Two years after Harold DeGraff’s 2010 departure from the partnership of Perkins Coie, the corporate lawyer sued his former employer in San Francisco federal court, alleging the firm routinely deducted extraneous expenses from his paychecks.
The list of allegedly unlawful deductions is extensive, including Workers’ Compensation and unemployment insurance fees, Medicare costs, shareholder loans, mandatory retirement fees, donations to charity and travel expenses. Each of which, DeGraff argues, are “a business expense to be borne by the employer” because he joined the firm as an employee.
The suit, filed in May as a proposed class action and since dismissed and sent to arbitration, hinges on a system in place at Perkins Coie that appears to be unique among major law firms: the ability to join the firm, which is a limited liability partnership, as an individual partner, or to join as an employee of one of several corporate entities set up in states where Perkins Coie does business. Those local businesses are, in turn, corporate partners of the LLP.
Perkins Coie, which is representing itself in the case, argues in court filings that DeGraff’s arguments have no merit.
“Despite the repeated references in the complaint to his purported ‘employee’ status, it is indisputable that DeGraff was a partner in Perkins Coie LLP from 2007 to 2010,” the firm writes in a June motion asking the court to either dismiss the case or uphold a mandatory arbitration clause in their partnership agreement.
DeGraff, now a partner at three-attorney San Francisco shop Hayden Bergman, joined Perkins Coie’s Menlo Park, Calif., office in June 2007 from Greenberg Traurig.
Perkins Coie also contends that it should have been clear to DeGraff, who worked earlier in his career at Wilson Sonsini Goodrich & Rosati and in-house at TurboTax maker Intuit, that the rules applied to him.
“As an experienced transactional lawyer, DeGraff could reasonably be expected to have examined the details of an agreement as important as a law firm partnership agreement before signing it, and any ‘surprise’ as to its contents would have been due solely to DeGraff’s carelessness, not to Perkins Coie’s contract-drafting,” the motion states.
U.S. District Court Judge Jeffrey White ruled in Perkins Coie’s favor on July 30, dismissing the suit with prejudice and ruling that if DeGraff still has grievances with the firm to pursue, he must do so in a non-confidential arbitration.
That may mean the end of the dispute, because so far, DeGraff hasn’t approached the firm, according to Robert Giles, Perkins Coie’s managing partner.
“We don’t have any claims against him,” Giles said. “It’s up to DeGraff to pursue arbitration.”
DeGraff and his lawyer did not return requests for comment.
The lawsuit hasn’t done anything to change Perkins Coie’s dual partnership system, which Giles said has been in place at the 100-year-old firm since the early 1980s, when it converted from being a general partnership.
The majority of the firm’s some 375 partners take the corporate partner route, Giles said, which doesn’t require partners to pay estimated taxes each quarter as individual partners must do. Depending on the state—Perkins also has offices in Alaska, Arizona, Colorado, Idaho, Illinois, New York, Oregon, Texas, Wisconsin and Washington, D.C.—each type of partnership offers other tax benefits, Giles said.
In day-to-day practice, a lawyer’s partnership status at the firm makes no practical difference, Giles said. Both contribute capital and abide by the partnership agreement. To underscore the point, Giles said the compensation committee doesn’t even know which partners are in each category.
Once compensation is set for each year, “if they happen to be a shareholder, it flows to a different waterfall,” Giles said.
The American Lawyer, an affiliate, reported earlier this year that Perkins Coie has among the highest spreads between the highest- and lowest-paid partners, at a ratio of 28:1. In an interview with that publication, Giles attributed the spread in large part to the firm doling out roughly a third of its net profits through variable bonuses.
Perkins Coie happened onto the system as they were phasing out an unfunded pension plan in the 1970s. At the time, Giles said, being a corporation provided more pension benefits than a partnership. Forming as just one corporation wasn’t an option, however, because the bar rules in some states, including Alaska, banned attorneys from practicing law for an out-of-state corporation. By 1986, the pension rules changed to the point that being a corporation didn’t offer any added benefits, but by that point, there was no reason to change to a traditional LLP.
“The reason we started it doesn’t exist anymore, Giles said. “But there are enough other reasons people liked that we kept the flexibility.”
Though not quite like Perkins Coie’s model, a number of major firms have ventured from the LLP model, which has been the predominant structure among law firms since the 1990s.
Some firms take the form of a professional corporation, or PC, including Florida-based Carlton Fields; intellectual property-focused Fish & Richardson; Silicon Valley stalwart Wilson Sonsini; and labor and employment firms Littler Mendelson and Ogletree Deakins.
Kent Zimmermann, a legal consultant with the Zeughauser Group, said he has noticed firms getting more creative in recent years with how they structure their operations. That creativity extends from housing back office work in a more remote location to setting up different entities in each country to alleviate partners from having to pay taxes in every country where a law firm operates.
“There are various reasons for doing it, but the bottom line is that increasingly there’s interest in exploring alternative business structures,” Zimmermann said.
@|Sara Randazzo, a reporter at The Am Law Daily, an affiliate, can be contacted at firstname.lastname@example.org.