Legal Affairs: LAW FIRMS
SILICON VALLEY'S OTHER POWER ELITE
When Apple Computer Inc. went public back in 1980, they were there. When Novell Inc. merged with WordPerfect Corp., they were at the bargaining table. And when the Justice Dept. and Microsoft Corp. battled on Apr. 24 to have their controversial antitrust deal resurrected, they were at the center of the storm. The lawyers at Wilson, Sonsini, Goodrich & Rosati have been so skillful at riding the wave of the most dynamic U.S. industry that they are as hot as their cutting-edge clientele. "If Wilson Sonsini was a stock, I'd invest in it," says Paul Lippe, legal counsel at software designer Synopsys Inc.
That a law firm could inspire such enthusiasm shows that Wilson Sonsini has little in common with the legal Establishment. Mirroring the entrepreneurial, risk-taking persona of its clients, the Palo Alto (Calif.) firm plays by its own rules. Its partners sit on the boards of such clients as Autodesk Inc. and Lattice Semiconductor Corp., flouting the current tide against such conduct. They dole mut the kind of financial advice usually expected of bankers or venture capitalists. The firm invests in startups it takes public, maintaining a current portfolio of some 500 client companies, including LSI Logic Corp. and Synopsys. Going another step, Wilson Sonsini does what would be unthinkable in most legal circles: It represents promising upstarts for free until they can pay legal bills. The gamble has paid off handsomely with such success stories as Sun Microsystems Inc.
The result is a 275-lawyer firm intricately tied to the fortunes of its clients as well as its community. It's also one of the most profitable firms in the country, with $100 million in annual revenues. "We're really part of the fabric of Silicon Valley," says 54-year-old Larry W. Sonsini, the firm's driving force. No kidding. Of the 150 largest public companies in Silicon Valley, Wilson Sonsini lists at least 36% of them as significant clients. Since 1990, the firm has taken more than twice as many high-tech companies public as its nearest competitor, according to Securities Data Co.
What's more, Wilson Sonsini represents at least 20 semiconductor companies and the top three independent disk-drive makers. Its vast representation of venture capitalists and underwriters makes for an incomparable business network. "The firm has an ability to access people all over the place at the drop of a hat," says A. Grant Heidrich III, a general partner at Mayfield Fund, a venture-capital firm. Founder Sonsini recognizes that his firm's intricate web could raise eyebrows. "There is an incestuousness in the Valley," he says. "I can see where it would look strange to the outside world."
JUDGE AND JURY. Particularly strange, because lawyers elsewhere, fearful of liability claims, have largely cut off the kinds of ties cultivated by Wilson Sonsini and a handful of other Silicon Valley firms. Clients are cracking down on affiliations with lawyers that shareholders say raise such ethical issues as lack of independence. "Increasingly, firms are realizing [such alliances are] risky business," says Charles W. Wolfram, an ethics professor at Cornell Law School. "The potential for conflict is explosive."
As Silicon Valley matures, Wilson Sonsini is beginning to pay a price for its devil-may-care approach. The firm has been hit with a malpractice claim, has been kicked off a case by an appellate court, and has had its ethics questioned by Microsoft in its antitrust brawl with the government--all because of alleged conflicts. "It appears to be Wilson Sonsini's policy that it decides if there's a conflict, not the client," says James T. Given, corporate counsel for Cadence Design Systems Inc.
In a recent run-in, Cadence got Wilson Sonsini disqualified from a trade-secrets dispute brought against it by Synopsys. Software maker Cadence contended that since partner Gary L. Reback had once been Cadence's counsel before joining Wilson Sonsini and was therefore privy to its sensitive information, neither he nor the firm should be allowed to represent Synopsys. A California appeals court agreed in late March. "It takes some guts to stand up to Wilson Sonsini," says Given. "Their influence is ubiquitous." Reback says the action is merely the litigation tactic of an adversary and that he had no inside information about Cadence.
That rare challenge to Silicon Valley's business culture could be a sign of more to come. "There is pressure on us, and it has a chilling effect," says partner Tor R. Braham. Adds partner Alan K. Austin: "We're pretty damn careful. In this increasingly litigious world, we have to be."
Critics say not careful enough. "The firm is so totally integrated in the overall ability to make an idea into a lot of money that it has, in many instances, crossed the line," argues securities class-action plaintiff lawyer Melvyn I. Weiss. Without actually suing them, Weiss has blasted lawyers in several shareholder suits for owning client stock--a relationship he says gives them a personal stake in the performance of a stock offering. In a case against Quickturn Design Systems Inc., for instance, Weiss's firm accuses Wilson Sonsini of helping to inflate client Quickturn's financial condition in order to attract investors. "The lawyers who helped Quickturn pursue this scheme personally stood to gain financially," the complaint states.
Wilson Sonsini calls such charges frivolous. Indeed, managing partner Mark A. Bertelsen says the firm minimizes any potential problems related to its investments by capping them at $25,000 per company. And though the fund has provided a stunning 3-to-1 average rate of return since it was created in 1978, no individual can reap a windfall because the proceeds are split among the firm's lawyers. "What's the incentive to risk anything for $5,000?" asks Bertelsen. "It's just crazy."
Still, alleged conflicts have begun to plague the firm in other ways. Last year, Wilson Sonsini paid an entrepre-
neur who charged it with a conflict of interest an undisclosed sum to settle his malpractice suit. Larry Sonsini, who denies any wrongdoing, says the firm settled to avoid a messy trial.
"POPPYCOCK." Wilson Sonsini couldn't duck a messy fight with industry giant Microsoft. The firm infuriated the software maker by opposing its antitrust deal on behalf of three anonymous clients. In appealing a federal judge's rejection of the settlement, Microsoft took the unusual step of railing against the firm's alleged conflicting relationships. "The law firm...has never explained how it can act as regular outside counsel for Novell Inc. while, at the same time, directly attacking Microsoft's planned acquisition of Intuit Inc. in which Novell has a substantial interest," wrote Microsoft in its appellate brief.
Sonsini, who is on Novell's board, says Microsoft's conflict allegations are sour grapes. "That's just poppycock," says Sonsini, adding that Novell used other counsel to negotiate with Microsoft and waived any potential conflicts before Wilson Sonsini took on the antitrust matter. Novell confirms this.
Wilson Sonsini relies on full disclosure to its clients when potential conflicts arise. On average, the firm asks clients to sign conflict waivers 15 times a month, says Bertelsen. It took five waivers from an array of clients for the firm to represent Wavefront Technologies Inc., which is currently being bought by another client, Silicon Graphics Inc. When Novell acquired WordPerfect in 1994, the firm not only had to get waivers, but Larry Sonsini, who was on the board of directors at both companies, resigned from WordPerfect.
Wilson Sonsini says it has turned away business even from the likes of Intel because of conflicts with existing clients. "Clients are often more relaxed about the conflict issue than the lawyers are," says Craig W. Johnson, an ex-Wilson Sonsini partner.
For now, most clients seem more than satisfied. The vast majority of those interviewed have faced thorny conflicts using Wilson Sonsini as counsel. Yet they gladly sign waivers in exchange for access to the firm's industry knowhow, legal skills, and connections. "They represent all the successful companies," says Seagate Technology Inc. Chairman and CEO Alan F. Shugart. "I don't worry about conflicts."
Synopsys, which does 30% of its business with Wilson Sonsini clients, says that if it didn't overlook potential conflicts, business would suffer. "If everybody took a black-letter view of the law with respect to conflicts, nothing would ever get done," says Synopsys' Lippe.
SUPPORT. Loyalty and trust runs so deep that companies abdicate control over routine matters to the firm. Recently, Wilson Sonsini interviewed candidates for general counsel of client Conner Peripherals Inc.--in essence helping to pick the person who will eventually supervise its legal work. And when Broderbund Software Inc. planned a merger with Sierra On-Line Inc., the companies jointly hired Sonsini, rather than investment bankers, to value the deal.
Even those who question the wisdom of such practices as lawyers sitting on clients' boards seem to drop their objections when it comes to Wilson Sonsini. "If there's an exception to the rule, I'd say it's Larry [Sonsini]," says Sanford R. Robertson, chairman of investment bank Robertson, Stephens & Co.
As long as clients offer such unwavering support, Wilson Sonsini has little incentive to back away from its chummy philosophy. Change will only come as companies grow and rely more heavily on global connections, or in the event of more lawsuits and financial penalties. Until then, Wilson Sonsini plans to stay in lockstep with its clientele. "I always want to be where my client is going," says Sonsini. And for the moment, that's full speed ahead into the next century.
Wilson Sonsini's Stake in Silicon Valley
With more than 2,000 clients, including some 1,200 high-tech
companies, Wilson Sonsini is a powerful force in Silicon Valley. The firm wields influence through its extensive business network.
SAMPLING OF CLIENTS
-- Apple Computer
-- Broderbund Software
-- Cypress Semiconductor
-- Dell Computer
-- LSI Logic
-- Packard Bell
-- Seagate Technology
-- Silicon Graphics
-- Sun Microsystems
-- VLSI Technology
-- 20 venture capitalists
-- 19 investment banks
CLIENTS WITH WILSON SONSINI PARTNERS ON THEIR BOARDS
-- Cats Software
-- Diamond Multimedia
-- Lattice Semiconductor
-- Parallan Computer
-- Ross Systems
-- Silicon Valley Group
-- Software Publishing
DATA: WILSON, SONSINI, GOODRICH & ROSATI By Linda Himelstein in Palo Alto, Calif., with Russell Mitchell and Robert D. Hof in San Francisco