J.D. Not Required, Comp Wars, & Retaining Rainmakers
Florida is the latest state to consider law firm ownership by non-lawyers, as a state bar committee recently recommended that the Florida Supreme Court consider instituting a 3 year “laboratory” program, based on the “regulatory sandbox” model established in Utah (Outside Ownership of Law Firms Gains More Momentum, Dan Packel, 6/30/21, Daily Business Review). Utah’s program, which began in August 2020, allows for majority ownership by nonlawyers and had already approved 28 applications as of May (Big Law, Big 4 on Sidelines, as Small Shops, Online Upstarts Embrace Rule Changes, Dan Packel, 7/8/21, American Lawyer). Arizona, which authorized a similar program in January, had issued 3 Alternative Business Licenses and had 11 applications pending as of May. Arizona also eliminated all prohibitions on fee sharing, which will allow firms to pay referral sources such as legal marketing websites, CPAs, bankers, and law firm staff.
One Managing Partner of an Am Law 200 firm based in AZ reports receiving a flood of calls from private equity firms expressing interest in investing in the firm; but Big Law has taken a wait-and-see approach in both states so far (Big Law, Big 4 on Sidelines). There is likely less upside for Big Law firms which have access to capital through traditional lending networks and capital calls; and outside investment might present additional hurdles for firms with multi-state operations, such as setting-up a separate entity for operations in the overwhelming majority of states that have not yet approved ownership by non-lawyers. The firms that have taken advantage of the new rules are relatively smaller firms seeking to add services they were otherwise referring to CPAs, financial planners and real estate professionals. Of note, Legal Zoom, which recently went public on NASDAQ raising approx. $700 Million, filed an application for an Alternative Business License in Arizona; Rocket Lawyer has been operating in Utah since October, and its lawyers (supervised by nonlawyers) have advised on 284 legal matters with no complaints filed as of yet.
Ownership by non-lawyers may continue to spread, as a state bar working group in California is considering a regulatory sandbox as well.
Comp Wars: New York or Bust!
The latest round of salary increases by NYC based firms have prompted firms based elsewhere to question whether they should continue to follow NYC on associate compensation. NYC firms often enjoy an advantage in revenue-per-lawyer, and adopting their cost structure can be a challenge (Is It Time for the Legal Industry to Stop Following New York?, Patrick Smith, 6/25/21, American Lawyer). Commentators like Hugh Simons are suggesting that firms focus instead on non-monetary offerings like more predictability in schedules, quality of work, and better management (Matching Davis Polk is a Short-term Win in a Hot Market. But What Happens Next?, Dylan Jackson, Lizzy McLellan, & Christine Simmons, 6/14/21, American Lawyer).
Selling such intangibles to law students and laterals, however, requires an intentional recruiting strategy. High skepticism is a trait held by most lawyers, according to Dr. Larry Richards, a leading expert in the psychology of lawyer behavior (Lawyer Brain, Dr. Larry Richards, 10/20/17, NASLC Fall Conference). Associates fear that they would make less, but work just as much, at a firm that pays below NYC market. And many assume that work-life balance is impossible to achieve, and thus resign themselves to strive for compensation at the top of the market for as long as they can.
Retaining Rainmakers
In addition to competing for associate talent, some firms are going to great lengths to retain partners through counter-offers, in many cases matching or exceeding the compensation package offered by the courting firm. In markets such as New York and California, the counter-offers can be up to 20% or 30% more than the partner’s current compensation and may include guarantees, retention bonuses, and/or leadership opportunities (The Art of the Big Law Counteroffer: How Firms are Fighting Rainmaker Attrition, Dylan Jackson, 7/7/21, American Lawyer).
Conventional wisdom is that counter-offers only work in the short-term; but some commentators note that is exactly what the counter-offering firm is purchasing, time to shore up the practice area and client relationships before the inevitable subsequent departure of the counter-offered partner.
