Risk Update

Lateral Hire Conflicts & Commentary — Clearance Speed versus Risk “Snags,” A Bit on the Business of Lateral Lawyer Strategy

The Price of Being Big: Law Firm Hiring Hits Conflicts Snag” —

  • “Major law firms’ checks of potential hires for conflicts of interest are becoming so extensive that they often slow the recruiting process and sometimes sink employment deals altogether.”
  • “Running the checks is often ‘the single most difficult job’ law firms have, said Jeffrey Lowe, a legal recruiter for Major, Lindsey & Africa in Washington. ‘You have to get it exactly right, not mostly right,’ he said.”
  • “Firms often review a wide range of information in checking for conflicts, including client representations, stock holdings and criminal records. They look largely for factors that could pose a conflict with the firm’s client base.”
  • “The growing challenges are part of a new reality for some of the largest firms in the world. Firms are increasingly sprawling, global operations with a vast web of clients, which require expanded conflicts checks for new recruits.”
  • “Checks that were once made at the end of a hiring process now often happen much earlier, said Sharon Mahn, New York-based legal recruiter and managing director with ZRG Partners. ‘Kind of like Tinder versus eharmony—let’s cut to the chase,’ she said.”
  • “Firms rely on lateral partner questionnaires, known in the legal recruiting business as LPQs, to vet candidates for potential conflicts, Mahn said. The ever-bulkier questionnaires, she said, can slow the hiring process for firms looking to snatch up certain lawyers with big books of business before competitors do it first.”
  • “A typical LPQ, she said, usually includes questions about the lawyer’s clients and whether they have been open to repeat business; how much the clients have been billed versus how much they’ve actually paid the firm; and whether the lateral candidate is the lead attorney for a particular client.”
  • “Law firm conflict check departments, once back-office functions, have come to be a dominant force in the hiring process, recruiters say. Ten to 20 people now typically staff the departments, with some topping out at 30 or more at the largest international firms.”
  • “Mary Beth Robinson, a senior vice president with the Attorneys’ Liability Assurance Society, which provides legal practice insurance to firms, said that even if conflicts checks take a long time and slow the hiring process, they are worth it. ‘We advise firms to take their time and do this work correctly,’ Robinson said. ‘It’s top of mind for us.'”

To Stem Lateral Movement, Firms Are Adding Clawback Clauses in Partnership Agreements” —

  • “Law firms are increasingly utilizing the proverbial ‘golden handcuffs’ in their partnership agreements, allowing them to go after the hefty bonuses and other incentives previously paid to a lawyer looking to leave.”
  • “Since January, three Am Law 30 firms have incorporated clawback provisions into their partnership agreements that make it more difficult for a partner to leave, according to legal recruiter Larry Watanabe.”
  • “Such arrangements could allow firms to go after bonus payments in 2022, he says. For instance, a partner with a $1 million compensation plan could be entitled to a bonus of up to $5 million expressed in January, but paid in April or the summer.”
  • “Other firms are strengthening clawback provisions, which have proven difficult to enforce in the past, with other financial tools such as forgivable loans that allow for more incremental payments to partners and mitigate some of the risks of going after money that has already left a firm’s bank account.”
  • “The strategy of using clawbacks reflects a bigger problem, as firm leaders desperately look to stave off lateral departures and hold onto business generators.”
  • “‘Because of lateral movement in the past two decades, law firms are worried about golden handcuffs. It was much less of a problem 20 years ago, by a material margin, because firms simply didn’t have to worry about partners getting up and taking their practice elsewhere,’ says Kristin Stark, a legal consultant at Fairfax Associates.”
  • “Firms are performing more due diligence on lateral candidates, according to legal recruiters. Some are using lateral partner questionnaires (LPQs) more often, and requesting candidates fill them out sooner, to collect financial data and client information, as well as details on conflicts and professional and personal references.”
  • “But that process is not without its own faults. For instance, a Decipher analysis of LPQs since March 2020 revealed a 75% increase in candidates claiming books of business. On average, candidates claimed a $2.1 million book of business in the period from March 2020 to October 2021, compared with an average of $1.2 million prior to the pandemic.That likely means candidates are inflating their books of business, according to Ellenhorn, who notes that since the start of the pandemic, Decipher has also seen a 40% rise in red flags related to financial irregularities.”
  • “Legal recruiters are fielding more questions from law firms interested in using clawbacks but unsure of how to apply them or whether or not the clauses are legal in the states where they operate.”
  • “As more firms consider clawbacks and run into potential hiccups along the way, some are strengthening such clauses with forgivable loans that are considered ‘friendlier the longer a candidate stays,’ according to Macrae.”
  • “‘The forgivable loan is better because it represents the other side of the coin. Now, the departing partner has to sue the firm to recover funds,’ the employment lawyer explains, noting that their firm generally advises clients to incorporate both clawbacks and forgivable loans into their arrangements to serve as a ‘deterrent.'”
  • “‘It is bad enough that someone is leaving,’ one Am Law 100 partner says. ‘When a firm makes a big deal out of a departure, it becomes obvious that the departure really hurts you. It tends to reflect negatively on the firm, and people will question what the firm was doing to prompt those partners to leave in the first place.'”
  • “The firm leader offers this advice instead: ‘In this tight market, I think it is better to lead with love, lead with compassion, and lead with why things will work.'”