Here Today, Gone Tomorrow

By Deanna S. Brocker and Douglas J. Brocker

The one thing we can always count on is change. It is the exception to find a lawyer who has remained at one law firm his entire career. If we know that the lawyers we work with now may not be there a year or two from now, then why aren’t lawyers and law firms better prepared to handle the departure of their partners and employees? Domestic lawyers advise their clients with respect to prenuptial agreements and corporate lawyers recommend shareholder or buy-sell agreements to handle changes in relationships between parties. Lawyers, too, can benefit from a written agreement in advance that sets forth how the transition should be handled in light of the Rules of Professional Conduct.

There are four primary concerns for both a firm and the departing lawyer when a lawyer leaves a firm. The first is client notification – which clients must be notified of the departure, who may contact the clients, how and when should the notice be given, and what should the notice say. The second concerns client files — how and when should the client file be transferred from the firm to the departing attorney, whether each side is entitled to a copy of the file, and who is responsible for making them. The third concerns firm proprietary information – is a lawyer ethically permitted to take client lists or contacts, form documents, firm policies, etc. and can the firm protect such information and documentation? The fourth primary concern is legal fees – how should they be divided?

While the Rules of Professional Conduct, and more specifically the ethics opinions, clearly address some of these issues, others remain fertile ground for disputes. For example, on the first issue, the ethics opinions require that when an attorney leaves a firm, notice must be given to those clients with whom the departing attorney has a “personal professional relationship.” These opinions require that the notice inform the clients of their right to counsel of their choice. The opinions also encourage the departing attorney and the firm to send a joint letter. RPC 200 and RPC 48. The opinions do not prescribe the time frame of the notice, and other than requiring that the notice explain the right to counsel of choice, do not prescribe the specific content. Agreeing on the contents of the letter, to whom it will be sent, and the timing and permissible means of the notice is often easier said than done after an attorney leaves. If drafted properly, a written employment or law firm agreement can mandate the timing, method and content of such notice and limit the departing lawyer’s ability to initiate other types of client contact. Why not agree on these items in advance?

The second issue – how to handle the transfer of the client’s files – should also be considered. Ordinarily, the file should remain with the firm until the client makes a decision concerning his or her representation. What happens to the file if the departing attorney must continue working on the matter until the client decides whether to retain him, remain with the firm, or choose completely separate counsel? The Ethics Rules are not entirely clear on this point except that the transfer or copying of the file should not interfere with the client’s representation. See generally RPC 227. To avoid disputes concerning copying and transferring client files, an employment or law firm agreement can address these issues in advance.

The Rules of Professional Conduct do not address the third issue – protection of firm proprietary information. As a professional business, however, a law firm needs to protect itself and its information. If an attorney leaves, is he or she entitled to take firm client lists, vendor lists, forms, brief bank materials, title notes, etc.? Even though the Rules of Professional Conduct prohibit non-compete agreements between attorneys, certain proprietary information can be protected from subsequent use and disclosure after a lawyer leaves a firm. An agreement can specify what types of information will be shared and what documentation must remain within the firm and the remedies for misappropriating it.

The final issue – the division of legal fees – often incites the most contentious disputes. The question most often arises when the law firm and the lawyer will be splitting a contingent fee. Part of the work was done while the lawyer was associated with the firm, and part was done after the lawyer departed. Unpublished Ethics Decision 283 provides that, for an associate, the employment arrangement or agreement should govern how the fee is handled. The same presumably is true for departing principals of a law firm if a clear arrangement or agreement exists. In the absence of an employment or firm agreement, any disputed portion of the legal fee must remain in trust until the dispute is resolved by agreement or litigation. See 2003 FEO 11. In all cases, attorneys should deal honestly with one another and make every effort not to involve the client in any negotiations or disputes over legal fees. RPC 48.

The difficulty in these situations is in agreeing, at the time of departure, on a proportional division of the fee based upon the time expended before the attorney left the firm and the amount of time spent to complete the matter. In an effort to avoid such later disputes, some law firms have drafted employment or law firm agreements that require the former attorney to pay a set amount to the firm for any file the attorney takes with him when he leaves regardless of the time spent on the matter. Another approach has been to have an associate pay the firm a percentage of the fee on a sliding scale, based only upon the amount of time the file has been in the office. Such agreements often also require the departing lawyer to reimburse the firm immediately for all costs and expenses incurred on behalf of the client, prior to obtaining any recovery. The problem with these agreements is that they likely violate Rule 5.6, Restrictions on the Right to Practice. Such provisions typically create a financial disincentive for a lawyer to continue representation of the client, thereby restricting the ability of the client to have counsel of his choice.

Rule 5.6(b) prohibits a lawyer from participating in offering or making an employment or law firm agreement that restricts the right of a lawyer to practice after termination of the relationship. 2001 FEO 10 and Ethics Decision 2000-6, interpreting this rule, provide that an employment agreement with a firm “must not create a financial disincentive that discourages or prevents a departing lawyer from representing a client from the former firm if the client chooses to follow the lawyer.” Although a firm can still minimize attorney fee disputes by appropriate advance agreement, any employment agreement proposing a fee split that heavily favors the law firm and bears no relation to the amount of work done by the departing lawyer is likely to be deemed unethical. However, agreements can be drafted to determine in advance a division of fees that complies with the Rules. Such arrangements generally are based on a reasonable advance estimate of work done on the case prior to departure of the lawyer, but not linked to the age of the file.

Employment or law firm agreements can provide a multitude of protections to a law firm and minimize the potentially unprofessional and unseemly disputes that often “come with the territory” when a lawyer leaves a firm. In general, a firm will be in a much better position when an attorney leaves if it has in place an agreement that complies with the Rules of Professional Conduct. Equally as important, such an agreement typically results in much more professional and orderly transitions and dissolutions. Without one, neither the State Bar nor the limited case law on these subjects can answer many of these questions or prevent potential disputes. There is no time like today to deal with these probable, if not inevitable, changes in your firm before someone is gone tomorrow.

Law Firms and Associations

Rule 5.6 Restrictions on Right to Practice

A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement; or

(b) an agreement in which a restriction on the lawyer’s right to practice is part of the settlement of a controversy between private parties.

Comment

[1] An agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer. Paragraph (a) prohibits such agreements except for restrictions incident to provisions concerning retirement benefits for service with the firm.

[2] Paragraph (b) prohibits a lawyer from agreeing not to represent other persons in connection with settling a claim on behalf of a client.

[3] This Rule does not prohibit restrictions that may be included in the terms of the sale of a law practice pursuant to Rule 1.17.

RPC 48

October 28, 1988

Law Firm Dissolution

Opinion outlines professional responsibilities of lawyers involved in a law firm dissolution.

Inquiry:

What are the ethical responsibilities of lawyers involved in a firm dissolution?

Opinion:

The dissolution of a law firm involves four potential areas of ethical concern for the principals involved: (a) the continuity of service to clients; (b) the right of clients to counsel of their choice; (c) the obligation of the principals to deal honestly with each other; (d) the involvement of clients in the disputes of the principals; and (e) the protection of the property of clients entrusted to the firm.

A. The Continuity of Service to Clients

Canon VII of the North Carolina Rules of Professional Conduct requires that an attorney represent his or her client zealously. This Canon, and the Rules adopted pursuant to it, require that the attorneys involved in dissolution take care that they continue to fulfill the lawful objectives of their clients.

While the client may have a contractual relationship with the firm, any professional relationships with regard to legal matters are necessarily personal as between the client and at least one identifiable attorney. Any attorney involved in such a professional relationship with a client at the time of dissolution has an obligation to continue the representation, as contemplated by the contract of employment, until the matter is concluded or, until the attorney is required or permitted to withdraw.

B. The Right of Clients to Counsel of Their Choice

The attorneys also must take care to notify present clients of the change in the relationship among the attorneys. In giving this notice, the right of clients freely to choose counsel must be preserved. Ideally, the attorneys will agree on the notice to be sent, who sends it, to whom it is sent, and when it is sent. CPR 24. In the absence of agreement, any attorneys in the firm who have had significant professional contact with the client may send such a notice. Each attorney in the firm who has an ongoing professional relationship with the client has an obligation to see to it that such a notice is sent. Rule 6(b)(1) and (2).

The attorneys must take particular care in notifying a present client for whom the firm is handling a current matter. In addition to notice of the change, such a client should be informed of the status of the matter, the attorney or attorneys who have been working on the matter, and should be asked to select an attorney or attorneys to continue the matter to conclusion. CPR 24, Rule 6(b)(1) and (2). Ideally, this communication to present clients should be sent, by agreement, over the signatures of those attorneys who have had a professional relationship with the client. Any attorney who has had such contact with the client may communicate the information and make the request.

C. The Obligation of the Principals to Deal Honestly With Each Other

In allocating the firm’s personal property, accounts receivable, fees to be received in the future for work in progress, and other assets and liabilities of the firm, the lawyers must deal with each other in compliance with their obligation to refrain from conduct involving dishonesty, fraud, deceit, or misrepresentation. Rule 1.2(c).

D. The Involvement of Clients in the Disputes of the Principals

If the dissolution gives rise to disputes among the lawyers about their respective rights to the firm’s personal property, accounts receivable, fees to be received in the future for work in progress, or other issues, the attorneys should strive to resolve such disputes amicably without involving the clients in negotiations or litigation. If the attorneys are unable to resolve such disputes by agreement, they should resolve them, where possible, by arbitration.

E. The Protection of the Property of Clients Entrusted to the Firm

A full and complete accounting of all fiduciary property of clients entrusted to the firm should be made to each client, with written request for their return or future disposition. Failure of the client to respond should be taken as a request for the return of said fiduciary property to the client, unless governed by a Court Order or proceeding to the contrary.

RPC 178

October 21, 1994

Editor’s Note: This opinion was originally published as RPC 178 (Revised).

Release of Client’s File

Opinion examines a lawyer’s obligation to deliver the file to the client upon the termination of the representation when the lawyer represents multiple clients in a single matter.

Inquiry #1:

Attorney represented Client A on complicated litigation which resulted in the settlement and voluntary dismissal of all claims. Numerous documents were filed with the court and exchanged between the adverse parties. Client A agreed to reimburse Attorney for all out-of-pocket expenses associated with the representation. After the settlement agreement was signed, Client A obtained new counsel who required Client A to sign a release requesting Client A’s file from Attorney. The release provides that only authorized out-of-pocket expenses will be reimbursed. Client A then requested a copy of the entire file from Attorney but refused to authorize Attorney to incur any out-of-pocket expenses. Is Attorney ethically required to incur the expense of copying the seven cartons of papers which constitute the file when Client A agreed to pay for the out-of-pocket expenses associated with the representation?

Opinion #1:

Yes, if Attorney would like to keep a copy of the documents in the file for her own records. Rule 2.8(a)(2) of the Rules of Professional Conduct requires a lawyer who is withdrawing from a case to deliver to the client all papers and property to which the client is entitled. By requiring a withdrawing or dismissed lawyer to provide the client with all of his or her papers and property, Rule 2.8(a)(2) recognizes that the file belongs to the client. See CPR 3, CPR 315, CPR 322 and CPR 328.

CPR 3 explains that a lawyer must provide a former client with originals or copies of anything in the file which would be helpful to the new lawyer but that “[t]he discharged lawyer’s notes made for his own future reference and study and similar things not representing a completed work product need not be turned over.”

Inquiry #2:

If Attorney represented several other clients in the same matter in which she represented Client A, is Attorney required to incur the expense of copying the file for each of the several clients she represented in the litigation?

Opinion #2:

No. Attorney must only incur the expense for making one set of copies to keep as her own record of the file. However, if Attorney has represented multiple clients on the same matter, she may give the original file to the client that the other clients agree should receive the original file and the other clients may make their own arrangements to get a copy of the file. If the clients cannot agree among themselves as to which client should receive the original file, Attorney may give the file to the client that the majority of the clients designate as the person who should receive the file or she may retain the file until such time as she receives a written agreement from all of the clients or a court order indicating to whom she should give the original file.

Inquiry #3:

Attorney is still representing a majority of the clients on the particular matter and the original file is required for the representation of the remaining clients. If Client A decides to obtain new legal counsel, is Attorney required to incur the expense of copying the file for Client A?

Opinion #3:

No. She must give Client A a reasonable opportunity to make copies of the materials in the file but does not have to do so at her own expense. However, any original documents in the file that relate solely to Client A must be given to Client A. If those original documents are not given to Client A, Attorney must make a copy for Client A at Attorney’s expense and, until the original is provided to Client A, Attorney must provide and pay for copies of the original document requested by Client A. See RPC 169.

Inquiry #4:

Who is entitled to retain the original documents procured, filed, or exchanged on behalf of all the clients?

Opinion #4:

See Opinion #2 above. If the clients cannot agree who should get custody of the file, Attorney must give each client a reasonable opportunity to copy the materials in the file at his or her own expense. Attorney may withhold the delivery of the original file to one of the clients until she receives a court order or written agreement of the clients indicating that the original file may be released to a designated individual.

Inquiry #5:

If Attorney delivered original documents, but not the entire file, to Client A during the course of the representation, has she fulfilled the requirement under Rule 2.8(a)(2) to deliver the file to the client so that she may charge Client A for additional copies of these original documents?

Opinion #5:

When Attorney delivered original documents to Client A during the course of the representation, she fulfilled the requirements of Rule 2.8(a)(2) with regard to the delivery of those original documents. See RPC 169. If Attorney kept copies of the original documents, Attorney may charge Client A for any additional copies of those documents which Attorney makes for Client A, but Attorney may not condition the delivery of these copies upon the payment of her bill for services. See RPC 169. However, to the extent that there are other documents in the file, either originals or copies, which were not previously provided to Client A, Attorney has not fulfilled the requirement under Rule 2.8(a)(2) to deliver the entire file to the client upon the conclusion of the representation. With regard to Attorney’s duty to deliver the file when she has multiple clients, see Opinions #2, #3, and #4 above.

Inquiry #6:

If the original documents were timely filed with the court or delivered to a third party on behalf of Client A and/or the other clients, has Attorney fulfilled the requirement under Rule 2.8(a)(2) to deliver the file to the client so that she may charge Client A and/or the other clients for additional copies of these original documents?

Opinion #6:

No. See Opinion #5 above.

RPC 200

January 13, 1995

Contacts with Clients after a Lawyer Leaves a Firm

Opinion rules that the lawyers remaining with a firm may contact by phone or in person clients whose legal matters were handled exclusively by a lawyer who has left the firm.

Inquiry #1:

ABC Law Firm has several offices across the state. For many years, Attorney D was the sole attorney present in ABC Law Firm’s satellite office in Little City. While he worked for ABC Law Firm, the clients for whose matters Attorney D was responsible were almost exclusively residents of Little City. These clients were not referred to Attorney D by other members of ABC Law Firm nor did the other members of ABC Law Firm assist with the representation of these clients.

Attorney D recently resigned from ABC Law Firm in order to set up his own law practice. He would like to telephone or go to see the clients that he was representing at the time of his departure from ABC Law Firm in order to inform these clients that he is no longer with the firm and to advise each client of the client’s options with regard to the continuation of the client’s representation. May Attorney D contact these clients for this purpose?

Opinion #1:

Yes, Attorney D may personally contact, telephone or write to the clients for whose work he was responsible at the time of his departure from the firm. Together with the lawyers remaining with ABC Law Firm, Attorney D has an obligation to ensure that the representation of these clients continues despite his departure from the firm. RPC 48. Notice, either written or in-person, should be given to each such client informing the client of Attorney D’s departure from the firm and advising the client of the right freely to choose counsel. Rule 6(b) of the Rules of Professional Conduct. Specifically, the client should be advised that he or she has the option of retaining Attorney D as his or her lawyer, requesting that another lawyer with ABC Law Firm take over the representation, or engaging a lawyer from another firm. The notice should also advise the client that he or she will need to instruct ABC Law Firm with regard to the disposition of the client’s file if the client chooses to move his or her representation to another law firm. Rule 2.8(a)(2).

The preferred method of advising clients of the departure of a lawyer or lawyers from a law firm is by the sending of a notice upon which the remaining and departing lawyers agree and which clearly informs the clients of their right freely to choose counsel. See RPC 48.

Inquiry #2:

May Attorney D call or personally visit clients for whose work he was responsible while he was a lawyer with ABC Law Firm but whose representation was complete at the time of his departure from the firm if the primary purpose of his contact with these former clients is to solicit employment?

Opinion #2:

Yes. Rule 2.4(a) only prohibits in-person or live telephone contact to solicit professional employment from a prospective client if the lawyer has no family or prior professional relationship with the prospective client. A “prior professional relationship” means “that the subject attorney actually was involved in a personal attorney-client relationship with the prospective client.” RPC 98. Such communication should be in compliance with Rule 2.4(b) which prohibits solicitation by written, recorded or in-person communications even when not otherwise prohibited by Rule 2.4(a) if the client has made known to the lawyer a desire not to be solicited by the lawyer or the solicitation involves coercion, duress, harassment, etc.

Inquiry #3:

May the other lawyers in ABC Law Firm telephone or visit the clients whose legal matters were being handled by Attorney D at the time of his departure in order to advise the clients of Attorney D’s departure and to discuss their representation?

Opinion #3:

Yes, the firm may designate a member of the firm who will be responsible for notifying the clients of the departure of Attorney D and advising them of the right freely to choose counsel as described in opinion #1 above.

Such verbal or written contact with these clients is not improper solicitation of prospective clients in violation of Rule 2.4(a) or (c) because the clients are not prospective clients of the firm. With regard to such clients, the remaining lawyers with ABC Law Firm have an obligation to ensure that the representation of each client continues or is responsibly transferred to an outside lawyer chosen by the client. To the extent that RPC 48 or RPC 98 imply that a member of ABC Law Firm would be prohibited under these circumstances from contacting any of the clients whose matters were being handled by Attorney D at the time of his departure from the firm unless such a lawyer had a personal professional relationship with the client, RPC 48 and RPC 98 are overruled.

Inquiry #4:

If their purpose is to solicit professional employment, may the lawyers remaining with ABC Law Firm telephone or visit clients for whose work Attorney D was responsible prior to his departure from ABC Law Firm but whose representation had ended prior to the time that Attorney D left the firm?

Opinion #4:

Yes, provided such communication does not violate Rule 2.4(b). See opinion #3.

Inquiry #5:

May the lawyers remaining with ABC Law Firm use written, telephone or in-person communications to solicit professional employment from a client whose active file was being handled by Attorney D at the time of his departure if the client has notified the firm that he or she has obtained other legal counsel and no longer needs the services of the firm?

Opinion #5:

Yes, provided such communication does not violate Rule 2.4(b). See opinion #3.

RPC 227

July 18, 1997

Editor’s Note: This opinion was originally published as RPC 227 (Revised).

Release of Title Notes to Former Client

Opinion rules that a former residential real estate client is not entitled to the lawyer’s title notes or abstracts regardless of whether such information is stored in the client’s file. However, a lawyer formerly associated with a firm may be entitled to examine the title notes made by the lawyer to provide further representation to the same client.

Inquiry #1:

Attorney A is a real estate lawyer with Law Firm X. Two years ago, Attorney A represented Client 1 in the closing of the purchase of a house and lot. Client 1 recently requested her real estate file from the firm. What documents does Law Firm X have to give to Client 1?

Opinion #1:

Rule 2.8(a)(2) requires a lawyer who has withdrawn from the representation of a client to deliver to the client “all papers and property to which the client is entitled.” RPC 178 cites CPR 3 for the proposition that a lawyer must provide a former client with originals or copies of anything in the file which would be helpful to the new lawyer except “the discharged lawyer’s notes made for his own future reference and study and similar things not representing a completed work product.”

See also CPR 3, CPR 315, CPR 322, CPR 328 and Rule 2.8(a)(2).

After a residential real estate transaction is completed, the client is entitled to originals or copies of the documents which were generated solely in connection with the client’s closing, including the following: the deed to the property, plats, title opinion, title insurance policy, all closing documents, all documents prepared for the lender and other third parties, correspondence, memoranda regarding the client’s transaction only, and documents referenced in the client’s deed or title opinion. The client is not entitled to the lawyer’s title notes, abstracts, or copies of documents not prepared solely for the client’s transaction regardless of whether such information is stored in the client’s file.

Inquiry #2:

Are the title notes, the title opinion, copies of deeds, and other similar documents in the file considered “work product” which Law Firm X can refuse to return to Client 1 or her designated attorney?

Opinion #2:

See opinion #1 above.

Inquiry #3:

While a shareholder in Law Firm X, Attorney B was retained by Client 2 to represent her in the refinancing of her home. Attorney B supervised his paralegal in performing a title search, prepared a title opinion, obtained title insurance, prepared closing documents, and otherwise represented Client 2 in refinancing her home. Attorney B subsequently resigned from Law Firm X and opened his own practice. Client 2 has retained Attorney B to assist her in another refinancing of her home. In accordance with Attorney B’s advice, Client 2 requested her original refinance file from Law Firm X. Law Firm X refused to release the file to Client 2, contending that all of the title notes and other information contained in the file, other than the actual title policy, are the “work product” of Law Firm X and Client 2 is not entitled to receive the originals or copies of this material. Attorney B’s representation of Client 2 on the new refinancing would be facilitated by the receipt of the title notes from the prior refinancing. May Law Firm X refuse to provide Client 2’s file, or a copy of the materials contained therein, to Client 2 or her attorney?

Opinion #3:

No. See opinion #1 above. If a lawyer who was formerly associated with a law firm asks the law firm for the file of a client the lawyer represented while he was a member of the firm and the use of the lawyer’s title notes will assist the lawyer in providing further representation to the same client, in addition to giving the lawyer the originals or copies of the documents noted in opinion #1 above, the law firm must give the lawyer access to the title notes made by the lawyer (or by a paralegal of the firm acting at the lawyer’s direction) during the previous representation of the client while the lawyer was still a member of the law firm. This opinion is subject to the file maintenance and destruction guidelines in RPC 209.

Inquiry #4:

Is the response to inquiry #3 affected by the fact that a paralegal employed by Law Firm X performed the actual title search?

Opinion #4:

No.

Inquiry #5:

Other clients of Attorney B when he was a member of Law Firm X have asked Law Firm X to forward their files, or copies thereof, to Attorney B. May Law Firm X refuse to send the files, or copies of the files, to Attorney B?

Opinion #5:

No. See opinion #3 above.

2001 Formal Ethics Opinion 10

January 18, 2002

Restrictions on Right to Practice

Opinion prohibits a lawyer from entering into an employment agreement with a law firm that includes a provision reducing the amount of deferred compensation the lawyer will receive if the lawyer leaves the firm and engages in the private practice of law within a 50-mile radius of the firm’s offices.

Inquiry:

Law Firm would like to enter into employment agreements with the principals of the firm. It is proposed that the employment agreement contain a provision dealing with deferred compensation. The provision reduces the amount of deferred compensation payable to a shareholder if the shareholder decides to leave the firm. Deferred compensation is reduced by 75% if the departing shareholder engages in “competitive activity” within a 50-mile radius of Law Firm’s offices. Stated in its entirety, the provision provides as follows:

If Employee’s employment is terminated by Employee under Section 2.2(e) hereof, and Employee, following such termination of employment, engages in a competitive activity as hereinafter defined, the Deferred Credit, as above determined, shall be reduced by 75%. This reduction of the Deferred Credit is necessitated because of the loss of goodwill and earnings capacity of the Corporation caused by the employee’s action. As used herein “competitive activity” means the employee’s engaging in the private practice of law other than in employment of the Corporation within a 50-mile radius of the principal offices of Corporation within a two-year period following termination of employment.”

Does this provision comply with the Revised Rules of Professional Conduct?

Opinion:

No. Rule 5.6(a) of the Revised Rules of Professional Conduct prohibits a lawyer from participating in a partnership or employment agreement with another lawyer or law firm that restricts the right of a lawyer to practice after the termination of the relationship created by the agreement except as a condition to payment of retirement benefits. The purpose of the rule, as explained in Comment [1], is to encourage professional autonomy of lawyers and to facilitate the freedom of clients to choose a lawyer. In Ethics Decision 2000-6, the Ethics Committee held that a provision of a law firm employment agreement that made the payment of a client’s account with a law firm a condition precedent to a departing lawyer’s receipt of compensation from the client after leaving the firm is a violation of Rule 5.6(a). In the same ethics decision, the Ethics Committee held that an employment agreement with a law firm “must not create a financial disincentive that discourages or prevents a departing lawyer from representing a client from the former firm if the client chooses to follow the lawyer.” The Ethics Committee also found that a provision of the same employment agreement that limited the departing lawyer’s financial compensation for representation in contingency cases to a specified hourly rate for work done for a client after the lawyer left the firm was a violation of Rule 5.6.

The proposed provision set forth in the inquiry above clearly creates a specific financial disincentive for a lawyer to engage in the private practice of law in the same community in which there are likely to be clients who will want to continue to be represented by the lawyer after departing Law Firm. This will inhibit the right of clients to be represented by their chosen lawyer. This disincentive is a violation of Rule 5.6(a) and is prohibited.

2003 Formal Ethics Opinion 11

April 23, 2004

Duty of Departed Lawyer When Dividing Fee with Former Firm

Opinion rules that a lawyer must deal honestly with the members of her former firm when dividing a legal fee.

Inquiry #1:

Attorney X worked for ABC Law Firm when she began the representation of Client in a workers’ compensation claim. Prior to the resolution of the workers’ compensation claim, Attorney X left the firm to join another firm. Client chose to continue to be represented by Attorney X. The Industrial Commission entered an order releasing ABC Law Firm from further representation and acknowledged ABC’s entitlement to a portion of any legal fee ultimately awarded in the case by the Industrial Commission.

Client’s workers’ compensation case settled. An order was entered by the Industrial Commission approving the settlement and the total attorney’s fee to be paid from the settlement. The settlement proceeds have not been delivered to Attorney X for disbursement. Separate checks for the client’s settlement proceeds and the approved legal fee will be sent to Attorney X. Is Attorney X required to notify ABC Law Firm that the Industrial Commission has awarded a legal fee in the case and to notify the firm of the amount of the fee?

Opinion #1:

Yes, the Rules of Professional Conduct require lawyers to deal honestly with each other and to comply with the law and court orders. Rule 8.4(c) and (d).

Inquiry #2:

When the check for the legal fee is received by Attorney X, where should it be deposited?

Opinion #2:

Rule 1.15-2(g) requires mixed funds to be deposited in a lawyer’s trust account intact: “When funds belonging to the lawyer are received in combination with funds belonging to the client or other persons, all of the funds shall be deposited intact.”

Inquiry #3:

Should Client’s consent be obtained prior to disbursing any of the legal fees from the money deposited into Attorney X’s trust account?

Opinion #3:

No, if the Industrial Commission has already approved the total amount of the legal fee and Client has no liability to ABC Law Firm for the fee, the dispute is between ABC and Attorney X and Client’s consent is irrelevant

Inquiry #4:

Is Attorney X required to advise Client of Client’s obligations relative to ABC Law Firm or any other party with a claim against the settlement funds?

Opinion #4:

Yes. Rule 1.4(b) requires a lawyer to explain a matter to a client to the extent reasonably necessary to make informed decisions about the representation. If Client is liable to ABC for litigation expenses or to a provider for medical expenses, Attorney X should advise Client of and may withhold the funds to pay medical liens as provided in 2001 Formal Ethics Opinion 11

Inquiry #5:

May Attorney X determine the amount of her share of the legal fee and disburse that amount to herself without the specific consent of ABC Law Firm

Opinion #5:

Yes, if Attorney X, acting in good faith, determines that her entitlement to a specified portion of the legal fee is undisputed, she may withdraw this amount from the trust account and pay it to herself. She should also disburse any undisputed portion of the remaining fee to ABC Law Firm. The disputed portion of the legal fee must remain on deposit in the trust account until the dispute with ABC Law Firm is resolved by agreement or litigation. In determining the amount of her fee, Attorney X must be guided by her duty of honesty to the members of ABC Law Firm. See opinion #1 above.

Proposed 2007 Formal Ethics Opinion 6

January 18, 2007

Valuing Effect of Lawyer’s Departure in Firm Agreement

Proposed opinion rules that a partnership, shareholders, or other similar agreement may include a repurchase or buy-out provision that takes into account the loss in firm value generated by the lawyer’s departure provided the provision is fair and is not based solely upon loss in value due to the loss of client billings.

Inquiry:

Law Firm requires all its shareholders to sign an agreement providing for the purchase of shares by incoming shareholders and the repurchase of those shares by the firm upon each shareholder’s departure. Attorney A, a shareholder at Law Firm, is leaving to join another firm. A number of clients have elected to have Attorney A continue their representation after he leaves the firm.

Pursuant to the agreement, in the event a departing shareholder takes clients with him, the repurchase obligation of Law Firm is reduced according to the following formula:

The purchase price shall be reduced . . . by an amount equal to one hundred twenty-five Percent (125%) of the work in process generated by employees of the corporation during the twelve (12) months preceding the event requiring or permitting the stock purchase on behalf of clients of the corporation for whom the shareholder or law firm with whom the shareholder is or becomes associated, performs legal services during the twelve (12) month period following the event requiring or permitting the stock purchase . . . .

In no event does the stock purchase price become reduced below zero.

Assume that the value of Attorney A’s stock is $20,000. After leaving Law Firm, Attorney A will continue to represent clients who have traditionally generated more firm revenue than the value of Attorney A’s stock. Therefore, Law Firm’s repurchase obligation to Attorney A under the circumstances is zero.

Does the above provision violate the Rules of Professional Conduct

Opinion:

Yes. Rule 5.6(a) of the Rules of Professional Conduct reads as follows:

A lawyer shall not participate in offering or making:

(a) a partnership, shareholders, operating, employment, or other similar type of agreement that restricts the right of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement;

Rule 5.6 protects two important ethical principles: the right of clients to legal counsel of their choice and lawyer mobility. Although this provision is not like a typical covenant not to compete in that it does not have geographical or temporal restrictions, it does tie the decrease in share value to the fact that the departed lawyer represents former clients of the firm. By so doing, the provision provides a disincentive for the departing lawyer to represent clients with whom the lawyer has a prior relationship, penalizes the departing lawyer for representing former clients of the firm, and restricts the lawyer’s right to practice. Moreover, the provision does not appear to measure the devaluation of the lawyer’s shares in the firm due to the lawyer’s departure. If a provision in a firm agreement penalizes a lawyer for taking clients, will dissuade a lawyer from continuing to represent firm clients after his departure, or does not otherwise fairly represent the devaluation of ownership interest in the firm engendered by the lawyer’s departure, it violates Rule 5.6(a). See e.g., 2001 FEO 10 (purpose of employment agreement was to discourage competitive activity and was, therefore, unethical).

Nevertheless, Rule 5.6(a) does not prohibit a repurchase provision in a firm agreement that takes into account the financial effect of a lawyer’s departure from a firm. However, the provision must include a more refined approach for evaluating the loss of value due to the lawyer’s departure. For example, a provision that takes into account various economic factors that affect the value of the firm’s shares, such as long-term financial commitments to staff and for space and equipment leases originally made by the firm in reliance upon the departing lawyer’s continued contribution to the firm, may be acceptable under the rule. To the extent that a contractual provision represents a fair assessment of the forecasted devaluation in the ownership interest in the firm engendered by a lawyer’s departure and does not penalize the lawyer for taking clients with him, the provision might not violate Rule 5.6(a). 19