Octogenarians Without Borders

How Do Law Firms Operate In America?
Questions From A Chinese Law Firm.
Answers From A Partner In Three American Firms.

Dong Jiaxin, now an associate at Shanxi Zhu Rong Wan Quan firm in Shanxi, was a student in a graduate course on International Business Arbitration at Vrije Universiteit Brussel in Belgium, taught by John Barnum in 2010. She and her colleagues at the firm in Shanxi posed the questions and he discussed his written answers with the attorneys at the Chinese firm in two, two-hour Skype video conferences in October and November 2013.

by John W. Barnum
November 16, 2013

Questions and Answers

1.What do we call you, Professor or Mr. John?

Neither. I am not a real "professor." If anything, I am a "Lecturer," but who wants to be called Lecturer? "Mr. John" is what the servants in a wealthy English family would call the grown children of the master of the house.

In America it is polite to call an older man "Mr." plus his family name, until he asks you to call him by his first name.

So please call me John. [But instead, they called me "Grandpa."]

2.How does a young lawyer work in America?

First, he or she today has to graduate from an accredited law school and pass the state bar exam in the state where he or she intends to practice. (It used to be possible to "read law" in a law firm under a partner in the firm instead.) Admission to a state bar permits an attorney to practice in the state courts in that state, but not in any federal courts in that state. To explain what that means, it is useful to jump ahead to answer another question, about the laws in different states and "national law."

2. AWhat are the laws in the states and national law?

The US Constitution gives the Congress of the United States (the Senate and the House of Representatives) authority to pass laws only in certain designated areas, such as "interstate commerce" and "national security." There is a separate court system for cases involving federal laws. Most laws in the United States, however, are state laws, adopted by the legislature in each state. Each state has its own court system for most of those cases. There are also laws and "ordinances" adopted by the governments of cities and towns, many of which have their own courts.

After someone has been admitted to the bar of one state for a certain number of years, he or she can also be admitted to the bar of most other states (called "waived in") without taking another bar exam.

There are also federal courts in each state. Admission to the bar of a particular federal court does not require another exam, but an attorney must be admitted to at least one state bar and recommended by a member of the bar of the federal court in question.

Each state has its own procedure for admitting a member of the bar of a foreign country to practice in its courts.

Law school graduates are strongly advised to take a bar review course before taking the bar exam.

Most law school graduates go either to a law firm like yours, large or small, or to the legal staff of a corporation, or to some government agency. But many still just go home to practice by themselves or with their family.

In addition, many law school graduates these days spend a year or two clerking for a state or federal judge. They research the issues raised in the briefs filed in the cases assigned to their judge. Typically they draft opinions after conferring with their judge about how he or she is thinking of deciding the case.

My personal experience has been mostly with large law firms in large cities. Since I graduated from the Yale Law School in 1957, that kind of law firm practice has changed in many important respects:

The size of the firms has increased dramatically - - from a hundred or two to thousands of attorneys.

The number of domestic branch offices of several large firms has increased. Many large firms also now have branches in several foreign countries.

The compensation of associates has increased ten times since 1965, with associates starting at $150,000 in large firms in New York and some other cities. Many partners in large firms earn more than $1 million a year.

There is more racial diversity and many more women in law firms today.

The number of titles for attorneys has increased: staff attorney, associate, contract partner, non-equity partner, equity partner. "Counsel" or "Of Counsel" do not have any one meaning; the title is used variously to describe positions from an older, more experienced associate who was not elected partner, to an older lateral not made a partner, to a retired partner.

The mechanics of law practice has also changed radically:

Typewriters have been replaced first by dictating to a secretary and now by using computers. Therefore the ratio of secretaries to attorneys in large firms has been reversed - - usually one secretary to four or five partners and associates today, instead of one or two secretaries for each attorney.

E-mail has greatly reduced the amount of "snail mail" and faxing has been largely replaced by scanning and electronic transfer.

But in recent years the number of applicants to take the Law School Aptitude Test ("LSAT") has decreased dramatically - - 45% since 2009.

3.How are American law firms organized?

Large law firms are organized by departments that represent the basic practice areas: corporate, litigation, tax, trust and estates. Often there are specialized groups within those departments. Some firms or such groups are organized by the industries they serve - - energy, transportation, finance. In addition there are many firms that specialize in one area, such as criminal law, immigration, tax, or intellectual property (patents, copyrights, trademarks). Maritime law is also a separate practice area, called "Admiralty."

Most large law firms rotate new associates among departments for a year or two before they or the firm select a permanent practice area for them.

Associates are assigned to work for a partner or a group of partners. Some firms rotate associates to work for other partners in the same practice area after a few years.

Most associates who go to the large firms hope to become partners after seven to eight years following law school. Those who are not elected partners usually move on to another firm, or leave the large firms to go to work for corporations, or to the government, for a few years or permanently.

4.How are American law firms managed?

Law firms have officers elected by the partners. The head of the firm is usually called either "Chairman" or "Presiding Partner."

The day-to-day management of the firm is done by the "Managing Partner," who is usually selected by the Chairman.

Typically the policy decisions of a firm are made by an elected Executive Committee of from four to nine, or by a larger Board of Partners or both.

The practice areas of a firm are usually managed by Department Chairs. Branch offices have their own managing partners.

The three firms in which I was a partner were all managed slightly differently from each other:

 

5.How are partners nominated and elected in America?

They are nominated and elected by the current partners of the firm. How depends on the size of the firm.

When Cravath had one office, all the partners would meet and decide (according to a vote of all the partners), first, how many new partners does each practice area need. Only then was any names even mentioned. Then each department would describe its candidates and the one or two with the most votes was elected. That worked well because most of the partners knew all the candidates.

In recent years White & Case had many offices, domestic and foreign, and very few if any partners knew every candidate. Therefore nominations were made by each department and foreign office. The firm was managed by an elected, four-person Management Committee, which considered the nominations and recommended a list of new partners to all the partners. The list was then submitted to the whole partnership for approval.

McGuireWoods has an Associates Committee that makes recommendations for partnership to the Department Chairs. Each department then submits its recommendation to the Board of Partners (30 partners) which submits a list of candidates for partnership to the all the current equity partners for a vote. Non-equity partners are also elected by the Board of Partners.

6.How is attorney compensation determined?

In most firms partner compensation is determined by an elected body (Management Committee at White & Case, which placed each partner in a class, starting at 1 and rising to 10; by the Executive Committee at McGuireWoods) based on recent performance in making money for the firm ("You eat what you kill."), plus performance of administrative responsibilities (such as Department Chair).

In a very few firms, such as Cravath, partners are paid according to when they became partner (called "lock step"). Each class earns a little more each year. The advantage is that the firm can ask a partner to change his or her practice area to meet a firm need and the partner will not lose any compensation. (I believe it also promotes unity within the firm, and a willingness to do whatever another partner asks you to do.)

Associate compensation is most often "lock step" for several years, but after five years gradations appear.

McGuireWoods has recently introduced an innovative compensation system that permits rewarding small numbers of top associates in each department.

7.How are "lateral" partners and associates selected?

"Lateral" means an attorney who moves from one firm to another. At the partner level, laterals are a relatively recent phenomenon.

Law firms often retain a company or firm (called a "head hunter") that is in the business of finding attorneys at another firm who has experience in a specific practice area and who has clients that he or she can bring with them (a "book of business").

In the last several years, whole practice groups move to a different firm or whole firms merge.

8."How does a lawyer deal with their emotion problem in their work?"

The answer depends on what you mean by "emotion." Law is meant to be logical and pragmatic, stripped of any emotion. There is not any room for emotion in the decisional part of law practice.

But that does not mean that a lawyer should not feel deeply about what he or she is doing. Moreover, when trying a case to a jury, or even to a judge, an attorney can and should take advantage of any emotional element in the issues and the character and circumstances of the parties before the court. A good trial lawyer has to be part actor.

Juries are human, and they bring their emotions with them. Jurors also bring their personal experience with them and often decide what actually happened based on that experience - - which is sometimes simply wrong in the case before them.

[In a Skype conference in November, however, the Chinese partner who asked the question said he was referring to an emotional relationship involving attorneys in the firm and their families. Literally, "what do you do when your partner steals your wife? My answer to that question was "like any other mature individual," but of course that can be good, bad or terrible! Parenthetically, most large American law firms have rules against employing an attorney related to another attorney in the firm, called an anti-nepotism rule.]

9.Real estate law is a separate practice area?

One distinct aspect of real estate law is "conveyancing," which means preparing the documents to pass title to the building, property or vacant land that is being bought or sold.

Another increasingly important aspect is "financing." That is really a separate practice area - - not all conveyancing attorneys are qualified to arrange the financing.

Real estate is also a very local practice, partly because any project invariably involves local laws, including not just state laws but also city laws and taxes, municipal ordinances and local zoning laws, federal and local environmental laws, and state and local "historic preservation" regulations.

In America it is common for real estate people to say there is one rule in real estate: "Location, location, location." I suggest that the first thing that a Chinese lawyer needs to learn about real estate law in America is that he or she must find a good local real estate lawyer for the purpose at hand, whether it be for conveyancing, or for financing, and particularly if it is for developing. (Advertisement)]

10."Distribution Mechanism" – How does a firm finance itself?

Partners and some senior associates send bills to their clients, usually monthly, and the client pays the firm.

Billing can be done on one or more bases: (1) the most common is monthly billing on the basis of agreed hourly rates and disbursements for related expenses; (2) requiring an initial retainer ($10,000 or more, sometimes with a continued requirement of maintaining a positive cash balance); (3) agree to a fixed fee, usually plus disbursements; or (4) a "success fee" when agreed in advance (a percentage of any recovery in a claim for money or achieving an acquisition, for example, or an agreed amount to defend a claim successfully).

Hourly rates are established by the firm for every attorney and paralegal. Some firms have reduced billing rates for certain large, "anchor" clients.

Equity partners each have a percentage interest in the profits of the partnership. During the year, they are typically paid a fixed amount monthly ("drawing account") and the balance of their agreed percentage of the firm's net income is paid to them at the end of the year when the profits for the year can be calculated.

Non-equity partners (sometimes called "contract partners") and most other attorneys (including all associates) are paid an agreed annual amount in monthly or bi-weekly installments.

Bonuses are paid to both partners and associates for exceptional work, and in some firms for attaining established goals (e.g., of billable hours) or results. Bonuses can be substantial, such as $50,000.

There is not any distinction per se between compensation for litigation and non-litigation attorneys, or any other practice area.

11.Billable hours.

Every attorney and paralegal ("fee billers") in a firm records the number of hours that he or she spends each day on their work and also describes in summary form just what work was done, such as "Draft brief on Statute of Limitations." In the "time sheet" or "diary," the fee biller indicates how much time was spent on each client and matter that day, usually in tenths of an hour.

He or she typically must account for eight hours each business day, and if the total of hours billable to a client is less than eight, the balance of the eight hours must be described according to given alternatives, such as "legal reading," or "client relations," or other prescribed categories. If during the day you have had to attend to personal business, like a doctor's appointment, the entry would be "personal" if you did not otherwise account for eight billable hours.

If part of an eight hour period on a work day is spent travelling on a matter, some firms treat that as billable time, at least when the attorney is able to work, on the train or plane.. (The rules of many arbitration administrators specifically provide that the time that an arbitrator travels away from home is to be paid for by the parties, whether or not it is working time.)

Fee billers should also record any time on weekends or even vacations that they work on a client billable matter.

Most firms also have a billing category for "pro bono" for firm approved pro bono work or for "community development" work.

If a partner wants to have work done by an attorney on a personal matter, he or she and the partner in charge of the work may agree that that partner will not bill time, but that the "client" partner will pay for the time of any associate working on the matter. In that manner the associate is not penalized for having less client billable hours. Alternatively, that billed time will simply be "written off," meaning it will not actually be paid for by the partner requesting the work.

Not all billable time reported by the attorneys has to be billed to the client. Each partner has the discretion to bill the client less than the total - - to "write off" some of the time. That is appropriate if the partner thinks that too much time was spent on a matter. The firm nevertheless reports the percentage of each partner's billable time for his or her team that was paid for.

I am sad to say that some partners ask associates to do work that is not really necessary to serve the client. They do it because the partner is compensated in part according to the billable hours that his or her clients pay for. Thus the work costs more, to be sure, but if the client pays the larger amount, the firm's profits are increased without increasing its expenses. The associate doesn't get paid any more for extra billable hours.

"Billable hours" is a useful and necessary tool for measuring a firm's efficiency; if many attorneys are not billing clients eight hours a day, the firm has too many associates for the amount of work it has to do.

But because "billable hours" can be inflated by the attorney and the firm, they can have an insidious influence on both.

It is not common, however, to tell a client that the case or matter will not take more than X hours.

12.Solicitors and barristers.

In the UK (England, Scotland, Wales) most attorneys are either litigators ("barristers") or general practitioners ("solicitors"). Solicitors form law firms. Barristers practice independently, but usually in offices they call "chambers" with other barristers. That avoids client conflicts with other barristers in the same chambers.

There are similar classifications of attorneys on the European continent: in French, for example, most lawyers are called an "avocat" and addressed as "Maitre;" attorneys handling litigation are called "avocat à la cour;" attorneys handling wills and real estate transactions are "notaires;" Large firms include both court-qualified attorneys and general practitioners. Notaires, however, either practice by themselves or form a firm with other notaires.

A similar distinction exists in Russia and the former Soviet Union countries. An attorney must be an "advokat" in the particular place (city, province) to handle a criminal case. Like English barristers, advokats are sole practitioners.

13.Retirement benefits.

In the United States the retirement age is usually 65, but some government positions (e.g., policemen, the military) permit retirement earlier, after a certain number of years. All retired people (not just attorneys) who have worked are entitled to a monthly Social Security payment from the federal government based on the amounts that were deducted from their salary every payday and paid to the Social Security Administration.

The federal government also permits wage earners to put an additional part of their salary aside without having to pay income taxes - - yet! The amount is largely up to the worker. Increases in the value of the funds put aside are also not taxed until withdrawn, but after retirement the person must withdraw a portion of those funds annually, determined by their actuarial life expectancy, and pay federal and state income taxes on the distribution as if it were current earned income. These funds are called Section 401(K) accounts or IRAs (Individual Retirement Accounts).

Law firms and other employers also may make payments periodically into "retirement accounts" on behalf of their employees including attorneys, and employees are entitled to be paid from their retirement accounts after their interest in the retirement fund has "vested" as a result of a specified number of years of service.

Retired equity partners in law firms are also entitled to be repaid the capital that they have been required to invest in the firm over the years as their percentage interest in the firm typically increased.

Some firms also give retired partners a share of the client's unpaid billings when they retire.

It is common for law firms to organize investment opportunities for the partners, who may invest their own funds in unrelated businesses.

14.What is Venture Capital?

Venture capital is money provided to new or early-stage companies that have a high potential for growth, but also high risk, usually with a new product or service. A venture capital fund makes money by acquiring stock in such companies, which usually have a novel technology or business model in high technology industries, such as biotechnology. A typical venture capital investment occurs after the "seed" funding round. It is the growth funding round, also referred to as the Series A round, intended to generate a financial return through an eventual realization event, such as an initial public offering (an "IPO"), or the sale of the company.

Venture capital is a subset of private equity, but not all private equity is venture capital.

In addition to creating the opportunity for substantial financial return, venture capital has become important to job creation and economic growth. Over 10% of new private sector jobs come from venture capital-backed companies and venture capital companies recently account for 21% of US gross domestic product.

The most recent public example of venture capital producing a saleable company is "Twitter." Eight years after the company was started with seed money and grown with venture capital, some additional shares were sold publicly in an IPO in November. On the first day of that public sale, shares increased in value from $26 to $50 before falling back to $44 a share. That valued the company at $38 billion, but in those eight years, the company has never made a profit.

15.Comments on Trusts.

Black's Law Dictionary defines a "trust" first as the right to enjoy the benefits of property to which another person holds the legal title. A second definition is "a fiduciary relationship regarding property." A third definition is "the property held by the trustee."

Black's says that there are two principle kinds of trusts, "private" and "charitable," but then Black's identifies more than 100 different kinds of trusts, such as a "real estate investment trust", also known as a "REIT."

In most of those 100 cases, a trust is used to either to perpetuate ownership or control of property, or to affect the taxes on the ownership of or the income from property.

Black's also recognizes "trust" as meaning a business combination that results in a monopoly; hence the word "antitrust" in American law relating to anti-competitive conduct of businesses. Europeans use the words "competition law" to describe essentially the same branch of law.

16.Thoughts on how to motivate partners and other attorneys.

More money is not the only way to motivate attorneys, and since many if not most attorneys think they are worth more than they are being paid, firms must find other ways to motivate them.

Partners at McGuireWoods are motivated by opportunities to participate in other legal activities. Lex Mundi is an organization of 160 premier law firms from around the world, one law firm from each American state and Canadian province and one law firm in each of more than 100 other countries. McGuireWoods is the law firm from the Commonwealth (i.e., state) of Virginia in the United States (several U.S. states are called a "Commonwealth," from colonial days). Other firm partners attend meetings in the US and abroad of world and regional conferences of two other similar groups.

Motivating associates is easier than motivating partners. In addition to more money and promotions to supervisory positions or assignments, assigning them to interesting clients and matters and giving them more responsibility in dealing with the client is the best, mutually beneficial way.

At White & Case associates went with partners to the law schools to interview students, which improved the hiring work because it showed students that associates were important, gave students a younger person's views and relieved the partner of having to be "on camera" every minute of the long interview day.

At McGuireWoods several associates are invited to attend the annual partner retreat to receive awards for their contribution to the firm's pro bono activities. The Associates Committee also has a role in nominating partners in each department.

When a firm has many offices, naming an associate "lawyer of the month" and running his or her picture and profile in the monthly firm newsletter makes them better known throughout the firm and has to be an ego booster. And something to show Mom and Dad as well as the SO! (You must know the meaning of "Significant Other" by now.)

What would motivate you? What has motivated you in your firm?

Jiaxin and friends, thank you for your interest in American law firms and good luck with your own firm.
John W. Barnum