January 15, 2014
LOS ANGELES DAILY JOURNAL

By Kylie Reynolds

LOS ANGELES – It took about two weeks for litigator Daniel Grunfeld to make the move from Kaye Scholer LLP’s Los Angeles office to his current firm, Morgan, Lewis & Bockius LLP. His transition, in July, marked the beginning of a flurry of eight partner departures from Kaye Scholer’s L.A. office over roughly the past six months. But when other partners resigned in Grunfeld’s wake, many were blocked by the firm’s enforcement of a clause in their partnership agreements requiring they give a 90-day notice of resignation.

It was the first time in recent memory the firm had enforced its resignation notice policy. Kaye Scholer held some of the decamping partners for 45 days or more before allowing them go to their new firms, said a handful of affected partners who asked not to be named in order to preserve business relationships.
Asked about the enforcement of the clause, Kaye Scholer Managing Partner Michael Solow said in a statement that, “We decide on a person-by-person basis what is best for our clients and the firm consistent with our partnership agreement.”

Requiring notice of resignation is a common provision in law firm partnership agreements, legal experts said. But their enforcement is unusual.
At least, that was the case until recent years, when more firms have turned to resignation notices as an economic and political tool to deal with losing partners to growing lateral activity. The enforcement of such holding periods, however, often leave departing partners in limbo.

“It creates a lot of frustration for the partners trying to leave and for the firms trying to hire them,” one former Kaye Scholer partner said.

The resignation notice ostensibly allows firms and their partners enough time to sort out various matters before a partner’s departure, such as notifying clients of the pending change, closing out accounts and preparing files to transfer, said Edwin B. Reeser, a Pasadena attorney and former managing partner of Sonnenschein Nath & Rosenthal LLP, now known as Dentons. The amount of time a firm requires partners to get such affairs in order can vary – a 60-day notice period is typical for most firms, he said, but it can be as many as 90 days and as few as 14.

Traditionally, firms have waived the remainder of these notice periods once such matters are resolved. Most agreements even note that firms reserve the right to “accelerate the effective date of departure” of a resigning partner, Reeser said.

Not only can it be awkward for a partner to linger at their soon-to-be-former firm, but it’s also considered common courtesy to let longtime partners leave, said legal recruiter Larry Watanabe of Watanabe Nason LLC, who brokered two of the Kaye Scholer L.A. partner departures.

“Once someone gives notice that they’re going to leave, it’s in the partner’s and the firm’s interests to part ways,” he said. “You wouldn’t want to have people walking around the firm that everyone knows is going to another firm.”

But in certain circumstances, tradition can be bucked. In 2012, now-defunct Dewey & LeBoeuf LLP held on to departing partners in droves for the firm’s full 60-day period, according to Daily Journal reports.

And keeping partners long after their resignation is now becoming a tool used even by firms in the most stable of financial situations. Though they’re often tight-lipped about their reasons behind enforcing the notice period, it’s likely happening more now than during the throes of the recent recession because of the spike in lateral activity, said Gwen T. Miller, executive vice president of City National Bank’s private client services in Los Angeles, who advises law firms. The extra month or more can often buy firms time to address economic and other concerns before partners jump to competitors.

“People were held much longer in 2013 than I’ve seen in the previous three to five years,” Watanabe said. Of the 61 partners he moved last year, he said at least five were held for more than 30 days. That’s “lengthy” compared to the 10-day average he saw for the rest of his clients, he said.

Weil, Gotshal & Manges LLP’s inner workings went public when media outlets this past fall reported that the firm was holding on to a group of nine Texas partners defecting to Sidley Austin LLP long after their resignations. Weil leaders didn’t disclose why they made such a choice, but analysts speculated that the firm was unprepared to lose so many partners in Dallas so quickly.

“Weil, for some reason [that is] unclear to me, is enforcing it,” Sidley executive committee chairman Carter Phillips said in October, according to media reports. “Historically it has always been waived.”

Through a spokeswoman, Weil leaders declined to comment.

Enforcing the full holding period can lessen the blow of losing high-profile partners by allowing a firm time to persuade clients to stick with them once a partner leaves, Watanabe said.

“When an attorney leaves, from a managing partner or executive committee perspective, they want to shore up those clients if they can,” Miller agreed. “There are a lot of things [firms are] trying to do, and the longer you can keep someone out of the market and still working for you, the better.”

Whether the practice proves successful in retaining clients isn’t always clear, Reeser said, but at the very least, firms can squeeze out a few billable hours during the wait.

In other cases, it can be intended to intimidate other partners at the firm from eyeing departures of their own.

“It can serve as a warning to others to behave,” Reeser said. “[Firms] make a bloody example of somebody to keep others in line.”

A former Kaye Scholer partner said he wasn’t aware of any attorneys who were dissuaded by the firm’s enforcement of the policy.

The practice can also delay the inevitable financial questions that come with the loss of partners. Certain covenants in law firm loan agreements, called defection clauses, require firms to alert their banks to various types of partner changes, such as the loss of a money-making practice group or the departure of a heavy hitter, Miller said. Firms may need the extra month or so to get affairs in order before heading to their bank with the news, she said.
Regardless of the motivations behind it, enforcing the resignation notice period isn’t without its drawbacks.

While one former Kaye Scholer partner said he did not know of client relationships or revenues that were lost due to the wait, other former partners who were held said it was a frustrating experience to be bound without an explanation from the firm.

“On the one hand, you feel like you’re working for free, because what you’re doing for clients … you’re not getting credit for at your new firm,” said one former Kaye Scholer partner. “On the other hand, it didn’t really affect me in any way, because the clients I worked for are loyal to me and then it didn’t really matter what firm I was at.”

Firms almost always reserve the right to enforce the policy for whatever reason, and there’s not much that partners or receiving firms can do to escape the waiting period. But Watanabe said partners who consider resigning need to read their partnership agreement before making any decisions and consult with an ethics attorney if they have questions. The rest is just a matter of patience, he said.

“Be prepared to stay,” laughed one Kaye Scholer partner. “And at the same time, be prepared to leave at a moment’s notice.”