By TERRY W. CONNER

REGARDLESS OF ITS ENTITY STRUCTURE,' SOONER OR LATER ALMOST EVERYLAW FIRM CONFRONTS THE MYRIAD ISSUES SURROUNDING PARTNER ORSHAREHOLDER RETIREMENT. Retirement may mean the lawyer's full retirement from the practice oflaw, or a significant change in the partner's status with the firm, such as moving from a position as equity partner toincome partner or of counsel. In either case, the lawyer's retirement can involve issues regarding maintenance andtransition of clients for wvhomn the retiring lawyer is responsible, transition of the lawyer's leadership and adminis-trative duties at the firm, financial security of the lawyer, structure and compensation for any continuing servicerelationship with the firm, and (last but certainly not least) friendship and fairness. (CONTINUED ON PAGE IIl)

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A number of recent trends have complicated the retire-ment drama. These include the swell of baby boomersapproaching retirement, lengthening life expectancies forretiring lawyers, post-2008-meltdown concerns regardingthe certainty of retirement income, flattened revenue andincome growth at many law firms, rising healthcare costs,and increasing levels of contention and litigation regard-ing mandatory retirement policies.

This article addresses the current commentary andcontention regarding partner mandatory retirement poli-cies, and then offers insights into certain components oflaw firm retirement policies, which will be relevantwhether or not retirement occurs as a result of a manda-tory retirement policy. Given the wide range of law firmsizes, compositions, goals, and experiences, the articleshoots for what to consider, rather than what to do.

MANDATORY RETIREMENT POLICIES STIR DEBATEDuring the past decade, the debate regarding law

firm mandatory retirement policies has increased sub-stantially. This results from the trends noted above, morepublicized surveys of lawyer sentiment regarding retirementpolicies, bar association pronouncements, and claimsagainst law firms enforcing mandatory retirement policies.

Regarding lawyer sentiment, in 2005, the legal indus-try consultant Altman Weil polled managing partnersand executive committee members in U.S. law firms hav-ing 50 or more lawyers. The survey reported that approxi-mately half of responding law firms had mandatoryretirement policies, with the most popular mandatoryretirement ages being 65 and 70, although a numberchose age 75. Of those surveyed, however, only 38 per-cent of respondents agreed with their firms' mandatoryretirement policies. More recently, Altman Weil opinedthat the profession will move away from mandatoryretirement, including as a result of expectations oflawyers and the profession, age discrimination issues, andcompetitive pressures. Also, both the New York State BarAssociation and the American Bar Association haveurged abandonment of mandatory retirement policies.'The ABA House of Delegates recommended that lawfirms evaluate partners purely on the basis of individualperformance, rather than on the basis of age. In this hyper-competitive legal marketplace, some firms are using theirlack of a mandatory retirement policy as a tool to recruitmore senior partners from other law firms having manda-tory retirement policies.

Regarding partner age discrimination claims, a basicissue is whether the partner is deemed an employee,because federal and state anti-discrimination laws usuallyprotect only employees.' In its 2003 decision in ClackamasGastroenterology Assoc., P.C. v. Wells, considering the

status of shareholders in a medical practice for purposesof the Americans With Disabilities Act, the U.S.Supreme Court described the principal factors to be con-sidered in determining whether someone is an employeeor an employer: (1) whether the organization can hire orfire the individual or set rules for the individual's work;(2) the extent to which the organization supervises theindividual's work; (3) whether the individual reports tosomeone higher in the organization; (4) the extent towhich the individual can influence the organization; (5)whether the organization and individual intend that theindividual be an employee, as expressed in agreements;and (6) whether the individual shares in the profits, loss-es, and liabilities of the organization.

Returning to law firm mandatory retirement policies;law firms took notice when, in 2007, a federal judgeapproved a $27.5 million consent decree between thelaw firm of Sidley Austin Brown & Wood and the EqualEmployment Opportunity Commission. The EEOC hadsued Sidley Austin for violation of the Age Discrimina-tion and Employment Act, following the firm's demotionto of counsel of 32 partners allegedly on the basis of theirage.' In the consent decree, Sidley Austin agreed that theaffected partners were employees and that it would nolonger implement age-based retirement policies. Beforethe settlement, the 7th Circuit held that the EEOC hadalleged facts sufficient to show that the Sidley Austin part-ners may qualify as employees protected by the Act.'

More recently, the EEOC and Kelley Drye & Warrensettled an age discrimination case s involving a partnerwho was required to depart equity partner status at age70. The consent decree prohibits the firm from basingactions affecting an attorney's status, current compensa-tion, or ownership on the attorney's age; requires firmpartners to attend training on anti-discrimination com-pliance; and requires the firm to pay the complainingattorney $574,000 in back pay. According to an AmLawDaily article, following the Kelley Drye settlement, a sen-ior trial lawyer with the EEOC's New York office said theagency would consider bringing cases against other lawfirms with or without a complaint from a partner beingfiled first. The president of the New York State Bar Asso-ciation commented favorably on the settlement, statingthat, "The retirement policies of law firms should be gov-erned by flexibility and consideration of the needs of thefirm and the individual partner. '

The Sidley Austin and Kelley Drye cases were settledbefore a judicial decision. Some other law firm cases haveheld, based upon the facts presented, that the affectedpartners were not employees for purposes of the Act."Whether or not a partner in a law firm is an employee, ofcourse, depends upon the nature of the partnership inter-

111 Texas Bar Journal • February 2013 texasbar.com

est, relevant governing documents, and how the law firmis managed and operated. Therefore, law firms that con-tinue to maintain mandatory retirement policies or thatmay take adverse employment actions with respect toolder partners should carefully evaluate their partnershipagreements, management practices, and operating proce-dures to determine whether those factors would materiallysupport a position of owner not employee status underexisting court authority.

MAJOR COMPONENTS OF RETIREMENT POLICIESDespite the contention and litigation, many law firms

continue to require mandatory retirement. In 2010, amajor professional liability insurance company analyzedmore than 80 partnership agreements obtained from insured

1. Normal retirement age, for the purpose of entitle-ment to certain retirement benefits.

2. Early retirement age, for the purpose of entitlementto retirement benefits.

3. If age-based mandatory retirement is adopted, thenwhether at mandatory retirement age the partneris no longer entitled to be an equity partner or mustretire from the firm altogether, and whether a gov-erning body can waive the requirement.

4. If age-based mandatory retirement is not adopted,then what standards does the firm apply in determin-ing whether a partner may continue as a partner?

5. Whether a partner may continue in law firm man-agement after a certain age.

6. The timing of return of an equity partner's capital.''

Basic goals of most mandatory retirement policies include providingclient management, economic, and leadership opportunities foryounger partners, and certainty regarding retirement timing.

firms in its underwriting process and found that approxi-mately 65 percent had mandatory retirement provisions,with retirement age ranging from 65 to 72, and 43 per-cent permitted a partner to defer retirement past themandated age, subject to approval of a governing body.Surprisingly, some did not address retirement at all.

Basic goals of most mandatory retirement policiesinclude providing client management, economic, and lead-ership opportunities for younger partners, and certaintyregarding retirement timing. A firm may eschew mandato-ry retirement, but adopt criteria for maintaining equitypartner status, which accounts for differences in individualpartner performance but necessitates individual partnerevaluation, not just for older partners, but all partners.

Whether or not a law firm has a mandatory retirementpolicy, the firm, in accordance with its governance sys-tem and with good internal communication and support,should adopt a policy governing partner retirement fromthe firm. Typically, the fundamental expectations regard-ing retirement (e.g., any mandatory retirement require-ment and retirement payment obligations) are includedin the firm's partnership agreement, but certain retire-ment-related topics may be embodied in a separate policystatement.

Most retirement policies will address one or more of thefollowing components:

7. Continuation of certain benefits, such as healthinsurance and life insurance.

8. Post-retirement payment obligations, if any, of thelaw firm.

9. The title and role of a partner continuing to workfor the firm, following retirement.

10. Non-competition agreements in exchange for retire-ment benefits.'

2

11. Pre-retirement transition and succession planning.

In facilitating partner retirement, arguably the mostimportant policy-related subjects are: (1) having a recog-nized procedure for discussing and planning the partner'sretirement; (2) if the partner may continue working for thefirm after retirement, then the characteristics of continuedemployment; (3) providing appropriate post-retirementpayments to the retiring partner; and (4) if the firm doesnot have a mandatory age-based retirement policy, thenthe performance standards required of its equity partners.

PRE-RETIREMENT PLANNINGFOR SUCCESSION AND RETIREMENT

Regardless of a firm's formal retirement policy, the firmand a partner, in the zone of retirement, should have a can-did discussion regarding future transition of the lawyer'sprincipal client relationships to other lawyers within thefirm; transition of practice group and firm leadership

Vol. 76, No. 2 ° Texas Bar Jounral 112texasbar.com/tbi

responsibilities; expectations regarding the partner's workcommitment; and, if the equity partner continues to work

for the firm in a different position, then the title, bene-fits, responsibilities, and perquisites of the new position."'These discussions often include representatives of the firmand the partner's practice group, and perhaps a retirementplanning committee, and may be memorialized in a multi-year transition plan. The law firm's compensation systemwill be relevant in at least three retirement-transitionrespects: (1) by rewarding the institutionalization, ratherthan individual-partner ownership, of client relationships,the transition of client relationships of the retiring part-ner is facilitated; (2) reasonably compensating a partnerapproaching retirement for accomplishing the necessarytransition, which necessarily will reduce the partner'sbillable productivity and client-related contributions(typically principal factors in determining a partner'scompensation); and (3) providing guidelines for setting thepost-retirement compensation of the partner, if the partnerwill continue working for the firm in some capacity.

POST-RETIREMENT PAYMENT OBLIGATIONSSome partnership agreements require the firm to make

post-retirement payments to the retiring partner. Forexample, payment obligations may be tied to the retiringpartner's compensation history at the firm or a percentageof the firm's accounts receivable and work in process. Insmaller firms, a significant partner's retirement may resultin the purchase by the remaining partners of the retiringpartner's share of firm equity and goodwill.'4 Unfundedcontractual payment obligations burden the remainingpartners in the law firm. 5 To alleviate these burdens, manylaw firms have eliminated or limited unfunded obliga-tions and adopted funded retirement plans" to permittheir partners to have good retirement assets and income.The structure of retirement plans affects not only retire-ment planning but also partner retention.

STANDARDS FOR CONTINUING AS AN EQUITY PARTNERNaturally, law firm partners contribute in many differ-

ent ways, and a partner's contributions will vary from yearto year based on a variety of economic, client, and insome cases, personal factors. Also, exceptional contribu-tions in one area, such as business development andclient management, may help offset below-norm per-

formance in another area, such as personal productivityand collections. Therefore, it is challenging to articulateprecisely what it takes to be and remain an equity partnerin a law firm. Nevertheless, the firm can, based upon itsstructure, economics, compensation philosophy, partner-ship admission standards, and culture, provide equitypartnership continuation guidelines, including in suchareas as business development, management of clientrelationships and projects, personal productivity and col-lections, supervised team productivity and collections,leadership in firm, practice and bar matters, and overallcommitment level.

This article cannot begin to suggest a particular retire-ment-policy path for any law firm. But regardless ofwhether the firm has a mandatory retirement policy, assur-ing the smooth transition from equity partner to anotherstatus is an important goal that deserves real discussionand attention. TBJ

NOTES1. In Texas, law firms are typically formed as limited liability partnerships

or professional corporations but also may be sole proprietorships, gener-al partnerships, or professional limited liabilities companies. In referringto law firm governing documents, this article will refer simply to "part-nership agreements."

2. Typically, an income or non-equity partner does not share in the prof-its and losses of a law firm or contribute equity capital into the law firm.The partnership agreement may describe other differences betweenequity and income partners, including as to voting rights, admission tothe partnership class, and expulsion from the class.

3. See Report and Recommendations on Mandatory Retirement Pictices in theProfession, New York State Bar Association on Age Discrimination inthe Profession, January 2007; and American Bar Association Recoin-mendation of the House of Delegates, Aug. 13-14, 2007.

4. The EEOC's compliance manual states "that in most circumstances,individuals who are partners ... will not qualify as employees," but that"an individual's title does not determine whether the individual is apartner ... as opposed to an employee." EEOC Compliance Manual §2-111 (2000). See also 29 U.S.C. § 630(0 defining "employee," but With-out much guidance. Note: this article does not address nuances Linderstate anti -discrimination statutes, but typically most states interprettheir laws consistent with federal counterparts.

5. 538 U.S. 440 (2003).6. See EEOC v. Sidley Austin Broun & Wood, L.L.P., No. 05-CV-0208

(N.D. iii. 2005). 29 U.S.C. § 623(a)(1) provides that it is unlawful foran employer to fail or refuse to hire or discharge any individual or oth-ervise discriminate against any individual with respect to his compen-sation, terms, conditions, or privileges of employment, because of suchindividual's age of 40 years or older.

7. See EEOC v. Sidley Austin Brown & Wood, L.L.P, 315 F3d 696 (7thCir. 2002).

113 Texas Bar Journal • February 2013 texasbar.com

8. See EEOC v. Kelly Drye & Warren, L.L.P., No. 10-CV-0655 (S.D.N.Y.2010)

9. New York State Bar Association News Release, April 16, 2012.10. See, e.g., Weir v. Holland & Knight, L.L.P., 201 WL 6973240 (N.Y. Sup.

Ct. 2011) (partner had voting rights, control over work environment,and some management involvement, and could be terminated only bya partnership vote; the decision also discusses partner reporting respon-sibilities, sharing of profits and losses, and management decision mak-ing); Solon v. Kaplan, 398 F.3d 629 (7th Cir. 2005).

11. In an informal survey of about 50 managing partners at a recent lawfirm conference, a majority of managing partners indicated that theirfirms return a retiring partner's capital within a year.

12. The enforceability of such restrictive covenants will vary based onapplicable state law. Rule 5.06 of the Texas Disciplinary Rules of Pro-fessional Conduct (the Texas Rules) prohibits agreements that restrictthe rights of a lawyer to practice after termination of the partnershiprelationship, except for agreements concerning benefits upon retire-ment.

13. To help ease the transition to, e.g., of counsel status, and retain thebenefits of the lawyer's considerable experience and relationships, thefirm may include the of counsel in partners meetings, strategy sessions,and business development planning activities that would benefit fromthe lawyer's continuing participation.

14. Rule 1.17 of The Model Rules of Professional Conduct permits the saleof a law practice to the law firm or its remaining lawyers, subject to cer-tain conditions. The Texas Rules do not address the subject. See alsoCottennan, Valuation of a Law Finn and a Practice, Altman Weil Reportto Legal Management (February 2008).

15. These burdens recently were described in a March 5, 2012, Wall StreetJournal article titled, "Next Pension Clash: Law firms."

16. It is (far) beyond the scope of this article and the author's acumen towade into partner retirement plans, but we would briefly note the fol-lowing. Retirement plans may be unqualified or qualified for federal taxpurposes, and may be funded either by the partner's own contributionsor by contributions made to the retirement plan by the firm. Recently,as a result of legal changes in funding rules, heightened volatility inequity markets, persistent abnormally low interest rates, and increasedlife expectancies, traditional defined benefit pension plans have givenway to cash balance plans, which provide greater flexibility regardingcontributions and benefits, while reducing the firm's exposure forunderfunding of the pension plan.

. Ai

TERRY CONNERis a managing partner and member of the board of directors forHaynes and Boone, LL.? He is an active member of numerous othercommittees within the firm, and has more than 30 years of experi-ence practicing in the area of business transactions, including com-mercial loans, loan restructures, and technology transactions

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