Editors' Blog

Freshfields and Sidley get closure but age timebomb ticks on

Posted 12/10/2007 by Deal Comment

Two recent cases on either side of the Atlantic point to one of the most crucial issues currently facing commercial law firms. Namely, how to cope with the pressures caused by ageing partnerships.

In the UK, Freshfields Bruckhaus Deringer finally emerged victorious on Wednesday (10 October) in its long-running dispute with former partner Peter Bloxham over the reform of the firm’s pension scheme. On the other side of the Atlantic, Sidley Austin last Friday (5 October) agreed to pay $27.5m (£13.1m) to 32 former partners who were demoted to counsel in 1999 when all were in their 50s and 60s. There are clear distinctions between both cases but they point to the demographic time-bomb ticking under most English and American law firms.

Freshfields was perhaps unlucky to garner extra press attention as the first law firm to fight a case under age discrimination laws introduced in October 2006. The facts in the case are now very well documented. Following the pensions restructuring, Bloxham saw his annuity reduced by 20% (from £225,000 to around £175,000) because as he was 54 when the firm's new pension scheme was introduced, he was one year short of when he could retire on a full payout. This change, the Central London employment tribunal ruled, was discriminatory but was a proportionate means of achieving a legitimate aim and therefore allowed. In a statement released hours after the result was announced, Bloxham’s lawyers confirmed that they were reviewing the implications and the options open to Bloxham. They have 42 days to lodge an appeal.

Both cases have fairly specific characteristics. Freshfields, for instance, was the last large law firm in London to reform its unfunded pension scheme, which most of its rivals either binned or severely curtailed years ago. In the Sidley dispute, the US Equal Employment Opportunity Commission (EEOC), which brought the case on behalf of the demoted partners, looked at how the firm ran itself, arguing that the firm’s closed management style meant that the partners were effectively employees rather than owners of the business, and therefore were subject to age discrimination laws.

The issues thrown up by the shifting demographics are arguably most pronounced at the vast swathe of UK firms and small band of US firms run on locksteps. Most now have a large chunk of their oldest, not always most productive, partners taking home the largest profit shares.

As recently reported, Ashurst’s attempts to update its lockstep, revealed that 75 of the firm’s 132 equity partners (57% of the partnership) are due to earn between £984,000 and £1.2m in the current financial year while their newly made-up colleagues start on £480,000. And that, for junior partners, comes after having to do your time as a salaried partner, which few if any of the current plateau partners had to bother about.

The UK firm has recognised that these intergenerational conflicts are hard to reconcile with a business eager to attract, develop and retain star partners earlier in their career and has started to reform its lockstep to widen the spread of those currently in the upper echelons of its pay scale and to increase the pay of those at the bottom.

Ashurst certainly won’t be the last to review its compensation structure. It seems inevitable that more lockstep firms will introduce a greater element of flexibility, to better reflect the contribution of partners at both the junior and senior end. It will be lockstep, but not quite as we knew it.

In theory the majority of US practices with eat-what-you-kill remuneration systems (including Sidley) should be much better placed to handle the shifting demographics of the profession. The likes of Joe Flom at Skadden Arps Slate Meagher & Flom and Ira Millstein and Harvey Miller at Weil Gotshal & Manges - all well over 70 - reflect a culture that is generally more ready to accommodate the 60-plus generation.

But there are dangers here too given the mounting backlash from older US partners increasingly resentful of large corporate firms squeezing their equity at their expense. Evidence of such sentiments can be seen in the current campaign by the New York State Bar Association (NYSBA) to get firms to ditch mandatory retirement ages. The NYSBA, which was quick to laud the (non-binding Illinois-governed) settlement in the case of Sidley as “excellent news for the legal profession”, claims its campaign is swiftly garnering signatory firms.

A recent survey of US partners by consultants Altman Weil also found that 46% of respondents disagreed with mandatory retirement provisions (38% agree and 16% said they were unsure). A stoic 4% even maintained that they would never retire. Finding a way to accommodate those that want to go on and on has never been more pressing.

rlloyd@alm.com

A version of this article also appears on the website of The American Lawyer, Legal Week’s US sister title.