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Cover Story: Partners In Transition

by James LaRosa

Spring 2006, Vol. 69, No. 1

More than forty percent of Philadelphia lawyers are age 50 or older, according to a 2005 survey conducted by the Philadelphia Bar Association. About one-third of the survey respondents reported that they intend to stop practicing law full time in ten years or less.

Given these findings, it’s not surprising that law firm retirement policies have become a hot topic of discussion. Firm management are grappling with the financial and business issues triggered by the changes anticipated to occur when large numbers of older attorneys retire or cut back their practices in close succession. Senior attorneys are busy thinking about and planning for changes to their personal and professional lives in a future that, whatever it brings, will differ dramatically from their years as law firm partners.

Many large law firms have mandatory retirement policies. These policies require the firm’s older lawyers to retire or undergo a change of statute at a particular age, commonly 65. Lawyers who are not equity partners generally are not subject to these policies. With law firms now being run more like traditional businesses, these policies are coming under closer scrutiny not only by firm management and attorneys, but also by the courts where the legality under the discrimination laws of mandatory retirement policies for law partners is being challenged.

Retirement policies also have become a hot topic because law firm partners are increasingly making lateral moves, often taking with them substantial books of business. Firms with retirement policies are concerned about losing rainmaking partners who control large institutional clients to firms without these policies. They also are concerned about missing opportunities to bring in new rainmaking partners nearing retirement age who could help grow their firms.

As law firms weigh the effectiveness of their policies against these challenges, many firms will reconsider the utility of their policies or consider one or more of the many alternatives to the traditional one-size-fits-all retirement approach.

The Typical Terms

What is a typical mandatory retirement policy at a law firm? Firm retirement policies and the exceptions made to these policies vary. Retirement means different things to different firms and to different lawyers.

“Retirement” might mean leaving the practice of law completely, but just as often it can mean a demotion in title—often to “counsel,” “of counsel” or “special counsel”—or changes in compensation, equity status, employment status, number of hours worked or some combination of these. Changes can be swift or can play out over time, depending on the terms of a partnership agreement.

Increasingly, the trend is to have policies that do not require retirement-age partners to leave the firm altogether. Instead, the firm allows older partners to transition into non-equity, non-management counsel or contract employee roles. Firms also have implemented more formalized pension and/or funded retirement plans to help provide some financial security or stability upon full or partial retirement.

Mandatory policies generally stipulate that the retirement age is 65 or 70. Large firms are far more likely to have such policies than firms with fewer than 100 attorneys. In fact, it has been reported that up to seventy percent of firms with 100 or more attorneys have retirement policies for partners. For firms with fewer than twenty attorneys, surveys report that only about eighteen percent have formal retirement policies.

Reasons For the Policies

The most common reason mentioned for having a law firm retirement policy is to provide an orderly transition for younger partners to take part in the management of the firm while making it easier to phase out partners whose advancing age may affect their performance. Younger up-and-coming partners know they’ll have opportunities to move into firm leadership as the more senior attorneys move into retirement. Young lawyers are spared the daunting task of telling the attorneys who mentored them for twenty years that it’s time to step aside. And firms are able to manage the long-term health of the firm through a structured transition of management and clients.

Reconsidering Retirement Policies

The leaders of firms with mandatory retirement policies are reluctant to state on the record whether the firm is reconsidering its current policy. There is evidence, however, that many firms are giving some thought to making changes to their policies, if not doing away with them altogether.

Many factors can lead firms to reconsider some or all of their policies. The lateral movement of partners can leave firms, especially those with few rainmakers, in a bind if they can’t keep their older rainmakers or have to pass up opportunities to bring in new rainmakers because of their age.

In an era of increased focus on profits per partner and intense scrutiny of the bottom line, partners are guarding their clients and client relationships more closely. Many partners believe their clients can provide them with leverage to negotiate exceptions to mandatory retirement policies or provide them with the option to make a lateral move if necessary. If senior partners are closely guarding their clients and not helping, encouraging and fostering relationships between their clients and junior partners within the firm, there are real concerns that these clients will not transition their work to the firm upon the mandatory retirement of the senior partner.

Objections by rainmaking partners have also led to internal challenges to mandatory retirement policies. Although many retirement policies allow attorneys to continue working beyond the mandatory retirement age, many have provisions that call for attorneys, either through a formula or de-equitization, to earn less for the work they originate. Business-generating partners faced with the prospect of reduced compensation often seek the elimination of or an exception to the policy.

Some of these objections have resulted in legal challenges. In most other industries, a mandatory retirement age is unlawful. Law firms, however, have maintained that because they are traditionally organized as partnerships and their senior attorneys are “partners,” not “employees,” they are not subject to anti-discrimination laws.

Some senior partners argue that they really are employees, pursuant to the Age Discrimination Employment Act (ADEA) and comparable state discrimination laws. Firms have adopted management structures in self-selecting or self-electing management committees and that these committees set firm policies on which most firm partners have never had the opportunity to vote, including mandatory retirement policies.

An example of this type of action is the EEOC’s current lawsuit against law firm Sidley Austin Brown & Wood LLP, alleging the firm violated the ADEA when it took away partnership status from partners by lowering the mandatory retirement age.

The Age Discrimination in Employment Act applies only in employer-employee relationships, however, the U.S. Circuit Court of Appeals for the Seventh Circuit has determined that if older partners at Sidley functioned as employees of the firm rather than decision-making partners they were protected by the ADEA. EEOC v. Sidley, 315 F.3d 696 (7th Cir. 2002). There also have been challenges by individual partners. In a suit filed in 2003 by 73-year-old partner Anthony F. LoFrisco in the New York office of Chicago-based Winston & Strawn LLP, LoFrisco alleged that Winston breached a special agreement that would not have subjected him to the “decompression” of compensation provisions of Winton’s retirement policy, which applied to partners over the age of 65.

LoFrisco also alleged that in 2002 he originated about $10 million in business for which he received $2.3 million in compensation. According to LoFrisco, his originations rose to $13 million in 2003 and $16 million in 2004, but his compensation dropped to $1.3 million in 2003 and $350,000 in 2004. In December 2005, the New York Supreme Court granted summary judgment to Winston & Strawn on most of LoFrisco’s claims, agreeing with the firm that the plain language of the agreement gave the executive committee discretion in deciding his pay.

The New York Law Journal described the significance of LoFrisco’s suit as follows: “The suit had called attention to the disputes that can arise between senior partners who want to maintain their positions at the top of their firms’ compensation scales and the firms that might prefer to phase them out in favor of rising stars. In recent years, firms have shown greater willingness to waive decompression, mandatory retirement or similar policies for older partners still responsible for a large amount of business.”

Alternatives

Firms are finding ways to keep senior partners who are valuable to the firm. Typically, this is accomplished by making the former partner an employee with the title “of counsel” or “special counsel.” Commonly in this type of arrangement, firms provide the lawyer with full benefits and a salary. Additional incentives may be tied to the number of billed hours.

For firms maintaining their retirement policies, exceptions can be incorporated to provide options to both the firms and the individual partners case-by-case basis.

Firms also work out “special deals” with rainmaking partners, allowing them to maintain the same or similar compensation structure to provide an incentive for the attorneys to stay with the firm, continue to generate work and maintain client relationships. These negotiated arrangements often include a change in the title or status of the partner so as to stay in technical compliance with the firm’s retirement policy but they eliminate some or all of the policy’s compensation “decompression” aspects. Usually these arrangements are tied to performance and governed by an employment contract.

When concessions cannot be made, or negotiations for special arrangements fail, partners at firms with mandatory retirement policies typically just move on to another firm as their retirement age nears. Two recent New York Law Journal news stories illustrate this point: “Veteran white-collar criminal defense lawyer John ‘Rusty’ Wing has left Weil, Gotshal & Manges to become a partner at 21-lawyer Lankler Siffert & Wohl. Wing, 68, has defended a wide variety of clients, including David Sandy, the British lawyer accused of destroying evidence during the investigation of wrongdoing at the Bank of Credit and Commerce International. Wing cited Weil Gotshal’s mandatory retirement policy as the reason for his departure after 28 years.”

“The former head of the government investigations and business crimes practice at Simpson Thacher & Bartlett has joined a Manhattan litigation boutique. John J. Kenney will be a name partner at 13-lawyer Engel & McCarney, which will be called Engel, McCarney & Kenney. Mr. Kenney, 62, cited Simpson Thacher’s mandatory retirement age as the reason for his move.”

These kinds of departures appear to be tough losses for the firms, and in many cases they are. On occasion, however, the departures are a win-win for everyone. Perhaps the departing partner, while still productive, is not productive enough to meet the standards of the departing firm. Or perhaps the partner’s business is down from prior years or the billing rate is not where the departing firm would like it to be. Under these circumstances, partners can move to other firms where the amount of their business and billing rates are viewed as a welcome addition. Moreover, the arriving attorney’s stature and reputation might help his or her new firm attract new clients or more work from existing clients.

Small Firm Policies

As previously indicated, fewer than twenty percent of small firms have formal mandatory retirement policies, primarily because the smaller size of the firm allows management to handle these issues on a case-by-case basis rather than with a written policy. As firms grow larger, it becomes difficult, if not impossible, to deal with certain issues on a case-by-case basis, especially when the decision-makers on a management committee have little or no working or personal relationship with many of their partners.

Also, for many small firms, the firm’s “brand” recognition in the community may be tied to individual partners in a firm, whereas most large firms strive to build a firm “brand” that is not tied to name recognition of individual attorneys.

Because the individual partners in many small firms play such a crucial role in the financial health of the firm, there is a real hesitation to be bound by a written policy that would require the mandatory retirement of partners.

Smaller firms that lack a retirement policy are also likely not to have a formal plan to compensate lawyers when they retire. This can be a major source of concern for senior partners in small firms.

Conclusion

Law firms will continue to confront mandatory retirement policy issues as the effectiveness of the policy as a firm management tool is weighed against the legal challenges law firms might face.