Around the Firms

EEOC Charges Sidley Austin With Age Discrimination

The U.S. Equal Employment Opportunity Commission (EEOC) has sued Sidley Austin Brown & Wood, charging that the law firm practiced age discrimination in demoting or forcing the retirement of older partners.

The suit could result in millions of dollars in back pay to former Sidley Austin partners. And it could force most large law firms to adopt radically different management structures and practices if law firm partners are determined to be “employees” under federal law.

Filed in the U.S. District Court for the Northern District of Illinois, the commission's lawsuit follows months of failed conciliation talks between the agency and the firm, whose largest office is in Chicago. Last July, after almost 4 years of investigation, the EEOC issued an administrative finding that Sidley Austin had likely violated the Age Discrimination in Employment Act (ADEA).

In its complaint, the EEOC charges that the law firm violated the ADEA by “maintaining and implementing, since at least 1978, an age-based retirement policy.”

The EEOC began investigating Sidley Austin in 2000, shortly after the firm demoted to counsel status more than 32 partners. The agency contends that virtually all of those lawyers, most of whom were in their late 50s and early 60s, were involuntarily downgraded because of their age. The EEOC says it is suing on behalf of other partners forced to retire, or demoted or expelled under similar circumstances.

The firm, then known as Sidley & Austin, merged with New York's Brown & Wood in 2001. It has more than 1,500 lawyers, making it one of the world's largest.

The agency's suit is seeking back pay and other compensation for what it says are the victims of discrimination. Such payments would measure in the millions, given Sidley Austin's profits per partner, which were $895,000 in 2003 according to a survey by The American Lawyer magazine, an affiliate of LFP&B.

The EEOC is also seeking an order requiring Sidley Austin to institute practices and policies that do not discriminate against employees over 40.

A spokesman for Sidley Austin said: “The firm has always been committed to a policy of equal opportunity and non-discrimination. We will vigorously defend against the EEOC action, which has no merit.”

John C. Hendrickson, the EEOC's regional attorney in Chicago, says the suit signals that laws against employment discrimination were not just for blue-collar workplaces.

“If there's a lesson to be learned from this case, it's that no sector of the economy, whether the factory floor or the offices of the most prestigious law firms, is exempt from the reach of the employment laws,” he says.

Whether those laws should reach law firm partners has been a subject of controversy since the EEOC first began its investigation. Sidley Austin challenged the agency's jurisdiction and power to subpoena records from the firm on the grounds that the affected lawyers were partners, and therefore employers rather than employees within the meaning of federal anti-discrimination laws.

In an opinion by Judge Richard Posner in 2002, the 7th U.S. Circuit Court of Appeals held that the EEOC had sufficiently shown that the affected lawyers could be considered employees in order to proceed with its investigation and subpoena the firm.

Judge Posner pointed to the highly centralized management of the law firm, in which partners never voted on issues, and a self-selecting executive committee that made all major decisions, in suggesting that the partners could, in fact, be employees.

The judge said that, while Sidley Austin was clearly a partnership, the “question is whether, when, a firm employs the latitude allowed to it by state law to reconfigure a partnership in the direction of making it a de facto corporation, a federal agency enforcing federal antidiscrimination law is compelled to treat all the 'partners' as employers.”

Though the 7th Circuit stopped short of declaring law firm partners employees, the decision sent a chill through the legal community.

Over the past decade, most large law firms have become even larger either through mergers or other forms of expansion. Along the way, most have adopted more corporate management structures, guided by a belief that the constant meeting and voting that characterized traditional partnerships had little place in the emerging megafirms.

Philip M. Berkowitz, an employment law partner at Nixon Peabody says the EEOC had made its positions clear and the suit was not surprising. But he said he still found it a troubling development.

“The reason why the issue is important for law firms is not that we want to have the freedom to discriminate,” says Berkowitz. “It's simply recognizing the notion that partners are not employees, as the EEOC seems to believe, but are employers and owners. We share in the profits. We are liable for the firm debts. We make contributions to capital.”

He expects Sidley Austin to continue arguing that partners cannot be considered employees based on issues like their liability and contributions to capital. Other firms, he says, would no doubt be watching the case closely.

“The ramifications of this going forward would be significant for every partnership,” he says.

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Testa Hurwitz to Disband

Venture capital law firm Testa, Hurwitz & Thibeault's 60 partners voted in mid-January to disband the 280-lawyer, 31-year-old firm after failing to find a merger partner following 10 major partner defections in December 2004.

Boston-based Testa said in a statement that it will wind down its operations over the next few months. The vote was almost unanimous – except for one partner who “didn't have the heart” to vote for the dissolution, a source said.

The move comes more than 2 years after the sudden death of the firm's founder, Dick Testa, in 2002.

“First-generation firms are like small personality cults,” says Randy Lewis, a law firm consultant with Denver-based Resolution Management Partners. “And when the charismatic leader steps back, there's not enough cohesion to hold the place together.”

In December, Boston rival Bingham McCutchen said it had grabbed three Testa partners, and New York-based Proskauer Rose announced it had poached seven for its Boston office. All 10 attorneys were part of Testa's fund formation group, one of the most profitable lines of business for the firm.

“In early December, 10 partners decided to leave the firm, having found opportunities elsewhere that they considered more attractive than continuing at Testa,” Testa said in a statement. “Although the firm conducted merger discussions with a number of suitors during the past several weeks, many partners ultimately decided that they preferred other opportunities. This week the partnership recognized that the fabric that had held the firm together for more than 30 years would no longer hold.”

Choate, Hall & Stewart, one of the firms said to be talking to Testa about a merger, said it would hire nine Testa partners. Later that same day, Goodwin Procter said it would take on 18 partners.

When F. George Davitt was elected the firm's managing partner in October, the partners assured him the firm was stable. But Testa reacted to the December defections by immediately enforcing a 90-day notice clause in its partner agreement. It told the partners that they had to show up for work during the next 90 days as they served out their notice. They could not do business on behalf of their new firms or indicate that they were partners of any firm but Testa.

Though common in partnership agreements, 90-day clauses are rarely enforced by law firms, legal experts said. But according to sources, Testa was intent on firming up its financial position to prepare for eventualities such as a merger or, some say, the eventual dissolution. By requiring the departing partners to serve out their 90-day notices, Testa could still collect on the defectors' bills. The clause also helps to distribute liabilities equally if a firm dissolves following partner defections.

“If the place collapses, we want you to go down with us,” is how one legal expert put it.

Davitt denied that Testa forced the partners to serve out their time because the firm saw its dissolution coming.

The 10 departing partners, along with 10 more who have since announced their decisions to leave Testa, are now free to go before their March 31 deadline, Testa officials say.

Testa has no bank debt, but the firm does have expensive real estate leases on its Boston office space. It must also decide how to pay its bills. Karen Schwartzman, a spokeswoman for the firm, says that Testa will not pay severance. “We're encouraging our staff to use their work time to advance their careers at other firms,” Schwartzman says.

EEOC Charges Sidley Austin With Age Discrimination

The U.S. Equal Employment Opportunity Commission (EEOC) has sued Sidley Austin Brown & Wood, charging that the law firm practiced age discrimination in demoting or forcing the retirement of older partners.

The suit could result in millions of dollars in back pay to former Sidley Austin partners. And it could force most large law firms to adopt radically different management structures and practices if law firm partners are determined to be “employees” under federal law.

Filed in the U.S. District Court for the Northern District of Illinois, the commission's lawsuit follows months of failed conciliation talks between the agency and the firm, whose largest office is in Chicago. Last July, after almost 4 years of investigation, the EEOC issued an administrative finding that Sidley Austin had likely violated the Age Discrimination in Employment Act (ADEA).

In its complaint, the EEOC charges that the law firm violated the ADEA by “maintaining and implementing, since at least 1978, an age-based retirement policy.”

The EEOC began investigating Sidley Austin in 2000, shortly after the firm demoted to counsel status more than 32 partners. The agency contends that virtually all of those lawyers, most of whom were in their late 50s and early 60s, were involuntarily downgraded because of their age. The EEOC says it is suing on behalf of other partners forced to retire, or demoted or expelled under similar circumstances.

The firm, then known as Sidley & Austin, merged with New York's Brown & Wood in 2001. It has more than 1,500 lawyers, making it one of the world's largest.

The agency's suit is seeking back pay and other compensation for what it says are the victims of discrimination. Such payments would measure in the millions, given Sidley Austin's profits per partner, which were $895,000 in 2003 according to a survey by The American Lawyer magazine, an affiliate of LFP&B.

The EEOC is also seeking an order requiring Sidley Austin to institute practices and policies that do not discriminate against employees over 40.

A spokesman for Sidley Austin said: “The firm has always been committed to a policy of equal opportunity and non-discrimination. We will vigorously defend against the EEOC action, which has no merit.”

John C. Hendrickson, the EEOC's regional attorney in Chicago, says the suit signals that laws against employment discrimination were not just for blue-collar workplaces.

“If there's a lesson to be learned from this case, it's that no sector of the economy, whether the factory floor or the offices of the most prestigious law firms, is exempt from the reach of the employment laws,” he says.

Whether those laws should reach law firm partners has been a subject of controversy since the EEOC first began its investigation. Sidley Austin challenged the agency's jurisdiction and power to subpoena records from the firm on the grounds that the affected lawyers were partners, and therefore employers rather than employees within the meaning of federal anti-discrimination laws.

In an opinion by Judge Richard Posner in 2002, the 7th U.S. Circuit Court of Appeals held that the EEOC had sufficiently shown that the affected lawyers could be considered employees in order to proceed with its investigation and subpoena the firm.

Judge Posner pointed to the highly centralized management of the law firm, in which partners never voted on issues, and a self-selecting executive committee that made all major decisions, in suggesting that the partners could, in fact, be employees.

The judge said that, while Sidley Austin was clearly a partnership, the “question is whether, when, a firm employs the latitude allowed to it by state law to reconfigure a partnership in the direction of making it a de facto corporation, a federal agency enforcing federal antidiscrimination law is compelled to treat all the 'partners' as employers.”

Though the 7th Circuit stopped short of declaring law firm partners employees, the decision sent a chill through the legal community.

Over the past decade, most large law firms have become even larger either through mergers or other forms of expansion. Along the way, most have adopted more corporate management structures, guided by a belief that the constant meeting and voting that characterized traditional partnerships had little place in the emerging megafirms.

Philip M. Berkowitz, an employment law partner at Nixon Peabody says the EEOC had made its positions clear and the suit was not surprising. But he said he still found it a troubling development.

“The reason why the issue is important for law firms is not that we want to have the freedom to discriminate,” says Berkowitz. “It's simply recognizing the notion that partners are not employees, as the EEOC seems to believe, but are employers and owners. We share in the profits. We are liable for the firm debts. We make contributions to capital.”

He expects Sidley Austin to continue arguing that partners cannot be considered employees based on issues like their liability and contributions to capital. Other firms, he says, would no doubt be watching the case closely.

“The ramifications of this going forward would be significant for every partnership,” he says.

---

Testa Hurwitz to Disband

Venture capital law firm Testa, Hurwitz & Thibeault's 60 partners voted in mid-January to disband the 280-lawyer, 31-year-old firm after failing to find a merger partner following 10 major partner defections in December 2004.

Boston-based Testa said in a statement that it will wind down its operations over the next few months. The vote was almost unanimous – except for one partner who “didn't have the heart” to vote for the dissolution, a source said.

The move comes more than 2 years after the sudden death of the firm's founder, Dick Testa, in 2002.

“First-generation firms are like small personality cults,” says Randy Lewis, a law firm consultant with Denver-based Resolution Management Partners. “And when the charismatic leader steps back, there's not enough cohesion to hold the place together.”

In December, Boston rival Bingham McCutchen said it had grabbed three Testa partners, and New York-based Proskauer Rose announced it had poached seven for its Boston office. All 10 attorneys were part of Testa's fund formation group, one of the most profitable lines of business for the firm.

“In early December, 10 partners decided to leave the firm, having found opportunities elsewhere that they considered more attractive than continuing at Testa,” Testa said in a statement. “Although the firm conducted merger discussions with a number of suitors during the past several weeks, many partners ultimately decided that they preferred other opportunities. This week the partnership recognized that the fabric that had held the firm together for more than 30 years would no longer hold.”

Choate, Hall & Stewart, one of the firms said to be talking to Testa about a merger, said it would hire nine Testa partners. Later that same day, Goodwin Procter said it would take on 18 partners.

When F. George Davitt was elected the firm's managing partner in October, the partners assured him the firm was stable. But Testa reacted to the December defections by immediately enforcing a 90-day notice clause in its partner agreement. It told the partners that they had to show up for work during the next 90 days as they served out their notice. They could not do business on behalf of their new firms or indicate that they were partners of any firm but Testa.

Though common in partnership agreements, 90-day clauses are rarely enforced by law firms, legal experts said. But according to sources, Testa was intent on firming up its financial position to prepare for eventualities such as a merger or, some say, the eventual dissolution. By requiring the departing partners to serve out their 90-day notices, Testa could still collect on the defectors' bills. The clause also helps to distribute liabilities equally if a firm dissolves following partner defections.

“If the place collapses, we want you to go down with us,” is how one legal expert put it.

Davitt denied that Testa forced the partners to serve out their time because the firm saw its dissolution coming.

The 10 departing partners, along with 10 more who have since announced their decisions to leave Testa, are now free to go before their March 31 deadline, Testa officials say.

Testa has no bank debt, but the firm does have expensive real estate leases on its Boston office space. It must also decide how to pay its bills. Karen Schwartzman, a spokeswoman for the firm, says that Testa will not pay severance. “We're encouraging our staff to use their work time to advance their careers at other firms,” Schwartzman says.