The Risk Manager, Spring 2010

Potential problems with lateral hires and the due diligence risk management required.

• The severe economic downturn in the legal profession has led to massive lay offs and lawyers leaving distressed firms resulting in a glut of lawyers looking for new positions. When these lawyers are laterally hired, the gaining firm risks conflict of interest issues and claims for a lateral hire’s prior malpractice. At the conference Anthony Davis, a well-known risk management consultant, identified the direct risks of a lateral hire as:
  • The lateral hire is accused of breach of fiduciary duties by the former firm and the gaining firm is accused of aiding and abetting the lateral hire (suits often concern clients leaving with the departing lawyer).
  • The lateral hire may claim money from the former or dissolved firm leading to a counterclaim against the gaining firm.
  • The gaining firm may be sued for wrongful interference in recruiting a lateral hire.
  • The gaining firm may be drawn into a malpractice claim against the lateral hire for work done at the former firm in which the former firm alleges the lateral hire committed some of the malpractice at the gaining firm.
• Davis also identified lateral hire indirect risks:
  • Problems with a former firm distract the lateral hire from work with the gaining firm.
  • Lateral hires under pressure from the gaining firm to produce results as claimed in the interview process leads to cutting corners increasing the risk of malpractice.
• What follows is a gloss of Davis’ risk management recommendations to a gaining firm given at the March conference and at a prior risk management program: *
  • Before hiring screen candidates thoroughly by checking for:
    • Legal qualifications by getting authority to obtain information from law schools and bar admission and disciplinary authorities – trust, but verify.
    • Ethics complaints and malpractice claims – inquire about potential claims.
    • Financial status and credit record.
    • Membership in organizations such as officer, director, or other interests in business; and fiduciary services such as trustee, conservator, administrator, or executor.
    • Powers of attorney held involving financial matters.
  • As a practical matter consider these questions before making a hiring decision:
    • Will this lawyer stay with us or jump to another firm at the first opportunity?
    • Why will this lawyer succeed and be satisfied here if one or the other was not the case in the former firm?
    • Is the investment the firm will make in hiring this lawyer cost effective recognizing that often both the firm and the lawyer are too optimistic about the synergistic results the move will bring?

Note: Lawyers Mutual recommends that you also consider: If a malpractice claim is filed against the lateral hire for something done at a previous firm, will your malpractice carrier be obligated to defend it and will that claim require you to pay your deductible?

• After hiring:
  • Perform a lawyer review of every file brought by a lateral hire. (One panelist suggested that the gaining firm get client consent in writing before accepting a client’s file brought by a lateral hire.)
  • Determine if the lateral hire has client funds and, if so, have them immediately deposited in the firm’s client trust account.
  • Inventory client property for which the lateral hire is responsible.

* This list is derived in part from the following materials used in the ABA 26^th National Conference on Professional Responsibility program On The Road Again: “Insurance Issues Related To Lateral Hire Musical Chairs,” by Professor Susan S. Fortney, and the Alexander & Alexander article “Evaluating and Managing the Risks of Mergers, Acquisitions and Lateral Hires” edited by Mr. Davis

• Davis concluded his remarks by observing that ideally a lateral hire’s employment contract will cover capital contribution, income, and client files.