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Mandatory Partner Retirements — Do They Make Any Sense?

 

Virginia Bell - Michael Kirby

Mandatory Law Firm Partner Retirements

 

Midlevel Service Partners Beware

 

                                                                                      Jerome Kowalski

                                                                                      Kowalski & Associates

                                                                                      April, 2010

 

In times of war, famine, plague and pestilence, it is, sadly, the old and the young who die first.  The same unfortunate fact applies in recessionary times.

In 2009, we all bore witness to the tragic series of layoffs in which young lawyers, of impeccable credentials and prior selfless dedicated service to their law firms were tossed overboard, like so much ballast, to help keep the law firms’ ships afloat.  An unanticipated consequence of reductions in force of associates by the score was the realization of unexpected revenues, as salary expenses for these lawyers disappeared, while revenues produced by these lawyers at the time of their departures in the form of both accounts receivable and work in progress were realized; a ramp down effect.  Thus, many firms were able to report increased profitability, despite declines in gross revenues.

Now, it is the older generation which seems to be too often pushed to the gangplanks.

Many, if not most, law firms, having partnership agreements drafted in the first part of the 20th century, when productive life spans rarely exceeded 70, include mandatory retirement at the ages of 65 or thereabout. In a 2008 study, Altman Weil determined that 58% of firms responding to the study had mandatory retirement ages. But these requirements were, as noted above, prompted by mortality statistics of the time of the drafting of the pertinent partnership agrrements.

Contemporary art of that era illustrates the point. Film aficionados and those of us of a certain age will recall the 1955 Academy Award winning movie Marty, starring Ernest Borgnine, playing Marty Peretti, a 34 year old unmarried butcher, who took over the shop established by his then deceased father. His immigrant widpwed mother constantly badgered him about getting married.  “Marty,” she would say, “I’m an olde lady, I’ma fifty tree years old. Soona, I’ma gonna die and I won’ta see any grandchildren.  Marty, whena you going to get married?”

In the go-go years of the last quarter of the last century and through the first eight years of this century, as business continuously expanded as did life expectancy, law firms routinely waived the mandatory retirement requirement keeping headcounts high, taking advantage of sound judgment and experience of these older partner derived over years of practice and, most significantly, cementing client relationships developed by mature partners over the decades.

Times are no longer flush. More ballast needs to be tossed overboard. Accordingly, mandatory retirement requirements are more miserly granted.  If at all, they are frequently granted one year at a time, with concomitant annual reductions in compensation, while the law firm battles to pass clients on to a younger generation of partners. Soon enough, when a firm believes the client transitions have taken place, no further waivers are being granted.

In our view, neither the young nor the old should fall victim. Rather, younger lawyers should have been retained with their compensation being more carefully rationed and the mature, productive lawyers being retained as irreplaceable assets.

Some firms, realizing the profitability of ramp downs, described above, anticipate that a byproduct of forced retirements is that in an era of declining revenues, profitability, in the face of continued declining revenues, will again probably materially adversely affect profitability; indeed, given the higher hourly rates of mature lawyers, the revenues derived by these ramp downs (accounts receivable and work in progress) should theoretically be higher, particularly given the higher rates and incomes of these partners.

More forward thinking firms, recognizing the combination of experience. the ability to efficiently deliver quality services that mature lawyers offer and long personal client relationships developed over decades, frequently result in clients’ rejections of being “transitioned” to younger less experienced partners.  These other law firms, having rejected mandatory retirement ages,  are very successfully mining the crop of retired partners, most of whom bring along most, if not all of their clients.  Noteworthy firms who have taken advantage of thee opportunities include K&L Gates, Pillsbury, Stroock, Kassowitz Benson and Winston & Strawn. A host of midsize firms have been grabbing – indeed actively competing for this treasure trove and benefitting quite handsomely.

One significant point to consider here is that of the firms mentioned, the only large firm that has been soaking up retired partners and admitting them as true equity partners are, apparently K&L and Pillsbury.  Midsize firms recruiting partners forced in to retirement have varying policies.

The game changer is, of course, the Federal Equal Employment Commission, which, consistent with our previous report, recognizes that law firm partners are in fact employees at will  and accordingly applied its regulations barring age discrimination to first sue Sidley in 2007 for these practices, with the case being disposed of by Sidley’s paying $27,500,000 for this practice. Kelley Drye most recently came under the EEOC’s cross hairs and in short order Kelley Drye, a firm widely well regarded for both its litigation skill and keen intellect, as its outside counsel on the matter, Proskauer, which is also widely respected for its skill in labor matters, simply said no mas¸ and on April 8 announced that it was simply dropping its mandatory retirement policy, which K&Land Pillsbury had done voluntarily two years ago to wisely take advantage of the opportunities created by the application by large law firms of anachrostic rules adopted 75 ago.

It seems quite obvious that many, if not all, of the rest of the large law firms will react to the EEOC actions or the escalating number of lawsuits brought by de-equitized senior partners or older partners who, while not being de-equitized, having their compensation reduced to pauper’s wages, most simply sloughed off recommendations made three years ago by the American Bar Association the New York State Bar Associations that such mandatory retirement policies be eliminated. The significant Sidley financial settlement provides a mighty strong inducement or firms to similarly cave in, in this epoch of continued declining revenue.

Now confronted with the Sidley and Kelley Drye precedents, the EEOC’s announced readiness to bring more such claims and the litigious penchant of some pissed off partners pushed in to involuntary retirement to sue the firms and partners to whom they had dedicated their entire careers, all of which must necessarily be contrasted with the demonstrated ability of septuagenarian lawyers to be at their most productive points in their lives, we firmly believe the wiser course would be for firms to simply drop these rules born of a different time and take fullest advantage of senior lawyers, with experience, sound judgment and often very loyal clients.

In short, continuing the application of forced retirements is in most instances, probably illegal, deadheaded and counterproductive.  Lawyers with seniority, whose years of practice and leadership in the firm, and who have mentored many younger lawyers, coupled with loyal clients, create both voids and loss of valuable assets.

Firms seeking to suppress the negative publicity of associate layoffs and forced retirements by announcing the inglorious (at least from clients’ perspectives) $160,000 starting salaries are simply doing themselves a disservice.  Clients made it clear starting last year that they will not pay for training young lawyers. Consumers of legal services are making it abundantly clear that they favor the skill, judgment and, most significantly, the efficiency of mature capable lawyers. Too many clients who see their law firms retire their trusted and efficient senior counsel simply get in to the same act and retire the firm.

The bad news is that the economy has far from fully recovered. Clients’ demands for fee reductions and efficiency continue unabated, and competition from medium sized firms that can deliver quality work product at reduced rates hover at the gates. More ballast may be required to be jettisoned. The most likely victims may be midlevel service partners lacking client followings and age discrimination claims, whose work may be able to be replicated by a combination of lower paid younger partners, counsel and senior associates.

Sadly, as we see it, there is still more tunnel at the end of the tunnel.

But the plain fact is that midlevel service partners are fully capable of making valuable contributions to the firms and its clients. These capable midlevel lawyers do perform quality services efficiently.  They also make important contributions to the firm and its clients.  Most significantly, in our view, it is this class of midlevel lawyers who are most suited to provide project management, a tool essential to both profitability and viability in this era of client demand for value billing and AFA’, a subject we have addressed in the past. Mature lawyers, trained in a different day, found it difficult, if not impossible, to adapt to even the digital era; learning the skills of project management will likely be pushing that envelope too far. Young associates are ill suited for project management, given their lack of experience.  Service partners should be the vanguard for critical project management that will distinguish law firms in the coming years. And, these service, who must be supported by management, should train the generations that follow not only in the skills of lawyering but also in the need for careful matter management and efficiency.

So much of the recent carnage could have been avoided if associates compensation would have been be rationalized by rules of supply and demand and law firms’ recognition that all of the old rules of the road are no longer extant. For the good and future weal of the law firm as an institution, firms need to return to a time of true partnership, the joint sharing of ownership of an enterprise, sharing both the rewards of the years of feast and some of the pain of the years of famine and maximizing the value of every level of lawyer. Fear of unemployment, uncertainty, management conducted behind smoke and mirrors and lack of transparency all work against a shared purpose. Firms with declined morale breed inefficiency.

But, most significantly, firms need to grasp the reality that the luxuriant years, yielded by the leverage model, must now simply give way to the demand for efficient delivery of quality services at prices now demanded by the marketplace.  Value billing and informed well managed AFA’s will stand in the stead of leverage.

The focus simply needs to be on skill and competency coupled with far greater attention to the management of a resourceful machine through which legal services are processed.

Associate reviews and compensation must be centered on the quality of the services rendered, the efficiency with which the services were rendered, the comprehension of the clients’ objectives and timely meeting those objectives, not on how many hours did you give us last year. No other service provider or manufacturer would tolerate an employee boasting of the extended and exaggerated amount of time it took to produce a finished product, instead of crowing about how efficient he or she was in producing the product or service.

Clients, in this new era of value billing, will handsomely reward firms which are efficient and obtain results consistent with client objectives, rather than law firms whose primary focus is on squeezing out as many billable hours as possible from the denizens of its precincts. The law firms which will prosper are those which most quickly grasp these obvious facts and recognize that these realities are not merely a fad or a passing storm.

© Jerome Kowalski, 2010. All rights reserved.

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7 Responses

  1. Beautifully written article!

  2. […]                         I have discussed the issues of mandatory age-based law firm partnership retirements and the wisdom of these practices elsewhere. […]

  3. […] While I have previously questioned the wisdom of law firms having mandatory policies, and the legality of these policies have come under scrutiny, the fact is that too many law firms […]

  4. […] So, I am afraid that we will see another round of layoffs, lateral moves, de-equitizations, and mandatory retirements. If you are a partner in law firm, pay very close attention to how your firm is doing, since there […]

  5. […] or perhaps leave it to his or her children. Lawyers can do neither. If they are lucky, they get to retire voluntarily when they are ready (not when they are forced to) and then simply get their own money, namely, […]

  6. […] will understand that we are doing this for the good of the firm. Let’s also be strict about our mandatory retirement policy. No waivers. […]

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