Lawsuit Alerts Large Firms To Ensure That Their Partnership Policies Remain Airtight

As accounting firms become larger, their partnership structures often become more elaborate and complex. Tiers of power often develop. An executive committee or board of directors may have decisionmaking authority over major ownership issues. Line partners may have virtually no say in major decisions.

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lawsuit making its way through the courts gives large and growing firms reason to review their partnership agreements and examine their firm's policies regarding partners - including mandatory retirement: The suit contends that equity partners with little or no decisionmaking authority are merely glorified employees and should have the same legal status in matters such as age discrimination as others who work for the firm.

The case centers on one of the nation's largest law firms, Chicagobased Sidley Austin Brown & Wood, which demoted 32 equity partners over age 40 in 1999 to the positions of "counsel" or "senior counsel" and lowered its mandatory retirement age to allow younger partners to advance. The federal Equal Employment Opportunity Commission (EEOC) contends that the action amounts to illegal discrimination based on age.

The law firm argues that age discrimination laws don't apply to owners, but so far, the EEOC is winning. A federal court ruled earlier this month that the EEOC can seek monetary damages from the law firm on behalf of the demoted partners, even though none of them filed discrimination charges before the agency sued the firm.

"This lawsuit will impact any professional partnership where centralized management sometimes trumps individual partner autonomy," says Andrew Boling, Chicago-based partner at global law firm Baker & McKenzie. It's especially pertinent in situations where partners don't have a voice in election of management and have limited access to firm financial matters, compensation matters, "and where the firm operates in such a way that individual partner input isn't meaningful," he says.

Richard Schnadig, Chicago-based senior partner at the law firm of Vedder Price, agrees. "IfI was running a large partnership, I'd be very careful about how I treat partners," he says. "If they're told their assignments, their pay, and if they have little control over their working life, it makes plenty of sense [for courts] to call them employees, in my opinion. You can have equity, share in the profit pool, and still have no control. Calling yourself a partnership doesn't immunize you from the law."

As firms grow and partners age, a business case evolves for centralizing decisionmaking and transitioning valuable younger partners into more authoritative roles, even at the expense of more senior partners who may be less productive. But that business case may be at conflict with current and evolving law if a subset of the partners serve as oligarchs.

Lawrence Goodman, in-house general counsel at Eisner LLP in New York (FY05 net revenue: $84 million, 63 partners, 378 total staff; three offices), believes his firm's lack of a mandatory retirement age is one factor that helps protect it from controversies such as Sidley's. So does the firm's partnership structure, he says: Eisner's executive committee is made up of partners from different areas of the firm. "Everybody has a voice, and everybody knows someone on the executive committee," he says. Also, partners elect the managing partner, who automatically is a member of the executive committee.

"Try to have a representative executive committee that includes people who have authority in different areas throughout the firm," he recommends. Coincidentally, Goodman is 70 years old and joined Eisner in May after representing the firm for more than 40 years as outside counsel. He was a partner at law firm Dechert LLP before retiring and joining Eisner.

Management systems such as Eisner's are on the right track, Boling says. "It's important to show that partners have an opportunity to vote and decide who the management team is," he says. "At a large firm, it's unwieldy to have all partners vote on an office level, but have the partners vote on certain levels even on a micro scale. Perhaps, for example, the Detroit office can elect a representative to speak for them, as can other offices. They should also have the power to submit nominations for management roles."

Leslie D. Corwin, a partnership law expert at New York's Greenberg Traurig, believes that ironclad partnership agreements will protect accounting and other professional services firms, whatever the outcome of the Sidley case may be. "The issues raised in this case need to be dealt with as accounting and law firms grow, but each firm needs to look at its own individual situation," Corwin says. "The only firms that really need to worry about this case are those that haven't looked at their partnership agreements within the last five years and made sure that they are up to date - and those who are playing Russian roulette by having no partnership agreement at all," he says.

The Sidley case has fewer implications for small firms, but the distinction between a small firm and a large firm remains unclear. "One court recently distinguished that partners at a five- or six- partner firm were, in effect, managers and therefore not employees," Schnadig points out. Adds Boling: "I wish I could pinpoint a bright line as to what constitutes a large partnership. A 50-partner organization in Moline, Ill., might be considered a large partnership, but is a 50-partner organization considered to be a large partnership if it's in Atlanta or Chicago or Los Angeles? That's a judgment call."

Experts agree that there are steps firms can take to protect themselves regardless of their size. "One way to address these issues is to include an understanding in your partnership agreement as to who exactly has decisionmaking ability," Corwin says. "Professional services firms are consolidating and becoming more global. They're becoming bigger and more international, so partners may feel that they're losing some of their rights. That may be true, but there are practical realities to the governance of large firms, and they're dealing with sophisticated people who tend to know what they're signing. If somebody doesn't like the agreement, they don't have to sign it."

Schnadig acknowledges that such provisions may take some of the sheen off the allure of partnership. "You become a partner because you don't want to be at the mercy or power of a small group." Boling adds that such techniques should be used with discretion: "You don't want the courts to see the entire partnership agreement as a sham when the firm is really run more like a corporation than a partnership," he notes.

The best course is to implement policies that keep the firm out of trouble in the first place, all agree. "Make sure work force reductions aren't based on age. If you let partners go because they're not productive enough or their billings are substandard, say so," says Schnadig. Provide a mechanism for partners to challenge decisions of executive or management committees, adds Boling.

Boling also recommends that partnership agreements include dispute resolution procedures, preferably arbitration. "All disputes between the partnership and partners should be resolved with arbitration rather than the court system for reasons of discretion. Arbitration is subject to confidentiality, whereas court procedures become part of the public record, and courts don't always respect firms' financial sensitivities in matters like revenue, profit margins, and individual compensation decisions. Also, with arbitration, there is some discretion in who decides the case."

Boling recommends stipulating that the arbitrator must be a partner at a law firm with at least 500 attorneys. "It reduces the field of fact finders to those who really understand the realities how professional services organizations work," he says.

The downside of arbitration is that it's harder to get an outright win, he adds. "Arbitrators tend to try to find common ground. You may end up having to pay a partner money when you think you shouldn't, but it may be less than a court would order you to pay, and it remains private," Boling points out.

Arbitration won't prevent the EEOC from taking action on behalf of partners if firm policies leave them vulnerable, he adds. "I think that probably all professional services firms have been put on alert with the Sidley case and need to be sure their partnership agreements and their practices toward partners are in order," Boling says.

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