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Apr 1, 2015Firms Take Harder Line On Guaranteed Deals For Laterals – Law360

By Keith Goldberg

Law360, New York (March 26, 2015, 2:19 PM ET) — The hypercompetitive nature of the modern legal marketplace means guaranteed contracts for laterals will never be consigned to the historical dustbin, but the sight of firms like Dewey & LeBoeuf LLP collapsing beneath the weight of hefty pay packages has made others put stricter limits on the financial promises they make to lateral hires.

Even if they aren’t a Kirkland & Ellis LLP — which in 2014 reportedly shelled out $9 million annually for at least four years to lure Winston & Strawn LLP litigation chief James F. Hurst and $8 million annually to Stephen Lucas, the former head of Weil Gotshal & Manges LLP’s London banking practice — firms are willing to guarantee checks to woo attorneys and their client lists.

“The highly desired lateral is a valuable commodity that law firms want to make sure they are able to attract, and one of the important ways to do that is to offer guaranteed money,” says Mark Jungers, co-founder of legal recruitment firm Lippman Jungers LLC. “Almost always, the potential lateral believes that they are taking on risk moving from one law firm to another, and this is one important way to mitigate against that risk.”

But experts say law firms are much more circumspect about the guarantees they offer lateral hires, from shorter contract lengths and more performance bonuses, to increased scrutiny of a candidate’s book of business.

“I think we’re in a conservative marketplace right now,” says Blank Rome LLP partner Leslie Corwin, a partnership law expert who frequently handles firm ruptures and partner-firm contract disputes. “I think there have been too many law firm failures that have made firms more cautious.”

Topping the list of cautionary tales is the 2012 demise of Dewey. As part of an aggressive growth strategy, it offered lavish, guaranteed pay packages to entice star attorneys to join as lateral hires. But the contracts drained the firm’s profits just as the broader financial crisis was taking its toll, prompting attorneys to leave in droves during Dewey’s chaotic final months.

“The Dewey situation was a significant wake-up call for all managing partners,” says Ruskin Moscou Faltischek PC partner Mark Mulholland, who just wrapped up a decadelong stint as the Long Island, New York, firm’s managing partner and had negotiated several lateral partner contracts. “I had fellow partners warning me to be careful in my own lateral negotiations. It tempered our appetite, but it did not eliminate it. Managing partners are still required, in a sense, to explore these opportunities.”

Whether it’s picking up expertise in a practice area, expanding into a new market, or simply bringing in a high-profile attorney with a thick book of business, lateral hiring is a way for firms to boost revenue. But it’s difficult to attract successful laterals unless they are provided some level of comfort, experts say.

“Typically, the reason you give these guarantees is because the lateral doesn’t know the firm really well and is a little shaky about being paid under a new compensation system,” says Tom Clay, a legal consultant and compensation expert with Altman Weil Inc. “For a year, it’s pretty reasonable, maybe two, under some circumstances.”

But multiyear commitments are going the way of the dodo, experts say.

“That has really become unpopular, and there’s very little of it actually being in the market today,” legal consultant Edwin Reeser says. “Firms have really pushed back at that and have been looking at lawyers to demonstrate they can build up their business.”

Due diligence on prospective laterals and their business is where firms have focused their attention post-Dewey, experts say. Not only are they more closely reviewing how much money prospective laterals have generated, but they’re also scrutinizing their client list and trying to determine if those clients will follow the attorney to the new firm.

“I think the diligence is better, and I think in particular law firms are pushing some of the envelope on the subject of client reference calls to try and figure out what’s going to come and what’s not going to come,” Jungers says. “It can at times make the firm more comfortable than they were before about guarantees.”

Still, guaranteeing compensation based on past performance is risky, even for the most bankable of lateral commodities, according to Seth Horowitz, president of Horowitz Agency, an integrated marketing agency that specializes in the legal industry.

“What happens if that attorney has a bad year and brings in $750,000 and he‘s guaranteed $1.5 million?” Horowitz asks. “That’s a costly proposition.”

Experts say it’s important for managing partners to ensure the firm’s partners buy into any lateral hiring strategy, especially when it comes to contract guarantees. Blowing up your existing compensation structure to bring aboard a lateral is asking for trouble.

“Politically, you’ve got very serious issues,” Reeser says. “If you’ve got a $10 million book of business and I’ve got a $10 million book of business and I’ve been in 20 years and you come in and make more, that’s a problem.”

A big enough problem that it could lead well-established partners out the door, taking their clients with them, according to experts.

“You could certainly see defections as a consequence of a badly composed lateral deal,” Mulholland says.

Reeser, for one, believes guarantees for laterals will continue to fall out of favor, because the improving economy is creating more legal work for everyone.

“Firms are not as pressured to pursue lateral recruitment as a means to buy books of business,” Reeser says. “Lateral hires are risky — almost half of them don’t work out like the firm intended, and they’re expensive.”

Still, corporate clients are increasingly tightening their legal purse strings, and the attorneys that are able to maintain or grow their piece of that legal spend are going to be hot commodities.

“Because of the unique nature of the legal profession, major rainmakers are going to have an offer or agreement as to what their compensation is going to be,” Corwin says. “The legal profession today, it’s the age of free agency. It’s no different than star athletes looking for more money and switching teams.”

However, like star athletes, rainmakers are a rare breed, and Horowitz says the easiest way for a firm to get financially burned is to make a lucrative guarantee to an attorney who doesn’t truly fit into that category.

“In my opinion, some of the bigger law firms operate out of fear,” Horowitz says. “If a law firm has the opportunity to acquire a strong candidate, they fear that they’ll lose the chance of acquiring a partner if they don’t do something over the top. But look at a firm like Dewey. They imploded because of these contracts.”

However, the margin for error is greater near the top of the U.S. legal market. Kirkland & Ellis may have handed out multimillion-dollar  guaranteed pay packages to laterals, but it’s also the sixth-largest law firm in the U.S., according to this year’s Law360 400.

“As some of these firms have gotten larger, it gives them freedom to place more bets,” Jungers says. “If you make some mistakes, it’s not as big a deal.”

–Additional reporting by Jake Simpson and Max Stendahl. Editing by John Quinn and Edrienne Su.

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