Ensure lateral moves are win-win

Questionnaires, conflicts checks and proper documentation will help boost profitability, lower risk
November 7, 2011
The Daily Report

Law firms change. Many times, law firms change by merger or by the hiring of laterals. Interestingly enough, when big firms started to emerge at the turn of the 19th century, the "Cravath System" (named after Paul D. Cravath of Cravath, Swaine & Moore) actually prohibited laterally hiring attorneys from other law firms. Instead, Cravath opted
for the "up or out" model for evaluating and promoting attorneys up the ranks from associate to equity partner.

Earlier this year, the Daily Report noted that in 2010, even in the recession-tempered legal environment, 1,859 attorneys changed law firms. While still high, it was down from the record 2,775 partners who switched law firms among the Am Law 200. On average, from 2005 to 2009, 2,454 partners switched firms. As 2012 approaches, the numbers are again on the rise as law firms move more aggressively toward hiring lateral associates to compensate for small summer associate classes and adding strategic lateral partners who can bring ready-made practices for long-term firm expansion and growth.

Lateral hiring of attorneys can be a win-win for the attorney and the law firm. For the attorney, a lateral move can mean improved advancement possibilities, a greater platform for clients, a different work/life balance and better compensation. For the law firm, lateral additions can expand practice areas, achieve firm growth and capitalize on proven producers seeking to take advantage of growth opportunities.

But, as some firms have learned, there are some lose-lose propositions. For example, in some situations, law firms acquire other law firms' problems without the reward, and with unforeseen conflicts—both legal and personal. Yet, in the modern legal world, lateral hires are a necessary part of the changing legal landscape. The challenge, of course, is to sift out the good from the bad by focusing on easily preventable problems.

Like all risk management issues, the most effective strategies involve systems. This means adopting practices, protocols and procedures that the law firm and its attorneys follow every time. Murphy's law applies in full force in lateral hiring. Inevitably, it is the one time that the law firm fails to follow the established rules that comes back to create the most difficult problems.

The most important part of the process is to clearly define the moment that a lateral hire moves from being prospective to actual. At that precise moment (when a partner joins a partnership or a non-partner becomes an employee), all of the rules change. Most importantly, all of the conflict of interest rules from the Rules of Professional Responsibility attach and there is no going back. Even a quick departure does not end the problems when clients of the new attorney and clients of the law firm become one and the same once the relationship commences.

Because the consequences are so significant, effective risk management in lateral hiring dictates that the law firm adopt a clear line of demarcation for the admission of a lateral partner or hiring of a non-partner employee. One of the most effective tools is to require a signed document between the firm and the new attorney memorializing the moment when the professional relationship (whether partner or employee) begins.

Most times, a countersigned letter will be sufficient. In other circumstances, an actual memorandum of understanding makes more sense. Either way, a signed document confirming the date of admission or employment with the mutual understandings is important.

All other risk management strategies fall on each side of the date of the professional relationship. Prior to the relationship, there is no substitute for two things: confidentiality and due diligence. Both require process.

Confidentiality means limiting the number of people who are involved at each step of the process. No matter how stringent the rules, the more people in the know, the more likely things leak. And, in the world of lateral hiring, leaks can create real injury to both the attorney and the law firm.

Due diligence consists of three information gathering parts: (i) objective data, (ii) professional information and (iii) subjective evaluations. All three are equally important.

Typically, an application—or the more semantically appealing "questionnaire"—works best for the first step. Some estimate that more than 40 percent of professional resumes are inaccurate. Hence, just accepting the resume no longer works. As a result, many firms use questionnaires that track the moral fitness application for joining the bar. The objective is to gather the basic information necessary to determine whether to invest the resources to pursue the opportunity.

Once past the initial screening, the next step is to gather professional information. Many firms combine the first two steps into one. However, there are many good reasons to separate the two. Biographical information does not imply in any meaningful way professional duties. On the other hand, the disclosure of professional information (like existing or potential clients, pending or potential claims, or the operation of law firms) does. Hence, this second step is appropriate only after both the law firm and the attorney have decided to move forward.

The professional information supplemental questionnaire should include at the least the following information:

  • Prior claims history (including all reported claims involving the attorney);
  • Knowledge of any circumstance that might give rise to a claim (including any reported to an insurer involving the attorney);
  • Prior discipline by any bar organization, court or government agency;
  • Any declination for legal malpractice insurance;
  • Any termination of rights, privileges or positions of any kind;
  • Any boards, trusteeship, offices, positions or relationships with other entities;
  • Prior litigation, administrative proceeding or criminal proceeding as a party;
  • Continuity of insurance coverage.

In addition, two other things are important. First, the law firm needs the appropriate releases necessary to conduct a background check including criminal history and credit history. Second, both the law firm and the necessaryinformation to perform a conflicts check. It is important that both the attorney and the law firm evaluate conflicts

An effective conflicts check requires the disclosure of clients, adverse parties and interested parties. As virtually all firms now operate with computerized databases, these searches can be done quickly and accurately. The important thing is that the conflicts check be done and that all relevant information be requested and disclosed. One additional tool is to include the lateral and the lateral's current firm in the computer search as client, adverse party and interested party. The key is to identify any potential issues before the relationship begins.

Finally, subjective evaluations are important. There is a reason that the most significant members of law firms are so significant. They have an intuitive sense of things that might not fit. Of course, the number of high-level partners involved will depend on the entry level of the lateral. However, at least one should be involved for any level. 

Attorneys and law firms should only make decisions after gathering and considering all three categories of information: objective data, professional information and subjective evaluation. If there are issues (conflicts, outstanding potential claims, other issues), both the attorney and the law firm should decide how to address them in advance of an actual relationship. These might include appropriate conflict waivers, ethics walls, and/or indemnification/insurance issues. Since there is always the unexpected, making sure all of the t's are crossed and i's are dotted for insurance purposes is critical.

Of course, it all sounds intimidating. But, it does not have to be so. The solution is an effective system with questionnaires, supplemental questionnaires, conflicts checks and a documented mutual understanding, which combine to do most of the work. Safer and more profitable—it is a winning combination.

Reprinted with permission from the November 7, 2011 issue of the Daily Report© 2011 ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.









Print PDF