Non-Equity Partner Tier Growing - In Numbers, Lawsuits and Controversy

 According to 2023 data, 49.4% "partners" at law firms are non-equity. That's up from 40% in 2013. 85 of the largest 100 law firms by revenue use this classification.Most recently Cravath, Paul Weiss and Wilmer Cutler have adopted the model. 

During 2023 itself the number of non-equity partners had increased 5.3% and the number of equity partners had declined. Obviously the smaller the pool of equity partners the larger the Profit Per Equity Partner for those who are actual shareholders. 

"Partner" is put in quotation marks because those lawyers in that tier are not partners in the sense of being an owner.

That and more have made the non-equity status the subject of three lawsuits this year. The most high-profile is the class action requesting a jury trial "Garland v. Duane Morris." Here is a copy of the complaint. And here is an analysis by Bloomberg Law.

The plaintiffs allege a "massive tax fraud." That is, law firms, they contend, are using this structure to reduce their own business and tax expenses. 

Another beef is that the agreement provides no job security because non-equity partners, since they are not owners, can be terminated at-will. You may recall how in 2009 Kirkland & Ellis gave some the boot in the Chicago office.

In addition, many experienced associates contend they could be pulling down more money as a senior associate than as a non-equity partner. The figure floating around is that they earn $2 million more for the firm than they are paid.

But the negatives associated with non-equity partnerships don't only apply to this category of lawyers. Bloomberg Law recently pointed out the risk to the law firm itself. For example:

"A 2023 report by Reuters found that nonequity partners typically billed between seven and 11 fewer hours per lawyer per month than equity partners, translating into a sizable gap in revenue."

Could there be a morale problem since in the status-heavy ethos of Big Law non-equities get it that they are children of a lesser god. Here is my Short Short Fiction on the subject.

Also the objective of the tier is to retain talent in what is essentially an up-or-out system. However, as a 2020 Bloomberg Law article documented: 10 years of data showed that at Kirkland & Ellis there was a low percentage of non-equity lawyers who remained at the firm. For the 2012 Class of non-equity partners fewer than 40% stayed with the firm and for the 2009 Class about 20%.

But the more interesting statistic in this controversy is that for the 2012 Class of non-equity partners at Kirkland & Ellis only 14% became equity partners.

Theoretically, that's part of the structure: The non-equity designation provides an opportunity for the lawyers to grow their skills and demonstrate performance which earns them the appointment to equity partner. 

Abovethelaw reports that last summer Chair of Paul Weiss Brad Karp said on Law, Disrupted:

" ... Karp explained that for associates 'who fall just short of what we believe is required to become an equity partner, we will confer a nonequity partner title … and we’ll track them for a few years and see whether they develop into equity partner talent.'”

Maybe that is the situation at Paul Weiss. But at the lion's share of other law firms does that classification have embedded in it the real possibility of becoming a partner who is a shareholder? Or is it an "arrangement of convenience" for enhancing Profit Per Equity Partner? 

Also, today Karp told the American Lawyer that contrary to the trend of equity partner decline in number that hasn't happened at Paul Weiss. Over the decade their numbers have grown from 143 to 212. 

He projects that there will be as many this year as in previous years. Meanwhile when it comes to what equity partners at the firm pull down in overall compensation Karp has made that a black box. The spread among what equity partners are making could unleash inner-firm tension.

So, here we are. The non-equity numbers are growing. But so is the balking among associates and some analysts of this sector. 

The future of this tier could depend plenty on the outcomes of the three lawsuits. Note that the defendant in "Garland v Duane Morris" has become quite aggressive. Does that signal fear?

Overall, if you read the professional anonymous networks such as Reddit Big Law and Fishbowl Big Law, you will pick up that junior lawyers are not positive about any aspect of the classification. 

With the interest-rate cut transactional practices could pick up. That shifts more power to associates. It will be all-hands-on-deck. They can let leadership know the non-equity tier should be dumped and other options established to motivate them to hang around with no right to disconnect and keep billing those hours.

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