Lawyers on the move: steps to take before dancing with a lateral hire

Issue January 2013 By William C. Saturley and Kenneth E. Rubinstein

Law firms hire laterally for numerous reasons, such as the need to meet clients' demands, or in an effort to create specialized practice groups within the firm. The marketplace no longer discourages such jumps, which makes it easier to conduct such hiring. Commentators in this field have identified three principal areas that firms should thoroughly investigate during deliberations on whether to hire a "lateral:"

Make sure your partner doesn't have two left feet. The decision to hire a lateral, particularly if the lateral is coming in as a partner, must be considered as a business decision, and analyzed in that perspective, suggested Frederik Fontein of Coregis Insurance Company in a paper submitted to the Bar Association's Standing Committee on Lawyers' Professional Liability. In other words, law firms must conduct "due diligence." He suggests the following specific steps as part of the review process:

  • Verify the apparent skills, and accuracy of credentials (such as academic history), of the prospective new hire.
  • Research both the disciplinary and malpractice history of the individual.
  • Interview others who have personal knowledge of the attorney's performance.
  • Review recent work products of the prospective hire. (Make sure the work is that of the hire and not a supervised associate).
  • If the lateral is bringing business to the firm, consider potential conflicts of interest with existing clients. Also, consider potential client relation problems (do the fee arrangements with the lateral's clients conflict with the firm's standard arrangements?). Evaluate whether the lateral's clients appear financially stable.
  • Define the lateral's staffing expectations.
  • Make sure the criteria for determining compensation has been thoroughly explored and agreed upon.
  • Make sure the firm's administrative requirements (such as prior engagement letters, or compliance with assignment committee directives) will be adhered to by the lateral.
  • Consider deferring full partnership status to a lateral hire until a reasonable period of time has passed, to allow further evaluation of the candidate; and then closely monitor performance during that period of time.

Frontein also suggests that, before hiring a lateral partner, the following considerations be taken into account:

  • Ascertain the medical history and likely good health of the individual.
  • If the firm requires disclosure of income tax returns from its existing partners, consider requesting a return and a personal financial statement from the prospect.

Will your partner follow the rules of the dance?

Lawyers (and firms) owe clients the duty to represent them competently and diligently. A law firm break-up can increase the difficulty of fulfilling these duties, as when all lawyers with a particular expertise leave the firm, but a client with that type of business remains. Similar difficulties can arise if the firm hires to create a new practice group, but has yet to determine its new attorneys' ability to accomplish tasks in that area. Moreover, the personal stress created during a split-up might compromise an attorney's ability to render competent legal services.

Clients' financial interest must also be protected. Some jurisdictions have considered mandatory malpractice insurance coverage as a means to protect clients' interests during such transitional periods. There are also ethical issues which arise between the lawyers at such times. Partners have fiduciary duties to each other which require full disclosure of all issues affecting the partnership. They also must account for all partnership property, and refrain from self-dealing.

Will you two-step your way into trouble?

According to Kirk R. Hall, writing in LPL Review No. 3 (a publication of the ABA's Standing Committee on Lawyers Professional Liability), the hiring firm should consider the following questions:

  • What coverage does the firm's malpractice policy provide to lateral hires?
  • Do the policies cover prior acts at the old firm?
  • What about vicarious liability for claims against the old firm?
  • Should the firm offer this type of coverage to lateral hires at all?

Hiring firms often request a special endorsement to provide "tail" coverage for their new hire, especially where the prior firm has gone out of business. This can be quite costly; it effectively means the new firm is broadening its insurance coverage to cover the lateral hire's old firm activities, but is paying the entire coverage premium. Claims made under such an endorsement may also diminish available insurance limits and implicate the new firm's underwriting record. Depending on the resulting experience, and the market at the time, this conceivably could render the hiring firm ineligible for future malpractice coverage, or affect its renewal premium.

In short, Hall suggests that the hiring firm "should think long and hard before agreeing" to obtain prior-acts coverage for the lateral hire.

As lateral hiring becomes an increasingly accepted mechanism for satisfying law firm's staffing needs, these issues will become more prevalent. Considering them in advance may avoid costly stumbles during the lateral dance.

William C. Saturley practices as a director from the firm's Boston and Concord, New Hampshire offices. His trial work focuses on commercial, employment and intellectual property litigation. Bill also defends lawyers and other professionals in malpractice claims and professional discipline matters.

Kenneth E. Rubenstein in is a director of Preti Flaherty. He regularly represents public and private companies in complex commercial disputes, with an emphasis on matters involving construction issues and financial professionals. Rubinstein was one of the founding co-chairs of the Construction Law Committee of the Massachusetts Bar Association, and is a member of the American Arbitration Association's Panel of Construction Arbitrators.

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