Profits Per Partner

As discussed last week, I agreed to answer some questions from Professor Bill Henderson of Indiana University’s Maurer School of law in exchange for his kind agreement to be interviewed (parts 1 and 2 of that interview available here and here) for this column. This week, I conclude our exchange by answering his final three questions. In so doing, another year of writing for ATL will come to a close, and I wanted to take the opportunity to thank everyone who interacts with this column, whether as reader, commenter, interview subject, or editor. May 2014 be a year of success, health, and growth for us all.

BH: You have chided your fellow lawyers to give back to the next generation of lawyers. I certainly agree. However, between moral exhortation to do the right thing, or changing incentives within law firms, where should we focus our efforts?

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The elite California law firm of Irell & Manella is a top firm for diversity. It’s a top firm for associate satisfaction. And, on a related note to associate satisfaction, it’s a top firm for bonuses.

Year-end bonuses at Irell & Manella for associates who meet their hours typically beat the New York market by a healthy amount. In recent years, they’ve been as high as twice the Cravath scale.

Alas, that’s not the case this year. But the Irell bonuses are still nothing to scoff at….

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At a roulette wheel in Vegas, you know the odds. The folks with all their money on red have a less than 50 percent chance of winning (47.37 percent, to get technical). There will be highs and there will be lows, but over the long haul, those poor saps swizzling their comped drinks will come out on the losing end.

On the other hand, you put all your money on black because the guy on your flight told you to. Intellectually, you recognize you have the same odds of pulling out a victory as the overmatched retirees from Kansas City betting on red, but you’re absolutely positive you’re going to win.[1]

Welcome to the positive expectation bias. Rational thought flies out the window as you ignore facts you know (or at least strongly believe) to be true, instead placing blind faith in the proposition that everything’s going to turn out well for you.

Law firm managing partners are expected to be a little more risk-averse compared to other chief executives, but it turns out law firm managing partners are not immune to a little irrational gambling from time to time….

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Certain firms are, in my opinion, routinely underrated in the Vault 100 rankings of law firm prestige. One of them is Williams & Connolly, currently #16, which strikes me as a top 10 firm. Another is Munger Tolles & Olson, which is all the way down at #34.

Munger is an amazing firm. Its attorneys work on major matters, including great pro bono cases, and its lawyers boast incredible pedigrees, with more Supreme Court clerks than you can shake a gavel at (wooed by $300,000 signing bonuses). At the same time, MTO gets top scores for diversity. These commitments to diversity and pro bono helped propel Munger to the #1 spot in the American Lawyer’s A-List rankings, which measure overall firm fabulosity (based on revenue per lawyer, pro bono work, attorney diversity, and associate satisfaction).

In light of all this, I’m still wondering why Munger doesn’t fare better in the Vault rankings (for whatever the Vault rankings are worth, and you’re free to argue about that). Perhaps MTO is hurt by its relatively small size and tight geographic focus, with offices in just two cities, Los Angeles and San Francisco. Or perhaps prestige is tied partly to partner profit, and Munger doesn’t hunger enough for money.

How much do MTO partners earn? Financial disclosures for two younger Munger partners, both nominated to the Ninth Circuit, shed a little light on this question….

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Last month we wrote about a Biglaw firm that’s in big trouble. The firm in question: Dow Lohnes, a former Am Law 200 firm that has been hemorrhaging lawyers and clients (and lost two more partners last week, to Venable). In our story about Dow Lohnes, we noted that “[i]t seems possible that the firm could merge out of existence — if it’s lucky enough to find a partner.”

Fortunately for the remaining lawyers and staff at Dow Lohnes, the sinking ship has located some lifeboats. A larger and stronger firm, a member of the Am Law 50 and Vault 100, will be picking up many (but not all) of Dow Lohnes’s lawyers.

Who’s the white knight riding to the rescue of Dow Lohnes?

(Note the UPDATES added at the end of this post.)

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David Bernick

As we mentioned earlier, prominent litigator David Bernick is leaving Boies Schiller for Dechert. Bernick joined Boies Schiller just a year ago, to much fanfare, so some were surprised to see him go so quickly.

But others were not shocked. As the always insightful Alison Frankel observed on Twitter, “Is anyone who knows David Bernick surprised he was mismatch at firm dominated by David Boies?”

Perhaps not. Some of our readers predicted this union wouldn’t last long….

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Ed. note: This is the latest installment of The ATL Interrogatories, brought to you by Lateral Link. This recurring feature will give notable law firm partners an opportunity to share insights and experiences about the legal profession and careers in law, as well as about their firms and themselves.

Rob Romanoff is Managing Partner of Chicago-based Levenfeld Pearlstein, LLC. He is also a partner in the firm’s Trusts & Estates Group. Rob has extensive experience in estate, gift and income tax planning and broad-based wealth transfer planning for high net worth individuals and owners of closely held businesses and their families. Rob is a fellow in the American College of Trust and Estate Counsel (ACTEC).

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Isn’t it a bit early to be pocketing bonus money?

As law students gear up for fall recruiting season — yes, the Biglaw gravy train still accepts new passengers, even if not as many as before — some rising 2Ls might start to think, after researching firm after firm, “All of these places sound alike! They all have cutting-edge practices in bet-the-company litigation or cross-border M&A. They all have collegial cultures and ‘no screamers.’ They’re all committed to diversity and pro bono.”

But there are real differences between law firms. If you doubt this, just check out Above the Law’s Law Firm Directory. You can see the different letter grades we’ve assigned to firms, based on reports from lawyers who work at each firm and on overall industry reputation.

Further proof that law firms aren’t all the same: while some firms are giving out pink slips, others are issuing bonus checks. And we’re in the middle of July, not exactly peak bonus season. What gives?

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Overcapacity. The Biglaw word du jour. Too many lawyers working in Biglaw to meet demand. Or is it too many lawyers in Biglaw to foist on that subset of clients still willing to pay those rates that guarantee profits-per-partner increases? Either way, the word is out. Biglaw is suffering from overcapacity. Something must be done.

Some firms will undoubtedly send out the message that every single one of their lawyers is in great demand. Debate among yourselves whether or not these firms are “stealth layoff” candidates.

Other firms have already taken action (e.g., Weil Gotshal) — sweeping, public action. Hopefully they did not enjoy what they were “forced” to do too much. The first cut is the hardest, as they say, and who can say that one of these firms won’t decide to wield the layoff katana like a sake-infused samurai?

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We have partner profits on the brain here at Above the Law. Earlier today, we wrote about a law firm that instituted a 20 percent holdback on partner pay — a move that was met with anger by some.

In that story, we noted the “continued expansion in the gap in power and pay between what we’d call ‘super-partners’ — partners in firm management and major rainmakers, who are often one and the same — and rank-and-file partners.” You can see this yawning chasm in the disparities in partner pay that exist within the same firm. As partner turned pundit Steven Harper has argued, partners aren’t true “partners” when they are paid and treated so differently.

New information from the American Lawyer shows how extreme some of these gaps between partners have gotten….

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