Amicus Curiae Brief — Ernst v. Simpson

MUHUN FILEU

MAY 1 1997. r

a

~

No. 96-1553

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1996

ERNST & YOUNG LLP,

Petitioner,

Vv.

P. LARUE SIMPSON,

Respondent.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

MOTION TO FILE BRIEF AMICI CURIAE AND

BRIEF AMICI CURIAE FOR SIXTEEN LAW FIRMS

IN SUPPORT OF THE PETITION

KATHLEEN B. BURKE

JONES, DAY, REAVIS & POGUE

North Point

901 Lakeside Avenue

Cleveland, Ohio 44114

(216) 586-3939

GLEN D. NAGER

(Counsel of Record)

SHARON MOLLMAN ELLIOTT

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005

(216) 879-3939

Counsel for the Amici

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

FOR SIXTEEN LAW FIRMS

IN SUPPORT OF THE PETITION

The following law firms (collectively, “amici”), hereby move

pursuant to Supreme Court Rule 37.2, for leave to file the

attached brief as amici curiae:

Arnold & Porter

Davis Polk & Wardwell

Dickinson, Wright, Moon, Van Dusen & Freeman

Fried, Frank, Harris, Shriver & Jacobson

Fulbright & Jaworski L.L.P.

Jones, Day, Reavis & Pogue

King & Spalding

Latham & Watkins

O’Melveny & Myers LLP

Paul, Hastings, Janofsky & Walker LLP

Seyfarth, Shaw, Fairweather & Geraldson

Shearman & Sterling

Skadden, Arps, Slate, Meagher & Flom LLP

Vorys, Sater, Seymour and Pease

Weil, Gotshal & Manges LLP

Wiley, Rein & Fielding

Counsel for the petitioner has consented to the filing of this brief;

counsel for the respondent has not.

The amici are law partnerships with a diverse array of national

and regional practices. Formed in different jurisdictions around

the country, each firm has structured itself and its affairs in

accordance with, and in reliance on, the law of the state in which

it is organized. As a consequence, amici represent a broad range

2

of partnerships with differing approaches to management, profit-

sharing, liability, and compensation.

The decision below — which appears to forge a new, general

federal definition of partnership divorced from specific state

partnership laws — is a matter of substantial concern for the

amici, as it creates considerable uncertainty about partnership

obligations and responsibilities under federal laws such as the Age

Discrimination in Employment Act (“ADEA”), 29 U.S.C.

§§ 621-634, and the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. §§ 1001-1461. Amici have relied on

specific state partnership laws to create business structures that

are competitive in today’s legal market. By requiring

partnerships to conform to general federal criteria that are

different from and inconsistent with specific state partnership

rules, the decision below might impel the restructuring of

partnerships and impede law firms’ ability to respond to changing

economic conditions. It would also undermine the states’

authority to create new forms of business associations like the

Limited Liability Partnership, a recent innovation that several of

the amici have already embraced.

Because of their significant experience in structuring and

operating law firm partnerships across the country, amici bring a

unique perspective to this case. The attached brief illustrates the

adverse effect of the decision below on law firms and other

business partnerships and focuses on issues that the principal

parties may not present.

3

For these reasons, the Court should grant this motion for leave

to file the attached brief amici curiae in support of the petition for

certiorari.

Respectfully submitted,

KATHLEEN B. BURKE

JONES, DAY, REAVIS & POGUE

North Point

901 Lakeside Avenue

Cleveland, Ohio 44114

(216) 586-3939

GLEN D. NAGER

(Counsel of Record)

SHARON MOLLMAN ELLIOTT

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005

(202) 879-3939

May 1, 1997 Counsel for the Amici

i

TABLE OF CONTENTS

Page

py Ee is: . Bere rn rer ar ili

INTEREST OF THE AMICI CURIAE .............. l

INTRODUCTION AND SUMMARY .............. 1

REASONS FOR GRANTING THE WRIT ........... 4

I. THE DECISION BELOW FORCES VALID

STATE PARTNERSHIPS TO RESTRUCTURE,

THREATENS THEM WITH UNEXPECTED

LIABILITIES, AND UNDERMINES

SEA E Oar TEE © on 8h 6 Oe 8 ee es 4

A. The decision below would require

parteremeps 00 VOSSUEEG 2 ww es 5

B. Under the decision below, partnerships that do

not restructure may be subject to huge,

ee ee ee eee 8

C. The new federal rules fashioned by the lower

court undermine the states’ ability to foster

TR GI, 5 ons oe 10

Il. THE SIXTH CIRCUIT’S DECISION TO FASHION

FEDERAL RULES OF PARTNERSHIP LAW

CONFLICTS WITH THE DECISIONS OF

Pee SE, 8 PEERS Ree eee ee Pee 12

A. Determining whether an ERISA or ADEA

plaintiff is a bona fide partner does not

require a nationally uniform rule of law ........ 13

il

B. Applying state partnership iaw to determine

whether an ADEA or ERISA plaintiff is a bona

fide partner would not frustrate the objectives

OE Gee eee OE NN os Sh so ee ee ens 16

C. Applying a federal definition of “partner” under

the ADEA and ERISA would disrupt commercial

relations predicated upon state partnership law ... 18

D. The Sixth Circuit should have applied state law

to determine whether Simpson was a “partner.” . . . 19

ew Bs ey mr Mr er er kee ea 20

iii

TABLE OF AUTHORITIES

Page

Cases

Ballard v. United States, 17 F.3d 116

eR TUNE ei ra ee FRE EE SE 15

BFP v. Resolution Trust Corp.,

ons 10.5; O91 COD 26 eee 4, 18

Barnhill v. Johnson, 503 U.S. 393 (1992) .-------°° °° 12

Bellis v. United States, 417 U.S. 85 (1974) .------- °°? 15

Brodsky v. Stadlen, 526 N.Y.S.2d 478

(App. Div. he ae te ee ee ati ate eee 17

Burks v. Lasker, 441 U.S. 471 (1979) .----°:°> 3, 14, 16

De Sylva v. Ballentine, 351 U.S. 570

NR ois ee a ERS ee 2 12, 13, 14, 18

Ehrlich v. Howe, 848 F. Supp. 482 (S.D.N.Y. Se gE,

Fegley v. Higgins, 19 F.3d 1126 (6th Cir.),

cert. denied, 115 S. Ct. 203 (1994) 2. eee 15

Fountain v. Metcalf, Zima & Co., 925 F.2d 1398

ici. TONED ep tat ee Oe ek 2

Gregory v. Ashcroft, sot U.S. 4852 (IDI) «ee ee tt 19

Hauer v. Bankers Trust New York Corp..,

65 F.R.D. 1 (E.D. Wisc. RITES ee Se 15

Hyland v. New Haven Radiology Associates,

194 F.2d 793 (2d Cir. MR Sige esa Ree 2

Kamen v. Kemper Financial Services Inc.,

oN 01.5. SO UINO)) » «2 tt 3, 12, 14

Madonia v. Blue Cross & Blue Shield, 11 F.3d 444

(4th Cir. 1993), cert. denied, 511 U.S. 1019

IME Coated ewes Kee ne 16

Martin v. Peyton, 158 we 97 OL.Y. We) <6 ees 17

Nationwide Mutual Insurance Co. v. Darden,

mie SES MIR IINORE ce ics ee eT 16

Peterson v. American Life & Health Insurance Co.,

48 F.3d 404 (9th Cir.), cert. denied,

ee We WP Clee ee eV eee ee es 2

In re Phillips, 966 F.2d 926 (Sth Cir. 1992) ..-----+-°° 15

iv

In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293

(7th Cir.), cert. denied, 116 S. Ct. 184 (1995) ...... 20

Robertson v. Alexander Grant & Co., 798 F.2d 868

(5th Cir. 1986), cert. denied, 479 U.S. 1089

SE) 6 Oe ks PEAR eos a 2,9, 17

Robertson v. Wegmann, 436 U.S. 584 (1978) ...... 16, 17

Runyan v. National Cash Register Corp.,

787 F.2d 1039 (6th Cir.) (en banc), cert. denied,

COP es EES iets ak ka OOS wee Rn 17

Tenney v. Insurance Co. of N. America,

409 F. Supp. 746 (S.D.N.Y. 1975)... 2. ee 2

In re 2111 Associates-Chicago, 580 F.2d 705

a SEU in koe ae ee ee Ee eee 15

United States v. Kimbell Foods, Inc.,

Ue Sti FE MOTE: oh woe ee 3, 13, 14, 16, 18

United States v. Yazell, 382 U.S. 341 (1966) ....... 13, 15

Walsh v. Ford Motor Co., 807 F.2d 1000

(D.C. Cir. 1986), cert. denied, 482 U.S. 915

(SRE 6 cae a RR Te CERES 19

Wheeler v. Hurdman, 825 F.2d 257 (10th Cir. 1987),

cert. denied, 484 U.S. 986 (1987) ... 2, 16, 17, 18, 19

Zola v. Gordon, 685 F. Supp. 354 (S.D.N.Y. 1988) ..... 15

Statutes, Regulations and Rules

Age Discrimination in Employment Act,

Be Ss Eo ks LL re a Ae 1

ee ks 05K ED SD ee ee eee 16

Be a TE 55 55 TRA es Ree 16

Se Sena OU a x ck ka BS Ae RO ee ale 16

Employee Retirement Income Security Act,

Be Oe ee COE Hk hae oie oe ee ES ]

Dy, 5 5 Se Ee ko hes Es ORS .

oes 5: PED EAE PE. iss os hee ttn ee we 6

N.Y. Partnership Law § 121-1500(d)............. 6, 11

Be So ee BORE AD ka a A AS 9

ee See ec a ee ee eee el ee ee 12

Miscellaneous Authority

A. Bromberg & L. Ribstein, Bromberg and

Ribstein on Limited Liability Partnerships

and the Revised Uniform Partnership Act (1997) .. 10, 11

1 A. Bromberg & L. Ribstein, Bromberg and

Ribstein on Partnership, § 1.02(b)

Beer tee he ew see anne 5, 6, 17, 19

Il A. Bromberg & L. Ribstein, Bromberg and Ribstein

on Partnership, § 6.05(b) (1996) .------ cc 7,8

Keating, Donn, Coleman & Hester, Limited Liability

Partnerships: The Next Step in the Evolution of

the Unincorporated Business Organization,

51 Bus. Law. 147 S| SOO SS Ee et ae 8, il

R. Nelson, Partners With Power: The Social

Transformation of the Large Law Firm (1988) ...--- 6

Partner Compensation: How Three Firms Split the Take,

95-5 Compensation & Benefits for L. Off. 1 (1995) - - 8

Richard, How Firms Manage, 18 Pa. Law. 20 (1996) ..-- 6, 7

Samuelson, The Organizational Structure of Law Firms:

Lessons From Management Theory,

4s thie Me 1.3. OGG) +. = eet 6, 7

Schwidetzky, Is Jt Time to Give the S Corporation

a Proper Burial?, 15 Va. Tax Rev. 591 (1996) ..--- 9

Smith, After the Flood: How Strategic Planning

Helped One Firm Weather Changing Times,

11 Cf Counsel 4 (Feb. ee ee Sd ee 6, 8

pe ek Seth I A ER EG Ft ttt PIO ANN Bat BER Se ed BOM

INTEREST OF THE AMICI CURIAE'

Amici are sixteen law firms with a diverse array of national! and

regional practices.? Formed in different jurisdictions around the

country, each firm has structured itself and its affairs in

accordance with, and in reliance on, the specific law of the state

in which it is organized. As a consequence, amici have different

management and financial structures as well as different practices.

What they all share, however, is a vital interest in preserving

their freedom to structure legal relationships between and among

their partners in mutually agreeable and economically productive

ways.

The decision below threatens that freedom. In a ruling

contrary to this Court’s teaching, the Sixth Circuit fashioned and

applied a judge-made, general federal definition of partnership

that is considerably more restrictive than the state definition of

partnership that it should have applied. Indeed, if allowed to

stand, the new federal definition would raise questions about the

validity of partnerships organized under the specific laws of every

state. Amici therefore submit this brief in support of Ernst &

Young’s petition for certiorari.

INTRODUCTION AND SUMMARY

The threshold question in the case below was whether or not

plaintiff LaRue Simpson was a partney in the accounting firm of

Ernst & Young. See Simpson v. Ernst & Young, 100 F.3d 436,

439 (6th Cir. 1996). Simpson sued the firm under the Age

Discrimination in Employment Act (“ADEA”), 29 U.S.C.

§§ 621-634, and the Employee Retirement Income Security Act

(“ERISA”), 29 U.S.C. §§ 1001-1461, but Ernst & Young

contended that as a co-owner and partner of the firm, Simpson

was not an employee protected by either statute. Simpson v.

Ernst & Young, 850 F. Supp. 648, 649-50 (S.D. Ohio 1994).

' No counsel for any party had any role in authoring this brief, and no

person other than the named amici and their counsel made any monetary

contribution to its preparation and submission.

2 Amici are described in the Appendix to this brief.

2

Since federal courts unanimously agree that the ADEA and

ERISA protect only employees, and not business partners, see

Peterson v. American Life & Health Ins. Co., 48 F.3d 404, 408

(9th Cir.) (ERISA), cert. denied, 116 S. Ct. 377 (1995); Fountain

v. Metcalf, Zima & Co., 925 F.2d 1398, 1401 (11th Cir. 1991)

(ADEA); Wheeler v. Hurdman, 825 F.2d 257, 274-75 (10th Cir.

1987) (ADEA, Title VII and Equal Pay Act), cert. denied, 484

U.S. 986 (1987); Robertson v. Alexander Grant & Co., 798 F.2d |

868, 870-71 (Sth Cir. 1986) (ERISA), cert. denied, 479 U.S.

1089 (1987); Hyland v. New Haven Radiology Assocs. , 794 F.2d

793, 797 (2d Cir. 1986) (ADEA, Title VII), Simpson had to show

that he was not a bona fide partner in Ernst & Young, even

though he had always regarded himself as one until he was forced H

to resign. See Simpson, 850 F. Supp. at 654. H

Both the district court and the court of appeals created and

applied a general federal definition of partnership to determine i

whether the plaintiff was a bona fide partner. The district court H

found “guidance as to the nature of partnership” in the Uniform

Partnership Act (“UPA”) and federal case law, id. at 657, after

reviewing, but ultimately rejecting, the elements of partnership

established under the law of New York, the state where Ernst &

Young was organized. See, e.g., id., at 662-63 (acknowledging

that New York law permits partners to delegate all of their

management power, but ruling that “at some point, delegation

destroys partner status”). Cf. N.Y. Partnership Law § 40;

Tenney v. Insurance Co. of N. Am., 409 F. Supp. 746, 749

(S.D.N.Y. 1975) (under New York law, partner’s complete lack

of voice in partnership governance did not show lack of “partner”

status). The Court of Appeals for the Sixth Circuit did not even

consider New York law; it simply looked to the UPA and federal

case law to derive a laundry list of partnership criteria. Simpson,

100 F.3d at 443-44. “[E]valuating the undisputed facts .. .

against the common-law principles as codified in the UPA,” the

Sixth Circuit decided that Simpson was not a partner in Ernst &

Young for purposes of the ADEA and ERISA. Id.

Whether someone is a bona fide business partner — and thus

not an employee with standing to sue under federal employment

-

i

3

statutes like the ADEA and ERISA — is a question of federal

law, but that does not “make state law irrelevant.” Burks v.

Lasker, 441 U.S. 471, 477-78 (1979). A court can interpret a

federal statute either by creating general federal rules of decision

or by employing existing state law, and the presumption is that a

court “should incorporate state law as the federal rule of

decision.” Kamen v. Kemper Financial Serv. Inc., 500 U.S. 90,

98 (1991) (internal quotation and brackets omitted). Indeed,

unless a uniform rule of decision is needed, or unless the

application of the particular state law in question “‘would frustrate

specific objectives of the federal programs,’” this Court has ruled

that a federal court must apply state law in interpreting a federal

statute. Jd. (quoting United States v. Kimbell Foods, Inc., 440

U.S. 715, 728 (1979)).

The Sixth Circuit, however, ignored the state partnership law

of New York, where Ernst & Young was formed. It did not

consider whether the state-law definition of “partner” would

conflict with the goals of the ADEA or ERISA; nor did it

consider the effect that a national partnership law would have on

commercial relations predicated on state law. It made no finding

that the ADEA or ERISA require a uniform definition of

“partnership.” In short, it made none of the analyses required by

this Court before creating federal rules of partnership based on

“the common-law principles . . . codified in the UPA,” that it

then said Ernst & Young had failed to meet. Simpson, 100 F.3d

at 443-44.

By failing to give specific state partnership law controlling

effect in determining who is a partner under the ADEA and

ERISA, the Sixth Circuit has created a federal body of partnership

law divorced from the particular state laws that business partners

rely upon in forming their associations. The immediate effect of

this decision is manifest: a bona fide partner under state law was

held not to be a partner under federal law. Worse yet, the

characteristic of the partnership that the court seemed to find most

inappropriate is one of the more common features of large and

even medium-sized partnerships: the partners’ delegation of

management responsibility to an executive committee. Most

4

a —

GRE EME Ry Fetes ne

States allow partners to agree to delegate their management rights,

but the new federal rules of decision announced by the Sixth

Circuit apparently would not do so. Bona fide partnerships may

thus feel constrained to reorganize their management structures to

conform with the new federal partnership rules — or face

potentially crippling liabilities under ERISA, the ADEA, and Title

VII when their non-managing partners are found to be employees.

Creating and regulating business associations is traditionally a

state role, yet the decision below creates a federal standard for

partnership formation that is inconsistent with most states’ laws.

Having competing rules of partnership under federal and state law

would inject uncertainty into partnership formation and place

dealings among partners “under a federally created cloud.” BFP

v. Resolution Trust Corp., 511 U.S. 531, 544 (1994). Moreover,

states will no longer be able to respond effectively to business

needs by inventing new, innovative approaches to partnership, for

partnerships will still have to conform to the Sixth Circuit’s

criteria for partnership. Because the Sixth Circuit’s decision will

cause the very problems that this Court sought to avoid when it

required federal courts to consider whether to apply existing state

law before fashioning an independent federal rule of decision,

certiorari should be granted.

REASONS FOR GRANTING THE WRIT

I. THE DECISION BELOW FORCES VALID STATE

PARTNERSHIPS TO RESTRUCTURE, THREATENS

THEM WITH UNEXPECTED LIABILITIES, AND

UNDERMINES STATE SOVEREIGNTY.

The effect of the Sixth Circuit’s failure to follow this Court’s

teaching will be manifold. Since the general, federal partnership

rules that it created differ significantly from most state laws,

countless partnerships that are bona fide under state law may be

impelled to restructure to conform with the new federal rules. If

they do not reorganize, they risk potentially crippling liabilities if

their former business partners bring suit under federal

employee-protection statutes like the ADEA and ERISA.

Moreover, the existence of a general, federal law of partnership

5

could stymie some of the states’ recent and popular innovations

in partnership law and hinder the states’ ability to respond to

changing economies by creating new forms of business association

like the limited liability partnership.

A. The decision below would require partnerships to

restructure.

In essence, the Sixth Circuit required Ernst & Young partners

to meet the default provisions of the Uniform Partnership Act in

order to be considered “partners” under federal law. Simpson,

100 F.3d at 443-44. The UPA provides a “standard form

contract” that is designed for the small, “closely held business in

which all of the owners are active participants and the departure

of any owner usually has significant consequences.” I A.

Bromberg & L. Ribstein, Bromberg and Ribstein on Partnership,

§ 1.02(b), at 1:25-26 (1996). Since partnerships are as varied as

the businesses in which they engage, all state partnership statutes

allow partners to reject the standard form of partnership of the

UPA and tailor their relationship through their partnership

agreement to meet the particular needs of their business. /d.; see,

e.g., N.Y. Partnership Law § 40.

The decision below effectively negates these long-standing state

laws, for purposes of the ADEA, ERISA, and other federal

employment laws, by holding a partnership to the standards set

out in the UPA rather than the standards established in its

partnership agreement or even in its own state’s statute. Virtually

all of the factors that the court listed — the right to participate in

management, the ability to control and operate the business,

voting rights, the right to act as agent, the right to share in the

profits, the duty to share in losses, exposure to liability, fiduciary

duty, employment security, investment in the firm, ownership of

firm assets, and compensation based on profits, Simpson, 100

F.3d at 443-44 — are elements that New York law, for example,

allows the partners to reject, either by agreement or by registering

with the State. N.Y. Partnership Law § 40 (allowing partners to

agree to vary or eliminate the right to participate in management,

the ability to control and operate the business, voting rights, the

6

right to share in the profits, the duty to share in losses,

employment security, investment in the firm, and compensation

based on profits); id. § 51 (allowing partners to agree to vary or

reject co-ownership of firm assets); id. § 121-1500 (allowing

partners to register for limited liability status that eliminates their

individual exposure for the partnership’s liabilities). Under the

Sixth Circuit’s rules, however, partners could not vary or

eliminate any of these standard-form features without risking the

validity of their partnerships under federal law.

The problem, of course, is that most modern partnerships are

based on partnership agreements that do vary and even eliminate

one or more of the partnership features provided by the UPA

default provisions. The standard form of partnership is a far cry

from the modern, complex partnerships that predominate business

today. See Richard, How Firms Manage, 18 Pa. Law. 20, 22

(1996); I A. Bromberg & L. Ribstein, Bromberg and Ribstein on

Partnership, § 1.02(b), at 1:25-26.

The legal profession provides an apt illustration of how out of

step the standard form of partnership — the form that the Sixth

Circuit would impose on all partnerships — is with modern

economic conditions. As a consequence of the dramatic growth

that law firms and partnerships have experienced over the past

few decades, most law-firm partnerships have adopted some form

of centralized management. Richard, How Firms Manage, 18 Pa.

Law. at 22; Smith, After the Fiood: How Strategic Planning

Helped One Firm Weather Changing Times, 11 Of Counsel 4, 5

(Feb. 3, 1992); see Samuelson, The Organizational Structure of

Law Firms: Lessons From Management Theory, 51 Ohio St. L.J.

645, 652 (1990) (explaining that “[lJeadership in law firms is

exercised by one or several managing partners”); see generally R.

Nelson, Partners With Power: The Sociai Transformation of the

Large Law Firm 91 (1988) (describing traditional law firm

management as involving “direct administration by leading

lawyers, aided only by a part-time managing partner, with no

regular monitoring of internal performance measures or financial

information”). Even firms with just 12 to 15 partners find that

the democratic governance typical of UPA “standard form”

eee

7

partnerships is “too cumbersome to be practical.” Richard, How

Firms Manage, 18 Pa. Law. at 20. Such firms usually delegate

management and control to committees that handle the details of

day-to-day governance. Larger firms find that committee-style

governance can be as unwieldy as democratic governance, and

“typically organize in a more hierarchical fashion.” Jd. at 21.

Some have even adopted corporate-style matrix organizations,

complete with CEOs. Samuelson, The Organizational Structure

of Law Firms: Lessons From Management Theory, 51 Ohio St.

L.J. at 671-72 n.194.

The move toward centralized management is not peculiar to

law firms, however, for it stands to reason that increases in size,

regardless of line of business, “create[ ] pressure on organizations

to rationalize their structures by developing more sophisticated

managerial and administrative frameworks.” Samuelson, The

Organizational Structure of Law Firms, 51 Ohio St. L.J. at 645;

accord II A. Bromberg & L. Ribstein, Bromberg and Ribstein on

Partnership, § 6.03(b), at 6:39-40 (1996). It is not difficult to

see why the UPA’s provision for “equal control” is ill-suited to

efficient business operation in an organization of any appreciable

size. “Democratic governance often fails to produce a coherent

managerial approach and the time required to reach decisions is

substantial.” Jd. at 652; see Richard, How Firms Manage, 18 Pa.

Law. at 20. Moreover, when professionals are required to

consider, debate and vote on even the most trivial aspects of

doing business — such as negotiating and renegotiating leases and

employment contracts — they have considerably less time in

which to practice their professions and generate income for

themselves and their firms. Many professionals prefer to leave

the more mundane aspects of business operation to a process

agreed upon in a partnership agreement.

Unfortunately, they may no longer have that choice.

Partnerships that want to ensure that they measure up to the rule

of law established below may have to reorganize their

management structure to conform to the UPA’s standard form.

While it is true that the court below created a general,

multifaceted federal test for partnership, it is also true that three

8

of the eleven factors that it listed — the right to participate in

management, the ability to control and operate the business, and

voting rights — would require a more traditional management

structure than many modern firms have.

Moreover, many of the remaining factors of the Sixth Circuit’s

test (such as exposure to personal liability and compensation

based solely on ownership share) are similarly lacking in modern

partnerships. See, e.g., Keating, Donn, Coleman & Hester,

Limited Liability Partnerships: The Next Step in the Evolution of

the Unincorporated Business Organization, 51 Bus. Law. 147,

147 (1995) (discussing development of limited liability in modern

partnerships); Smith, After the Flood, 11 Of Counsel, at 6

(discussing performance- and _ responsibility-based partner

compensatic ‘n modern partnerships); Partner Compensation:

How Three Firms Split the Take, 95-5 Compensation & Benefits

for L. Off. 1 (1995) (same). Contrary to the assumption of the

court below, it is not uncommon for partnerships to base profit

distribution on partner performance rather than on some

ownership formula, II A. Bromberg & L. Ribstein, Bromberg and

Ribstein on Partnership, § 6.02(b), at 6:11-12, just as it is not

uncommon (as some of the amici can attest) for firms to assist

new partners in getting loans to cover the cost of their capital

contributions. In fact, many modern professional services

partnerships have all three features: centralized management,

assistance in securing loans for capital contributions, and

performance-based partner compensation. If such firms want to

ensure that their partners are considered bona fide under federal

law, they may have to reorganize their business and financial

structures to meet the new federal criteria.

B. Under the decision below, partnerships that do not

restructure may be subject to huge, unanticipated

liabilities.

Since conforming to the Sixth Circuit’s idea of partnership

would entail the adoption of unwieldy management structures,

inappropriate compensation models, and individual exposure to

unlimited liability, many modern partnerships may prefer to retain

ee SSS

9

their current, state-approved form. Doing so, however, could

invite lawsuits from disgruntled former partners who could point

to the firm’s centralized management, performance-based

compensation, and other modern features to show that they were

really “employees” under the Sixth Circuit’s test, despite their

status as bona fide partners and co-owners under state law.

If bona fide partners under state law can be “employees” under

the ADEA, for example, partnerships with a mandatory

retirement age for partners may find themselves unexpectedly

subject to lawsuits for age discrimination. As employers,

business partners cannot discriminate against their employees

based on age. But partners can agree amongst themselves that

they will retire from active participation in the business when they

reach a certain age. Such agreements, which are not uncommon,

do not violate the ADEA when they apply only to bona fide

partners. See, e.g., Schwidetzsky, Is It Time to Give the S

Corporation a Proper Burial?, 15 Va. Tax Rev. 591, 622-23

(1996) (noting that accounting firms “often have mandatory

retirement ages for partners”). But if a partner who agreed to

mandatory retirement later claims that he was actually an

employee under the Sixth Circuit’s criteria, he could sue the

partnership for age discrimination under the ADEA even if he

was an admittedly bona fide partner under state law.

More importantly, business partners will suddenly find that

their benefits and pension plans could now be subject to ERISA.

See Simpson v. Ernst & Young, 879 F. Supp. 802, 828 (S.D.

Ohio 1994) (finding partnership liable for over $700,000 in

ERISA damages after finding that “partner” was an “employee”).

ERISA does not cover retirement plans that include only partners.

29 C.F.R. § 2510.3-3(b), (c)(2); see Robertson, 798 F.2d at 871.

But a pension plan that includes even one employee is subject to

ERISA’s participation, funding, and vesting requirements.

Ehrlich v. Howe, 848 F. Supp. 482, 486 (S.D.N.Y. 1994); see

Simpson, 879 F. Supp. at 812, 814-15. Ifa partnership fails to

restructure to conform to the Sixth Circuit’s federal partnership

rules, a federal court could rule that its partner pension plan

includes employees, even where all of the participants in the plan

10

are bona fide partners under the applicable state law. If one or

more of those partners fails to meet the federal partnership criteria

set out in the decision below, the partnership may well find itself

subject to huge, and potentially crippling, liabilities for unfunded

pension benefits.

C. The new federal rules fashioned by the lower court

undermine the states’ ability to foster business develop-

ment.

The decision below would upset not only the expectations of

business partners who relied on particular state laws in forming

their partnerships, but also the ability of the states themselves to

respond effectively to business needs. Creating and regulating

business associations is traditionally a state role, but the decision

below establishes a general, federal standard for partnership

formation that is inconsistent with most states’ laws. Since

partnerships will have to conform to the new federal law of

partnership as well as any state standards, any attempt by the

States to respond to changing business conditions by changing the

parameters of partnership law could be ineffective. The decision

be'ow could thus effectively freeze the evolution of partnership

law.

That freeze would come during the midst of a major overhaul

of state partnership law. The past few years have seen both the

complete revision of the Uniform Partnership Act and the birth

(and rapid growth) of the Limited Liability Partnership. A.

Bromberg & L. Ribstein, Bromberg and Ribstein on Limited

Liability Partnerships and the Revised Uniform Partnership Act

xvii (1997). After the savings-and-loan debacle in the 1980s

resulted in a slew of malpractice suits against the law and

accounting firms that had done work for failed savings-and-loans,

the limitations of the traditional partnership form came home to

roost, for even partners who had nothing to do with their firms’

savings-and-loan work were held liable for their partners’

conduct. Jd. at 3. Business owners lobbied for another option,

and states seeking business development responded by creating the

1]

Limited Liability Partnership. J/d.; Keating, Donn, Coleman &

Hester, Limited /iability Partnerships 51 Bus. Law., at 158.

Limited Liability Partnerships (“LLPs”) are general

partnerships subject to all of the same laws as _ regular

partnerships, with the added benefit that the partners are not

individually liable for the debts and liabilities of the partnership.

Thus, 2 modern partnership with centralized management and

performance-based compensation can register for limited-liability

status that protects the partners from personal liability. Since an

LLP is the same general partnership that it was before it

registered, see, e.g., N.Y. Partnership Law § 121-1500(d), it is

subject to the same default rules as other partnerships — and has

the same ability to draft around them. The LLP provision simply

allows one more way in which to deviate from the standard form

of partnership.

The first Limited Liability Partnership (“LLP”) laws offered

partners protection only from certain forms of tort liability. A.

Bromberg & L. Ribstein, Bromberg and Ribstein on Limited

Liability Partnerships and the Revised Uniform Partnership Act at

3. But Delaware, in keeping with its “policy of becoming the

most favorable state for business organizations,” id. at 10,

expanded the liability shield to cover any misconduct, tort or

contract. /d. at 11. Other business-oriented states followed suit,

and New York expanded the protection even further to shield

partners from liability for essentially a// partnership obligations of

any kind. /d. at 12-13. By 1996, just five years after the

introduction of the LLP, forty-six states and the District of

Columbia had adopted LLP provisions, many offering liability

protection indistinguishable from that given to corporations. /d.

at 16.

Businesses have been quick to adopt the new form. After 127

years as a general partnership, Goldman, Sachs & Co. converted

to an LLP. /d. All of the “Big 6” accounting firms have

converted, as have thousands of other partnerships. Jd. (even as

early as 1995, over 800 law firms alone had converted). Courts

throughout the country have even modified the rules governing

12

the legal profession to allow attorneys to practice in Limited

Liability Partnerships. See, e.g., Ohio Gov. Bar R. Ill, § 1. The

wide and rapid acceptance of the new form of business

partnership demonstrates the states’ success in meeting the

evolving needs of business.

That success, however, could be undermined if the decision

below were to stand. If federal courts refuse to recognize

partners as “bona fide” when they do not share in the losses and

liabilities of the partnership, particularly when they have also

delegated their management and control rights to others, some of

the thousands of partnerships that have registered for limited

liability status will no doubt find that the advantages offered by

their states’ laws have been completely negated by the federal

courts. The states’ authority to create new business structures to

respond to modern business needs will be severely undermined,

and laws meant to make state partnerships more secure in today’s

competitive marketplace will instead add to the uncertainty of a

partnership’s status under federal law.

Il. THE SIXTH CIRCUIT’S DECISION TO FASHION

FEDERAL RULES OF PARTNERSHIP LAW CON-

FLICTS WITH THE DECISIONS OF THIS COURT.

The many adverse effects of the decision below could have

been averted if the court had simply followed this Court’s

teaching. When Congress fails to define a statutory term that is

traditionally a matter of state law, this Court looks to the relevant

state’s law to determine the term’s meaning. See, e.g., De Sylva

v. Ballentine, 351 U.S. 570, 580-82 (1956) (applying California

family law to determine meaning of “child” in Copyright Act);

Barnhill v. Johnson, 503 U.S. 393, 398 (1992) (using New

Mexico law to define “property” under Bankruptcy Act).

Likewise, when Congress leaves a gap in a federal statute, this

Court presumes that specific state laws should fill the gap,

“particularly . . . in areas in which private parties [expect to] be

governed by state-law standards,” such as corporate law. Kamen,

500 U.S. at 98.

13

In United States v. Kimbell Foods, this Court held that the

choice between using state law or fashioning federal rules to

interpret a federal statute depends on (1) whether the issue

requires “a nationally uniform body of law”; (2) “whether

application of state law would frustrate specific objectives of the

federal programs [or statutes involved]”; and (3) whether

“application of a federal rule would disrupt commercial

relationships predicated upon state law.” Kimbell Foods, 440

U.S. at 728-29. There is no reason why the same principles

should not apply here.

The Sixth Circuit, however, did not consider any of these

principles before forging general federal rules of partnership law

that are completely divorced from the myriad of state laws under

which countless partnerships, including those of the amici, were

formed. This Court’s teaching, however, cannot simply be

ignored. Had the lower court followed the principles applied in

De Sylva or the analysis set forth in Kimbell Foods, it would have

had to use the existing law of New York to provide the federal

definition of “partners” who are not “employees” protected under

the ADEA and ERISA. The Sixth Circuit’s failure to apply these

principles is directly contrary to the decisions of this Court.

A. Determining whether an ERISA or ADEA plaintiff is a

bona fide partner does not require a nationally uniform

rule of law.

The determination of who is a “partner,” and thus not an

“employee” protected by ERISA and the ADEA, is a classic

example of the type of decision that this Court leaves to the

“permissible variations” of state law. De Sylva, 351 U.S. at 581;

see United States v. Yazell, 382 U.S. 341, 354-56 (1966)

(comparing cases where Court has found need for uniform

standard against those where state law sufficed). Federal statutes

that use standards traditionally established by state laws — the

definition of “child” or the powers of corporate directors, for

example — do not require uniform federal solutions because

Congress enacted the statutes “against the background of existing

state law,” presumably with the assumption that those state laws

14

would provide the controlling standards. Burks, 441 U.S. at 478.

See, e.g., Kamen, 500 U.S. at 98 (borrowing state law on powers

ef corporate directors to interpret federal securities law); Kimbell

Foods, 440 U.S. at 728 (incorporating state commercial law to

determine priority of liens arising from federal loan programs);

Burks, 441 U.S. at 477-79 (requiring application of state

corporate law to determine power of corporate directors to

terminate derivaiive suit under Investment Company Act); De

Sylva, 351 U.S. at 580-82 (applying state family law to determine

meaning of “child” in Copyright Act).

In De Sylva v. Ballentine, for example, this Court looked to

state law to determine whether an illegitimate child was a “child”

of a deceased author, entitled to renew the author’s copyright

under the Copyright Act. De Sylva, 351 U.S. at 580. Despite

the variations in state-law definitions of “child,” the Court used

California family law to define “child” since family law is a

traditional area of state, not federal, concern:

To decide who is the widow or widower of a deceased author,

or who are his executors or next of kin, requires a reference

to the law of the State which created those legal relationships.

The word “child{ ],” although it to some extent describes a

purely physical relationship, also describes a legal status not

unlike the others. To determine whether a child has been

legally adopted, for example, requires a reference to state law.

Id. Similarly, the Court in Burks v. Lasker held that because

“[c]Jorporations are creatures of state law,” “the first place one

must look to determine the powers of corporate directors is in the

relevant state’s corporation law.” Burks, 441 U.S. at 478

(quotation omitted). As this Court has consistently held, “[t}he

presumption that state law should be incorporated into federal

common law is particularly strong” — and thus the need for

uniformity correspondingly weaker — “in areas in which private

parties have entered legal relationships with the expectation that

their rights and obligations would be governed by state-law

standards.” Kamen, 500 U.S. at 98.

15

Indeed, matters of traditional state-law concern have not been

at issue in those cases in which the Court has found a need for

national uniformity, and thus a need to create a federal rule.

Yazell, 382 U.S. at 354-55 (describing cases finding need for

uniform rule). As this Court observed in Yazell, the decisions

choosing general federal standards “typically relate to programs

and actions which by their nature are and must be uniform in

character throughout the Nation.” Jd. at 354. Generally, such

programs neither implicate traditional areas of state-law concern,

nor involve the rights of private parties who entered legal

relationships that they expected to be governed by state law.

This case, however, does both. Partnerships, like corporations

and domestic relations, are creatures of state law. Zola v.

Gordon, 685 F. Supp. 354, 364 (S.D.N.Y. 1988); Hauer v.

Bankers Trust New York Corp., 65 F.R.D. 1, 3 (E.D. Wisc.

1974). Since partners expect that their rights and obligations as

partners will be governed by state law, federal courts have

generally looked to the law of the relevant state to determine

whether someone is a bona fide partner. Fegley v. Higgins, 19

F.3d 1126, 1132 (6th Cir.) (borrowing Michigan partnership law

in holding partners jointly liable for co-partner’s violation of the

Fair Labor Standards Act), cert. denied, 115 S. Ct. 203 (1994);

Ballard v. United States, 17 F.3d 116, 118 (Sth Cir. 1994)

(applying Texas law to determine if person was a partner for

employment tax purposes); Jn re Phillips, 966 F.2d 926, 933 (Sth

Cir. 1992) (applying Texas law because defining “general

partner” was “exclusively the task of state partnership law”); Jn

re 211] Associates-Chicago, 580 F.2d 705, 708 (4th Cir. 1978)

(looking to Virginia law to determine meaning of “partnership”

under the Bankruptcy Act). Even this Court implicitly recognized

that partners expect their relationships to be governed by

particular state laws when it borrowed Pennsylvania partnership

law to decide whether a Pennsylvania partnership was separate

entity for Fifth Amendment purposes. Bellis v. United States,

417 U.S. 85, 96-100 (1974).

Moreover, there simply is no need for a uniform definition of

partnership under the ADEA and ERISA. Courts must already

16

look to state law to define “employee” under those statutes, see

Madonia v. Blue Cross & Blue Shield, 11 F.3d 444, 449 (4th Cir.

1993) (citing Nationwide Mutual Ins. Co. v. Darden, 503 U.S.

318, 322-23 (1992), and holding that state law must be used “[t]o

discern common law principles” applicable as a result of Darden’s

mandate to fill gaps by looking to established common-law

meanings), cert. denied, 511 U.S. 1019 (1994), so using state law

to define “partner” will not entail any extra effort in

administering the statutes. Kimbell Foods, 440 U.S. at 729-33

(adoption of uniform federal law not warranted by administrative

convenience where agency already considers state law in applying

Statute). There is thus no need to create a uniform federal rule of

partnership.

B. Applying state partnership law to determine whether an

ADEA or ERISA plaintiff is a bona fide partner would

not frustrate the objectives of the ADEA or ERISA.

Congress intended the ADEA and ERISA to protect

“employees” (more precisely, employees who are not specifically

exempted), and only employees, from prohibited employment

practices. See 29 U.S.C. § 621(b); id. §§ 1002(7), 1140.

Neither statute protects bona fide business owners, whether

partners or other employers; thus, neither statute embodies an

unlimited federal policy of eradicating discrimination. See

Wheeler, 825 F.2d at 275-76. Instead, the statutes’ goals are

expressly limited by the scope of their prohibitions and remedies

to protecting employees.

Applying state law to determine who is or is not a partner will

not frustrate the statutes’ goal of protecting employees, even if it

turns out that a plaintiff is a true business partner under a

particular state’s law, and not an employee entitled to sue under

the ADEA or ERISA. State law “cannot be considered

‘inconsistent’ with federal law merely because [it] causes the

plaintiff [in a particular case] to lose the litigation.” Robertson v.

Wegmann, 436 U.S. 584, 593 (1978); see also Burks, 441 U.S.

at 479. Moreover, there is nothing irrational or inequitable about

denying partners the same protection against discrimination or

17

retaliation that is afforded to employees. As the Fifth Circuit has

explained, “[e]mployees in the traditional employer-employee

relationship are more vulnerable than partners in a partnership are

to abuses because . . . a partner has more control and input than

does an employee.” Robertson, 798 F.2d at 870. Moreover,

partnerships “contain{ ] a self-policing feature largely absent in

the typical employer-employee relationship” because “partners

have an incentive not to agree to provisions that may harm certain

members of the partnership because each partner knows that he

could end up being the partner who is harmed.” Robertson, 798

F.2d at 870. And to the extent that partners find it expedient to

delegate their control to a managing partner or to a management

committee, which will often be the case in large partnerships,

there is every reason to honor their “abdication of rights” if it is

valid under generally applicable state partnership law. Wheeler,

825 F.2d at 274. See also Runyan v. National Cash Register

Corp., 787 F.2d 1039, 1044 (6th Cir.) (en banc), cert. denied,

479 U.S. 850 (1986).

Although it would frustrate federal anti-discrimination laws and

ERISA to permit employers to avoid their strictures by merely

labeling their employees as “partners,” no state attaches

talismanic significance to whether or not the parties term their

relationship a “partnership.” See generally | A. Bromberg & L.

Ribstein, Bromberg and Ribstein on Partnership § 2.05(c), at

2:56, 59-60. Certainly, the State of New York does not. See,

e.g., Martin v. Peyton, 158 N.E. 77, 78 (N.Y. 1927) (holding

that, because express statements in contracts “may be a mere

sham to hide the real relationship,” express statements regarding

partnership intent “are not conclusive” because “[m]Jere words

will not blind us to the realities”); Brodsky v. Stadlen, 526

N.Y.S.2d 478, 480 (App. Div. 1988) (“It should be noted that

calling an organization a partnership does not make it one.”).

Absent such a situation, there is no federal objective that is

frustrated in any way by applying and giving controlling effect to

the pertinent state business-associations law in deciding whether

an individual is an “employee” or a “partner” for these purposes.

18

See De Sylva, 351 U.S. at 581 (as long as state does not define

“child” in a way contrary to ordinary usage, state law controls).

C. Applying a federal definition of “partner” under the

ADEA and ERISA would disrupt commercial relations

predicated upon state partnership law.

Because partnership agreements are drafted against the

background of state partnership law, there is ordinarily a

substantial degree of certainty in forming partnerships: so long

as the detailed provisions of the state’s law are followed, a valid

partnership will result. Business people form partnerships with

the expectation that the law of the particular state where they are

organized will govern their rights, obligations, and dealings as

partners. Cf. Kimbell Foods, 440 U.S. at 739-40 (businessmen

depend on state commercial law in structuring financial

transactions). That expectation, however, would be upset by the

application of a general federal rule of partnership that differs

from the state’s rules.

Having competing rules of partnership under federal and state

law would inject uncertainty into partnership formation and place

dealings among partners “under a federally created cloud.” BFP

v. Resolution Trust Corp., 511 U.S. at 544. Under the Sixth

Circuit’s decision, for example, partners who relied on their state

partnership law to form a limited liability partnership with

centralized management could now find that those partners who

delegated their management rights, and thus have neither

management control nor personal liability for partnership losses,

are employees for some purposes under federal law, but partners

for other purposes under state law. Such a state of affairs would

be “potentially chaotic,” as the Tenth Circuit has explained,

because “no one [would] ever quite know[] who is an

employee/partner and who is a “‘pure’ partner.” Wheeler, 825

F.2d at 274.

Moreover, the existence of a competing body of federal

partnership law would impair the ability of states to adapt their

business associations laws to the ever-changing needs of the

modern economy. Courts should not deal such a blow to federal-

19

ism (much less commerce and freedom of association) without

clear direction from Congress. See, e.g., Gregory v. Ashcroft,

501 U.S. 452, 461 (1991) (applying this principle to exclude state

judges from the scope of the ADEA). Indeed, as then-Judge Ruth

Bader Ginsburg wrote in a joint opinion with one of her collea-

gues: “[I]f Congress intended displacement of state law . . . one

would expect to find a clear statement to that effect. Particularly

in an area traditionally in the state’s domain, such as sales law,

the likelihood is that the national legislature, when it intervenes,

and does not say otherwise, opts for the little rather than the

much.” Walsh v. Ford Motor Co., 807 F.2d 1000, 1016 (D.C.

Cir. 1986) (footnote omitted), cert. denied, 482 U.S. 915 (1987).

D. The Sixth Circuit should have applied state law to

determine whether Simpson was a “partner.”

Because there is no need for uniform rules of partnership under

federal employment statutes like the ADEA and ERISA, the Sixth

Circuit should have followed the analysis of Kimbell Foods before

fashioning a general federal rule of decision. If it had, it would

have considered whether the application of state law would

frustrate the goals of the ADEA and ERISA and, conversely,

whether the application of federal rules defining “partnership”

would disrupt commercial relationships based on state law. The

Sixth Circuit, however, made no such analysis before creating its

general federal rules for partnership. See Simpson, 100 F.3d at

443-44.

This mistake was no mere technical error on the part of the

Court of Appeals. Even if it is true that “the general indicia of

partners and partnerships are very similar across state lines,”

Wheeler, 825 F.2d at 267, the fact remains that partnership laws

do vary, to a greater or lesser degree, from state to state. See I

A. Bromberg & L. Ribstein, Bromberg and Ribstein on Partner-

ship § 1.02(b), at 1:27 (“Despite the prevalence of the U.P.A.

and the R.U.P.A., and their exhortations for uniform interpre-

tation, there are variations in the wording of the acts as passed by

the several legislatures and in the way the act has been construed

by the courts.”) (footnotes omitted). Because such “nuance[s] can

20

be important” even if the laws of the various states otherwise bear

much in common, a federal court simply cannot abstract general

principles of law as a substitute for a detailed analysis of the law

of the relevant state. Jn re Rhone-Poulenc Rorer, Inc., 51 F.3d

1293, 1300 (7th Cir.), cert. denied, 116 S. Ct. 184 (1995).

When this Court’s decisions require the incorporation of a specific

State law — New York law — as the federal rule of decision in

interpreting a term in federal law, the Sixth Circuit is simply not

free to refer instead to some generalized version of state law.

CONCLUSION

For the foregoing reasons, and for the reasons stated in the

Petition, certiorari should be granted.

Respectfully submitted,

KATHLEEN B. BURKE

JONES, DAY, REAVIS & POGUE

North Point

901 Lakeside Avenue

Cleveland, Ohio 44114

(216) 586-3939

GLEN D. NAGER

(Counsel of Record)

SHARON MOLLMAN ELLIOTT

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005

(202) 879-3939

May 1, 1997 Counsel for the Amici

SS She oe dm ho CR eA NAP SOA fas AANA Raf A 5 Ab Re AR cl i is nt ac SO AEB ARES ALAND LEELA LARISA ART AE PHBE ALS OR

APPENDIX

APPENDIX

This brief amici curiae is submitted on behalf of the following

law firms.

Arnold & Porter (a D.C. partnership)

Davis Polk & Wardwell (a New York partnership)

Dickinson, Wright, Moon, Van Dusen & Freeman

(a Michigan partnership)

Fried, Frank, Harris, Shriver & Jacobson

(a New York partnership)

Fulbright & Jaworski L.L.P. (a Texas registered limited

liability partnership)

Jones, Day, Reavis & Pogue (an Ohio partnership)

King & Spalding (a Georgia partnership)

Latham & Watkins (a California partnership)

O’Melveny & Myers LLP (a California limited liability

partnership)

Paul, Hastings, Janofsky & Walker LLP (a California

partnership)

Seyfarth, Shaw, Fairweather & Geraldson (an Illinois

partnership)

Shearman & Sterling (a New York partnership)

Skadden, Arps, Slate, Meagher & Flom LLP (a New

York limited liability partnership)

Vorys, Sater, Seymour and Pease (an Ohio partnership)

Weil, Gotshal & Manges LLP (a New York limited

liability partnership)

Wiley, Rein & Fielding (a D.C. partnership)