Sidley suit settled

The WSJ Law Blog is reporting that the Sidley Austin age discrimination suit has been settled by payment of $27.5 million to 32 former partners.

I discuss the main issue in the case -- whether the partners were protected employees, in the following excerpt from my Unincorporated Business Entities casebook (88-89):

Equal Employment Opportunity Commission v. Sidley Austin Brown & Wood, 315 F.3d 696 (7th Cir. 2002). . . held that there was enough question whether the 32 equity partners in a law firm demoted to “counsel” or “senior counsel” were covered by the age discrimination law that EEOC was entitled to compliance with that part of a subpoena seeking documents concerning whether the demoted partners were employees under the age discrimination law. The firm was controlled by a “self-perpetuating” executive committee. Partners who are not members of the committee have some power over hiring, firing, promotion, and compensation of their subordinates, but not as to their own status. The non-member partners have no other power other than a vote on Sidley & Austin’s merger with Brown & Wood, which the firm allowed after the EEOC began its investigation. The demoted partners had capital accounts averaging about $400,000, were liable for the firm’s liabilities in proportion to their capital, and had rights to income based on percentage points of the firm’s overall profits the executive committee assigned to them. The court held that the EEOC was “entitled to obtain the facts necessary to determine whether it can proceed to the enforcement stage.” The court concluded that the demoted partners’ classification under state law did not control their treatment under federal antidiscrimination law.

Judge Posner, writing for the majority, reasoned:

. . . The law does not allow firms to obtain the benefits or avoid the costs associated with particular forms of doing business by simple redesignation. Of course firms have broad freedom of election among the different forms of doing business, such as the corporate, partnership, LLC, and so forth. Their freedom is not unlimited; there is, for example, the “substance over form” rule of tax law. [Citation omitted.] But the question, as we have been at pains to emphasize throughout this opinion, is not whether Sidley is a partnership; it is. The question is whether, when a firm employs the latitude allowed to it by state law to reconfigure a partnership in the direction of making it a de facto corporation, a federal agency enforcing federal antidiscrimination law is compelled to treat all the “partners” as employers. . . . All that is clear . . . is that the coverage issue in the present case remains murky despite Sidley’s partial compliance with the subpoena. The Commission is therefore entitled to full compliance, at least with regard to coverage, unless the additional documents the Commission is seeking are obviously irrelevant. What the Commission particularly wants to know is how unevenly the profits are spread across the entire firm. Are profits so concentrated in members of the executive committee, or in some smaller or larger set of partners, in relation to the profits that the executive committee allocated to the 32, that the latter occupied the same position they would have if they had been working at a comparable rank for one of the investment banks that once were partnerships but now are corporations? This might not be decisive but it would bear on the unavoidably multi-factored determination of whether this large law firm — which in recognition that conventional partnership is designed for much smaller and simpler firms has contractually altered the structure of the firm in the direction of the corporate form — should for purposes of antidiscrimination law be deemed the employer of some at least of the individuals whom it designates as partners. . . . We are not ruling that the 32 demoted partners were in fact employees within the meaning of the age discrimination law. Such a ruling would be premature. Sidley has respectable arguments on its side, not least that the functional test of employer status toward which the EEOC is leaning is too uncertain to enable law firms and other partnerships to determine in advance their exposure to discrimination suits — that it would be better if the courts and the Commission interpreted the employer exclusion to require treating all partners as employers, with perhaps a narrow sham exception. These issues will become ripe when Sidley finishes complying with the coverage part of the subpoena. We hold only that there is enough doubt about whether the 32 demoted partners are covered by the age discrimination law to entitle the EEOC to full compliance with that part, at least, of its subpoena.

Easterbrook, J., concurring in part and concurring in the judgment:

No one believes that a bona fide partner is in a master-servant relation with the partnership, or that the partner “is employed by” the partnership. The qualification “bona fide” is important; as Justice Powell observed in Hishon, an employer may not evade obligations under federal law by plastering the name “partner” on someone whose legal and economic characteristics are those of an employee. . . . It is neither our duty, nor our privilege, to invent a federal law of employment relations, as my colleagues appear to believe. . . . . . . [I]t makes both linguistic and economic sense to say that someone who is liable without limit for the debts of an organization is an entrepreneur (a principal) rather than an “employee” (an agent). Unlimited liability and profit-sharing give each partner an interest in monitoring (and if need be expelling) those other partners who are shirking or otherwise not carrying their part of the load. Their actions in this respect are those of owners. . . . What leads me to concur in the judgment is not any doubt about the right characterization of the 32 demoted partners but uncertainty about that of other lawyers. . . .

315 F.3d at 705, 707, 709-710.

The issues involved in these cases ultimate were only slightly clarified in the Supreme Court's later case of Clackamas Gastroenterology Associates v. Wells, 538 U.S. 440, 123 S. Ct. 1673 (2003). 

I confess to being disappointed by the settlement.  I would have liked to see the Court figure this one out.