Firms Increasingly Making Partners Pay to Leave

As law firms look to protect themselves from cash walking out the door in a low-demand market, they are increasingly looking at methods to discourage lateral departures and, perhaps more importantly, are enforcing those methods more frequently.

To a point, consultants say, moves to claw back bonuses from departing lawyers ' like what Legal Week recently reported happened when Kirkland & Ellis sought the return of a $120,000 bonus from a partner leaving for Latham & Watkins (see “Kirkland Asks Asia Partner to Pay Back $120,000 Bonus Before Leaving for Latham,” http://bit.ly/1WMxukz) ' should not come as a surprise to partners who agree to terms that serve to protect the overall financial health of their firms.

But the lengths to which some firms have gone to financially penalize a lawyer looking to move to another firm could backfire when those firms attempt to recruit new talent, consultants say.

Delayed Distribution

In the past few years, a growing number of law firms have delayed distributions of prior-year pay, sometimes as late into the following year as June. Some firms have lengthened the time they will take to pay back capital to departing partners to as much as four or more years, and have amended partnership agreements to limit a partner's earnings to whatever his or her draws were at the time of departure, forcing departing partners to forfeit unpaid distributions that would have come out of year-end profits.

Edwin Reeser, a consultant in Los Angeles, says law firms have typically used such provisions as protection, only enforcing them when a departure would severely impact the financial stability of the firm. But now, he says, they are being more aggressively applied.

“They are being used as a sword now, [where it] used to be it was a shield,” Reeser says. “It puts huge restrictions on the ability of a partner to leave.”

And these new methodologies, adds Reeser, are taking many partners by surprise. He said they might be attorneys, but they aren't partnership lawyers and often don't even read their own partnership agreements.

Strings Attached

But some consultants said these clauses should not come as a surprise or be viewed problematically, particularly when it comes to bonuses.

Chicago-based legal recruiter Kay Hoppe says she has done several deals where a sign-on bonus is structured as a loan that is forgiven after the partner remains for a certain amount of time.

Mark Jungers of national legal search firm Lippman Jungers says sign-on bonuses have become more common, in part because firms are trying to make up for what a partner is leaving on the table at his or her former firm in terms of unpaid distributions. Reeser notes many of the firms that are paying bonuses to make laterals whole are the same ones who have “draconian” policies on the back end when partners look to leave.

Kent Zimmermann of the Zeughauser Group says Kirkland wasn't the only large firm offering bonuses with strings attached. And he says more firms might want to adopt what he called a “smart, business-minded and savvy” approach. Zimmermann did note, however, that he wasn't aware of many examples of the clauses being enforced. He says the practice falls into a general trend of firms getting tougher on exiting lateral partners.

Reeser says no firm wants to pay a bonus to a partner, only for that partner to turn around and leave. But he says there has also been an “arbitrage” on the draw system and when compensation is deemed earned, which almost “guarantees a six-figure beating to the partner who is leaving,” according to Reeser.

If a partner leaves around October, for example, she could be forfeiting the withheld portion of her annual compensation. If she leaves in March, she could be forced to repay her distributions for January and February because the firm technically hadn't turned a profit yet, Reeser says.

“Firms are really playing this at both ends,” he adds. “It's happening with regularity.”

Frank D'Amore of Attorney Career Catalysts in Haverford, PA, says existing partners would have a hard time objecting to any new partnership provisions that limit departures because they would be viewed as looking to leave.

“The tougher you make it, and the more that you enforce these types of provisions or create new ones, you then are making it more difficult for people to want to come to your firm,” D'Amore says.

In many firms, these provisions have been lurking in the partnership agreements for years, D'Amore says, echoing Reeser's comments that partners don't always read their own agreements. Someone who is retiring will generally be treated benignly, while those going to a client will also be forgiven of any of those provisions, D'Amore says, adding that firms also may look to work with a departing partner if she agrees to help bring in accounts receivable even after they leave.

An astute lawyer will do research on the front end of what contractual clauses their potential new firm employs, D'Amore says: “It's becoming more of a minefield and something where, sure, it could be a lawyer who steps on the mine, but I think with too much of this stuff, it could be the firm that steps on the mine.”

Ethical Implications

While many see some of these contractual clauses, particularly with bonuses, as an agreement between sophisticated buyers, there could be lingering ethical and legal implications.

Structuring sign-on bonuses as loans that are only forgiven as a matter of employment could be seen as a breach of the profession's rules against restrictions on a lawyer's right to practice, according to Hinshaw & Culbertson partner Janis Meyer, a former general counsel of now-defunct Dewey & LeBoeuf who advises law firms on ethics issues.

Specifically, Meyer says these types of loans may violate Rule 5.6 of the Model Rules of Professional Conduct, which states that partnership agreements “shall not restrict the right of a lawyer to practice after termination of the relationship.” See http://bit.ly/1ZNSAxg.

Jungers says he anticipates a lawyer eventually filing suit against a former firm to recoup money he feels he is owed as earned compensation.

“Because those are hours you billed, you collected, and they're just sitting on it,” Jungers adds. “So at some point, somebody's going to get sued over that and we'll see how the partnership agreement deals with that.”

Gina Passarella and Christine Simmons write for The Legal Intelligencer. Roy Strom writes for The National Law Journal. Each is a sister publication of this newsletter.