Left to right: Randy Evans and Shari Klevens, Dentons partners ()
As law firms grapple with new economic realities, it is becoming more common for firms to ask individual or groups of partners to leave in an effort to shore up the firm’s finances. Not only can this decision be extremely difficult considering the firm’s personal relationships with those partners, it can also involve ethical and financial risks for the firm and for the departing partner.
An ugly divorce benefits no one, but instead can be costly for both the firm and the departing partner. Handled properly, the risks can be minimized and both the firm and the partner can hopefully move on in the best way possible.
The concept of a partnership is premised on a confidence and trust shared among partners that is uniquely personal. Absent specific provisions in the partnership agreement or other law, partners generally do not need a reason to dissolve the partnership or to ask partners to leave.
However, there may be limitations to this rule under certain circumstances. For example, there have been a number of high-profile lawsuits brought by partners against their law firms alleging gender discrimination with respect to compensation or other issues.
In the context of partner departures, a firm may have both objective and subjective reasons for asking a partner to leave. The objective reasons may include billings, origination, productivity, and similar, quantifiable reasons. Many firms will review these criteria to determine whether they are uniformly applied without regard to race, gender, ethnicity or religion.
On the other hand, a firm may also choose to ask a partner to leave based on subjective reasons, such as the personal dynamics between that partner and other partners. In such cases, law firms may document the issues as specifically as possible so that the firm has a record to rely upon should its decision be challenged later.
In practice, the decision to ask a partner to leave is often a combination of both the objective and subjective factors. Although law firms may not admit it, a firm may be willing to tolerate a difficult but productive partner, whereas partners with less business may have a shorter leash.
It is not advisable, however, for law firms to turn a blind eye to the misconduct of any partner. If there comes a point where the firm deems it necessary to separate from the partner, well-documented files help fend off challenges from partners unhappy with the firm’s decision.
The Separation Process
There are various issues to consider when discharging a partner. First, as noted above, there may be legal boundaries, such as where the decision could be viewed as premised on the partner’s race, age, ethnicity, gender or religion.
Second, firms can also consider their contractual obligations. Partnership agreements, limited liability partnership agreements, bylaws and similar “contractual mutual undertakings” may address the process for dismissal from the partnership and, therefore, govern the separation process.
It can be an unnecessary risk for law firm decision-makers who are unfamiliar with the actual partnership agreement language to move forward without considering or fully appreciating the specific provisions implicated by such decisions. In those cases, unnecessary legal disputes could emerge, creating unexpected problems and additional expenses.
If the partnership agreement does not address the dismissal of partners, it may be worth considering whether such provisions should be added. For most firms, specific provisions detailing the separation process can help reduce the risk of unnecessary trouble and expense for law firms. Issues that can be addressed in the partnership agreement including specifying the effective date for the departure and both the law firm’s and the departing partner’s obligations upon the effective date.
Third, there are fiduciary and statutory responsibilities to consider, including those set forth in California’s Uniform Partnership Act. Cal. Corp. Code § 16404. The reciprocal duties owed by the law firm and the departing partner generally continue up until the effective date of the departure. Thus, while the departing partner may have one foot out the door, until the departure is actually effective, the partner’s duty of loyalty typically remains with the firm.
However, where the partnership agreement contains greater detail regarding the duties upon a departure, there is generally less of a need to apply the law relating to fiduciary duties to determine what conduct is appropriate. If the partnership agreement is silent on the issue, then the firm and the departing partner may have more difficulty determining how to act given the facts and circumstances of the situation.
Unsurprisingly, in many scenarios the most significant issues arising from a partner’s departure involve money. The partnership agreement can define the circumstances upon which the departing partner may be entitled to various payments and could even condition the receipt of any payments upon the partner’s compliance with her obligations to the firm. Sometimes statutory partnership law also addresses this issue.
Finally, generally speaking, departures do not change either the law firm’s or the partner’s responsibilities to individual clients. The attorney-client relationship reflects an agreement between the attorney and the law firm, on the one hand, and the client, on the other. Because a partner departure may change the terms of the relationship between the firm and its client, the firm may need to address and confirm any such changes with the client.
In addition, firms should consider whether additional steps are necessary to fulfill the various other ethical responsibilities owed to the client, including protecting confidences and secrets, avoiding conflicts of interest, preserving client funds, and avoiding any impairment to the client’s interests.
Although there are a wide range of issues to consider, planning ahead is the key to ensuring that a partner departure goes as smoothly as possible. With appropriate protocols in place, law firms can limit the potential that the difficult decision to ask a partner to leave does not lead to a messy break-up.