Tips for Avoiding Risks in Lateral Hiring

While the lateral market remains competitive as firms jockey to land the next big fish, the risks for law firms associated with a botched lateral hire are increasing in severity. As a result, experts say that law firms would be well-served to engage in a thorough vetting process before agreeing to invest in new partners.

At the Fall 2018 National Legal Malpractice Conference in Las Vegas, three panelists with diverse perspectives shared experiences of lateral hires gone bad and tips for how law firms can avoid risky situations when adding new partners.

Gather Sufficient Background Information

Janis Meyer, a Partner at Hinshaw & Culbertson, emphasized the need for law firms to consider all potentially relevant information when reviewing potential lateral hires and identified some perhaps less common questions to ask lateral hires to avoid unwelcome surprises. Meyer recommended that firms perform background checks early enough to catch problems, as later in the hiring process the firm may become more invested in the potential hire and overlook potentially problematic issues that might have ended the discussion if they were known at the outset.

In particular, Meyer focused on eliciting information intended to uncover potential conflicts that could create problems with the firm’s existing clients. For example, in addition to requesting information regarding the attorney’s current and prior representations, firms can request information regarding the opposing parties and other related parties in the representations as part of their evaluation. Many attorneys are also asked to serve on the boards of for-profit or non-profit entities, which also may be a source of conflicts.

In addition, Meyer discussed the fact that many firms fail to inquire regarding the lateral candidate’s roles as an arbitrator, mediator, or expert witness. In that regard, Meyer shared a story of an arbitrator who, while poised to enter a final award, joined a law firm that counted one of the parties to the arbitration as a major client, creating big problems in the arbitration.

Meyer also noted the importance of gathering relevant information where the lateral hire comes not from another law firm, but from a role as in-house counsel. Although occurring in a different context, firms may still wish to consider the parties that were adverse to the lateral candidate’s company during her or his time as in-house counsel.

Finally, even if conflicts do not create an issue for purposes of hiring the attorney, Meyer recommended that firms maintain the information gathered during the lateral hiring process in the firm’s database. Joining a new firm does not wipe the attorney’s slate clean when it comes to prior representations, and thus firms may incur unnecessary risk by failing to include those representations in future conflict checks.

Common Issues for Prospective Lateral Hires

According to some, the most common problem with lateral hires is not outright lies from the candidate, but rather “sins of omission” made during discussions with the firm and, specifically, in completing lateral partner questionnaires. Michael Ellenhorn, Co-Founder and General Counsel of Decipher (an executive vetting firm specializing in the legal market), identified some common areas where attorneys may be less than forthcoming in the absence of carefully worded questions intended to elicit potentially problematic information.

This includes, for example, the potential hire’s financial history, which may include a history of liens or UCC filings that may raise red flags. Another potentially revealing question is the attorney’s personal criminal and civil litigation history, which Ellenhorn noted is commonly ignored by hiring firms. To illustrate the potential problems, Ellenhorn shared a story of a lateral candidate that was held in civil contempt as a result of his actions in connection with a family law matter. However, because the firm had no direct question regarding prior litigation, that information was not revealed on the firm’s lateral partner questionnaire.

Other problematic areas can include the disclosure of outside business interests, prior malpractice claims, and academic or work history. Responses in each of those categories can tell a revealing story about the potential lateral hire but, without appropriate questions, the firm may be left in the dark.

Don’t Be Haunted By The Prior Firm’s Problems

When an attorney joins a new firm, she or he can carry some unwanted baggage. Jon Margolies, General Counsel of Michael Best & Friedrich LLP, discussed at least two ways in which firms can try to avoid issues arising out of the lateral hire’s prior firm.

First, a key question to ask lateral candidates is whether they are aware of any circumstances that might lead to either a disciplinary action or a malpractice claim relating to their work at their current firm. In addition to evaluating whatever circumstances may be disclosed by the attorney, the firm can also potentially avoid the negative publicity associated with a claim against the lateral hire should she or he join the firm. Indeed, while such a claim may be covered under the prior firm’s insurance policy, for purposes of media coverage the claim will appear to be one that is made against the attorney’s current firm.

Next, Margolies discussed provisions in the prior firm’s partnership agreement that could impact the transition of the lateral hire to a new firm. In particular, Margolies recommended that firms inquire regarding any notice provisions contained in the partnership agreement that may prevent the lateral hire from leaving her or his prior firm for a certain period of time. With knowledge of such provisions, the hiring firm can account for the required time period or, if appropriate, arrange for outside counsel to assist the lateral attorney in navigating any issues with the prior firm. However, it is less desirable to agree to hire a lateral candidate only to find out that the candidate is beholden to a lengthy notice provision. Margolies did note, however, that at some point lengthy notice provisions may run afoul of Rule 5.6 of the ABA Model Rules of Professional Conduct, which prohibits restrictions an attorney’s ability to practice law under certain circumstances.

In addition, a hostile relationship with the attorney’s prior firm could cause the new firm to become embroiled in litigation, including in connection with a claim for tortious interference with business relations. Margolies noted that such claims are becoming increasingly common in the context of lateral hiring by law firms.

Scrutinize the Books

An overall theme stressed by all three panelists was that firms should be realistic in their expectations regarding lateral hires and take time to scrutinize their practice. According to Ellenhorn, approximately 75% of lateral hires ultimately bring in less than their promised book of business at the new firm. Assessing the likelihood that business will follow the lateral to a new firm may be a difficult task, but Ellenhorn provided examples of potential warning signs for firms to consider. If, for example, the lateral candidate has high compensation but low origination credit and is not leaving with a team of attorneys, it may warrant follow-up questions.

Margolies likewise emphasized the need to train hiring partners to be skeptical regarding the books of business promised by lateral hires, as a hire made in reliance on unsubstantiated claims regarding portable business can lead to a host of problems. In such circumstances, the new lateral hire may get desperate when his billings fail to meet expectations, which can cause the lateral hire to take on risky and less than desirable clients.

Get to Know Lateral Hires

Given the increasing size of many law firms, Meyer noted that it is often impossible for each partner to personally meet the prospective hire to get a feel of whether that person would be a good fit for the firm. However, as demonstrated by recent events, it is becoming more important for firms to pay attention to a partner’s behavior in the law firm environment, including any history of poor treatment or harassment of fellow attorneys or firm employees. In that regard, Margolies recommended using informal methods such as contacting colleagues at other firms who may be familiar with the candidate to learn more about their reputation and professional demeanor. Ellenhorn also noted that firms can potentially uncover relevant information by asking the lateral candidate to disclose whether they have been the subject of any internal complaints at their previous employers.

Key Takeaways

According to Margolies, despite all of the potential pitfalls, most lateral hires can be positive for law firms when the process is done right. However, all panelists agreed that the key is both to ask a lot of questions and to ask the right questions. In today’s climate, Meyer also noted that the rise of “serial laterals” might require increased vigilance, as lateral hires may be perceived as lacking loyalty or may have issues that have caused them to change firms frequently.

While acknowledging that recruiting attractive lateral candidates is a key part of the hiring process, Ellenhorn emphasized the need to balance the ledger between recruiting the candidate and vetting the candidate, so that an otherwise promising lateral hire does not create headaches as a result of issues that could have been discovered with increased due diligence. By achieving that balance, law firms can get to the right place when it comes to lateral hiring.