How the Heenan Blaikie law firm collapsed

In the early days, the lawyers relaxed by throwing a football around the office. Then Johnston became an MP, so his name came off the door. Former prime minister Pierre Trudeau joined in 1984, and a rush of marquee names followed. In what seemed like no time at all, the firm had 500 lawyers with offices across the country and in Paris.

By any measure, Heenan Blaikie was a great success story.

“When we were moving into the Adelaide Centre five years ago,” recalls Toronto partner John Craig, referring to the five floors the firm occupies, “between signing a lease and actually moving in we had become too big for the space. We just kept growing.

“It seemed like the sky’s the limit.”

And then it came crashing down.

Heenan Blaikie became the biggest law firm to self-destruct in Canada when partners voted Wednesday to dissolve it. It collapsed so fast it left the legal community breathless.

The coup de grâce was an exodus of partners in the month before its demise.

And yet, on paper at least, the ship wasn’t sinking. Heenan says the firm billed clients $222 million for services last year and cleared a $75 million profit. Last December was one of its best months ever, with $35.1 million billed.

“That’s another irony in all this — things seemed to be turning around,” Craig says, referring to the December revenue.

“People think the firm was going bankrupt. Of course not. The firm was very profitable,” he adds. “We’re talking about an operation that isn’t as profitable as the year before.”

Some partners talk of a “perfect storm” — fewer and stingier clients, more competition for contracts, tensions over restructuring, a sudden drop in profits, partners nervous about cuts to their incomes and rival firms smelling blood, and poaching.

But Heenan, the firm’s chairman from 1973 to 2012, says the real problem is the loss of trust, the firm’s founding ingredient. He describes a firm torn over the past year by infighting and clashing visions, where individuals and whole offices were accused of not pulling their weight, and disputes raged over practices that should be cut.

“It’s very hard to see it end as a result of squabbles, because I really think that’s what brought the firm down, rather than the financial situation,” says Heenan, 78, now the firm’s chairman emeritus.

“Once you start pointing fingers at this person or that person and this office or that office, that leads to discontent and discontent is what leads to departures.”

By the time partners voted for a merciful end, Heenan no longer recognized the place he founded.

“I always tell the story of the handshake to show that this was a place where you dealt in trust,” he says by phone from the firm’s Montreal office. “We liked each other, we were happy together. I’ve got dozens of emails from former partners saying, ‘I can’t believe it, it was such a great place to work.’ So that’s the sad part.”

Heenan Blaikie was a mid-sized firm bolstered by big names like former prime minister Jean Chrétien, retired Supreme Court justice Michel Bastarache, and former Quebec premier Pierre-Marc Johnson. It focused on entertainment law, commercial litigation, and labour and employment law before expanding to nine offices across Canada.

“It was exciting to come to work because there were all kinds of ideas floating around and our clients would come to us for that reason,” says Heenan, noting an early emphasis on public policy issues.

Johnston went on to become a Liberal cabinet minister, Blaikie became president of the Progressive Conservative Party in the early 1980s, and Heenan concentrated on running the firm.

The Toronto office, the first outside of Montreal, opened in 1989.

“It was a really great place to work,” says Craig, an expert in domestic and international labour law, who joined in 2001. “It wasn’t the stuffy Bay St. environment that people hear about.”

In 2011, the firm opened an office in Paris with a team of 18 lawyers — many poached from the British firm Norton Rose — largely to access markets in Africa.

“The reality is we were stretched too thin because we’re kind of the victims of our own success,” says Craig, sitting in an underground coffee shop near his office, an hour before the vote to end the firm.

“The firm seemed to be growing continually and then when (business) began levelling off there were commitments made, ventures that were undertaken that probably weren’t affordable as a result. You grow too fast.”

Previously loyal customers began tendering contracts to the lowest bidder or doing more legal work in-house. The most notable decline, Craig says, was in the resource sector. The result was more lawyers with less work.

Departments and offices were told to slash expenses. About four months ago, some managers proposed bringing in former Ontario premier Dalton McGuinty, arguing his high profile would invigorate the brand. It didn’t go over well, says a former partner, who asked not to be named.

“A lot of us just rolled our eyes and said, ‘You’ve got to be out of your mind! Why would you just want to bring in another retired politician to the firm and pay him a lot of money? We need to develop the business; we need to actually have a strategy.’ ”

Downsizing became the order of the day.

“So you’re in the process of trying to realign priorities, restructure the practices, restructure the offices in the various cities, and if everything had been stable you might have been able to turn the ship around,” Craig says. “But you have too many people leaving at the same time.”

Law firms are funded by partners putting money into the firm. When partners leave, taking their clients with them, they get back their capital within a certain period. Those who remain have bigger liabilities, essentially spending some of their time working to pay back the capital of those who left. Sticking around becomes less appealing, all the more so when a drop in profits likely means less personal income.

The dynamic can prove fatal at any law firm as more and more partners leave.

“It’s a run on the bank,” says Ralph Lean, the long-time Cassels Brock partner who joined Heenan Blaikie in 2013 and jumped to Gowlings a week ago.

At Heenan Blaikie, the first departures began early in 2013. But Craig wasn’t concerned until a year later. On Jan. 9, three prominent members of the Montreal office — mergers and acquisitions specialist Eric Levy, tax lawyer Manon Thivierge and commercial lawyer Antonella Penta — jumped to Osler, Hoskin & Harcourt LLP.

“When people who are really strong and successful within the firm all of a sudden decide to leave,” Craig says, “that’s when eyes begin to open and you think, ‘Oh, no, this is much worse than we thought.’”

On Jan. 20, about 60 partners gathered in the main conference room on the 29th floor of the firm’s Adelaide Centre offices. Kip Daechsel, the managing partner, and Norman Bacal, who founded the Toronto office, announced that per-partner earnings were down 15 per cent, according to a source who attended the meeting.

The drop didn’t necessarily mean across the board cuts of 15 per cent to incomes, because individual salaries are decided by a compensation committee. But the news wasn’t good.

Bacal and Daechsel laid out two options: a significant downsizing of the firm, including less rented space in Toronto, and a major restructuring that could result in the Montreal and Toronto offices going their separate ways. There was no talk of joining U.S.-based DLA Piper, the world’s largest law firm — an option some remnants of Heenan Blaikie are now pursuing.

The partners asked few questions. A couple attempted rah-rah speeches about pulling together and making it work, but it was a deeply sombre affair. The next day, many more partners were out the door.

Craig estimates that almost 40 partners left in a few weeks, but it was hard to keep track.

“To find out who’s leaving the firm, I get Google alerts,” he says with a smile over coffee. “A few people begin leaving, then a few more … and all of a sudden there’s a stampede for the door.”

Partners were called to Montreal for a Feb. 2 meeting. But a subsequent email told them to save money by staying at their offices and participating through teleconference. Many read that as a sign the firm was finished.

Three days after the teleconference, a majority of partners voted “for an orderly windup of the firm’s operation” over the next few months. Clients will continue to be served until their files are transferred to other firms, a press release stated.

“Several practice groups and even entire offices will continue to operate under new names,” it added.

Craig joins the Fasken Martineau firm late next week, along with a dozen other labour lawyers from Heenan Blaikie’s Toronto office. A group of labour lawyers from the Ottawa office have already made the move. Deals being negotiated include some 60 corporate lawyers and litigators trying to join DLA Piper, a move that would give the American giant a foothold in the Canadian market.

“Heenan Blaikie was not an outlier,” says Lorne Sossin, dean of York University’s Osgoode Hall Law School. “There’s a lot of flux in the air. The winds of change are buffeting all law firms.

Law firms are notoriously “change-resistant,” he adds. But gone are the days when a firm can basically take the summer off and depend on loyal clients for business. They either innovate or die.

Small boutique firms focus on niche practices while big ones protect their market with everything from mergers to different billing models. Mid-sized firms like Heenan Blaikie in particular are getting squeezed. Goodman and Carr, one of Canada’s top real estate and tax-law firms, shut down in 2007.

Roy Heenan doesn’t dispute the pressures of a changed business climate. He notes that in the past, however, the firm overcame dips in its fortunes by sticking together. But by 2013, attitudes had changed.

“There’s a lack of loyalty,” he complains.

The trouble began, he says, when the firm did not appoint a new chairperson when he retired in 2012. Without the bearer of a unifying vision, tensions between the Montreal and Toronto offices grew.

Some managers began insisting on what Heenan describes as a bean-counting approach. They looked at hours worked and profit made. By that measure, the Paris office and others came under fire.

“It was mainly, ‘Well, this office has too many lawyers or that office isn’t profitable enough’ — that type of thing,” Heenan says. Among the heated debates was whether the firm should dump its international law practice and focus solely on domestic accounts.

“Last year from where I was sitting it was not a particularly happy place,” Heenan says. “And some of the measures that were being adopted were not ones that were popular or that you wanted to be around. Once you start feeling that this isn’t a happy place, you go somewhere else.”

Some see a storied law firm caught off guard by a changed business climate. But Heenan blames managers for failing to work as a team.

“We used to manage by consensus, and that was the beauty of the firm. But once you start throwing stones, that atmosphere disappears.

“It’s very upsetting to me,” he adds. “I think ending the firm was totally unnecessary.”