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A Jewel [v. Boxer] is a Law Firm Bankruptcy Trustee’s Best Friend; Unfinished Law Firm Business Taxes Departing Partners and Their New Law Firms for Years

Posted on November 8, 2011 by kowalskiandassociates

Boxer                                                                           

  Jerome Kowalski

 Kowalski & Associates

 November, 2011

In a recent post on these pages dealing with the consequences of a law firm failure on the firm’s partners, I described the clawback provisions of Jewel v Boxer, sometimes called the “unfinished business” doctrine:

[A] line of cases in California beginning with Jewel v Boxer state that the law “requires that attorneys’ fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution. The fact that the client substitutes one of the former partners as attorney of record in place of the former partnership does not affect this result.” In short, Boxer holds that fees received by a partner and his or her firm in connection with a case which was started at the now dissolved law firm belongs to the former firm. The Boxer case and its progeny have been heavily criticized and are not followed in many jurisdictions, but they do provide mighty weapons to a receiver or a dissolution committee.

Yesterday’s Wall Street Journal breathlessly described the long tail of the Jewel v Boxer clawbacks as if this were news. A number of commentators seemed rather surprised, indeed, even offended, that these clawbacks exist, including Professor Larry Ribstein and Ed Poll.

These clawbacks have been with us for quite some time. Nor is the doctrine an aberrant anomaly of California law, as a recent decision in the Coudert case demonstrates. In Coudert, a Southern District of New York case, three years after confirmation of the firm’s plan of liquidation, which itself had a five year gestation period, numerous Jewel v Boxer claims are still being actively litigated, involving “unfinished business” that spans the globe.

Law firm partnerships cannot, as Professor Ribstein suggests, contractually write their way out of Jewel v Boxer.  Bankruptcy Judge Dennis Montali of the Northern District of California, the jurist with the most experience in law firm dissolutions, having presided over Brobeck, Heller Ehrman, Thelen and now Howrey, has plainly ruled that so called “Jewel waivers” are unenforceable and has so held in several cases. As an aside, in several law firm dissolutions, as some law firms see the inevitable end as being around  some firms have attempted to create life preservers for their partners by amending their partnership agreements to include “Jewel waivers”  in the waning days of the firm.  Unfortunately, for these partners and the firms they join, last minute “Jewel Waivers” are simply voidable preferences and unenforceable.

Well then, what to do?  With some strong likelihood that the next 24 months will see at least several further law firm dissolutions, the prospect for lateral partners bringing along with them  nintended Jewel v Boxer liabilities as their former firms sink under the waves, is a material consequence that law firms must consider.  I am afraid that there is no way around it.  In assessing a potential new lateral partner candidate, law firms need to consider the prospect that they may be required to disgorge revenues brought along by the new partner should his or her former firm fail. Sometimes, the potential of a law firm is obvious from either media reports or simply based on the fact that a law firm is suddenly inundated with a raft of partner resumes from a particular firm. In these instances, I suggest that potential candidates be queried about the financial strength and viability of his or her former law firm.  In the ordinary course of risk and reward assessment, the otential exposure of Jewel v Boxer claims simply must be part of the calculus.

We have recently seen some law firms address the issue in a different fashion:  They have inserted provisions in their partnership agreements a provision which would require a partner upon withdrawal from the firm remit amounts ranging from 10 to 20% of revenues they derive from clients of the firm that follow them to their new firms for a period of one or two years.  The purpose of these provisions, it seems to me, is to attach mathematical certainty to Jewel v Boxer claims.  The unintended consequence is that lawyers burdened by these contractual provisions are essentially unmarketable. It is highly unlikely that a new firm would assume that kind of liability.  Additionally, that departure tax is a hefty and prohibitive additional tax for an individual partner to bear.

But, on the positive side, such departure taxes aren’t all bad.  In the 32 large law firm bankruptcies since Finley Kumble filed in 1988, the coup de grace has uniformly been the massive defections of partners with books of business. These departure taxes will necessarily provoke a “why can’t we all just all get along” dialogue with a view towards all working in synch to resolve what ails the firm.  And these departure taxes will provide potent shark repellent and keep those who would draw the lifeblood of a law firm at bay.

[Update: On May 24, 2012, Judge Colleen McMahon, ruling in the Coudert bankruptcy proceeding in the United States District Court for the Southern District of New York, ruled that Jewel v Boxer is the law in New York and that the liquidating trustee of the Coudert estate may recover from each former partner the profits derived from each case that followed each partner to his or her new law firm. The court ruled: "Under the [New York] partnership law, the client matters are presumed to be Coudert’s assets on the dissolution date, .. Because they are Coudert assets, the former Coudert partners are obligated to account for any profits they earned while winding the client matters up at the firms.” A link to the full opinion can be found at the foot of this article.]

© Jerome Kowalski, November, 2011.  All Rights Reserved.

 

Jerry Kowalski, who provides consulting services to law firms, is also a dynamic (and often humorous) speaker on topics of interest to the profession and can be reached at
jkowalski@kowalskiassociates.com
.

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Filed under: Crisis management, Dewey & LeBoeuf, Fiduciary Duties, Global law firms, Jewel v Boxer, Lateral law firm partner, Lateral law firm partner movement, Lateral Partner, Law Firm Crisis Management, Law Firm Dissolution, Law Firm Dissolutions, Law Firm Implosions, Law firm management, Law firm management strategies, Law firm partner layoffs, Law Firm Risk Management, Navigating the Perfect Storm: Recruiting, Retaining and Training Lawyers in the Coming Decade, Strategic law firm planning, The Law Firm of the Twenty-first Century, Unfinished Business | Tagged: , , , , | 24 Comments »

HOWREY’S LESSONS: A NATIONAL CONVERSATION (via The Belly of the Beast)

Posted on March 24, 2011 by kowalskiandassociates

Howrey

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Steve Harper, a former Kirkland & Ellis partner who is now an acclaimed author, columnist and professor at Northwestern University’s School of Law as well as its undergraduate school, treads where many are a tad reluctant to go: Professor Harper provides a detailed independent analysis of what went wrong at Howrey. Professor Harper’s three posts on the subject (this post contains links to his earlier pieces) provides the most thoughtful analysis of the Howrey implosion. Interesting and compelling reading. Harper provides important insights, but also cautionary lessons to be learned.

My latest “Commendable Comments” award goes to a non-lawyer, the Washington Post‘s Pulitzer prize-winning columnist Steven Pearlstein. Since I started my blog a year ago, two of my most popular articles have been “Howrey’s Lessons” and “Howrey’s Lessons — Part II.” Versions recently ran on Am Law Daily, where they also attracted widespread attention. I don’t know if Pearlstein was among the thousands who saw my analysis of Howrey’s end and its r … Read More

via The Belly of the Beast

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Creating Better Law Firm Leaders: What Law Firms Can Learn from Google

Posted on March 14, 2011 by kowalskiandassociates

Image representing Google as depicted in Crunc...

Image via CrunchBase

Jerome Kowalski

Kowalski & Associates

March, 2011

I recently attended a conference of managing partners in which one of the topics under discussion was “How many hats does a managing partner need to wear?”  The discussion was animated and the clear consensus was that an MP needs to wear them all: manager, strategic thinker, leader, psychologist, economist, parental figure, marketer, promoter, consensus builder, team builder, peace maker, visionary, piñata, the Harry Truman “buck stops here” hat, huckster, Indian chief, CEO,COO, CMO CIO,  and on and on.

As I relaxed in my easy chair on Saturday catching up on my reading, a piece in the New York Times about work performed within Google (clearly one of the greatest companies on the planet) to create better managers.  The piece, entitled “The Quest to Build a Better Boss,” describes Google’s detailed analyses and data mining to identify the definitive qualities of effective managers.  Remarkably, Google’s list is short and sweet. It identified “Eight Habits of Highly Effective Google Manager” and “Three Pitfalls of Managers.”

Among the reasons Google’s simple principles struck me is that they appeared as Bob Ruyback was being pilloried for his failed stewardship at Howrey by, among others, Professor Steve Harper and minions of anonymous Howrey staffers and lawyers on  a blog entitled “It’s Howrey Doody Time.” At the time of this writing,  that Howrey blog, which has been in existence for only a couple of months, seems to have received an astounding 262,000 hits.  And at the same time, Mr. Ruyback is also being criticized by his former partners (whom he said “abandoned him”) for putting them is serious  long term financial jeopardy.

Mr. Ruyack’s contentions, among other things was that partners jumped ship because they “had little tolerance for change” and the new free agency mindset of Big Law partners induced them to leave when there was a dip in revenues. Yes, lawyers do resist change, as I previously reported.  But that innate resistance to change must be overcome by leadership and sound management skills.

And in every study ever done on why people seek alternative employment, compensation factors rank at the bottom of the list.  Always at the top of the list for reasons for voluntarily leaving a job is a lack of job satisfaction.  I also previously wrote about how important it is for law firm leadership to concern itself with associate job satisfaction, even in an era when the supply of lawyers so far exceeds demand.  Certainly, the same principles of maintaining adequate job satisfaction is all the more critical at the partner level.  Maintaining job satisfaction is a critical function of management.

My own personal view, based on long tears of observation, is that successful law firm leadership is predicated on fairly few  building a team, developing consensus, avoiding hubris, and keeping lines of communication open and honest, giving deference and weight to all of a law firm’s stakeholders. Here, then is Google’s Rules, as reported by The Times.

 Google’s Rules – NYTimes.com

As I said, Google is a great company and we, as a profession, should build on these principles to create better law firm managers, practice group leaders, office leaders and lawyers heading up particular engagements.

© Jerome Kowalski, March 2011.  All Rights Reserved.

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The Financial and Legal Consequences of a Law Firm Dissolution on the Partners of the Defunct Firm

Posted on February 3, 2011 by kowalskiandassociates

Howrey

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Requiem for a Law Firm

 

 

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             February, 2011

 

The financial effects of the death of a law firm on its partners

 

This week, as we mourn the loss of Howrey, we look at the typical death rattles of a law firm suffering a fatal condition and the individual ramifications to law firm partners upon the dissolution of a law firm.  While the demise of Howrey seemed quite inevitable a year ago, it could have been and should have been avoided.  [Update:  Following the announced dissolution of Howrey, Florida based 250 lawyer Adorno & Yoss, LLP, now known as Yoss, LLP also imploded . Adding to these losses, 150 lawyer Austin based Clark Thomas & Winters announced on April 11, 2011 that it was shutting down as well.]

[Update; May, 2012]:  Dewey & LeBoeuf appears about to be about ready to join the parade of failed law firms. Predictions of more imminent BigLaw firm implosions abound.

This post is sorrowfully grim reading and a précis of lessons we learned over twenty years in advising law firms and partners of law firms that have escaped implosion as well as some that have imploded, largely because of a failure of leadership and management. I would hope that a reading of this requiem will provide a mighty incentive for law firms to recognize warning bells and avoid early on implosion and dissolution.  On the brighter side, we have successfully worked with law firms when the first signs of distress appeared and we succeeded in avoiding the painful consequences described below. And we have successfully charted safe passage for many partners through the minefields described below.

In recent years, we have watched the unfortunate demises of too many fine and venerable law firms, including, among others, Thacher Proffitt, Heller Ehrmann, Thelen Reid, Wolf Block and Coudert.  It is not unlikely that before this year is out, others may follow.

The syndrome leading to law firm implosions are all too common.  The malady begins with diminished profitability, caused by general business slowdowns, a burst economic bubble (dot.coms, S&L’s, securitizations, real estate, to name just a few), and the defection of a major client or a partner who is a major producer of business. As profitability slides, partners producing significant business begin to quietly seek alternatives for themselves as their own compensation suffers.  A slow trickle often escalates.

Management too often initially reacts to these phenomena by severe cost cutting including laying off partners not deemed sufficiently productive.  Too often,  management of failing firms do not adequately grasp the gravity of the firm’s condition and address the onset of distress signs in a series of whack-a-mole activities. Managers are loathe to acknowledge the gravity of a declining situation.  As the firm’s condition continues to decline, partners begin to lose confidence in management. And, thus, the rush to the exit doors begin.

When the trickle of defecting partners starts to turn in to a torrent, and there are insufficient fingers to plug the holes in the dike, management then reluctantly begins pursuing a merger partner. The ability to consummate such a merger is almost nil as partners’ resumes flood the streets and the blogosphere creates a cascade of rumors and innuendo, often given legitimacy by traditional media. And, when partners learn that a merger candidate is being sought, they are even more incentivized to seek personal alternatives in order to maximize their own options.

The first “code red” sirens and lights often occurs when the firm finds itself in violation of covenants with its lenders regarding items such as reduction in the number of partners or timekeepers, loss of revenue or failure to abide by a revolving credit facility’s annual thirty day cleanup period.  Lenders, almost always secured by an assignment of all accounts receivable, are no longer charitable in granting waivers, nor are they keen to restructure loans.  Demands for personal guaranties are often made, which often hastens the retreat of partners.

The foregoing is an exceedingly brief synopsis of the course leading to an implosion.  But, what are some of the consequences as the firm shutters?

Most often, law firms endeavor to dissolve through a dissolution group without judicial intervention.  Some of these arrangements have worked relatively well, although for a voluntary dissolution to succeed, the dissolution committee needs to gain the confidence of the firm’s creditors.  Law firm landlords are most frequently the major players here.  These landlords have learned, as have law firm lenders, through too many experiences that the value of accounts receivable upon a law firm’s dissolution are worth a small fraction of their sated value. Accordingly, in the absence of a compelling argument, creditors, often led by the landlords, file an involuntary petition for bankruptcy under Chapter 7 of the Bankruptcy Code. Most often, the only available response by the law firm is the filing of a voluntary petition for reorganization under Chapter 11, which inevitably leads to the appointment of a receiver, who is statutorily mandated to marshal all assets available.  As discussed below, this often leads to a receiver dipping in to individual partner’s pockets to pay for any shortfalls.

We have often seen potential suitors of decline to make a full acquisition and instead, cherry pick some significant number of lawyers.  In many instances, these law firms are charged with either successor liability or with inducing partners to breach their fiduciary obligations to their law firms.

Salaried employees of a suddenly shuttered law firm most frequently avail themselves of claims under the WARN Act : WARN offers protection to workers, their families and communities by requiring employers to provide notice 60 days in advance of covered plant closings and covered mass layoffs.  These claims are asserted against the dissolution committee, if it exists, the law firm’s bankrupt estate and firms who are claimed to have successor liability.

In addition,  a line of cases in California beginning with Jewel v Boxer  state that the law “requires that attorneys’ fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution. The fact that the client substitutes one of the former partners as attorney of record in place of the former partnership does not affect this result.”  In short, Boxer holds that fees received by a partner and his or her firm in connection with a case which was started at the now dissolved law firm belongs to the former firm.   The Boxer case and its progeny have been heavily criticized and are not followed in many jurisdictions, but they do provide mighty weapons to a receiver or a dissolution committee.  (More on Jewel v Boxer  can be found here.)

The impact of a law firm dissolution is exceedingly financially severe to individual partners.

Virtually all law firms require partners to maintain capital accounts, which as far as partners are concerned is very real money: it is money borrowed from banks by individual partners or deductions from profit distributions.  In the former instance, the debt is not discharged by the firm’s dissolution or bankruptcy; in the latter, the partner paid income tax on such deductions.  Most partners view their capital accounts as a retirement benefit which will be paid out as a partner withdraws or retires.  Insofar as the law firm is concerned, these capital accounts are not segregated funds; they are simply accounting entries.

As the law firm goes in to dissolution mode, these capital accounts are reduced to negative numbers, often substantial six figure amounts.  Upon the conclusion of the dissolution, these negative capital accounts are “zeroed out.”  Under applicable federal tax law, the effect of zeroing out a capital account is that the amount of the negative account is deemed to be income (actually, phantom income) and is taxable. A simple example:  if at the time of the dissolution a partner’s account is deemed to be (-$100,000), that negative $100,000 is deemed taxable income. And, as an added whammy, the money actually invested in the capital account simply disappears, as far as the partner is concerned.  That retirement nest egg is as good a having been invested with Bernie Madoff. It’s gone forever.

To the extent that individual partners have personal liability as a result of a personal guarantee provided to a lender or a landlord and a portion of that indebtedness is compromised or otherwise discharged in connection with the law firm’s final plan of liquidation, the forgiveness of that debt is considered income (this form of phantom income is commonly called “cancellation of debt” or “COD”) for tax purposes.  For example, if an individual partner’s several personal liability on an outstanding bank loan is $100,000 and the loan is compromised at fifty cents on the dollar, the partner must recognize as income the $50,000 cancellation of debt and is taxed on that amount.

In addition, since partners are not salaried employees but instead receive instead profits, in the form of draws and distributions, they are subject to clawbacks for any payment they may have previously received from that point in time when the law firm is deemed insolvent, from a bankruptcy point of view.  Thus, compensation received by partners during the period of insolvency (again, from a bankruptcy law point of view) are subject to being recouped by a receiver.

[Update:  while the Heller Ehrmann partners were each required to take out their checkbooks, they were fortuitously shielded from some of this pain when fortuitously, for those partners, counsel for the Bank of America and Citibank erroneously terminated a UCC filing, thereby losing the entitlement to a $20,000,000 secured claim.  The bankrupt estate of Heller Ehrmann  had anticipated that the banks would pursue remedies against individual partners and set aside a $6,000,000 defense fund for those claims. Presumably, that $20,000,000 clerical gaffe may be the subject of an independent claim by the banks against its counsel.  In all events, the Heller Ehrmann saga is a cautionary tale concerning how landlords so often push a presumed orderly extra-judicial wind-down to a bankruptcy court proceeding. http://www.law.com/jsp/pa/PubArticlePA.jsp?id=1202489077698&src=EMC-Email&et=editorial&bu=The%20Legal%20Intelligencer&pt=TLI%20AM%20Legal%20Alert&cn=TLI_AM_LegalAlert_20110405&kw=Settlement%20Lets%20Heller%20Lawyers%20Move%20On&slreturn=1&hbxlogin=1 ]

Breach of fiduciary duty claims are also regularly made against those in management who defect prior to dissolution, with these new partners’ law firms made co-defendants for inducing such breaches.

A particular thorny issue always arises in connection with the collection of accounts receivable.  Clients often perceptively see that their outstanding obligations to a law firm in dissolution are going to be heavily discounted.  Receivers often seek to impose fiduciary obligations on former partners in collecting accounts receivable and partners are simultaneously often conflicted in connection with their relationships with existing clients.  Moreover, aggressive collection tactics by a receiver are often reflexively met with malpractice claims.

Other areas of potential liability arise in connection with recruiting associates to join defecting partners, defending against malpractice claims, complying with partnership agreements particularly in regard to notice of withdrawal requirements, retention of client files where the firm may have a retaining lien on account of fees owed and occasionally restrictive covenants.

Law firms and certainly partners of law firms finding themselves in these circumstances need to be guided carefully through these treacherous shoals by an independent adviser.

© Jerome Kowalski, February, 2011.  All rights reserved.

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Law Firm Partner Layoffs? Hardly A New or Shocking Development

Posted on March 16, 2010 by kowalskiandassociates

NYC TEACHERS' PROTEST RALLY AGAINST LAYOFFS ...

NYC TEACHERS' PROTEST RALLY AGAINST LAYOFFS & CUTBACKS / MARCH FROM CITY HALL > WALL ST. > BATTERY PARK - Lower Manhattan, New York City - 05/12/11 (Photo credit: asterix611)

 

The Question About the Announcement Concerning the Howrey Partner Layoffs Was That it Was Newsworthy At All

 

                            

                                                                             Jerome Kowalski

                                                                             Kowalski & Associates

                                                                             March, 2010

                                                                  

 

          Some portions of the legal community seemed to take it by surprise that Howrey announced this week that it was laying off 30 partners.  The primary surprise was that Howrey elected to make the announcement public.  The other surprise was that so many in the profession and the media professed to be shocked by the news.  In some of our earlier posts, we discussed the trend towards partner layoffs at law firms.  We were hardly prescient; we simply reported on facts on the ground that escaped much of the trade press and frequently the attention of much of the legal community.  Moreover, we have predicted that this trend will likely continue for the near and intermediate term.  Nothing we have seen suggests that this unfortunate trend will abate soon.

An enigma to some observers of the 60 or so partner layoffs at Howrey, may be the faintly lingering myth that partners have virtual life time tenure and are equity owners of the enterprise.  Robert Ruyak, managing partner at Howrey helped debunk that myth when he recently described the relatively wholesale partner layoffs as a “massive restructuring” facilitated in part by the ability to outsource discovery to offshore vendors. One does not “restructure” by firing owners, nor can ownership, or, indeed, tenure be outsourced.    While Mr. Ruyak explained that the reduction in force of Howrey was essential for its economic survival, he also suggested that such layoffs could have been largely avoided but for American legal principles precluding law firms from simultaneously representing conflicting interests.

Of course, at the sad end of the day, Mr. Ruyback’s “massive restructuring” ended with his call for his partners (or at least 75% of them) to all jump ship and board the lifeboats being offered by Winston & Strawn, leaving at least 25% of his partners adrift.

The fact is that for the past fifteen months, large law firms have been quietly asking partners to leave.  Some of those partners were primarily “service” partners; others were partners whose practice areas were in a downturn or whose client base could not and would not pay the high fees that the fixed infrastructure of large law firms requires.  Members of the latter group certainly have many recourses.  Middle market law firms, who have fared comparatively well during the Great Recession, have their welcome mats out for these lawyers. These middle market firms are driven by middle market clients who are far more comfortable in paying reduced rates which those firms can profitably charge.

The sad irony was that prior to 2009, partners at middle market law firms were moving up the food chain, entreating larger firms to have them join their ranks, because their client bases were growing and the platform afforded by larger firms allowed these partners to offer a greater diversity of services in a greater number of geographical locations. The trend is now reversed as partners for their own survival and to maintain their own client bases find themselves to now move in the opposite direction.

However, before law firms act on these new opportunities, they should carefully read our earlier post entitled The Market for Laterals in 2010; partners seeking new opportunities in this changing market should similarly read that posting and be fully prepared to respond to the questions suggested there.

Law firms are in many material respects economically anomalous in a variety of ways.  One of these great anomalies is that there are no economies of scale in large firms.   In fact, the larger the firm, the higher is the fixed cost of the firm to maintain each lawyer, exclusive of compensation.  The inexorable result is that large law firms are constrained to pay high hourly rates simply to meet fixed expenses.  The converse is axiomatic, smaller firms have lower per lawyer costs and are therefore able to charge lower rates and yet yield comfortable profits. These smaller firms are also less prone to fall victims to wild swings in economic cycles. In other words, partners at well managed middle market law firms make steady relatively predictable profits and are not prone to be victims of large market fluctuations.

As we all know and as mentioned above, law firms have been quietly asking partners to leave for the last fifteen months.  We all understand that the notion that partners, equity or contract, are, in today’s world as much employees at will as anybody else in the law firm universe.

Certainly, most, if not all, partnership agreements contain provisions that require either a majority or super-majority vote to oust a partner.  However, a partner who is summoned by a managing partner or an executive committee group and is asked to leave the firm almost always recognizes the plain reality that while he or she can demand a partnership vote, as is his or her contractual right, it is extremely unlikely that the partnership would buck management recommendations, particularly in these perilous times.  Moreover, demanding such partnership votes inevitably results in a public spectacle and deprives the departing partner to use the cover, when seeking a new position, to explain to a prospective new employer that his or her decision to leave was made reluctantly and that his or her client base could no longer afford the high hourly rates large law firms require. Rather, by demanding the contractually mandated partnership vote, the departing partner is inviting a public announcement that he or she was fired — indeed, his or her tenure at the firm began and ended the same way:  Fired with enthusiasm.

Partners, vested with maturity, almost always saw the wisdom to leave quietly and certainly not immediately report to the various blogs that the law firm is engaging in layoffs, stealthy or otherwise, as so many associates feel is an imperative.

As we have also noted in the past the strange year end announcements from various law firms that while revenues for 2009 took a dip, profitability had increased.  Many of these blips were not only attributable to sharp reductions on the expense side, but also resulted from the “ramp down” effect:  Just as law firms make an investment in bringing in a lateral partner by compensating him or her during the 90 to 120 day period following a start date until WIP results in cash in the bank, so too, eliminating the expense of compensation, while continuing to collect A/R and WIP, results in one time booster of profitability.  The danger in enjoying the benefit of ramp down profitability is that these are events not subject to replication and often result in revenue issues for the years that follow.  Reduced headcount limits revenues.  Replacing those who have been shown the door in the years that follow, as the economy expands, requires new investments in laterals and incurring “ramp up” expenses.

So, yes, partners have been shown the door with some degree of regularity for the last past 15 months. The evidence is conclusive in walking through corridors and seeing vacant partner and associate offices. Further evidence is made available as firms report on headcounts as the new year begins.  Yet the headcount reports are certainly not always terribly reliable, since not all firms, quite regrettably, report with consistency or accuracy the true headcounts at year end.

All too often removal of partners by firms fail to take in to account the new reality:  Leverage and hours billed are models very much on the wane.  Clients are demanding the efficient delivery of quality legal services at predictable costs.  They are becoming most indifferent to the numbers of hours required to complete an engagement.  Rather, clients simply want to know how much an engagement will cost from start to finish and are, as a whole, most cost conscious.  And the most valuable resource law firms possess who have the capacity to efficiently deliver quality legal services is mature, well seasoned and experienced lawyers.

As I said, law firms are uniquely economically anomalous enterprises.

© Jerome Kowalski, March 2010; All Rights Reserved.

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