It’s turning into a banner year for settlements involving big law firms facing accusations from within.
Six months after Norton Rose Fulbright and Chadbourne & Parke paid more than $3 million to exit a gender bias suit brought by former Chadbourne partners, Proskauer Rose agreed last week to resolve discrimination and harassment claims brought by a female partner in Washington, D.C.
Many more accusations of bias and misconduct are likely settled out of court. Even partners within a firm may be unaware of the specifics—or sometimes the existence—of such deals. And even when both the allegations and the agreements to resolve them are public, one detail typically is not: the source of funding for the payouts.
Kate Mueting is a partner at Sanford Heisler Sharp, the employment plaintiffs firm behind the Chadbourne and Proskauer cases, among others. She said plaintiffs lawyers don’t necessarily “have a line of sight” as to where settlement payments are coming from, and neither do partners at the firms doing the paying.
“Often the existence of settlements, or where the money comes from on settlements, is not something that the partnership as a whole at law firms knows about,” Mueting said. ”Partners at law firms don’t typically have insight into settlements that do not involve them.”
Follow the Money
Secret settlements and payouts are nothing new. But in the wake of the #MeToo movement, and amid accusations involving partners at major law firms, the notion that firms may be quietly paying for silence has become more unsettling to some.
Allegations of misconduct may never become public, and they may trail law firm partners from one firm to another. In the case of James Tanenbaum, who resigned from Mayer Brown shortly after joining the firm from Morrison & Foerster this spring, The Wall Street Journal reported that sexual harassment allegations against him had led to a 2003 settlement with a female lawyer at another of his previous firms, Stroock & Stroock & Lavan. (Tanenbaum has forcefully denied engaging in improper conduct.)
“Sometimes—and I suspect more often than not—the only way a partner in a law firm finds out about serious allegations of discrimination and harassment occurring at the firm is when it is reported in the news,“ said Kerrie Campbell, the lead plaintiff in the Chadbourne case.
There are multiple ways law firms fund settlement payments, and the approaches vary from firm to firm. “Law firms are privately-held entities, so there’s very little transparency in their financial dealings,” notes Minna Kotkin, a professor of law at the Brooklyn Law School.
The most common source of funding for settlements is through law firms’ insurers, some experts said.
Most employers, including law firms, have employment practices liability insurance (EPLI) to cover claims of harassment, discrimination and retaliation, said Lawrence Organ, a California trial attorney and founder of the California Civil Rights Law Group.
Organ was appellate counsel in the sexual harassment case filed by Rena Weeks in 1992 against Baker McKenzie and then-partner Martin Greenstein. A San Francisco jury initially awarded Weeks $7.1 million in punitive damages, finding that the firm knew of the trademark attorney’s history of harassing women but failed to do anything to correct it. The California Court of Appeals later reduced her award to $3.5 million.
EPLI coverage could also apply to pre-litigation claims, Organ said, covering settlements negotiated in response to a demand letter from plaintiffs firms. And general liability coverage may also be used where there are negligence-based causes of action—a common element of sexual harassment allegations—he said.
“Big firms have [EPLI], so in many cases the payout will come out of that,” Kotkin agreed. However, some of those insurance plans have fairly high deductibles, so law firms don’t always use them, she said. In those cases, Kotkin said, “it’s going to come out of the partnership funds.”
Kotkin pointed to general law firm funds that are created by ongoing revenues, but Alan Exelrod, a longtime San Francisco-based employment attorney and of counsel at Rudy, Exelrod, Zieff & Lowe, suggested that firms may also tap their capital accounts to fund settlements.
Exelrod was co-lead counsel in the Weeks case and most recently represented Ellen Pao in her gender discrimination case that reverberated across industries. He noted that all law firm partners commit capital into their firm, adding that in his case against Baker McKenzie, the international legal giant had some $69 million in capital.
And while firms bring in way more revenue than what they hold in capital, their capital accounts could theoretically serve as one option to fund a settlement, he said. “The capital [fund] is one source, and then, of course, there’s profit,” Exelrod said.
While the source of funding may vary, so does the way firms may delegate authority to deploy it.
“Any big case I’ve had against a law firm, my sense is the executive committee, [along] with the CEO, has been making the decisions about what to do in the case,” Exelrod said. And in that sense, law firms aren’t exceptional, he suggested. “Yes, other partners are paying for bad behavior—but corporations pay lots of money for sexual harassment, so the shareholders are paying for somebody’s bad behavior,” he said.
Call for Transparency
Others say law firms have a responsibility to their partners to be more transparent about who’s being accused of misconduct, whether they should be paid for their silence, and what it’s costing the firm.
Campbell, a former Chadbourne partner, said a culture of secrecy can perpetuate and facilitate discrimination and harassment, and undermine what’s left of the notion that partners are owners that share oversight over business decisions.
“Over my 30 years of practice in Big Law firms, rank and file partners—including those labeled ‘equity’ partner—have not been informed about or privy to internal law firm discrimination and/or harassment complaints, let alone how they were resolved,” Campbell said.
“This is a sad and unacceptable state of affairs that, in my view, requires immediate corrective action if we are going to make real progress to stop discrimination and sexual harassment in the legal industry,” she said.
Campbell said firms should have a clear system in place to investigate allegations fairly, and to keep partners aware of the key details—including how claims may be settled.
“So much for being an ‘owner’ of the firm,” she said, if partners are kept in the dark.