In 1980 I accepted employment as a summer law clerk with the
Denver firm Head Moye Carver & Ray.
It was a great summer. I lived in
a house in Boulder with two close college buddies, saw the Doobies play Red
Rocks on their Minute by Minute tour, made some great new friends,
partied . . . a lot . . . and spent hot summer days in the Equitable Building‘s
cool, historic law library where the volumes dated from its opening 88 years
|The "Lawyers' Building - 1892|
I must have made some kind of impression on the firm’s partners because just before Christmas – right about the time I had decided I really didn’t want to spend another three years in school earning a Doctor of Laws – I received a letter from Craig Carver offering me a position as an associate upon graduation. I immediately and gratefully accepted and have been genuinely blessed to have never even wanted to look for another job again.
|Uriah Heep -Illustration by Frederick Barnard|
With this venerable lineage it was surprising that, beginning in the 1980s, “law clerk” fell out of favor as a title to describe summer employment with a private law firm and was replaced with “summer associate.” I vividly recall the partner meeting where I first heard this neologism. I nearly fell out of my chair laughing when Ed O’Keefe, our firm’s first and longest-serving Managing Partner, asked incredulously, “Why don’t we just call them summer partners?!’” Little did Ed or I know that the arrival of this euphemism heralded the coming of another with potential ethical issues: “income partner.”
|Google nGram: Summer Associate|
“Up or Out” Goes Out of Fashion
When I first began practicing, most private law firms operated on the “up or out” model. Lawyers were typically hired as an “associate” directly out of law school and, after an apprenticeship period, were expected to either “make partner” or leave. Ed O’Keefe once observed that law firms operating under this model were unique compared with other businesses because, if all went well, labor eventually became management. If all didn’t go well, the associate was not invited into the equity ownership group and usually left the firm out of shame or irritation to seek better opportunities elsewhere.
The “up or out” model, though harsh, had a purpose. Then as now, the major criteria for an associate making partner is developing enough clients to not only keep herself, but also one or more associates gainfully employed. Sustaining the pyramid profitability model most law firms are built on depends on this. Culling non-originators from the herd was believed to assure the continued economic viability and profitability of a firm.
But adherence to “up or out” also had serious flaws. An associate might be a brilliant, hard-working lawyer, beloved by clients the firm had entrusted to her care, but not be very good at, or perhaps simply disinclined toward, doing the kinds of things that traditionally generate legal business. That there was no place for such valuable contributors in the “up or out” firm model was, from a business standpoint, insane.
Moreover, an associate might develop into a fabulous “rainmaker” but have poor management skills, lack sound business judgement, be a complete ass or raging egomaniac, or otherwise be a serious and disruptive drain on the firm’s mojo. Elevated to partner such a lawyer might also spend most of his time seeding clouds on the golf course rather than practicing law, billing time, and collecting fees. Because such idiot savant rainmakers exist, the “up or out” model did not always guarantee firm success. More than a few law firms comprised of über business-generators with serious character flaws have been torn asunder by competing egos.
But more fundamentally, over-reliance on a single metric – business origination – and model – “up or out” – is a not merely a stupid way to manage a business, it is literally no way to manage a business. A partnership that slavishly adheres to “up or out” as the means of determining its ownership is not managed – it is merely practicing an ideology.
It is a cliché, but one solidly grounded in reality, that successful law firms need more than rainmakers – they need “finders, grinders, minders, and binders.” From this recognition, as well as a belief that it could increase per-partner profits, in the early 1990s the “up or out” model gave way to a two-tier law firm partnership model. No longer were valuable attorneys who did not generate enough business to sustain themselves, much less others, cast out. Instead, they were elevated from associate to “non-equity partner,” becoming in essence a slightly better compensated associate with a different title.
At its outset, the two-tier partnership model promised benefits to equity and non-equity partners alike. For the “non-equity partner” the pressure to generate business was eliminated, and there was a slight increase in pay. As long he performed well and the firm is successful, a non-equity partner’s income was guaranteed – a perk no equity partner enjoys. An income partner was also able to keep more regular hours and, important to many, free to simply practice law. No need to schmooze, booze, join boards, or to learn golf.
For equity partners, the creation of a non-equity partner group offered the promise of increased profits. “[T]hey were paid at high associate rates, and yet the firm could bill clients at partner rates” That was until the next downturn in business, at which time equity partners were reminded of two truths: (1) in good times only equity partners share in profits, but in lean times they are paid last or not at all; and (2) highly compensated non-equity partners are expendable.
|Welcome to the Partnership!|
By What Name Shall Ye Be Called?
Part and parcel with the invention of the two-tier partnership came the necessity of a title to describe a new class of partners. As one commentator wryly observed:
[S]omeone needed to come up with a word for lawyers who somehow never left their firms, but on the other hand weren’t really getting anywhere, either. There had to be something better to call them than “fourteenth year associate,” which is one of those titles more apt to leave a lawyer gazing into a mirror, his face wet with tears, than crowing with pride at a firm cocktail event.
Will Meyerhofer, Stuck in the Middle with You (28 March 2018). The euphemism invented varied from firm to firm – “income partner,” “profits partner,” “contract partner,” “salary partner,” etc. By whatever name, however, “non-equity partner” is an oxymoron. By definition, partners are co-owners who share in profits and losses. A non-equity partner is simply an employee who, absent a contractual agreement, may be discharged at will should his performance flag or the firm’s fortunes turn south.
Some firms in Chicago – the city which claims to have invented the model – discovered after some experience that the two-tier partnership was not as profitable as envisioned. “Over time, their salaries went up and it was no longer the profitable way to go,” observed Joel Henning, the head of Chicago-based Joel Henning & Associates. Chicago Lawyer, Income partners: The Next Group Hit by the Changing Economy (2 July 2010). Salary creep, a glass equity ceiling, and other factors, led some firms which had initially embraced the two-tier system to abandon it. DLA Piper eliminated the category income partner at the end of 2008:
“It was not tied to [an economic] downturn, it was about instituting a better business model,” [William A. Rudnick, managing partner of the Chicago office of DLA Piper] said. “If we are going to expect people to act like partners, then we should treat them like partners and align their interests with the firm. We did this by asking them to contribute capital, and by connecting their compensation to the firm’s performance.
Still, the two-tier partner model still widely persists, albeit with a few tweaks. Which brings us to today’s ethics question: Is it ethical for non-equity partners to be held out to the public, and to fee-paying clients, as simply “partners?”
The incentive to do so is irresistible. Calling a non-equity partner simply a “partner” both increases the prestige of what is in reality employment at will, and creates an opportunity to charge higher “partner” rates for their services. But does doing so violate the Rules of Professional Conduct because it is misleading? In Colorado the answer is unclear, made less clear by a recent revision to the Rules.
On 10 September 2020, while most of us we were still in our COVID bunkers, the Colorado Supreme Court updated its advertising rules to mirror revisions made earlier by the American Bar Association. I blogged about those revisions here.
The Repeal of Rule 7.5(d)
One change was to repeal Rule 7.5 (“Firm Names and Letterheads) in its entirety. Former Rule 7.5(d) arguably came the closest to answering the question presented, providing, “Lawyers may state or imply that they practice in a partnership or other organization only when that is the fact.”
In thinking about policies supporting this rule, consider the situation where Mary falsely tells a would-be client, “John is my partner,” when in fact John is not. Prior to its repeal, one might have argued that Rule 7.5(d) was designed to protect potential creditors and clients who might not only have been impressed by, but also relied upon, Mary’s false statement that John was her partner. This is because under partnership law the members of a general partnership are vicariously liable for the negligence, defalcations, and properly incurred debts of their other partners. If Mary falsely claimed to be a partner with others, and real partners tolerated this conduct or held Mary out to others as their partner, a potential creditor or client might reasonably rely upon the putative partners’ collective creditworthiness, and not just Mary’s, in deciding whether to engage her.
The Comments to former Rule 7.5, however, lend no support to this argument, stating only, “[w]ith regard to paragraph (d), lawyers sharing office facilities, but who are not in fact associated with each other in a law firm, may not denominate themselves as, for example, ‘Smith and Jones,’ for that title suggests that they are practicing law together in a firm.” The focus of former Rule 7.5(d) thus appears to have been prohibiting misleading general statements of affiliation, rather than mandating affirmative differentiation of the ownership status of lawyers who in fact practice law together.
Further, to the extent anyone ever relied upon the financial strength of someone’s putative partners in deciding whether to hire a lawyer, the reasonableness of that reliance came to an abrupt end on 5 December 1961. On that date the Colorado Supreme Court, at the behest of the Colorado Bar Association, broke from centuries of legal tradition, allowing law firms to organize as professional corporations and limit the personal liability of individual firm owners for the acts of their co-owners.
Whereas previously lawyers were prohibited from organizing in any form other than a general partnership, constitution of law firms as limited liability entities – whether as P.C., or later as an LLP, LLC, LLLP, or PLLP – quickly became both accepted and the norm. Under Colo. R. Civ. P. 265, the requirement of maintaining a certain level of professional liability insurance as a condition of receiving the benefit of limited liability replaced “John is my partner” as security for would-be clients. Reflecting public recognition that firms may practice as limited liability entities, ever since 1961 savvy landlords and creditors have known to, and routinely ask for, individual personal guaranties from a firm’s owners.
Revised Rule 7.1
The repeal of Rule 7.5(d) left only a greatly slimmed-down Rule 7.1 among rules which specifically address “Information About Legal Services” as guidance on the question of whether a non-equity partner or shareholder may be simply referred to as a “Partner” or “Shareholder”:
A lawyer shall not make a false or misleading communication about the lawyer or the lawyer’s services. A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the statement considered as a whole not materially misleading.
Comments  and  to Rule 7.1 fill some of the void created by the repeal of Rule 7.5. Comment  states that “Lawyers may not imply or hold themselves out as practicing together in one firm when they are not a firm, as defined in Rule 1.0(c), because to do so would be false and misleading.” Comment  provides, in part, that, “A law firm name or designation is misleading if it implies a connection with . . . a lawyer not associated with the firm or a predecessor firm.” But neither Comment provides any guidance on the specific question whether non-equity partners may be held out simply as “partners.”
Colo. RPC 1.0(g) defines the word “Partner,” but also fails to conclusively resolve the question:
“Partner” denotes a member of a partnership, an owner of a professional company, or a member of an association authorized to practice law.
One might contend that the juxtaposition of “member of a partnership” and “owner of a professional company” compels the conclusion that a “Partner” must mean an equity member of a partnership. However, the use of “Partner” throughout the Rules is inconclusive on whether a “Partner” must be an owner. Further, it is unlikely the drafters wrote this definition with multi-tiered partnerships and non-equity partners in mind. Notably, at least one jurisdiction, Pennsylvania, found the ABA’s definition sufficiently ambiguous that its enactment of Rule 1.0(g) explicitly provides: “‘Partner’ denotes an equity owner in a law firm . . . . “ (emphasis added).
N.C. Bar Opinion 2015-09
The reformation of general liability law partnerships as limited liability “professional companies,” and consumer and creditor awareness of the same, strongly support recognizing a material and ethical distinction between lawyers who falsely claim to be a partner, and lawyers who represent themselves or other members of their firm as “partners” or “shareholders,” but do not affirmatively disclose their equity status.
To date, the only authority to address the question presented head-on is North Carolina Bar Opinion 2015-09. There the North Carolina Ethics Committee considered the holding out of non-equity shareholders “E” and “F” by equity shareholders “A,” B,” and “C”:
Lawyers A, B, and C consider Lawyers E and F to be “partners in every sense of the word except actual ownership.” Lawyers E and F have the authority to bind the firm and to sign opinion letters on behalf of the firm, but they do not vote on matters of corporate governance. Within the firm, Lawyers E and F are referred to as “income partners.”
Acknowledging the traditional legal definition and general liability of partners, the Committee correctly observed that its usage and understanding had long ago changed among both members of the Bar and the public:
Black’s Law Dictionary defines “partner” as “[o]ne of two or more persons who jointly own and carry on a business for profit.” Black’s Law Dictionary (10th ed. 2014). However, within the legal profession, the designation is often used without regard to the legal definition. For example, shareholders in a professional corporation for the practice of law are frequently referred to as “partners.” 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.
Against this backdrop the Committee found that holding out a non-equity shareholders as a “partner” is not unethical. It concluded:
deference to Rule 7.1, publicly denoting someone as a “partner” cannot be an
outright “sham.” One held out as a partner
must be a member of the firm.
recognize that the title “Partner” equates to “a certain level of experience,
status, or authority within a law firm,” and not necessarily ownership.
long as the promotion to “Partner” (or “Shareholder”) is institutionalized
within a firm, based on merit, and on objective criteria (which may vary among
firms), it is not unethical to refer to such person as a “Partner.”
- Finally, “Any firm lawyer who is identified as a ‘partner’ [must] be held to the professional responsibilities in the Rules of Professional Conduct that may arise from that designation,” i.e., the responsibilities outlined in Rule 5.1.
Presented with the same question, I believe the Colorado Supreme Court would follow North Carolina’s lead. Foremost, the reasoning of the North Carolina Bar makes sense. The modern public understanding and expectations regarding a lawyer who is called a “partner” is not synonymous with a guarantee of increased sense of security based on the imputed liability of general partners, if it ever was. Moreover, it is inconceivable given ubiquitous Bar usage that the court would abruptly declare it unethical to call non-equity members “Partners” (or “Shareholders”). The result of doing so would be to subject almost every lawyer in Colorado to immediate professional discipline, with little or no public benefit.
In updating its advertising rules the Colorado Supreme Court has shown itself eminently practical. Were the question put to it, the court would almost certainly recognize that public expectations would not be compromised, or the interest of consumer protection greatly advanced, by declaring that the widely accepted practice of not publicly disclosing the non-equity status of firm members who have been formally and institutionally recognized and promoted for demonstrating a high level of achievement and professionalism, and who are held to the same standards within a firm as its equity members, to be a violation of the Colorado Rules of Professional Conduct.
 This second motive is not a merely a manifestation of equity-partner “greed.” Rather it is necessary to finance the expectation that non-equity salaries, or at least some component of them, will be based on seniority and longevity with a firm. Many firms which adopted the two-tier structure, and then created more non-equity partners than equity partners, have experienced “salary compression” in the upper non-equity ranks because of this expectation. Such compression is completely foreseeable and has the potential of creating dissatisfaction among that group of lawyers which a firm ostensibly considers to be among its most valuable.
It is the same dynamic that resulted when firms began to stretch out the time before an associate is first considered for partnership, and then got caught up bidding wars for top law school graduates. This caused the salaries of the firm’s most senior, and presumably most valuable, associates to become highly compressed. Annual increases in associate compensation in the upper ranks become smaller and smaller – creating a formula for lawyer mobility, not retention.
 Years earlier the court had abolished the rule that a law firm cannot operate under a trade name. I suspect that the court finally recognized that most law firms had long ago stopped using letterhead that lists the names of individual attorneys.
 New York County Lawyer’s Association Opinion 740 (Oct 7, 2008) earlier addressed the question, “When can a lawyer, and his or her law firm, use the title “partner” in dealing with clients and the public?” However, this opinion was decided under New York’s former enactment of the ABA’s Code of Professional Responsibility DR 2-102(C) and is of dubious continuing validity following New York’s enactment of the Rules of Professional Conduct.
Finding no definitive answer in the Code, the authors of Opinion 740 felt bound by decisions of the Second Circuit and the U.S. District Court for the Southern District of New York , the latter which had held 37 years earlier, “it is a misrepresentation to the public, clients and the Courts and professionally improper to hold a lawyer out as a full member of a partnership, who in fact is merely an employee.” Id. (citing Sands v. Geller, 321 F. Supp. 558, 561 n.1 (S.D.N.Y. 1971).
Feeling constrained by this caselaw, Opinion 740 concluded, “it is the Committee’s opinion that compliance with DR 2-102(C) requires that attorneys holding themselves out to the public as partners, and the law firms in which they practice, be in fact partners under New York partnership law and their individual partnership Agreements.”