATENT BOOM
By Nina Schuyler
As the number of scientific discoveries in biology has exploded, so have the patents to protect this new intellectual property. Such rapid technological change has also ushered in a host of unsettled legal questions and lawsuits, as well as a flurry of mergers and acquisitions. "The number of patent and biotechnology cases being considered by the U.S. Supreme Court is unprecedented," says Sean Johnston, senior vice president and general counsel of Genentech. "It's a reflection of how very important intellectual property has become in our economy and the world economy."
Not long ago, biotech companies were focused on identifying genes and patenting gene sequences. According to the Human Genome Project, more than 3 million genome-related patent applications have been filed. Now companies are bringing patented products to market, such as "small molecules" and antibodies that affect genes, says Jean Burke Fordis, managing partner at Finnegan, Henderson, Farabow, Garrett & Dunner in Palo Alto, who provides strategic counseling to small biotech and Japanese pharmaceutical companies. Other products covered by patents include proteins made by gene cloning?such as erythropoietin, which stimulates red-blood-cell production?and one of the newest developments on the biotech scene, therapeutic cancer vaccines?proteins that activate the immune system to kill cancer cells.
The new technologies have increased M&A activity. Biotech and pharmaceutical patent lawyers have seen their practices take off, with more patent due-diligence work.
The scientific advances have also raised new legal questions, such as when it is permissible for someone to use a patented invention for research purposes. (Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193 (2005); the U.S. Supreme Court granted a wide latitude to researchers.) Or what makes an invention obvious. (KSR Int'l Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007).) Though KSR didn't emanate from biotech, it "goes to the core of when you are entitled to patent any technology," says Johnston. And MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), which removed a big hurdle for licensees seeking to challenge a patent's validity, exemplifies how biotech will be at the heart of litigation over valuable patented products.
That a case would be pursued to the U.S. Supreme Court shows not only the novelty of the legal questions being raised but also how much is at stake. "With all these new biotech discoveries, there are major profits to be made," says Juanita Brooks, a partner in Fish & Richardson's San Diego office who specializes in patent litigation.
The chance to garner some of those profits has resulted in a burgeoning generic drug industry?and consequently patent litigation. "When a generic drug company files an application to come to market with a generic of a blockbuster drug, it will usually end up in litigation," says Brooks, who has seen her practice expand and believes the litigation has yet to reach its peak.
What is now being hashed out in Congress is a statutory process by which the Food and Drug Administration will approve lower-cost copies, or follow-on generics, of biologics. The issue is controversial, with lawyers weighing in on a pending bill, the Access to Life-Saving Medicine Act, HR 1038. "On the one hand, you have big pharmaceutical lawyers arguing that you need to proceed with caution before you allow follow-on biologics into the market," says John Wetherell, a life sciences partner at the San Diego office of Pillsbury Winthrop Shaw Pittman, who represents biotech start-ups and multinational pharmaceutical companies. "On the other hand, you have lawyers who represent the generic drug companies saying the safety issue is greatly exaggerated."
Just as controversial, if not more so, is the new landscape of stem-cell research. Though no human embryonic stem-cell product has been brought to market yet, state?and most likely federal?funding will fuel this industry. Already, patents for stem cells have been issued?and rejected. In April, the U.S. Patent and Trademark Office rejected three broad human stem-cell patents owned by the Wisconsin Alumni Research Foundation. "Some patent lawyers say you can't patent stem cells, some say you can," says Anthony Insogna, partner in charge of Jones Day's San Diego office who represents emerging and established biotech companies, pharmaceutical companies, and companies involved in stem-cell research. "That in itself makes this an interesting time to be practicing biotech patent law."
Nina Schuyler (ninaschuyler@hotmail.com) is a writer located in the Bay Area.
COPYRIGHT: HIGH-STAKE DISPUTES
By Anna Oberthur
Copyright law has never been more contentious, with major players battling in court over core issues relating to the Internet. The outcome of some of these lawsuits "will affect not only the way we communicate and share information over the Internet, but what information is available and accessible to share and communicate in the first place," says Anthony Falzone, executive director of Stanford Law School's Fair Use Project.
On one side are content owners who, concerned about the new potential for quick, unlicensed, high-quality digital distribution, want to protect their intellectual property?and ensure they are compensated for it. On the other are members of the tech industry and advocates, such as Falzone, who worry about copyright law being applied in a way that will stifle future innovation and free speech.
"There is a huge difference of opinion between content creators and the tech business as to what the copyright law means," says Craig Cardon, an intellectual property partner at Sheppard, Mullin, Richter & Hampton in Los Angeles and San Francisco. "That's why it's a fun, fantastic, and exciting area, with a lot of work going on these days."
One case that experts say implicates the entire search-engine business was brought by Perfect 10. The company, which markets and sells copyrighted images of nude models, alleged that Google infringed its copyright by displaying thumbnail images of Perfect 10 photos that were then republished by others without authorization. In a May opinion that addressed a number of key copyright issues, the U.S. Court of Appeals for the Ninth Circuit found that Perfect 10 was unlikely to succeed in overcoming Google's fair-use defense. (Perfect 10, Inc. v. Amazon.com, Inc., 2007 U.S. App. LEXIS 11420.)
The case still isn't over, however. In response to Perfect 10's allegation that Google and Amazon.com, joined in the lawsuit, were secondarily liable for failing to take "reasonable and feasible steps to refrain from providing access to infringing images," the Ninth Circuit remanded that matter back to the district court.
The opinion is an important one, says Mitchell Zimmerman, chair of Fenwick & West's copyright group in Mountain View. "I think it's going to provide key guidance to Internet enterprises on a range of issues," he said. "It doesn't answer every question, but it is encouraging for all search-engine businesses."
Large amounts of money are at stake in some of these high-visibility cases, especially Viacom's copyright-infringement lawsuit against Google-owned YouTube, which seeks damages of at least $1 billion. (Viacom Int'l, Inc. v. YouTube, Inc., No.1:07 CV 02103.) The lawsuit calls into question the Digital Millennium Copyright Act's (DMCA) safe-harbor provisions, one of which limits the liability of service providers for infringing material posted on their systems if the provider takes down such material promptly upon receiving proper notice. YouTube maintains that the DMCA protects it, but Viacom disagrees.
The decision, by the U.S. District Court for the Southern District of New York, could have a dramatic effect on the future of sites based on user-driven content. (That is, if the case makes it to trial?some experts say that because the parties have so much at stake, they're likely to settle.) "What the parties are really wrangling over is who has the burden of finding and policing copyright," says Jennifer Urban, an intellectual property professor at the University of Southern California Gould School of Law. "The outcome could affect anybody who builds a technology that somebody could use to infringe."
In another case pitting copyright protections against Internet use, Paul Aiken, executive director of the Authors Guild, says a Google project to make literary texts available online is "pushing the envelope. It's not within the bounds of the traditional reading of copyright law," says Aiken, whose New Yorkbased group has sued Google over the Google Print Library Project. The question is whether or not the project constitutes fair use, says Aiken. He argues that because it's a commercial project, Google needs to license the works. But Google maintains that the project is covered by the fair-use doctrine, which allows the use of copyrighted materials for certain purposes, such as research or parody. The company also states that any copyright holder can exclude its books from the program.
The crux of many of these cases depends on which side of the table you talk to, says Cydney Tune, who heads Pillsbury Winthrop Shaw Pittman's copyright practice in San Francisco. "From the point of view of a copyright owner, what's at stake is the viability of their livelihood," she says. But for those on the other side, the issue is probably the creative potential of society, "and whether we have a culture in which creative activity can blossom."
Anna Oberthur is a San Francisco?based writer who formerly covered intellectual property for the San Francisco Daily Journal.
FERTILITY LAW: UNDER THE MIRCOSCOPE
By Laura McClure
Although the science behind fertility has steadily advanced since 1981, the year the first test-tube baby was born in the United States, regulation of this booming business is still in its infancy. In the meantime, the use of assisted reproductive technology has skyrocketed. According to the national Society for Assisted Reproductive Technology (SART), approximately 123,000 cycles of in vitro fertilization (IVF) were performed in 2005 alone, the last year for which data is available. SART lists 50 fertility clinics in California?more than in any other state in the country.
One of the most controversial legal questions to arise from this activity is also an eminently practical one: What happens to extra embryos after IVF has brought about the desired number of children? Currently, an estimated 500,000 embryos remain frozen in the United States?a sort of surplus-as-byproduct of fertility treatments, which can be costly and repeatedly unsuccessful. Multiple embryos increase the odds of at least one healthy birth; more stored embryos mean more potential lives, even after a decade or more in storage. Faced with the often emotionally heavy toll of deciding whether to donate, discard, or implant excess embryos, many IVF users do nothing at all. Over time, their indecision can open the door to family law questions of a novel sort. For example, in a divorce proceeding, who gets the embryos? Are they property, to be divided, or something more? What if only one partner wants to bring them to term? What if both partners die?
The courts are continuing to sort out these and other legal issues related to fertility, says June Carbone, professor at the University of Missouri at Kansas City School of Law and author of From Partners to Parents: The Second Revolution in Family Law (Columbia University Press, 2000). "The determination of parentage is the most contentious issue in family law," she says.
An even more explosive area is where fertility treatment meets stem-cell research and spins into the abortion debate. In 2001, George W. Bush banned federal funding for research on new stem-cell lines, effectively limiting study to existing lines?the number of which varies greatly depending on who is doing the counting. California voters responded in 2004 by funding embryonic stem-cell studies themselves through the creation of the California Institute of Regenerative Medicine, the constitutionality of which was upheld in February by a state appellate court. Many thousands of dollars have already been spent litigating stem-cell-research issues. And after the U.S. Supreme Court upheld the "partial-birth" abortion ban in April, some observers believe, embryo disposition could be the next politicized crack in the wall of Roe v. Wade. Considering that a patchwork of state laws on both fetal homicide and wrongful birth already exist, it seems only a matter of time before the legal status of embryos is reevaluated by the highest court. "If fetal life can be maintained entirely outside the body via artificial wombs, then how durable is a Supreme Court precedent based largely on the need to respect a woman's bodily integrity?" asks Judith Daar, professor at Whittier Law School in Costa Mesa and at UC Irvine College of Medicine.
For now, there are more questions than answers, and stem-cell research and embryo disposition are just two of many legal?and ethical?issues coming to light. Also in the controversy queue: Are gestational surrogates parents? Should egg donors be paid? Do the children of unidentified donors have a right to know if heart disease runs in their genes? And who decides when and how same-sex couples can have children, anyway?
The California Supreme Court has already agreed to hear arguments related to that last issue, in a case questioning whether a physician has a constitutional right to refuse, on religious grounds, to perform a fertility treatment because of the patient's sexual orientation. (North Coast Women's Care Medical Group v. Superior Court, No. S142892.)
And as assisted reproductive technology continues to advance, especially in the Golden State, answers to even more fertility-law quandaries may be just around the bend.
Laura McClure (laura_mcclure@dailyjournal.com) is an associate editor at California Lawyer.
CLIMATE CHANGE: HEATING UP
By Dennis Pfaff
When Governor Schwarzenegger signed the loftily named California Global Warming Solutions Act into law last September, many lawyers likely agreed with the assessment of Robert Wyman, a partner at Latham & Watkins in Los Angeles. "There will just be an enormous array of work this will spawn," he said.
The measure, AB 32, set a broad goal for the year 2020 of reducing to 1990 levels California's emissions of carbon dioxide and other greenhouse gases that contribute to global warming. That would mean reducing the amount of gases spewed into the air by the state's industries, power plants, and vehicles by 25 percent. In January, Schwarzenegger signed an executive order requiring motor fuels to contain less carbon in the future.
But that wasn't all. Lawmakers also passed measures designed to shrink California's carbon footprint. Most notably, they included a bill (SB 1368) to limit utilities from investing in and contracting with power plants?even those located outside California?that produce excessive amounts of greenhouse gases.
All this comes on top of a previous state effort, now under legal attack, to cut greenhouse-gas emissions from cars and trucks. In addition, Attorney General Jerry Brown has started moving to make sure that climate-change impacts are assessed as part of new land-use development plans.
In response, many large firms?such as Bingham McCutchen, Sheppard Mullin Richter & Hampton, and Sonnenschein Nath & Rosenthal?have formed or are in the process of forming internal practice groups dedicated to climate change or "clean technology" issues. Some of them are housed within their existing practice groups, such as the one at Latham & Watkins. Others cluster attorneys from diverse specialties such as energy, intellectual property, insurance, litigation, and, of course, environmental law. Firms may also emphasize their expertise in lobbying and in helping to develop emissions-trading schemes that could play a critical role in California.
But any really large gains in the environmental and energy practices are still to come. Kevin Haroff, a partner in Sonnenschein Nath & Rosenthal's San Francisco office, says that although those practice areas have taken off at his firm, their framework is not yet fully developed. He predicts that his firm will hire new attorneys and that the practices will mature in about a year.
"We are still at such an early stage in the United States in terms of developing the regulatory programs that need to be in place and where lawyers will be needed to help clients understand and work through that process," he says. Additionally, Haroff says, despite all the attention the issue has received, industry has yet to fully understand the breadth of its implications.
Los Angeles attorney Rick Rothman, chair of Bingham McCutchen's 65-lawyer environmental practice, says that AB 32's passage generated a flurry of calls to law firms from concerned clients. "There was an initial reaction that had a lot of people running around," he says.
In theory, especially in large firms, creating practice groups can help foster communication among lawyers who normally would have little to do with one another professionally. Pillsbury Winthrop Shaw Pittman, for instance, has monthly conference calls linking the 40 or so members of its climate-change group, and a staff person has been assigned to monitor developments in the fast-changing field.
"It's all the sort of individual sectors we think will be most affected by legislative changes in the climate-change area," says Pillsbury San Francisco partner Michael Steel. He says the group also includes attorneys representing economic sectors, such as agriculture-related businesses, that might be directly affected by a warmer planet.
Among the big economic winners in a world focused on reducing carbon emissions will likely be so-called alternative energy producers. Wind, solar, and geothermal projects fit the bill. Law firms serving those industries report a healthy demand. Thelen Reid Brown Raysman & Steiner partner Paul Lacourciere said its San Francisco office recently added at least four attorneys to its renewable-energy practice group, bringing the number to an even dozen. And more attorneys are working on the issue at the firm's other locations. The group performs various work for clients, ranging from negotiating contracts and arranging financing to advising them on regulatory changes.
Tom Berliner, a partner in Duane Morris's San Francisco office, heads that firm's renewable-power group, a practice comprising about 35 lawyers specializing in corporate and tax issues, technology and intellectual property, and energy and environment. The team, he said, can take a client "from the first step to the last step" in developing a project such as a wind turbine farm or solar array. The firm hopes to see a big demand for its services, partly as a result of a state Public Utilities Commission mandate that California utilities obtain 20 percent of their power from renewable energy sources.
Make no mistake, firms see all this as a business opportunity?one they are hurrying to position themselves to fill. "The fact that people are actually forming these groups means you'll see a rush to do this soon enough over the next year," says Burkey Belser, president of Greenfield Belser, a Washington, D.C., marketing company that is already helping some law firms burnish their images as experts in the climate-change field.
Sonnenschein's Haroff sees further promise in the new practice group. "When people see that we are doing this in a credible way, that we have multiple resources, with people from different backgrounds, that makes them call."
Dennis Pfaff (dennis_pfaff@dailyjournal.com) reports on environmental law for the San Francisco Daily Journal.
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