# Amicus Curiae Brief — Ernst v. Simpson

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1997
- **Citation:** 520 U.S. 1248

## Text

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)

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_0506%3A2. Public record. Not legal advice.