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Who is a Partner?

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Sept. 21, 1999, was David Alan Richards’ 54th birthday. He hadn’t made any special plans to mark the event, and he didn’t expect it to be one of those turning points in his life.

By 1999, Richards, a 1972 graduate of Yale Law School, had become, by any measure, a very successful real estate lawyer at one of the largest law firms in the United States–no, make that the world.

Richards joined Sidley & Austin (which became Sidley Austin Brown & Wood after a 2001 merger) as a partner in 1982. He co founded the Chicago based firm’s office in New York City. He had a solid book of business, and his clients included developers selling homes to the likes of media mogul Rupert Murdoch.

That’s why what happened to Richards right around the time of his 54th birthday came as such a shock. He says his life hasn’t been the same since.

When Richards was asked to meet with two of the administrative partners at Sidley’s Manhattan office, he remembers expecting it to be about some routine matter.

He realized that wasn’t the case when a letter was pushed across the desk. The letter was addressed to him, but he noticed that it omitted the usual courtesy of “Esquire” following his name.

The letter told Richards he would no longer be a partner at Sidley. He could, however, continue to work at the firm, with “senior counsel” status, on an 18-month contract renewable at the firm’s option.

“I was told that I would need to sign this letter on or before Dec. 31, or I was out of the firm completely,” Richards says.

But at least Richards wasn’t alone. He later learned that he was one of 30 or so Sidley partners–all in their 40s or older–who were demoted by the firm during the fall of 1999.

Richards and many of the other demoted Sidley partners eventually started looking for new jobs. Richards was one of the fortunate ones–today he is co managing partner of the New York City office of McCarter & English, a law firm based in Newark, N.J. At 350 attorneys, McCarter & English isn’t in the behemoth ranks with Sidley’s 1,500 attorneys in offices around the world, but it is the biggest and oldest law firm in New Jersey.

Even after landing on his feet, Richards says he still is bitter about the way he left Sidley.

“I’m not deadwood. I’m not a schlump,” says Richards, a past chair of the ABA Section of Real Property, Probate and Trust Law. “I’m one of the most well-known real estate lawyers in the country, and it didn’t protect me. I’d given them 18 years of my life. It was like, ‘What have you done for me today?’ It was not loyal, or smart.”

One of the other Sidley partners who was demoted along with Richards expresses similar feelings.

“One of the things that was devastating was that I was in what I assumed would be my prime earning years,” says this former partner, who spoke on condition of not being identified. But, at the same time, “it was not just income. It’s status, it’s stature, it’s a place in the professional community. There are a whole lot of factors involved that made it difficult.”

Looking back, he says, “I imagine it could have been worse, but it was far harder and harsher than it needed to be.” At least knowing other partners also were being demoted “helped put things in perspective,” he adds. “It relieved some of the thoughts of individual responsibility.”

Want to Make Something Of It?

How Sidley dealt with those 30-plus partners in the fall of 1999–and the firm says it did nothing discriminatory–could turn out to have a dramatic impact on the meaning of partnership at law firms and other business entities.

Indeed, the U.S. Equal Employment Opportunity Commission is making a federal case out of the incident.

On Jan. 13, the EEOC filed a lawsuit in U.S. district court against Sidley, alleging that the firm’s demotion of partners in 1999 violated the federal Age Discrimination in Employment Act. The suit further alleges that Sidley has maintained an age-based retirement policy since at least 1978 that violates the ADEA. United States Equal Employment Opportunity Commission v. Sidley Austin Brown & Wood, No. 05 C 0208 (N.D. Ill.).

The EEOC’s suit is based on what experts in the employment law field say is a novel claim that the lawyers demoted by Sidley in 1999 held the title of partner but were, in effect, employees of the firm. While federal antidiscrimination laws do not apply to partners, they do protect employees.

The suit is believed to be the first action by the EEOC alleging that a law firm engaged in age discrimination against some of its own partners. As such, it will be scrutinized carefully within the legal community.

“I think every law firm in the country, if they’re not watching, they should be watching to see how things unravel and to see what the court looks to as being important indicia of being a true partner or really just an employee,” said Ellen E. McLaughlin of Seyfarth Shaw in Chicago when the suit was filed.

The EEOC filed the suit on behalf of a class of Sidley’s partners age 40 and older who the commission alleges were adversely affected by an age based retirement policy maintained by the firm since at least 1978.

“We want unconditional offers of reinstatement to partnership, and we want economic relief,” says John C. Hendrickson, regional attorney for the EEOC’s Chicago district and the lead lawyer in the suit against Sidley.

The EEOC’s complaint also seeks a permanent injunction against Sidley engaging “in any employment practice which discriminates on the basis of age against individuals 40 years of age and older,” and an order that the firm take steps to provide equal employment opportunities for older individuals to “eradicate the effects of its past and present unlawful employment practices.”

Hendrickson declines to estimate the number of former Sidley partners who might be covered by the suit or the total potential damages. But, he notes, “It’s a big firm, and they have a number of people aging all the time.”

Sidley’s answer, filed March 14, denies the EEOC’s allegations and asks that the complaint be dismissed primarily on grounds that it fails to state a claim.

William F. Conlon, a Sidley partner, declined to discuss the case on behalf of the firm as a matter of pending litigation, except to say, “We did not and do not discriminate against partners or anyone at the firm.”

The EEOC’s age discrimination action against Sidley can be viewed as a reflection of both changing legal standards and an evolution in law firm culture.

The critical issue in the case is whether the EEOC is correct in its contention that the demoted Sidley partners actually were employees of the firm. But finding a legal answer to that question is intertwined with cultural changes that have taken place in the legal profession over the past few decades.

The EEOC, Hendrickson says, is seeking to affirm that, “in the carpeted offices of the top law firms, the federal discrimination laws apply just as much as on the oil slicked factory floor.”

Another official, EEOC vice chairwoman Naomi C. Earp, declines to discuss the Sidley case specifically. But she says the commission’s mission is to enforce laws prohibiting discrimination in the workplace. “We want as many workers as possible called employees. So our interest is to have a very expansive definition of ‘employee.’ ”

Increasingly, she says, “employee” is a more appropriate description of attorneys at many firms who hold the title of “partner.”

“As law firms have gobbled each other up and just become so huge, I think it’s reasonable now to ask the question, ‘Who is a partner?’ ” Earp says. “The larger and more complex and more spread out a law firm becomes, the more like a corporate entity–with various managers and workers–it becomes.”

Some lawyers, however, dispute the commission’s position on the issue.

“It sounds to me as though the EEOC is pursuing this as an extension of the law,” says Mark S. Dichter, who chairs the labor and employment group at Morgan, Lewis & Bockius in Philadelphia. He is a past chair of the ABA Section of Labor and Employment Law.

“These are all individuals, these former partners, who could certainly afford legal counsel,” Dichter says. “Why is the EEOC, which has a very limited budget, in effect spending their resources on behalf of people who could certainly afford to hire their own lawyers?”

Defining partners at law firms as employees does not seem to fit the intent of Congress in legislating against discrimination in the workplace, Dichter says. If Congress does want that to be the case, he adds, it should pass legislation that expressly says so.

The Corporate Approach Creeps In

The traditional view, says Christine Kearns, an employment lawyer with Pillsbury Winthrop Shaw Pittman in Washington, D.C., is that “law firms are partnerships, and it’s a real blow to the longstanding identity of lawyers to begin to question whether our partners really are employees. It’s a difficult thing for law firms to accept, if it’s true.”

But there is less and less about law firms that still can be called traditional.

There was a time when only the most illegal, unethical or outlandish behavior would keep a member of a law firm from holding his partnership–and in those days, nearly all partners were men–for life. Many older partners enjoyed their later years as a time to reap the rewards of decades spent slogging it out in the legal trenches.

But in those days, the financial imperatives of a competitive business environment weren’t as strong as they are today, either. Law firm mergers were rare, and firms with more than a few hundred lawyers were practically unheard of.

Now, law firms routinely seek to emulate corporate management techniques. It is increasingly common for a firm to cast out senior partners who no longer produce the way they once did. Meanwhile, partners at the top of their games check out opportunities elsewhere that might increase their income and prestige, and many don’t hesitate to jump ship for a better situation.

If anything, Sidley displayed the traditional law firm values long after things began to change at many firms, say former firm members and observers who were interviewed for this story.

The firm’s self-image did not focus on money as the ultimate goal, says the demoted partner who agreed to be quoted without attribution for this story.

“I don’t think there was any doubt that a number of those guys could have gone to any law firm in the country and made as much money as any lawyer in the country, if that was what motivated them,” the former partner says. “And for whatever reason, that was not what they did.”

This former partner and others maintain that 1999, when a new management team took charge at Sidley, was a key transitional year for the firm. The demotions imposed in the fall “represented a major cultural change that was absolutely unprecedented at Sidley,” the former partner says.

But those were still good years at Sidley, says Michael I. Miller, who was a partner then.

“I had a wonderful experience at Sidley,” says Miller of the 12 years he spent at the firm before leaving in 2000 to join a Chicago litigation boutique with other former Sidley partners. He is now counsel to that firm, Eimer Stahl Klevorn & Solberg. Sidley’s mandatory retirement age of 65 “did play a role” in his decision to join the spin off group, says Miller, who was 63 years old when he left in 2000.

But whether to leave the firm upon reaching retirement age is a personal decision, Miller says. “Partners who retire at Sidley don’t necessarily leave the premises, and if they want to continue practicing they can do so,” he says. “Even after retirement, I could have continued as a professional affiliated with Sidley & Austin.”

(Calls to Thomas A. Cole, who has chaired Sidley’s executive committee since 1998, and Charles W. Douglas, a litigator who has been chairman of the management committee since 1999, were referred to Conlon. The management committee oversees Sidley’s day-to-day operations, while the executive committee has general authority over the firm and sets policy.)

Even in a time of change for law firms, the meaning of partnership ultimately is a matter of law. The EEOC’s age discrimination case against Sidley likely will add to a recent line of cases reconsidering the legal meaning of partnership at law firms and other business entities.

The starting point is the U.S. Supreme Court’s 2003 decision in Clackamas Gastroenterology Associates. v. Wells, 538 U.S. 440. At issue in the case was whether a former bookkeeper could sue a medical clinic in Oregon for discrimination on the basis of disability under the Americans with Disabilities Act. The clinic, organized as a professional corporation, would not meet the 15-employee threshold to invoke jurisdiction of the ADA unless the four doctors who owned it as shareholders and directors were counted as employees.

The justices reversed a ruling by the 9th U.S. Circuit Court of Appeals at San Francisco to grant the clinic’s motion for summary judgment and remanded the case to the U.S. District Court for the District of Oregon to determine whether the doctors were employees for purposes of ADA jurisdiction.

The Supreme Court directed the district court to apply a common-law “element of control” standard to make its determination. The justices noted that the EEOC favors the element of control standard, and that commission guidelines identify factors that should be considered.

“As the EEOC’s standard reflects,” wrote Justice John Paul Stevens for the court’s 7-2 majority, “an employer is the person, or group of persons, who owns and manages the enterprise. … The mere fact that a person has a particular title–such as partner, director or vice president–should not necessarily be used to determine whether he or she is an employee or a proprietor.”

Earlier this year, a three-judge panel of the Chicago-based 7th U.S. Circuit Court of Appeals applied the Supreme Court’s Clackamas test to affirm a district court’s ruling that one of four partners at a law firm did not have standing as an employee to sue the other partners for voting to oust him. Solon v. Kaplan, No. 04-2113 (Feb. 15).

The ousted lawyer “was one of four general partners who, by virtue of his voting rights, substantially controlled the direction of the firm; his employment and compensation; and the hiring, firing and compensation of others,” states the appellate court’s opinion. “Under the facts of this case, he was an employer as a matter of law.”

Act Now, Don’t Pay Later

There are different views on how the EEOC’s suit against Sidley would fit into this line of cases.

Speaking in April at a program sponsored by the ABA’s Labor and Employment Law Section, Sidley’s lead counsel in the EEOC case suggested that the size of a firm shouldn’t affect an attorney’s standing as a partner.

“Is Clackamas going to change all that? I don’t think so,” said Paul Grossman of Paul, Hastings, Janofsky & Walker in Los Angeles, who did not specifically discuss the Sidley case. “But we’ll have to wait and see.”

D.C. employment lawyer Kearns says Solon affirms that “the legal principle that Sidley is relying on–that a true partner is not an employee–is alive and well.”

But Hendrickson of the EEOC points out that the management structures of a four-partner office and a firm with thousands of lawyers in offices around the world are vastly different.

“Those two firms are just at opposite ends of the spectrum,” Hendrickson says. “They’re both engaged in the practice of law. Other than that, they don’t appear to look anything like each other. It’s comparing apples and oranges.”

Unlike the lawyer in the four-partner firm in Solon, partners at Sidley lack input on management decisions, a key factor indicating that they are employees rather than true partners, Hendrickson says.

For their part, Richards and other former Sidley partners interviewed by the ABA Journal say they are not aware of the entire Sidley partnership ever being asked to vote on a matter of firm business in recent decades, except for the merger with Brown & Wood–and that vote took place after the EEOC began investigating its age discrimination case against the firm.

But Dichter of Philadelphia says a “fixation with voting” as a key to determining a partner’s true status at his or her firm is inconsistent with long-established definitions of partnership.

Traditionally, “the firms were run by the senior partners,” Dichter says. It would not be particularly unusual even in a two-member firm for one partner to opt out of management decisions.

Partners generally have authority to delegate a great deal of decision making power to other partners, if they wish, he notes.

Ellis B. Murov of Deutsch, Kerrigan & Stiles in New Orleans says that, as a practical matter, especially at large firms, full partnership votes cannot be taken on every firm decision, so there must be some delegation of administrative authority to a smaller number of partners.

At his 70-lawyer firm, “We have monthly meetings and, yes, we take partnership votes” on such matters as compensation, taking on significant debt and new partners, says Murov, who chairs the Employer Employee Relations Committee in the ABA’s Tort, Trial and Insurance Practice Section. But “if everything was voted on, nothing would get done.”

Heads Up!

A victory by the EEOC in its case against Sidley would force other law firms, especially large ones, to recognize that the emperor has no clothes, says Michael P. Maslanka, managing partner of the Dallas office of Ford & Harrison.

“Large firms need to understand they are no different than a large company and can’t hide employee status behind a partner label.”

Moreover, Maslanka says, “This case is going to be used like a can opener by plaintiffs lawyers to pry into law firm decision-making, to go after midsize-to-large law firms. There’s no question in my mind about that.”

The potential damages from a discrimination case like the one Sidley faces are too enormous for law firms to await further developments in the courts before they start implementing preventive strategies, Maslanka says.

Maslanka recommends that law firms hire other firms or consultants to determine whether all partners would qualify for that designation under the developing legal standards.

If they don’t, a firm will have to decide whether to give those lawyers an actual ownership role or recognize that the firm’s so-called partnership is actually akin to a corporate structure and adjust accordingly.

“I think this case is a wake-up call to law firm partnerships,” Maslanka says. “You’re talking about partners making several hundred thousand dollars a year.”

Law firms “are sitting on top of huge liabilities, and that’s why I think they need to act now and not later.”

Martha Neil, a lawyer, is a legal affairs writer for the ABA Journal.

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