Nonequity Partners

Earlier this month, we reported on Bingham McCutchen and Morgan Lewis & Bockius’s agreement to merge. The 750-lawyer Bingham firm has been going through a rough patch lately, so news of the deal with 1,200-lawyer Morgan Lewis sounded like a rescue to some observers.

But rescues come with terms and conditions. What are the ones at issue here? There’s good news for some Bingham partners, and bad news for others….

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Although Am Law and ATL covered the story first, the long spread in The New York Times alerted the whole world to the woes of Gregory Owens, a former Dewey partner who’s now a bankrupt non-equity partner at White & Case.

The legal blogosphere naturally lit up over this story, with Scott Greenfield dispensing his usual simple justice and the Volokh Conspirators (and their many commenters) debating Owens’ personal and professional worth.

But my emailbox filled up, too, with assorted reactions from people at all levels in the law. The most interesting rant — and the one I’m sharing with you today — came from a person who looks a lot like Owens; he or she is a non-equity partner at a Vault 50 firm who’s in his or her 50s. This person disagrees violently with the conventional wisdom about non-equity partners. My correspondent sings their praises and insists that both law firms and many law firm consultants terribly misjudge the value that non-equity partners provide to their firms. . . .

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I’ve just celebrated my fourth anniversary working in-house, and I’m now officially out of touch with law firm life.

I thought I knew all the law-firm-partnership tricks. For example, when law students ask at interviews what percentage of firm partners hold equity status, some firms answer: “At this firm, all partners are partners.” That’s true, of course, but tautological; it says nothing about the equity and non-equity ranks.

On the other hand, this non-responsive answer serves a useful purpose. It may help to convince law students (or lateral associates) that they have a real chance at making partner at the firm, even though the equity partnership ranks are tiny and getting thinner every day.

But I recently learned about a new game that law firms play. This one is aimed not at deceiving law students or lateral associates, but rather the granddaddy of law firm rankings: The American Lawyer’s profits per partner calculation.

I thought I knew all the ways law firms could try to mislead The American Lawyer. There’s the possibility of outright lying, of course, and then there’s using funky methodologies that inflate profits per partner from $1 million to $1.8 million for the year 2011. But there’s a new game in town. It may well be widespread, but I heard about it only recently….

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Let’s be honest: despite being the Biglaw version of the Titanic, the collapse of Dewey & LeBoeuf could have been worse. Even though the Dewey dissolution constituted the largest law firm collapse in history, many D&L lawyers and staff were able to find new employment. Even Steve Davis, the disgraced ex-chairman of Dewey, landed a new gig.

But not everyone emerged unscathed. Some attorneys and staffers never got back on their feet professionally. Many Dewey partners scored new positions, but not all of them took all of their people with them to their new firms.

And even some partners are still suffering. In fact, one former Dewey partner, now a partner at another major law firm, recently filed for personal bankruptcy….

(Please note the UPDATES at the end of this post.)

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Let’s not mince words: Patton Boggs is stuck in the muck. In the most recent Am Law 100 rankings, the firm showed a 15 percent decline in profits per partner — one of the biggest dips in the entire survey, contrasting with the modest growth that most of Biglaw enjoyed. Gross revenue also fell, by 6.5 percent.

The Am Law 100 rankings looked at 2012 performance compared to 2011 performance. Perhaps things have improved for Patton Boggs in 2013?

Alas, no. While many firms have resorted to voluntary buyouts or layoffs of support staff this year, few have laid off lawyers (at least not openly). But Patton Boggs has already been through two significant, open and notorious rounds of layoffs in 2013 to date, affecting not just staff but lawyers as well.

How is Patton Boggs trying to save itself, and will its plan work?

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As we’ve repeated countless times in these pages, Biglaw isn’t what it used to be, and good luck to you if you happen to be a partner. Sure, you’ve grabbed that brass ring, but you also have what could be described as “the worst job in Biglaw.” Here in the new normal, where layoffs and de-equitizations abound, despite increases in firm profits, many partners now have the same fears as associates.

So what happens when partners are pushed out of the law firms they once loved? Now we know, thanks to the results of a a new survey. You won’t believe how messy these bad romances can get…

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“Being a partner at an elite law firm isn’t what it once was,” as I recently wrote in a Wall Street Journal book review, but “while the brass ring might be tarnished, it still gleams brightly for many.” And with good reason: even if it’s harder than ever to become (and remain) a partner, for those who do manage to make it, the pay, perks, and prestige are plentiful.

The American Lawyer just released its latest New Partner Survey. The magazine heard from almost 500 lawyers who began working as partners between 2010 and 2013. About 60 percent of the survey respondents are non-equity or income partners — which makes sense, given the proliferation of two-tier partnerships, as well as how junior these partners are — and the rest are equity partners.

What are the most notable findings from the survey? Here are five:

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In discussing the recent news of Akin Gump overhauling its partnership capital structure, I sounded some generally positive notes. I echoed the thoughts of Akin Gump’s chair, Kim Koopersmith: “We thought it made sense to have everybody have skin in the game.”

But there are less sanguine ways of assessing the situation. Are the non-equity partners who will be converted into equity partners putting skin in the game, or are they getting skinned?

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If you’re a law firm managing partner, the captain of a Biglaw ship, have you done all that you can to make sure your vessel is as seaworthy as possible? You don’t want your ship to suffer the fate of the S.S. Dewey.

Some steps are easy and obvious. Conduct layoffs of unneeded associates, whether openly or stealthily. Offer buyouts to surplus support staff (or lay them off, if feeling less generous). Usher underperforming partners towards the exit, to lower the denominator for your profit per partner figure; keeping PPP high reduces the likelihood of crippling defections and helps you attract star laterals.

Those are the basic moves, which everyone is doing. For something that’s a little more challenging, a maneuver that might even impress the East German judge in its level of difficulty, you can play with your partnership capital structure….

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Here’s one great benefit of blogging: Publishers send you free copies of books, hoping that you’ll review them!

I received and read, but now choose not to review, Steven J. Harper’s valuable new contribution to the literature: The Lawyer Bubble: A Profession In Crisis (affiliate link).

I’m not reviewing the book, but instead using it as a jumping-off point to discuss a tangent. Harper explains in his book two things that every sentient lawyer has noticed over the past several years: (1) students are graduating from law school buried under a mountain of debt, and many of those students can’t find jobs, and (2) many law firms have lost sight of the law’s noble history as a learned profession and are now obsessed with maximizing their profits per partner in the coming year.

Harper’s right about these things, of course, and this isn’t exactly late-breaking news to anyone who’s been following either Above the Law or Harper’s blog, The Belly of the Beast, for the last few years. Harper’s book advances the discussion, however, by exploring these issues in more detail than others have. He also proposes possible solutions to these problems, including “allowing the federal government to recover [law school loan] guarantees from a law school (and its university) whenever a student loan became the principal contributor to an alumnus’s later bankruptcy.” (Page 159.) Or encouraging law firms to release their “Working Culture Index,” which would show the percentage of lawyers billing more than 2000, 2100, 2200, 2300, 2400, and 2500 in the previous year (perhaps with separate totals being released for partners and associates). (Page 173.)

These ideas are well worth discussing, and I’m glad that Harper has taken the time to analyze these things. But I have another topic to highlight, which is an odd tangent to Harper’s two issues . . . .

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