Are firms being led up the garden path?

Thirty years ago, there were two ways out of law firms for partners: “They were either dismissed for incompetence or they died,” says David Dalgarno, employment partner with McDermott Will & Emery.

But the massive changes undergone by City firms over the last 20 years have left their mark on the old partnership ideal. The bonds of loyalty and fraternity have been weakened by the new world of lateral hires, headhunters and defections.

Faced with this increasingly volatile market, firms have sought to protect business by introducing or strengthening restrictions on partners who want to leave. These constraints take the form of restrictive covenants with long notice periods, and “gardening leave”, where a partner is sent home to serve their notice period before joining a new firm.

“Restrictive covenants have been around for ages but were never very serious in the 1960s and 1970s,” says Ronnie Fox, senior partner of Fox Williams. “In the 1980s a lot of firms started introducing them, and in the 1990s they have become a serious thing.”

Firms are now more likely to enforce notice periods of between six and 12 months where they had previously tended to waive the restriction. With clients increasingly following their lawyers, firms are isolating departing partners from their clients in the hope of keeping valued business (see Stephen Groom box).

One of the toughest and most widely reported restrictive covenants is that of Wilde Sapte. Last month, the City firm faced legal action in France when asset finance partner Tom McDonald sought to overturn Wilde Sapte's rule that only two senior equity partners aged under 55 can leave in any financial year.

McDonald was hoping to join White & Case, but he will have to wait until next year unless a possible appeal is successful.

Meanwhile, project finance partner Bruce Johnston is languishing in the firm's London office and may have to wait until 2001 to join Weil Gotshal & Manges (see box).

There is a common misconception that Wilde Sapte only introduced this clause after its failed merger with Arthur Andersen in 1998.

But senior partner Mark Andrews points out that the measure was introduced in the late 1970s when three partners a year were allowed to depart, and that this number was reduced to two in 1994 when the firm moved premises.

Some rivals find Wilde Sapte's measures extraordinary, but Andrews is robust in defending the firm's right to protect its business. “We were moving to new premises at Fleet Place and we were taking on a colossal commitment.

“What people forget is that law firms are organisations that take on massive liabilities for which partners are liable. We take on premises, we employ enormous numbers of people and we have vast indemnity costs.”

There are rumours that some partners have resigned from Wilde Sapte to get in the queue in case they want to leave in the future, but Andrews says the rule has been effective in discouraging departures. “The best thing about a long notice period is that it stops people being tempted,” he says.

There seems to be some truth in this. Firms such as Simmons & Simmons and Dibb Lupton Alsop, which are understood not to have restrictive covenants or gardening leave, have suffered a number of high-profile departures over the last 18 months.

“The firms that have limited defences seem to lose more partners than those who do,” says Richard Linsell, head of the professions group at Rowe & Maw.

A Dibbs spokeswoman says the firm has no plans to review its arrangements for partners who want to leave.

“The thinking behind it was that if a partner doesn't want to be within the firm they should be free to go,” she says.

Macfarlanes partner Charles Martin says the firm has lost no partners to other firms since the early 1980s without any partnership agreement at all.

“Not only do we not have a written partnership agreement, but we don't believe we will need one,” he says.

“If you have got to lock the doors, have you got a firm? Locking the door isn't usually the best way of motivating people, and if you have people looking at the small print of their partnership agreement you have got bigger problems anyway.”

But Martin concedes that if the firm needs to grow from its current 54-partner size through a number of lateral hires it might need to set out the rules by which the partnership would be governed.

Andrews says he can name “at least five or 10 firms” which would like to have similar restrictions to Wilde Sapte's, but in an increasingly volatile market partners are unlikely to vote for rules that bind them too closely to their present firm.

“If they are a bunch of individuals primarily concerned about their own interests, then they would be opposed to bringing in gardening leave,” he says.

“But if they are a group of partners thinking sensibly about the protection and growth of their business they would welcome it. Too many lawyers just think it's a job, but it is more than that.”

There are dangers in keeping an unwilling partner at the firm for months on end. “The individual is not motivated,” says Adrian Fox of recruitment consultants QD Legal. “They can be extremely disruptive and that can be a distraction and a demotivation to everyone who's there.”

Dalgarno adds: “Once a partner has said he's going it's not sensible to have them around. Clients won't send work because they won't know if [the departing partner] will be around to finish it.”

Clients are, of course, the great bone of contention between departing partners and their firms, because a partner may take a major chunk of business with them.

To prevent partners walking off with prize clients, firms have increasingly resorted to gardening leave in the last five years.

Andrews says: “I think gardening leave is a very sensible thing to have. The best reason for it is to take people out of the market for a while and get the opportunity to show to clients the suitability of your practice without them.”

But despite its increasing popularity (among firms if not individual partners), the concept of gardening leave is based on shaky ground.

Philip Brown, a consultant at Hildebrandt International, says: “Gardening leave is an expensive way of doing it. You have got someone sitting at home doing nothing and taking their share of the profits.”

Gardening leave is only enforceable if it is set down in the firm's partnership agreement. In the case of Tucker v William Hill (1998), it was ruled that someone cannot be forced to work their notice away from the workplace unless it is in their contract.

Ronnie Fox believes that, even under the terms of a partnership agreement, gardening leave might not survive a legal challenge. “You are preventing a professional man from earning his living and making it impossible for him to keep his knowledge up to date,” he says.

These debates seem outlandish to US lawyers, who often resign from one firm on a Friday and start work at their new practice the following Monday.

Larry Cranch, managing partner of Rogers & Wells, told The Lawyer (19 July) that retaining the firm's arrangements for departing partners is a non-negotiable aspect of the merger with Clifford Chance.

In the US, through a mix of legal precedent and historical tradition in individual states, the overriding principle is that a client should be able to seek advice from the lawyer of their choice, and notice periods and gardening leave are unenforcable.

And clients in the UK are not always happy with these arrangements. A landmark case occurred in 1997, when a Clifford Chance insurance insolvency partner decided to join US firm Cadwalader Wickersham & Taft. Clifford Chance attempted to put Andrew Wilkinson on gardening leave for his entire 12-month notice period, but backed down under pressure from a major client (see box).

“When these things are in dispute, the partner who's moving will often try to get their key clients to put pressure on the firm, but it is a high-risk strategy,” says Linsell. “The client may say “He's got problems and we don't like being drawn into this', and they think less of him.”

Brown says firms are trying to go a step further in protecting their liabilities from the threat of partners jumping ship.

“Some firms are starting to try to work out how partners can remain liable even though they have left. They may say that partners are liable for leases after they leave.”

Linsell believes the solution is for a “transfer market”, where compensation can be paid to the firm losing a partner and agreement is reached on which clients the partner will keep away from.

If a client insists on going with the partner, a deal can be struck so that the client's book debts are paid without a client claiming the work was not worth the firm's billings, as is common when a contact partner goes elsewhere.

This, Linsell says, is common practice among accountants. “When partners start leaving law firms, lawyers often reach for the contract, but when they start leaving accounting firms they are minded to do a deal,” he says.

He believes this practice will spread to law firms as it becomes apparent that neither side gains from long disputes.

But Linsell also says that firms should have a good set of defences in place that lay down rules for departing partners in terms of time, clients and money.

But Ronnie Fox disagrees: “You cannot keep a professional man out of his business. I think most firms accept that if someone wants to leave, even if they have got a long notice period, it's better to let them go.”

Clifford Chance insurance insolvency partner Andrew Wilkinson resigned in June 1997 to join US firm Cadwalader Wickersham & Taft.

But Clifford Chance was worried Wilkinson would try to take a number of assistants to Cadwaladers and passed a tough new partnership agreement in August 1997.

The firm tried to make him serve out his entire 12-month notice on gardening leave. There were even tales of a private detective snooping around Cadwaladers' office.

However, it is understood that a major client for whom Wilkinson was acting at the time told Clifford Chance to allow its favoured lawyer to carry on working or it would withdraw all work from the firm.

Wilkinson went on secondment to the client and joined Cadwaladers the following year.

Bruce Johnston has two and a half years to wait before he joins US firm Weil Gotshal & Manges.

The Wilde Sapte project finance partner handed in his notice in May, but his current firm is insisting it will hold him to his notice period, which is up in December 2001. Johnston was hoping Wilde Sapte's negotiations with another firm would go through, freeing him from his contract, but those talks are now off. When he announced his departure, Johnston claimed: “Before I joined, they didn't have a project finance practice, and I have built it into one of the leading practices in the City.” A Wilde Sapte source suggested Johnston was making these claims to annoy the firm in the hope it would let him go. Howard Barrie, head of project finance at Wilde Sapte, told The Lawyer (24 May): “Bruce is continuing to work on matters on which he has been instructed and he'll stay until his notice expires.”

Most firms do not insist on partners serving their entire notice period. But Lewis Silkin partner Stephen Groom was only able to join Osborne Clarke last May – a full year after handing in his notice.

He says: “It was difficult because one feels isolated from what is going on. Inevitably, one's involvement with client work becomes significantly less as the practice tries to decouple you from clients. There is, inevitably, especially if one is going to a competitor as I was, a suspicion and a diminution of trust [from other partners]. But one does have certain entitlements to be involved in a practice one is still a part-owner of.

“That does present some difficulties, and maybe that's one of the reasons that in most cases partners are released earlier. But that's something the continuing partners decided they were prepared to hack to keep me away from clients.”