Structural Conflicts of Interest

How a Law Firm’s Compensation System Affects Its Ability to Serve Clients

While much information pertaining to the earnings and financial affairs of law firms is routinely publicly disclosed, information regarding a firm’s compensation system or the tenure of its partners is not generally released. Mr. Bernstein’s article suggests that clients should seek this in-formation because it directly affects a lawyer’s incentives to act in a cli-ent’s best interest. Moreover, the author suggests that Model Rule 1.7 may, under certain circumstances, require the disclosure to clients of partnership compensation arrangements, but that the Rule should speak to the issue with greater clarity.The author discusses the relationship between law firm compensation sys-tems and partner incentives to serve the firm’s clients and points out that the so-called eat what you kill system of partner compensation may give rise to conflicts of interest within the meaning of Rule 1.7 by depriving the partner of the benefit of the firm’s client diversification. The author illustrates his point by describing one of the circumstances in which a partner who does not have the benefit of such diversification will have an incentive to act contrary to the best interest of the client in the course of rendering advice concerning the sale of a business.The author concludes with a suggestion that perhaps the American Bar Association should consider a rule requiring that law firms disclose their partner compensation systems to their clients.

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