November 30, 2016
Are you Really a Partner? Non-Equity or Income Partners May Have Unique Issues During a Departure or Lateral Move
In today’s legal world, the traditional view of what it means to be a “partner” seems to be ever-changing. As more law firms move from two-tier to multi-tier partnerships, the question of what it truly means to be a non-equity, income, or salaried partner is becoming an increasingly important issue. Specifically, during any partner departure or lateral transition, the exact nature of the partner’s status has a variety of ethical, contractual, and legal implications for the lawyer, as well as for the law firm. This issue must be analyzed carefully as part of any law firm departure.
Holding Out Lawyers as Partners
Recently, the North Carolina State Bar Ethics Committee addressed the question of whether a lawyer who does not own equity in a law firm may be held out to the public by the designation “partner,” “income partner,” or “non-equity partner.” (See Formal Opn. 2015-9, 7/22/16.) The Committee concluded that provided the lawyer was officially promoted based upon legitimate criteria, and that the lawyer complied with the professional responsibilities arising from the designation, that the firm could refer to a non-equity owner as a partner. While the Opinion acknowledged that traditional definitions of partner include some reference to ownership, it concluded that the “designation is often used without regard to the legal definition.” And that “Like lawyers themselves, laymen generally equate the designation with the achievement by a lawyer of a certain level of experience, status, or authority within a law firm.” (Formal Opn. 2015-9, 7/22/16.)
However, the North Carolina Opinion also cautioned lawyers against using the term “partner” as a sham, citing to its rules of professional responsibility to avoid communications that contain false or misleading statements. (See Model Rule 7.1(a). California has a similar requirement. See Rule 1-400.) The North Carolina State Bar Ethics Committee went on to state that to avoid misrepresentation, the law firm may hold out a non-equity partner as a partner provided that the “the lawyer was promoted to the position by formal action or vote of firm management or pursuant to the firm’s governing documents.” Further, the Committee concluded that such promotion must be based upon criteria that indicates that the lawyer is worthy of the promotion, such as: experience, integrity, industry, intelligence, communication, legal knowledge, motivation, judgment, efficiency and involvement. Finally, it concluded that any lawyer identified as a partner must be held to the professional responsibilities that arise from such as designation. (Formal Opn. 2015-9, 7/22/16.)
California and the Revised Uniform Partnership Act
In California, and in the many other states that have adopted the Revised Uniform Partnership Act (RUPA) (North Carolina is not among them), a partnership is specifically defined using the word “co-owners.” (See California Corporations Code sections 16101(9) and 16202.) Again, there is often a disparity between the legal definition of the word “partner” and how it is commonly used by law firms when identifying various members of the law firm. While the North Carolina Opinion is instructive on the issue of how and when law firms many ethically identify non-equity lawyers as partners, that is not the end of the inquiry with respect to a myriad of other partnership issues.
Rights and Obligations of Non-Equity Partners During a Partner Departure
Understanding that law firms can properly refer to non-equity lawyers as partners in some circumstances is one thing, but the question about what specific rights and obligations non-equity partners may have in California, and other jurisdictions, particularly during a partner departure or firm dissolution, raises a host of other issues that must be thoughtfully analyzed. For example, one must consider not only how the non-equity member is held out to the general public, but analyze the law firm’s partnership agreement, other governing documents and the firm’s management structure, and consider whether there are fiduciary duties owed to other partners, and if the attorney has authority to bind the partnership, among other things.
These analyses contain the true indicia of the partner’s status at the firm which has a variety of ethical, contractual, and legal implications for the lawyer, as well as the law firm. As such, it is important for all law firm partners to analyze and understand these issues prior to entering into a partnership or planning a law firm departure, as they are critical to navigating a successful transition for any law firm or non-equity partner.
Dena M. Roche
O’Rielly & Roche LLP