Big Law Firm Takes a Shortcut to Diversity

McElroy Deutsch reaches promising deal with a small minority-owned firmMorristown – Last week the Morristown law firm of McElroy, Deutsch, Mulvaney & Carpenter formally announced it had earned the right to pursue legal work that is typically set aside for businesses that are certified as minority owned. The move is likely to give the 230-attorney firm an edge over the competition when it comes to serving big corporations that are trying to direct more businesses to minority-owned suppliers of goods and services.

Historically, McElroy Deutsch hasn’t had have enough minority partners to qualify as a certified minority supplier through the National Minority Supplier Development Council (NMSDC). But instead of changing the mix of its equity owners, the firm took the shortcut of buying a 49 percent stake in Espinosa & Espinosa, a minority-owned 11-attorney firm in Weehawken headed by Juan Espinosa. His father, since retired, started the firm nearly 40 years ago after fleeing Cuba.

“Under our agreement, Espinosa & Espinosa LLP will operate as a subsidiary of McElroy Deutsch,” says Edward Deutsch, managing partner of McElroy Deutsch, who declined to say what his practice paid for the stake in the smaller law firm.

The arrangement does not make Espinosa a partner in McElroy, but does let him continue to bid for work that’s been designated for minority suppliers. It also gives him the option of tapping into the resources of his firm’s much-bigger new parent as needed.

Espinosa & Espinosa is currently certified as a minority-owned business, but the new ownership structure means it will have to reapply for certification, says an NMSDC spokesperson. The New York City-based organization certifies about 15,000 Asian, black, Hispanic and other minority-owned businesses and matches them with companies that want to purchase goods and services from such suppliers. Espinosa says he doesn’t think the recertification will present much of a problem.

To seal the deal, Espinosa restructured his firm as a limited liability partnership called Espinosa & Espinosa LLP, and transferred 49 percent of the equity to McElroy Deutsch. He chose not to take a simpler path that typically involves no equity exchange: forming a so-called strategic alliance with a larger firm.

“We believe this kind of formal arrangement will promote a long-lasting relationship,” says Espinosa. “Strategic relationships tend to dissolve after a specific project is completed.”

Not everyone sees it that way. Last week, Day Pitney, a New York law firm with offices in New Jersey, announced it had formed a “strategic alliance” with Gray Haile, a minority-owned law firm in Washington, D.C. The two firms will remain as separate entities but will “co-counsel on transactions when appropriate,” according to a Day Pitney press release.

For McElroy Deutsch and Espinosa & Espinosa, the deal already appears to be paying off. Deutsch notes that Microsoft Corp. has vowed to expand its existing relationship with the Espinosa firm, now that it can support the needs of a Fortune 500 business.

“Companies want to do work with minority suppliers, but often the minority firm is too small to take on a lot of the work,” says Espinosa.

All of the attorneys in his firm are Hispanic, and he notes that many of its clients are Hispanic-owned community-based businesses. In addition to his work on behalf of Microsoft, however, he counts such clients as AT&T, Burger King, Bank of New York and the Spanish department store chain El Corte Ingles.

Across the nation, an increasing number of large companies have committed to do more business with minority-owned enterprises.

Computer retailer Dell Inc.’s Supplier Diversity program, for example, seeks to “provide equal access to potential business opportunities” for small businesses, minority and women business enterprises and others, according to the company’s Web site. A similar program at Johnson & Johnson “is designed to ensure opportunities” for minority-owned, veteran-owned and other businesses, according to the J&J Web site.

For the most part, qualifying under these and other diversity programs means that black, Hispanic or other minority individuals must own at least 51 percent of the business. That’s why McElroy Deutsch kept its stake in the Espinosa firm to 49 percent.

For now, McElroy Deutsch will bill Espinosa for its attorneys’ time, but Deutsch says his firm will eventually instead receive a cut of Espinosa & Espinosa’s profits.

From an ethical standpoint, it’s not easy to pass judgment on deals like this, which are common in a number of industries, says Gayle Porter, an associate professor of management at the Rutgers School of Business at Camden, whose research includes the concepts of ethics and social responsibility. “If the law firms or other companies are simply appointing minorities to a partner or other ownership position without giving them real responsibility, then they’re gaming the system and engaging in unethical behavior,” says Porter. “But if the arrangement will truly be a step up for them, it can be an exemplary arrangement.”

Espinosa says he shopped the idea to a few law firms before finally striking a deal with Deutsch. It was not a quickie marriage: Talks started around mid-2006 and didn’t get finalized until a few weeks ago.

In fact, says Espinosa, the idea wasn’t even worth considering until April 2006. That’s when the Advisory Committee on Professional Ethics, which is appointed by the state Supreme Court, issued Opinion 704 that let law firms create wholly owned subsidiaries.

“Besides doing more business with large clients, being part of a bigger firm will also make it easier for us to attract and retain minority lawyers,” says Espinosa. There’ll be more work for them and more room for advancement.”

E-mail to [email protected]