Clients should consider to contract the partner, not the firm
There were more than 3100 lateral partner moves among Am Law 200 firms in 2019. That is about 12 partners moving firm every working day. That would be more than one partner every working hour. So, during the time it takes me to write this article there has been at least one lateral partner move among the AML-200 alone. If we would include the 200 biggest law firms from the rest of the world the number would almost be double. Partners being loyal to their firm, clearly has become a thing of the past.
The whole lateral hiring circus has become an endless boulevard of broken dreams. We know from data statistics that less than one-in-five lateral hires turns out successful. 80 percent turns out to be a disappointment to the hiring law firm or to the moving partner, and sometimes to both.
Obviously, there is two categories of partners that move to another firm. There is the category of talented partners that think they see better potential to grow their practice at the other firm. The other category is the partners that have no future at their present firm and have been kindly requested to leave. This category makes up about half of all lateral moves. The looser from one firm is expected to become a winner at the next firm.
For the law firms these huge numbers of lateral movements have become a bit of a curse. Of course, law firms welcome the opportunity to buy market share, revenue and profit by attracting a rainmaker from another firm, but they equally fear losing their own rainmakers to the competition. That is why most law firms have put non-compete clauses in their partnership agreements stipulating that partners owe the firm a percentage of their revenue as a penalty and/or must take a gardening leave.
All this is about to change!
Thursday 13 February 2020 the Washington D.C. Court of Appeals ruled that law firms have no property interest in hourly billed client matters. This case is about the question if former Howrey partners owe part of the revenue they have made on their Howrey clients after this firm went bankrupt in 2011, to the estate. But the verdict has a far wider reaching relevance: “A law firm does not have a ‘legitimate claim of entitlement’ to hourly-billed client matters because it is the clients who retain the right to control the representation,” Chief Judge Anna Blackburne-Rigsby wrote for the panel. ”A law firm’s belief that it will continue working on such hourly-billed client matters into the future constitutes no more than an ‘abstract need’ or ‘unilateral expectation.’” As a result, former partners have no duty to remit profits they earned at their new firms back to their prior ones, the D.C. court found. This verdict is widely supported by a total of 25 national and international law firms, as well as the ABA, the Association of Professional Responsibility Lawyers and the D.C. Bar Association.
Your non-compete will probably not be enforceable
There you have it. This court ruling confirms what we all knew already but always tried to ignore. Ultimately it is the client who decides. The client may choose to stick with the partner and follow him/her to the new firm or remain with the old firm and continue with a different partner handling their mandates. The ruling will likely render any provisions in a partnership agreement that could in any way obstruct this freedom of a client, as being void. Firms will not be allowed to send a partner on gardening leave and will not be entitled to part of their future revenue. The more high-level question is if a non-compete preventing a lawyer to continue working for a client would be valid in the first place. Law firms will have to come up with different forms of ‘penalties’ for partners who want to join the competition. This should however not be a problem.
Clients should reconsider their position
It is not only for the law firms that the huge numbers of lateral partner movements have become a bit of a problem. Also, for law firm clients it is has become a nuisance. Have you ever asked clients how they feel about partners entrusted with their matters moving firm? We have asked this question many times and universally clients tell us that they hate it! It invariably causes problems and costs. Some partners move to firms that are not on the panel. Often the new firm will have a higher rate. What about the other partners and lawyers who are still at the old firm, that have been involved in the client’s matters. A partner’s lateral movement is never ever in the clients’ interest.
Here is my point. Why do clients still select law firms in the panel, if they, in about half of the instances, want to work with a particular partner. If the relationship between a client and a partner is so strong that the client will most likely follow the partner if he/she moves to a new firm, why not put this into writing? Engagement letters are invariably made between a client and a law firm. In about half the cases this would be wrong. In these situations, clients engage an individual lawyer, whom they want to work on their matters. If this is the case, this should be put into contact. The engagement then should be between the client and the lawyer, not with the firm. This engagement letter should then have clear provisions governing the situation if this lawyer moves to a new firm.
All this is old school thinking
Those of you who know me, will be aware that I truly believe in teamwork. I am convinced that both clients and law firms will be better of if the relationship is not limited to one partner. Clients need law firms to make use of ‘swarm intelligence’ to find smart and innovative answers to the clients’ questions. However, the way law firms are organized today, most incentives stimulate one individual partner to monopolize the relationship with a client. Most law firms are aware that this system will cost them money on the long run. There are invariably lots of issues around lateral departures, succession in case of retirement and young partners building up their own practice.
For a law firm it would be clever to build many strong relationships between many of its lawyers and the client. This will not only mitigate the risks; it will also make the relationship much stronger. But as long as law firms keep thinking old school, their clients would be better off engaging a specific lawyer instead of a law firm.