Moving to a New Firm Involves Complex Financial, Ethical Issues
The movement of lawyers from firm to firm involves a number of complex legal and ethical issues, according to an expert panel that participated in the American Bar Association webcast “Lawyers Changing Firms.”
Jewel v. Boxer, a case decided about 19 years ago, provides guidance on fees. In the case, a four-partner law firm operated without a partnership agreement. The firm dissolved and effectively split into two firms, each with two of the four partners of the previous firm, explained Robert Hillman, professor of law, University of California Davis School of Law. The Boxer group handled personal injury cases. “This litigation arose as the Jewel group sought to share fees ultimately collected by the Boxer group on the personal injury cases,” he said. “The question in Jewel v. Boxer was did all of the partners of the old dissolved law firm have a right to share the fees generated in bringing the work in progress at the time of the firm’s dissolution to a close?”
The answer by the California court was a resounding yes, Hillman said. “Fees received on cases from work in progress at the time of a dissolution are to be shared by the former partners of the law firm in the same ratios that they shared firm income prior to the dissolution of the firm,” he said. “In reaching this conclusion, the court relied on a partnership statute in California, which was then the Uniform Partnership Act. But it also said that its conclusion was supported by the policy objective of discouraging lawyers in a law firm from hoarding clients.”
The Jewel case is not unique to California. It has been cited favorably in more than 125 reported opinions, Hillman said.
He broke the case down further, explaining the difference between a business and a partnership. “When we think about a business, we usually think in a very linear fashion,” Hillman said. “The beginning is formation and the end is dissolution. This is an incorrect view of a business formed as a partnership because there are three, not two, pivotal dates in the life of the partnership.
“First, we have the formation,” he added. “At the very end we have termination, and in between we have the dissolution of the partnership, and the key idea here is that the partnership remains alive even after it’s dissolved, until all the work in progress — for a law firm, that would be all the open cases of the firm — are brought to a conclusion.”
The point between the dissolution and the termination is called the “winding up” period, Hillman said. “The key takeaway point for law firms is that partners may have scattered to the four corners following dissolution, but the original partnership continues to exist until the winding up is complete,” he said.
What is unfinished business? Both contingent and hourly fee cases qualify, Hillman said. “Several courts … have quite sensibly concluded that hourly cases are handled under the same principles as contingent fee cases — that hourly cases, to the extent that they represent files that are open at the time of the dissolution of the firm, represent unfinished business of the firm, and the fees in most cases need to be shared with all of the other partners of the dissolved firm,” he said.
To the extent that a firm dissolves and a former partner of the dissolved firm takes on a new matter, that would not constitute unfinished business of the old firm, Hillman said.
What do you do if you don’t like Jewel? Have an anti-Jewel agreement, Hillman said. “Partnership law has always been very permissive with partners structuring their relationship any way they want to and modifying the default principles of the partnership statues,” he said. “Even the Jewel case recognizes that partners can change this dictate of sharing income simply by having an agreement that changes that result.”
There are, of course, ethics issues to consider when switching firms as well.
Allison Rhodes, partner, Hinshaw & Culbertson LLP, says the No.1 ethics rule that comes into play is 5.6. It’s the rule behind no noncompetes. “If you go behind the various cases in 5.6, you’ll see that lawyers over time have gone out of their way to try and draft around this rule, primarily in the noncompete arena, and to say you’re permitted to go and compete, but we’re going to make it so financially impossible that it actually functions as an impairment on the lawyer’s ability to practice law after the relationship because of some conditions or restraints or other aspects of the move,” she said. “So the concern with Jewel v. Boxer is if you tell a lawyer you can leave a firm and go work at another firm, but when you do, all of the fees that you collect are coming back here, you’re essentially going to go work for free for the new firm.”
There’s a clear tension between fiduciary responsibilities and duties to clients, Hillman added. “One ABA opinion expressly suggests that from an ethics opinion, there is nothing wrong with telling clients [that you are leaving a firm] before telling the firm,” he said. “Don’t talk to your clients before your partners.”
This CLE was sponsored by the ABA Center for Professional Responsibility, Solo, Small firm and General Practice Division, Law Practice Management Section, Section of Litigation and Center for Professional Development.