Risk Update

Risk News — Conflicts Firm Merger Groundhog Day? Lateral Departure Financial Risk Revisions (With Covid Considerations)

The repeating nature of this one caught my eye. (It was just Groundhog Day after all.): “Two Troutman Pepper Partners Size Down for Boutiques Post-Merger” —

  • “As large firms grow larger, some partners are opting for smaller shops. In the past couple weeks, two partners have left Troutman Pepper Hamilton Sanders for boutiques, on the heels of last July’s merger between Troutman Sanders and Pepper Hamilton that created a 1,200-lawyer firm.”
  • “Mandel said client conflicts prompted his departure. He’d joined Troutman two years ago from Andrews Kurth after that firm merged with Hunton & Williams in April 2018 to form 1,000-lawyer Hunton Andrews Kurth, also because of client conflicts.”
  • “‘It was almost deja vu,’ Mandel said. ‘Before I joined Troutman I was seriously considering going to a boutique firm because of conflict issues.'”
    “‘Troutman is a great place with great people,’ he added. ‘I made sure Lewis Baach isn’t planning any large-scale mergers in the near future.'”

That had me thinking about pre-lateral terms with financial contingencies in the case of future conflicts. Maybe those already exist? Maybe they will? And then I spotted not quite this point but the related: “Law Firm Penalties On Departing Partners Just Got Riskier” —

  • “The D.C. Court of Appeals, on Feb. 4, issued an important decision that sharply limits the ability of law firms to penalize departing partners who leave for other law firms and take clients with them. Even before COVID-19, large law firms were experiencing significant volatility with partners changing firms. COVID-19 has escalated these lateral moves and the resulting economic hit that law firms will suffer.”
  • “Fortunately for departing partners, any substantial financial penalty that the law firms may impose will violate Rule 5.6(a) of state bar ethics rules and the American Bar Association’s Model Rules of Professional Conduct, which many states follow as guidance. The D.C. Court of Appeals, in Jacobson Holman PLLC v. Gentner, has now provided a clear road map for the numerous law firms in Washington, D.C., and their equity partners, and confirms that the law is continuing in the direction of prohibiting financial penalties on departing partners.”
  • “Historically, law firms had a range of so-called golden handcuffs that they could use to prevent their rainmaking partners from leaving, or to impose financial penalties on them if they did leave. The Model Rules of Professional Conduct and bar ethics opinions have had to respond to new strategies by law firms that violate the rules by interfering with the attorney-client relationship.”
  • “The most recent decision, from the D.C. Court of Appeals, involved an intellectual property litigation boutique, in which the two name partners informed the other partners in 2013 that they were going to dissolve the firm and do business under a new entity. Marsha Gentner and several other attorneys instead decided to leave the firm, and they demanded their accrued capital be returned to them.”
  • “Gentner had an accrued capital balance of $141,569, but the firm tried to offset that with (1) pending member bonuses and allowances; and (2) writeoff of accounts receivable unlikely to be paid, resulting in Gentner now owing $21,762 to the firm. Further, the firm asserted that if a court were to find a positive balance, it should be cut by 50% because clients followed Gentner to her new law firm, Dykema Gossett PLLC.”
  • “Judge Catharine Easterly, joined by Judges Roy McLeese and Eric Washington, held that although the firm’s partnership agreement allowed for adjustments to the year-end accrued capital balance, those adjustments could only be based on costs or events arising after the year-end financial statement. Here, the firm knew all along that it had to budget for bonuses and that it had numerous uncollectible accounts unlikely ever to be paid. The court held that allowing these adjustments would ‘simply invite the remaining equity members to make unpredictable, self-interested, post hoc changes to the firm’s financial statements.'”
  • “Thus, the law firm could not enforce the financial penalty provision of its partnership agreement against Gentner and other departing partners.”
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