Protecting Law Firm Investments in Human Capital


By Gene Commander

With economic and demographic challenges stacking up against them, Colorado law firm leaders cannot afford to ignore the harsh reality that comes with the loss of valuable talent and the clients that departing lawyers take with them. Noncompete agreements clearly are not the answer. A recent decision by the Colorado Court of Appeals limited the enforceability of anti-competition provisions in law firm employment agreements under the Colorado Rules of Professional Conduct. This article will suggest better ways for firms to protect their investments in human capital.

The Steep Price of Losing Talent

Law firms across Colorado are facing a short supply of capable attorneys — particularly midlevel talent — at an affordable price. Talent is leaving the legal industry at an accelerating rate. Baby boomers are looking to hand off their law firm leadership responsibilities and cash out their ownership interests, while younger talent is looking for more rewarding careers in other industries.

This talent gap has been exacerbated by two new twists that national law firms have introduced to the state’s labor market: (1) a price war via aggressive salary hikes the firms have instituted in their Denver offices; and (2) a portal to out-of-state clients via the work-from-anywhere, technology-driven business operations the firms have adopted coming out of the pandemic.

The costs of doing business, including compensation for capable talent, have been climbing into unfamiliar territory for law firms across the state. Now, a historic rate of inflation alongside skyrocketing interest rates has sparked a recession that is cooling down corporate America’s red-hot business activity and extraordinary demand for legal services. But even as that demand softens, the shortage of legal talent will still hobble Colorado law firms. And when firms lack the talent they need to properly perform client services, their reputations and finances will suffer.

As Colorado firms augment their investments in talent, they also must further invest in attracting and retaining revenue-generating clients. These colliding forces will make it difficult to sustain an acceptable level of net profit per equity partner — the legal industry’s chief indicator of sustainable financial success.

Loyal and trusted employees and clients are every law firm’s most valuable assets. Colorado law firms pay a steep price whenever a top producer and future firm leader takes his or her valuable business experience and clients to a competitor. Yet against the backdrop of the labor market challenges outlined above, the increased mobility of experienced attorneys and their portable books of business has never been a greater threat to the business of law. Let us hope these mounting human capital risks are the catalysts that motivate Colorado law firm leaders to adopt more sustainable business models.

Handcuffs Are Not the Answer

Law firms have tried to mitigate the financial consequences of attorney and client mobility by asking their lawyers to sign agreements that disincentivize their departure. But in contrast to most industries, Colorado law firms cannot effectively manage their investment risks through employment agreements. Colorado Rule of Professional Conduct 5.6(a) limits the enforceability of agreements that restrict an attorney’s right to practice law after departing a firm.

A recent decision in Johnson Family Law, P.C. v. Grant Bursek considered a law firm’s attempt to collect from a departed associate a disincentive fee designed to dissuade him from continuing to represent the firm’s prior clients. The Court of Appeals ruled that financial disincentives are not per se violations of Rule 5.6(a). The decision rejected the majority and minority views from other jurisdictions in favor of a “case-by-case approach” whereby the unique circumstances of each law firm, departing attorney and client relationship will determine the reasonableness of financial disincentives. The court held that the disincentive fee in this case was unreasonable, rendering it unenforceable.

The Bursek decision will require trial courts in future cases to balance the interests of the law firm and departed attorney with the client’s freedom of choice. The subjective nature of the new Colorado case-by-case approach does not bode well for the enforcement of financial disincentives in law firm employment agreements. Even though Rule 5.6(a) is worded in terms of the attorney’s right to practice law, Bursek noted that the rule’s primary purpose is to protect the client’s right to select counsel of his or her choice. As such, it seems doubtful that law firms will be able to draft financial handcuffs that withstand close judicial scrutiny.

Weighing the Options

It is often argued that clients pick attorneys to represent them — not law firms. But either way, clients become emotionally invested in their attorney-client relationships. So, in most instances, they will gladly follow their attorneys to different firms if they decide to move.

Experience shows us that the decision to leave a law firm is usually based upon real concerns about compensation and the prosperity of the firm. And those concerns are typically grounded in a sense that the firm is managed improperly, communication is poor, compensation criteria are unclear and there is no promising vision for the firm’s future.

The most effective way to guard against the loss of valuable talent is to foster an inclusive, healthy and caring firm culture that attracts, develops, rewards and treats talent equitably and honestly. This requires a transparent compensation system that is designed and managed with integrity to sustain the professional and financial success of the firm and its talent by: (1) dealing with underperformance problems; (2) celebrating and rewarding extraordinary contributions; (3) planning for retirement and leadership succession; and (4) promptly and appropriately resolving unacceptable behavior, inadequate leadership, misdirected compensation and inequitable ownership issues.

Studies indicate that today’s talent will consider accepting less compensation if they believe their jobs will give them purposeful opportunities to collaborate with firm leaders and clients on top assignments. As they look for the right work-life balance, younger attorneys highly value career opportunities that offer them workplace freedom, flexible daily routines and other benefits that support their physical, mental and financial health. Tethering lawyers to their office billing stations is not the right answer to any of the challenges facing law firms, particularly in this labor market.

Colorado law firm leaders also need to institute training and mentoring programs that are appropriate for each employee’s level of professional and personal development. The work-from-home arrangements that became standard during the pandemic resulted in lost in-person and impromptu learning opportunities. Junior and midlevel talent have not had the full benefit of a traditional law firm training and mentoring experience and have missed meaningful opportunities to hone their entrepreneurial instincts and skills.

Firm leaders who double down on their investments in the professional development, personal growth and well-being of their human capital — and who can demonstrate to them an authentic commitment to the highest principles and best practices for the business of law — should be able to earn their talent’s respect, trust and gratitude in return. This is truly every Colorado law firm’s best shot at persuading both new and existing talent to stay at the firm, rather than bolt for greener pastures with valuable clients in tow.

– Gene Commander practiced construction law with small, midsized, regional and national firms for more than 40 years. He formerly served as managing shareholder in Polsinelli’s Denver office and currently serves as an executive business counselor for the legal and construction industries with a special focus on business growth strategies for Colorado law firms. He can be reached at [email protected].

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