Freshfields and Sidley Cases Demonstrate Challenge of Aging Partnerships

Richard Lloyd

The American Lawyer

Two recent cases on either side of the Atlantic point to one of the most crucial issues currently facing law firms: coping with the pressures caused by an aging partnership. In the United Kingdom, Magic Circle firm Freshfields Bruckhaus Deringer finally emerged victorious on Wednesday in its long-running dispute with former partner Peter Bloxham over the reform of the firm's pension scheme. Meanwhile, in the United States, Sidley Austin last Friday agreed to pay $27.5 million to 32 former partners who were demoted to counsel in 1999 when all were in their 50s and 60s. There are clear distinctions between the cases, but they point to the demographic time bomb ticking at most English and American firms.

The Freshfields case has attracted the interest of both the legal and national press in the United Kingdom because it was the first to be brought under new age discrimination laws that came into force in October 2006. Under the pension restructuring that Freshfields instituted last year, Bloxham, then a year short of retirement at a full payout, saw his annuity reduced by 20 percent, from $458,000 to around $356,000. The Central London employment tribunal ruled that the pension plan restructuring was discriminatory, but that it was also a proportionate means of achieving a legitimate aim and therefore legal. Freshfields had argued that it needed to undertake the reform because the firm's younger partners were faced with the prospect of shouldering the pensions of a growing pool of retired partners. Bloxham's lawyers said in a statement released hours after the result was announced that they were reviewing the implications and the options open to Bloxham. They have 42 days to lodge an appeal.

In the Sidley dispute, the U.S. Equal Employment Opportunity Commission brought the case on behalf of the demoted partners. The EEOC argued that the firm's closed management style meant that the 32 partners were effectively employees rather than owners of the business, and therefore were subject to age discrimination laws.

The issues thrown up by shifting demographics are arguably most pronounced at the vast swath of U.K. firms -- and a small band of U.S. firms -- run on lockstep. Most now have many of their oldest partners taking home the largest profit shares. A recent story in Legal Week on U.K. firm Ashurst's attempts to reform its lockstep revealed that 75 of the firm's 132 equity partners (57 percent of the partnership) are paid between $2 million and $2.44 million each year, while their newly promoted colleagues start at $976,000. Ashurst management has recognized that this is not sustainable and has started to reform its lockstep to widen the spread of those currently in the upper echelons of its pay scale and to increase the pay of those at the bottom.

Ashurst almost certainly won't be the last firm to review its compensation structure. It seems inevitable that more lockstep firms will introduce a greater element of flexibility, to better reflect the contribution of partners at both the junior and senior end. Compensation will be lockstep, but not quite as we have known it.In theory, the majority of U.S. practices with eat-what-you-kill remuneration systems (including Sidley) should be much better placed to handle shifting demographics. In the United States, still-active older partners, such as Joseph Flom at Skadden, Arps, Slate, Meagher & Flom and Ira Millstein and Harvey Miller at Weil, Gotshal & Manges -- all well over 70 -- reflect a culture that is generally more ready to accommodate the 60-plus generation. On the American side of the pond, retirement in the mid-50s, when most English partners call it a day, is generally scoffed at.

But there are dangers for American firms, too. A recent survey of U.S. partners by consultants Altman Weil, as reported in The New York Lawyer, found that 46 percent of respondents disagreed with mandatory retirement provisions. Another 38 percent agreed, and 16 percent said they were unsure. A stoic 4 percent even maintained that they would never retire. Finding a way to accommodate those who want to go on and on has never been more pressing.