Dolinko, Robert A.

English

University of North Carolina School of Law

NORTH CAROLINA LAW REVIEWVolume 84Number 5 Empirical Studies of the Legal Profession:What Do We Know About Lawyers' Lives?Article 146-1-2006A Comment on Professor Henderson's EmpiricalStudy of Single-Tier versus Two-Tier Partnershipsin the Am Law 200Robert A. DolinkoFollow this and additional works at: http://scholarship.law.unc.edu/nclrPart of the Law CommonsThis Comments is brought to you for free and open access by Carolina Law Scholarship Repository. It has been accepted for inclusion in NorthCarolina Law Review by an authorized administrator of Carolina Law Scholarship Repository. For more information, please contactlaw_repository@unc.edu.Recommended CitationRobert A. Dolinko, A Comment on Professor Henderson's Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200,84 N.C. L. Rev. 1751 (2006).Available at: http://scholarship.law.unc.edu/nclr/vol84/iss5/14A COMMENT ON PROFESSOR HENDERSON'SEMPIRICAL STUDY OF SINGLE-TIER VERSUSTWO-TIER PARTNERSHIPSIN THE AM LAW 200ROBERT A. DOLINKO*As a practicing attorney asked to comment on a law reviewarticle rife with statistical analysis, I hope to provide a pragmatic viewof Professor William Henderson's perceptive work-An EmpiricalStudy of Single-Tier Versus Two-Tier Partnerships in the Am Law 200.Professor Henderson's Article is a thorough analysis of acomplex subject. I certainly agree with the observation that "thesuperior profitability of single-tier firms appears to be primarily afunction of their reputational capital (and presumably the lawyersand clients the firm attracts) rather than the tier structure per se."1However, contrary to Professor Henderson's statement that thesuperior profitability of large single-tier firms is "surprising," I do notthink there are many Am Law 200 partners who are the least bitsurprised that such single-tier firms are more profitable than theirtwo-tier competitors.If one examines the 2005 National Law Journal 250, only abouttwenty percent of those firms have single-tier partnerships.2Examining the list of single-tier firms with principal offices in one ofthe largest seven U.S. markets,3 it appears that virtually all are at thetop of any list of law firms based on reputation and prestige. Thosefirms have not moved to a two-tier structure because they (thus far)have no strong reason to do so. The rewards of achieving partnershipwith those firms are so great, in terms of prestige and compensation,that excellent attorneys from top law schools will work long hours formany years even if the odds of achieving partnership may be* Robert A. Dolinko is a partner in the San Francisco office of Thelen Reid & Priest LLP.He has an undergraduate degree from Cornell University and a J.D. from New York UniversitySchool of Law.1. William D. Henderson, An Empirical Study of Single-Tier Versus Two-TierPartnerships in the Am Law 200, 84 N.C. L. REV. 1691, 1727 (2006).2. See 2005 NLJ 250, NAT'L L.J., Nov. 14, 2005, at 316, S16-S32.3. These markets are New York, Los Angeles, Chicago, Washington, D.C., SanFrancisco, Boston and Houston, according to the NLJ. Id.NORTH CAROLINA LAW REVIEWrelatively slim. Moreover, those firms routinely handle sizeablematters-transactions or litigation-that are staffed with manyassociates at premium rates.4 Thus, it is not at all surprising that thosefirms are more profitable than their two-tier competitors.I respectfully disagree with Professor Henderson's suggestionthat "[t]he higher level of profitability of single-tier partnershipscannot be explained by higher leverage,"5 as he suggests single-tierpartnerships average lower leverage than two-tier partnerships. Thismight appear to be true based upon the artificial definition ofleverage used by The American Lawyer in its analysis of major lawfirms.6 I would hope that most practicing lawyers in large firms wouldnot view second-tier partners as the precise equivalent of associates inanalyzing leverage. In my experience, partners are treated aspartners regardless of their particular tier (though I am confidentProfessor Henderson is correct in his remarks about the voting rightsof second-tier partners'). Thus, if one views leverage as the ratio ofassociates to all partners in a law firm, I am confident that single-tierfirms have equal or greater leverage than two-tier firms, which surelyis a factor in the former's greater Profits Per Partner ("PPP"). Thatsaid, even if non-equity partners are viewed as associates indetermining leverage, they are certainly a more expensive form ofleverage.Ultimately, I am of the opinion there are two primary reasonswhy law firms adopt two-tier partnership structures: apparentprofitability and concern for colleagues and clients. While on somelevel these may seem to be conflicting reasons, they are not really atodds.As noted above, Professor Henderson and The American Lawyerequate most non-equity partners as associates in analyzing law firms'PPP. Thus, even someone who last studied statistics as anundergraduate decades ago understands that excluding lesser-paid4. Billing rates, a key driver of revenue and profitability, are one economiccomponent that receives scant mention in Professor Henderson's Article. Yet, there islittle doubt that the high-prestige single-tier firms charge premium rates for the majorityof their work. In my experience, two-tier firms often have a broader array of practicegroups, including some that are likely to have difficulty charging premium rates due tocompetitive pressures. As an employment attorney in a two-tier firm, I am very familiarwith the pressures to keep our rates competitive with smaller firms that specialize inemployment law.5. Henderson, supra note 1, at 1696.6. Leverage "is the ratio of all lawyers to equity partners," and equity partners "arethose who file a schedule K-1 tax form and receive no more than half their compensationon a fixed income basis." Guide to Our Methodology, AM. LAW., July 2005, at 109, 109.7. Henderson, supra note 1, at 1711-12 & n.87.1752 [Vol. 84COMMENT ON HENDERSONpartners from a calculation of PPP will result in a higher publishedPPP figure. The law firm has not truly made more profits. But theoutside world is looking at a PPP figure that reflects only the firm'shigher-paid partners (in accordance with the Am Law methodology).This benefits the two-tier firm in its ability to attract both mergercandidates and lateral partner candidates. This is no small thing intoday's legal marketplace, where many firms believe they must growor they will wither away.Law firms also have adopted two-tier partnership structures in aneffort to retain solid attorneys who have knowledge, experience, andvaluable skills-but who lack either a significant book of business orsome other quality that would qualify them for the first tier ofpartnership. Firms want to retain these experienced attorneys whohelp form the fabric of the firm. They also want to retain theseattorneys whose continuing relationship with the firm benefits clientswho are better served by experienced partners with reasonable billingrates as opposed to less senior associates whose lower rates cannotoffset their lower levels of knowledge, experience, and efficiency. Ofcourse, these partners' long-term relationships with clients help bindthose clients to the firm. Thus, the retention of partners in a secondtier benefits both the law firm and its clients.8Whether in single-tier or two-tier partnerships, it is easy for mostlarge-firm attorneys to appreciate Professor Henderson's observationthat the average annual billable hours worked by partners has risensteadily from 1,538 in 1985 to 1,703 in 2003. 9 As the practice of lawamong large firms has become more of a business, the focus onfinancial performance has increased-and billable hours still generaterevenues. While Professor Henderson's Article states that "[o]nceadmitted to the partnership, a lawyer in a single-tier firm has littleincentive not to shirk,"'" such a statement is unsupportable. At mostAm Law 200 firms, all attorneys-both partners and associates-work very hard. Some partners spend significant hours in necessarynon-billable activities such as firm management, client relations, andbusiness development. Moreover, partners are motivated by morethan money-professional responsibility, pride, and intellectualchallenge are motivators as well. Finally, my sense of today's largelaw firms is that they react fairly quickly to underperforming partners,8. Given the relatively recent significant increases in associate compensation amongAm Law 200 law firms, it seems to me that clients and firms are getting far more valuefrom non-equity partners relative to less experienced associates.9. Henderson, supra note 1, at 1710.10. Id. at 1694.2006] 17531754 NORTH CAROLINA LAW REVIEW [Vol. 84and there are financial (or worse) consequences for those whounderperform.While Professor Henderson's Article is replete with keenobservations too numerous to mention, it also demonstrates howmuch the profession of law has morphed into the business of law.Fortunately, not all law firm business decisions are based solely orprimarily on economics. Firm culture and collegiality remainimportant considerations for me and many other attorneys.Despite these minor points of contention with ProfessorHenderson's Article, he presents a cogent analysis of partnershipstructures among large U.S. law firms. It merits the close attention ofboth academics and practitioners.

A Comment on Professor Henderson\u27s Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200

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A Comment on Professor Henderson\u27s Empirical Study of Single-Tier versus Two-Tier Partnerships in the Am Law 200

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