A checklist for bringing in lateral partners

PARTNER DEPARTURE LAW

Many law firms today are facing the relatively new reality that growth will depend, at least in part, on bringing in talented lateral partners. Although many firms still emphasize developing and promoting their own trained lawyers to partner, and some firms still rely on this organic growth exclusively, for most firms the strategic plan for growth will include the addition of lateral partners.

There is a strong business case for bringing in lateral partners. Obviously, a lateral partner can add to, or supplement, the firm's practices in areas where there may be a missing capacity. This is especially true in today's business environment for law firms, since firms are more likely to have lost talented partners to other firms in just the same way as they add them. In the best situations, lateral partners can provide turn-key value to the firm.

Lateral partners or groups can also add value in less obvious ways, if they bring a refreshed view of the practice, a new approach to client service, and renewed energy. A strong internal firm culture can be a significant asset to a law firm, because it helps to create unique value that cannot easily be replicated elsewhere. But there can also be downsides to a strong internal firm culture, especially if it encourages insular thinking, detachment from competitive realities, or in the worst cases, bad behaviors among partners. Adding lateral partners can provide a needed fresh perspective.

The potential benefits do not come without potential risks, of course. The data clearly shows a mixed bag on lateral partners. Despite its increasing prevalence, it can be a challenge for some firms to add lateral partners or groups and to make it work. What separates the firms who make it work from those who don't? Preparation. Anticipating the potential issues that can arise when you add a partner or group to the firm is critical to success.

Partner Obligations to the Former Firm. Many firms view the obligations that lateral partners may have to their soon-to-be former firms as something that is not their problem, or even their business. But since those obligations can be a significant impediment to a successful transition of a partner or group, law firms should anticipate these issues and, to the extent possible, try to manage them.

It is not uncommon these days, for example, for a partnership agreement to require 30-, 60-, or 90-days of notice to the firm before departing. Whether that is strictly enforceable in all circumstances can be an open question, but a 90-day notice period certainly chills the ability of partners to move to new firms. From the new firm's perspective, how confident are you that the partner's clients will come after such a long cooling-off period? Similarly, many firms now have arguably punitive delayed returns of capital to partners who depart. Putting aside whether these can be enforced, won't years-long delays in the return of capital from a former firm impede a lateral partner's ability to transfer to your firm and be a successful contributing member? This can create financial shocks for any partner seeking to move, and those financial shocks are problems for the new firm because they affect performance and, worse, can threaten the deal in the first place.

Analyzing Conflicts. Perhaps not surprisingly, new firms tend to take a very narrow view of what is, and what is not, a conflict for lateral partners or groups. This can be an existential threat to bringing in lateral partners, which means firms should anticipate and actively manage potential conflict issues from day one. Any economist will tell you that humans tend to downplay risk and amplify benefit in any transaction. As lawyers, and humans, we should recognize that bias and seek to avoid succumbing to that instinct. This means taking an expansive view of potential conflicts, at least for the sake of analysis, when considering a lateral partner or group. Are there potential conflicts with parent companies and far-flung subsidiaries? Are there latent conflicts that could emerge? If so, is there a remedy that could solve the problem or would the treatment be worse than the disease?

Disputes with the Former Firm. Certainly, no new firm wants to be involved in a dispute with a lateral partner or group's former firm. Yet firms tend to underplay the potential for such disputes when they bring in lateral partners or groups. Any firm considering adding a lateral partner or group should conduct its own analysis of the potential for a dispute to arise between the partners and the former firm, or a dispute that directly involves the new firm. These types of suits have historically been rather rare in the world of law firms, but that is changing as the competitive pressures mount on firms. Firms can manage and mitigate this risk by analyzing and anticipating potential areas of dispute. But don't anticipate that the former firm will go gently into that good night, especially if a lot of money is walking out their door and into yours.

Whose Side are You On? It is critical for firms to ask, and to answer, these questions, before, during, and after adding lateral partners or groups. But it is also critical for firms to recognize that the firm's interests here are distinct from the interests of the incoming partner or group's interests. Each side of this transaction should be asking its own questions and getting its own answers on these critical issues.

Not surprisingly, asking these questions and others, and answering them, is what separates a successful lateral partner or group transition from a potentially perilous one.