Biglaw, Law Firm Mergers, Legal Ethics, Partner Issues, Partner Profits

Be Afraid, Be Verein Afraid

Use of the verein structure: all the Biglaw cool kids are doing it. Okay, well maybe not the coolest kids, at least if “cool” is tied to profits per partner and prestige. But there’s no doubt that the verein structure is spreading rapidly throughout Biglaw.

This is partly because firms that use the verein form are fond of combining with other firms. If the talks between Dentons and McKenna Long bear fruit, the resulting entity will surely be a verein, like Dentons and its constituent firms.

But does the verein structure present ethical problems for the firms that employ it? Two observers of the legal profession believe it does….

In a long and interesting piece for the ABA Journal, two former Biglaw partners, Edwin B. Reeser and Martin J. Foley, subject vereins to heightened scrutiny. They begin by noting the arrangement’s growing popularity:

The last nine years have witnessed remarkable developments in national, international and global law firm business operation constructs. Among these, since 2004, are a number of Swiss verein structures, which have been adopted by several firms: Hogan Lovells, Baker & McKenzie, DLA Piper, Squire Sanders and Norton Rose Fulbright….

Verein structures for law firms are growing rapidly in number, and by lawyer headcount. The majority of law firm vereins have been formed since 2008 and already account for more than 20,000 lawyers worldwide.

What exactly is a verein? Reeser and Foley explain:

A verein is an association of independent legal entities for specifically defined purposes — generally, marketing and branding in nature. Financial separation and local entity independence of control for each verein member law firm is confirmed in the verein’s governing documents, and reaffirmed in dedicated disclaimer and notice sections prominently featured on the website of every verein member, along with the important note that the verein itself does not practice law anywhere.

Significantly, as Peter Kalis noted in a 2011 American Lawyer piece, “the member law firms independently render legal services and severally accept the rewards and liabilities that accompany such work. They do not share a common profit pool.” He compares the verein structure to the Articles of Confederation that connected the several states before the Constitution.

Here’s a less high-minded comparison. If a traditional merger between two law firms is like a marriage, then a verein is like “friends with benefits.”

Now, many people — e.g., Millennials — are fond of the whole “friends with benefits” thing. What’s the problem with the Biglaw equivalent? It’s that pesky prohibition on fee splitting that spoils the fun, according to Reeser and Foley:

Ethics rules for financial arrangements between lawyers in separate law firms are simple. The ABA Model Rule 1.5(e) is the source for many of the rules adopted by the various states in various iterations. The fee-splitting requirements provide that a division of fees between separate law firms cannot be made unless a) up-front full disclosure is made in writing to the client; b) the client agrees in writing; and in some states c) the division is in proportion to the actual services rendered, or the firms assume joint responsibility for the representation.

It should be no surprise that, based on conversations with partners in four different vereins, the standard form client engagements do not contemplate fee-splitting or referral fees, and therefore they do not include any of the elements of full client disclosure and written consent, or satisfaction of reasonableness, or proportional sharing/joint responsibility, let alone all three. Most clients do not concern themselves with law firm structures and are unaware of the applicability of the ethical rules. In such circumstances, the only way a referral can be in compliance with the U.S.-based ethics rules is if there is no fee-sharing between verein member firms.

The authors then run through some hypotheticals and describe which vereins should be kosher and which ones could create problems. If a verein merely “anticipates a dues or tithe payment to the common cause, such as branding, marketing, business development,” then that should be fine. But if a verein provides for collecting funds from member firms that then get paid out to partners to reflect some sort of referral bonus or origination award, then that could pose a problem.

“Compliance with the U.S, ethics rules is not optional,” the authors write in closing. “U.S. firms that are part of vereins must apply great care, supervision and discipline to ensure that they are not inadvertently engaged in a business model structured to comply with verein charter rules while ignoring one of the most fundamental ethical proscriptions embraced by virtually every state bar association in the U.S. Let’s be real careful out there.”

Are verein-style law firms ignoring fee-splitting ethics rules? [ABA Journal]
The Am Law 100: Grand Illusion [Am Law Daily]
Are Am Law Rankings Distorted by Swiss Vereins? Two of Top Five Operate This Way [ABA Journal]

Earlier: Law Firm Merger Mania: Dentons And McKenna Long Are Talking

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