Arthur J. Ciampi
Arthur J. Ciampi (NYLJ/Rick Kopstein)

Among the most ubiquitous features of modern law firm life are non-equity or contract partners. Despite the prevalence of such positions and the substantial benefit they bring to the profession and to the careers of many lawyers, some uncertainty remains as to what the title means and how to ensure that firms and their non-equity partners are operating within the ethical norms.

In this month’s column, we provide a brief description of some of the salient aspects of the non-equity partner position, discuss a recent and helpful Formal Ethics Opinion from North Carolina which addresses non-equity partners, and compare and contrast the opinion with the existing New York view.

Non-Equity Partners

The indicia of partnership courts use to determine whether a partnership exists include the existence of joint control, profit splitting, and loss sharing. Zito v. Fishbein Badillo Wagner Harding, 809 N.Y.S.2d 444 (Sup. Ct. N.Y. County 2006). No single element is necessarily controlling; instead, to determine whether a partnership exists, the courts look at the “conduct, intention and relationship between the parties.” Fasolo v. Scarafile, 120 A.D.3d 929 (4th Dep’t 2014).

For the most part, non-equity partners do not meet all these criteria. Most non-equity partners do not have joint control over the management of the partnership. They may be involved in certain decision-making, but the ultimate determination concerning the partnership rests with the equity owners. In addition, non-equity partners often do not share profits but are more typically paid a guaranteed salary with the option of a bonus based upon performance. Non-equity partners do not usually share losses. Unlike equity partners, non-equity partners do not make a capital contribution to their firms and therefore do not have capital at risk if the firm suffers losses. Non-equity partners also are not normally asked to personally guarantee their firm’s liabilities, such as leases or lines of credit. Concerning tax filings, non-equity partners may receive IRS form K-1, like equity partners, but the form does not show a share of profits or losses in the firm to the non-equity partner; instead their compensation is most often included, not as a percentage of firm profit, but as a “guaranteed payment.”

Many salutary aspects exist concerning the non-equity partner position. Such positions permit lawyers who have been in practice for a substantial period of time to be elevated to the title of partner without the financial risk associated with an equity partnership. The non-equity partner position is also a sign of the firm’s confidence in the non-equity partner and may enable the attorney to gain the confidence of clients and also to better market their services. Becoming a non-equity partner often is a part of the process for becoming an equity partner as opposed to the harsh “up or out” alternative which was the historical norm and which some firms still employ. In some instances, a non-equity partner position permits both the firm and the non-equity partner to further evaluate whether making the attorney an equity partner is mutually beneficial. The position of non-equity partner can also be a permanent position for attorneys who do not want to take the business risks and management responsibilities of an equity partnership.

Formal Ethics Opinion 9

This summer, North Carolina issued Formal Ethics Opinion 9, entitled “Holding Out Non-Equity Firm Lawyers as ‘Partners.’” The opinion, although concise, is somewhat complicated in that it addresses the holding out of employees, not of a partnership, but of a Professional Corporation, as “partners.” Nonetheless, the opinion is helpful in the partnership context as well.

Formal Opinion 9 concludes that it is ethically permissible for a law firm organized as a professional corporation and that referred to its shareholders as “equity partners,” to hold out to the world as “partners” or “income partners” lawyers who do not own any interest in the firm and are not shareholders. The firm considered these lawyers to be “partners in every sense of the word except actual ownership.” Id. In addition, the firm stated that these lawyers had the authority to bind the firm and to sign opinion letters on behalf of the firm although they did not vote on corporate governance.

The Opinion begins its analysis by quoting Black’s Law Dictionary’s definition of “partner” as “[o]ne of two or more persons who jointly own and carry on a business for profit.” Black’s Law Dictionary (10th ed. 2014). It then quickly observes that within the legal profession the designation of partner is often used independent of the legal definition and states: “For example, shareholders in a professional corporation for the practice of law are frequently referred to as ‘partners’. Like lawyers themselves, laymen generally equate the designation with the achievement by a lawyer of a certain level of experience, status, or authority within a law firm.”

Independent of the consideration of holding out lawyers as “partners” in a professional corporation, the opinion cautions that “referring to a lawyer as a “partner” in external communications cannot be a sham.” It then provides, in general terms, the means by which a law firm may properly designate a lawyer as a “partner.” “To avoid misrepresentation, a law firm may designate a lawyer as a partner, regardless of whether the lawyer satisfies the legal definition of that term, if the lawyer was promoted to the position by formal action or vote of firm management or pursuant to the firm’s governing documents. Further, to prevent the public from being misled as to the lawyer’s achievements, the promotion must be based upon criteria that indicates that the lawyer is worthy of promotion.”

The North Carolina Ethics Committee, noting that different standards and criteria exist, then provided some examples of legitimate criteria: Experience, Integrity, Industry, Intelligence, Communication, Legal knowledge, Motivation, Judgment, Efficiency, and Involvement. In essence, therefore, according to North Carolina Formal Opinion 9, if the non-equity partner is formally promoted based upon the merits, as exemplified by the above criteria, holding them out as a “partner” is acceptable.

NYCLA Opinion No. 740

The relevant New York ethics opinion, New York County Lawyer’s Association Opinion 740, takes a somewhat different approach and is not quite as clear as the North Carolina opinion in its conclusion.

Opinion 740 is entitled “Use of the Title ‘Partner’ in Connection With Law Firm Practice.” NYCLA Comm. on Professional Ethics, Op. No. 740 (Oct. 7, 2008). The opinion was determined under the old Code of Professional Responsibility DR 2-102(C). It states: “Compliance with DR 2-102(C) requires attorneys holding themselves out to the public as partners, and the law firms in which they practice, be in fact partners under New York partnership law and their individual partnership agreements. In the absence of a definition of a partner under the Code, the Committee finds that it is sufficient to satisfy the definition of a partner under New York law.” Id.

This portion of Opinion 740 could result in it being unethical for non-equity partners to be held out as “partners,” and, with the proliferation of non-equity partners, could mean that potentially thousands of lawyers and hundreds of firms would be in violation of the ethical rules. At the same time, it is worth noting that, under the New York Rules of Professional Conduct, which became effective after Opinion 740, “partner” is defined to “denote[] a member of a partnership, a shareholder in a law firm organized as a professional legal corporation or a member of an association organized to practice law.” New York Rules of Professional Conduct Rule 1.0(m).

Opinion 740, however, perhaps providing a workable solution to the reality of the marketplace as it relates to non-equity partners, also stated:

Ethically permissible designation by a firm of a lawyer as its “partner” should in substantial part be a factual determination. That determination should depend on the degree to which clients and other third persons may safely rely upon the acts of that lawyer being recognized by the firm as those of a partner. If the lawyer is provided with the emoluments of partnership (e.g., the power to bind the firm to the same degree as other partners both contractually and otherwise and as the manager of matters assigned to him or her by the firm), as a matter of professional ethics, the private financial arrangements as to the lawyer’s compensation should be irrelevant. Id.

The New York opinion, therefore, does not focus on whether the promotion was formal and meritorious, as does the North Carolina opinion, but, rather, on whether the non-equity partner is recognized by the firm as a partner based upon a factual determination concerning whether the partner is provided with the “emoluments” of partnership. Accordingly, as in the example given in North Carolina Formal Opinion 9, if the lawyer were permitted to issue opinion letters on behalf of the firm, it would appear that under New York Ethics Opinion 740 the lawyer could ethically hold himself out as a partner. Similarly, in the litigation context, if the non-equity partners were those who were in charge of cases and the ones making decisions, which bound clients through the firm, this could satisfy the New York criteria as well.

Combining the New York and North Carolina perspectives would require a formal promotion to non-equity partner status based upon merit and the ability of the non-equity partner to act with authority in a manner similar to equity partners.

Conclusion

The non-equity partner position provides both a commercially and professionally viable alternative to the disruptive “up or out” practice historically applied by the profession. Its widespread application nationally throughout the profession is powerful evidence of its benefits. North Carolina’s Formal Opinion 9 and New York’s Opinion 740 provide some guidance for ensuring that, in implementing a non-equity partner program, firms and lawyers are acting ethically.

Among the most ubiquitous features of modern law firm life are non-equity or contract partners. Despite the prevalence of such positions and the substantial benefit they bring to the profession and to the careers of many lawyers, some uncertainty remains as to what the title means and how to ensure that firms and their non-equity partners are operating within the ethical norms.

In this month’s column, we provide a brief description of some of the salient aspects of the non-equity partner position, discuss a recent and helpful Formal Ethics Opinion from North Carolina which addresses non-equity partners, and compare and contrast the opinion with the existing New York view.

Non-Equity Partners

The indicia of partnership courts use to determine whether a partnership exists include the existence of joint control, profit splitting, and loss sharing. Zito v. Fishbein Badillo Wagner Harding , 809 N.Y.S.2d 444 ( Sup. Ct. N.Y. County 2006 ) . No single element is necessarily controlling; instead, to determine whether a partnership exists, the courts look at the “conduct, intention and relationship between the parties.” Fasolo v. Scarafile , 120 A.D.3d 929 ( 4th Dep’t 2014 ) .

For the most part, non-equity partners do not meet all these criteria. Most non-equity partners do not have joint control over the management of the partnership. They may be involved in certain decision-making, but the ultimate determination concerning the partnership rests with the equity owners. In addition, non-equity partners often do not share profits but are more typically paid a guaranteed salary with the option of a bonus based upon performance. Non-equity partners do not usually share losses. Unlike equity partners, non-equity partners do not make a capital contribution to their firms and therefore do not have capital at risk if the firm suffers losses. Non-equity partners also are not normally asked to personally guarantee their firm’s liabilities, such as leases or lines of credit. Concerning tax filings, non-equity partners may receive IRS form K-1, like equity partners, but the form does not show a share of profits or losses in the firm to the non-equity partner; instead their compensation is most often included, not as a percentage of firm profit, but as a “guaranteed payment.”

Many salutary aspects exist concerning the non-equity partner position. Such positions permit lawyers who have been in practice for a substantial period of time to be elevated to the title of partner without the financial risk associated with an equity partnership. The non-equity partner position is also a sign of the firm’s confidence in the non-equity partner and may enable the attorney to gain the confidence of clients and also to better market their services. Becoming a non-equity partner often is a part of the process for becoming an equity partner as opposed to the harsh “up or out” alternative which was the historical norm and which some firms still employ. In some instances, a non-equity partner position permits both the firm and the non-equity partner to further evaluate whether making the attorney an equity partner is mutually beneficial. The position of non-equity partner can also be a permanent position for attorneys who do not want to take the business risks and management responsibilities of an equity partnership.

Formal Ethics Opinion 9

This summer, North Carolina issued Formal Ethics Opinion 9, entitled “Holding Out Non-Equity Firm Lawyers as ‘Partners.’” The opinion, although concise, is somewhat complicated in that it addresses the holding out of employees, not of a partnership, but of a Professional Corporation, as “partners.” Nonetheless, the opinion is helpful in the partnership context as well.

Formal Opinion 9 concludes that it is ethically permissible for a law firm organized as a professional corporation and that referred to its shareholders as “equity partners,” to hold out to the world as “partners” or “income partners” lawyers who do not own any interest in the firm and are not shareholders. The firm considered these lawyers to be “partners in every sense of the word except actual ownership.” Id. In addition, the firm stated that these lawyers had the authority to bind the firm and to sign opinion letters on behalf of the firm although they did not vote on corporate governance.

The Opinion begins its analysis by quoting Black’s Law Dictionary’s definition of “partner” as “[o]ne of two or more persons who jointly own and carry on a business for profit.” Black’s Law Dictionary (10th ed. 2014). It then quickly observes that within the legal profession the designation of partner is often used independent of the legal definition and states: “For example, shareholders in a professional corporation for the practice of law are frequently referred to as ‘partners’. Like lawyers themselves, laymen generally equate the designation with the achievement by a lawyer of a certain level of experience, status, or authority within a law firm.”

Independent of the consideration of holding out lawyers as “partners” in a professional corporation, the opinion cautions that “referring to a lawyer as a “partner” in external communications cannot be a sham.” It then provides, in general terms, the means by which a law firm may properly designate a lawyer as a “partner.” “To avoid misrepresentation, a law firm may designate a lawyer as a partner, regardless of whether the lawyer satisfies the legal definition of that term, if the lawyer was promoted to the position by formal action or vote of firm management or pursuant to the firm’s governing documents. Further, to prevent the public from being misled as to the lawyer’s achievements, the promotion must be based upon criteria that indicates that the lawyer is worthy of promotion.”

The North Carolina Ethics Committee, noting that different standards and criteria exist, then provided some examples of legitimate criteria: Experience, Integrity, Industry, Intelligence, Communication, Legal knowledge, Motivation, Judgment, Efficiency, and Involvement. In essence, therefore, according to North Carolina Formal Opinion 9, if the non-equity partner is formally promoted based upon the merits, as exemplified by the above criteria, holding them out as a “partner” is acceptable.

NYCLA Opinion No. 740

The relevant New York ethics opinion, New York County Lawyer’s Association Opinion 740, takes a somewhat different approach and is not quite as clear as the North Carolina opinion in its conclusion.

Opinion 740 is entitled “Use of the Title ‘Partner’ in Connection With Law Firm Practice.” NYCLA Comm. on Professional Ethics, Op. No. 740 (Oct. 7, 2008). The opinion was determined under the old Code of Professional Responsibility DR 2-102(C). It states: “Compliance with DR 2-102(C) requires attorneys holding themselves out to the public as partners, and the law firms in which they practice, be in fact partners under New York partnership law and their individual partnership agreements. In the absence of a definition of a partner under the Code, the Committee finds that it is sufficient to satisfy the definition of a partner under New York law.” Id.

This portion of Opinion 740 could result in it being unethical for non-equity partners to be held out as “partners,” and, with the proliferation of non-equity partners, could mean that potentially thousands of lawyers and hundreds of firms would be in violation of the ethical rules. At the same time, it is worth noting that, under the New York Rules of Professional Conduct, which became effective after Opinion 740, “partner” is defined to “denote[] a member of a partnership, a shareholder in a law firm organized as a professional legal corporation or a member of an association organized to practice law.” New York Rules of Professional Conduct Rule 1.0(m).

Opinion 740, however, perhaps providing a workable solution to the reality of the marketplace as it relates to non-equity partners, also stated:

Ethically permissible designation by a firm of a lawyer as its “partner” should in substantial part be a factual determination. That determination should depend on the degree to which clients and other third persons may safely rely upon the acts of that lawyer being recognized by the firm as those of a partner. If the lawyer is provided with the emoluments of partnership (e.g., the power to bind the firm to the same degree as other partners both contractually and otherwise and as the manager of matters assigned to him or her by the firm), as a matter of professional ethics, the private financial arrangements as to the lawyer’s compensation should be irrelevant. Id.

The New York opinion, therefore, does not focus on whether the promotion was formal and meritorious, as does the North Carolina opinion, but, rather, on whether the non-equity partner is recognized by the firm as a partner based upon a factual determination concerning whether the partner is provided with the “emoluments” of partnership. Accordingly, as in the example given in North Carolina Formal Opinion 9, if the lawyer were permitted to issue opinion letters on behalf of the firm, it would appear that under New York Ethics Opinion 740 the lawyer could ethically hold himself out as a partner. Similarly, in the litigation context, if the non-equity partners were those who were in charge of cases and the ones making decisions, which bound clients through the firm, this could satisfy the New York criteria as well.

Combining the New York and North Carolina perspectives would require a formal promotion to non-equity partner status based upon merit and the ability of the non-equity partner to act with authority in a manner similar to equity partners.

Conclusion

The non-equity partner position provides both a commercially and professionally viable alternative to the disruptive “up or out” practice historically applied by the profession. Its widespread application nationally throughout the profession is powerful evidence of its benefits. North Carolina’s Formal Opinion 9 and New York ‘s Opinion 740 provide some guidance for ensuring that, in implementing a non-equity partner program, firms and lawyers are acting ethically.