Nick Shilton discusses the commercial issues around lengthy partner notice periods following the news of partner Eduardo Ustaran’s forthcoming move to Hogan Lovells in London.
Last week Hogan Lovells announced hiring Eduardo Ustaran, the head of Field Fisher Waterhouse’s privacy and information group. Ustaran’s move represents a genuine coup for Hogan Lovells - the dual English and Spanish qualified partner has been with FFW for almost a decade and sits as one of a dozen or so lawyers at the top of the Chambers rankings in what is proving an increasingly important practice area globally.
The focus of the report in The Lawyer (read more) however is more on FFW’s striking decision to enforce a lengthy notice period on Ustaran than regarding the move itself.
While anathema to the vast majority of US law firms, lengthy notice periods are not solely the preserve of UK law firms. Indeed some German law firms have notice periods that are effectively up to two years. (For example we have previously placed a partner into an international firm from a major German firm in Munich whose notice period was technically ‘a year to the end of a year’. On resigning in the middle of February his firm initially threatened to hold him to a notice period of 22 and a half months before relenting and releasing him after five months.)
The norm within UK law firms is a notice period for equity partners of between 6 and 12 months. In practice most firms release departing partners well before the expiry of the notice period.
An 18 month notice period is in our experience extreme (whether it is enforced or not). While I will leave commenting on its legal validity or otherwise to the partnership lawyers, various commercial considerations are surely paramount:
Will a partner being held to a lengthy notice period be fully motivated?
While remaining a partner of a firm, that partner has not only obligations but also rights – including being paid. Even if a partner is not put on garden leave, retaining the services of that partner during a lengthy notice period could prove disproportionately expensive.
Will the interests of clients be best served during a partner’s lengthy notice period?
Clients – particularly where they are clients both generally of the firm from which the partner wishes to depart and also close to that partner personally - may take a dim view of a firm’s treatment of a partner in this scenario and in particular when a partner is put on garden leave. We are aware of a number of cases where ‘client power’ has persuaded a firm ultimately to release a partner before the expiry of his/her notice period. (“Keep X on garden leave and you will never receive another instruction from us again,” is a threat that has been issued by clients on more than one occasion over the years and been decisive in expediting a partner’s exit.)
What message does it send to the market when a firm retains a partner – whether in the office or on garden leave – for a lengthy period?
To many observers such retention suggests that a firm is very reliant on that partner and/or lacking confidence about its ability to recover from the impending departure of that partner. The argument “We are simply expecting departing partner X to adhere to his contractual obligations under the partnership agreement” is a legalistic one and unlikely to be sympathetically received by the market.
Is a firm’s morale going to be strengthened or damaged by holding a partner to a lengthy notice period?
I suggest that the clear answer is the latter. As well as other lawyers in a departing partner’s team/department, there’s a wider issue, namely the message sent out to a firm’s partnership as a whole. In our experience holding a partner to a lengthy notice period does not put other partners off from seeking to depart from that firm but rather has the contrary effect and can act as a catalyst for further exits.
What effect will a lengthy notice period have on a firm’s ability to recruit at lateral partner level?
Prospective lateral partners will rightly scrutinise the partnership agreement of a firm before agreeing to join that firm. A notice period that is outside market norms may make them think twice before accepting an offer, however attractive that offer may be in other respects (both financially and non-financially). Emerging talent within a firm – i.e. senior associates – often focus less on their rights and obligations under a partnership agreement when invited to join the partnership club but may equally have some wariness about committing themselves to their firm long-term when faced with such a notice period, even if it may apply only when they reach equity partnership.
The news of FFW’s current stance on this topic provoked some lively comments last week on The Lawyer’s website. Ultimately of course whether Eduardo Ustaran is really held by FFW until spring 2015 remains to be seen.
Nick Shilton, 17 October 2013