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Law Firm Breakups and Lawyer Departures: The Ethical Dos and Dont's

David P. Atkins
Connecticut Lawyer
July/August 2015

This article originally published in the July/August 2015 issue of Connecticut Lawyer and is reprinted here with permission from the Connecticut Lawyer.

Like warring spouses bickering over custody of their children after their marriage breaks up, warring law partners who have separated routinely fight over custody of their own perceived "offspring": the clients.

Co-owners of any business venture are subject to a variety of contractual, common law [fiduciary], and statutory obligations when one owner leaves the business, whether to retire or to join a competing enterprise. But lawyers are subject to additional duties imposed by the Rules of Professional Conduct. Those duties run not only between the lawyers and the clients, but between the lawyers themselves. Here is a summary of the dos and dont's—for the departing lawyer and for the law firm she is leaving as well as the law firm she is joining.

Consult the Law Firm's Agreement

Whether organized as a general partnership, PC, LLP, or LLC, most law firms are governed by some form of written operating agreement. Step one in any lawyer departure; review those provisions of the operative agreement addressing the rights and obligations of individual partners and employees on one side, and the entity on the other, in the event of a lawyer' s withdrawal or the firm's dissolution.

A partnership or LLC operating agreement should, at a minimum, contain provisions addressing the rights and obligations of the withdrawing partner or member; the valuation of the withdrawing partner's equity stake [or capital account] in the firm; and the timing of the firm's payment obligation to its former partner for both undistributed income and equity. In addition, a comprehensive law firm agreement will address what firm property, if any, a departing lawyer is authorized to take.

Pre-Departure Notice to Clients

Virtually all courts and ethics bodies have concluded that a departing lawyer is permitted— prior to departure—to notify his or her clients of an imminent move from the firm. Indeed, a lawyer may be ethically required to timely notify each client for whom he or she is then actively working of the planned moved. This requirement arises from the obligations under Rule 1.4 of the Rules of Professional Conduct ["Communication"]. That Rule requires a lawyer to "keep" a client both "reasonably informed about the status of" the client' s matter, and provide the client with enough information "to permit the client to make informed decisions regarding the representation."1

The ABA Ethics Committee concluded that Rule 1.4 requires pre-departure notification to affected clients in all circum­ stances. However, the CBA's Committee on Professional Ethics slightly parted company with the ABA. It concluded that a pre-departure notice to a client "is ethically permissible, but not mandated ...."2

Whether mandated or permitted, the better practice is for the departing lawyer who contacts clients prior to departure to do so after first notifying the firm of the decision to leave. Indeed, a lawyer who departs with little or no advance notice to his or her colleagues, or deliberately conceals his or her plans to depart, is exposed to a claim by the firm for, among other things, breach of fiduciary duty.

Pre-Departure Solicitation of Clients

Although the departing lawyer may properly notify clients of planned departure, the lawyer may not, prior to departure, solicit or otherwise lure firm clients. This is particularly true if the luring is concealed from firm colleagues or involves a less than honest description to those colleagues of pre-departure contacts with clients.

The content of the pre-departure notice to clients should, therefore, be neutral and free from pitches promoting either the lawyer or her new law firm or denigrating Connecticut Lawyer July/August 2015 19 the old firm. It also should expressly confirm that the right to "stay or go" belongs to the client alone.

Pre-Departure Solicitation of Colleagues or Staff Members

As in any business venture, a law firm partner's fiduciary obligations prohibit the lawyer, prior to departure, from recruiting other owners or employees to join or follow him in leaving the firm. The standard may be less strict for firm lawyers who are not partners.

But, by far, the best practice is not to solicit any firm professional or staff member until after the lawyer lands at his or her new firm.

The Joint Notice and the "Ballot" to the Client

As noted, the departing lawyer is most likely to cross fiduciary or ethical boundaries when pre-departure preparations are surreptitious and/or dishonest.

By the same token, upon learning of a lawyer' s planned departure, the firm may not ethically block the lawyer's efforts to notify clients of the planned departure. This is because a law firm's clients and the clients' files are not the "property" of either the departing lawyer or the firm.

Departing lawyers and their firms should negotiate, prior to the lawyer's departure, the wording of a jointly delivered letter to each affected client. Such a joint notice not only complies with the ethical duty to keep each client informed. It also is the best way to minimize the suspicion and resentment triggered by unilateral efforts by each side to "grab" the client.

The joint letter should, at a minimum, contain the following information:

  1. The effective departure date
  2. The identity of the departing lawyer's new firm
  3. An express statement of the client's unfettered right of choice. This should include within the notice a written "ballot," to be completed by the client and then returned to the firm, in which the client registers his or her "vote" as follows:
    • I direct the firm to keep my file and continue its representation of me with the understanding that [name of firm lawyer] will be responsible for handling my matter
    • I direct the firm to transfer my file and the balance of my unapplied retainer deposit to [departing lawyer's new firm]
    • I direct the firm to transfer my file and unapplied deposit amount to [a different firm]
    • I direct the firm to transfer my file and unapplied deposit amount to me
  4. A reminder that, in the event the client elects to transfer his or her file, the client remains obligated to pay the firm for fees and costs previously incurred, but not yet billed, by the firm.

Conflict Checking by the Departing Lawyer's New Firm

Normally a lawyer is prohibited, absent client consent, from revealing to anyone outside his or her firm any "information relating to the representation of [the] client."3 But in negotiating to leave firm A to join firm B, both the lawyer and firm B are required to conduct a conflicts check for those clients the lawyer anticipates are likely to transfer their files to his new firm.

This obviously requires the departing lawyer to disclose to the outside firm information that plainly is confidential within the meaning of the Rules of Professional Conduct [RPC]; the identity of clients and, either directly or by implication, the nature of the representation.

Under an amendment to RPC 1.6 effective in Connecticut in 2014, a lawyer now is expressly permitted to disclose to an outside firm such information "to the extent reasonably necessary to detect and resolve conflicts of interests arising from" the lawyer's change of employment.4 The exception does not apply if the disclosed conflict-checking information would "... compromise the attorney-client privilege or otherwise prejudice the client."5

So how do the departing lawyer and the new firm meet the competing ethical demands for both client confidentiality and a meaningful conflict check? The authors of the RPC instruct as follows:

  1. The lawyer may disclose the identity of clients to the new firm only after "substantial discussions regarding the new relationship have occurred";
  2. The revealed client information should "include no more than the identity of [the client] and the [other] persons and entities involved in a matter, a brief summary of the general issues involved in a matter, and information about whether the matter has terminated"; and
  3. The transferring lawyer should not reveal even that limited amount of information if doing so would likely prejudice the client. The authors provide three examples: [a] a client considering a corporate takeover not yet publicly announced; [b] a client consulting about a possible divorce before the other spouse is aware of it; or [c] a client under a criminal investigation that has not yet resulted in publicly filed charges.

The Departing Lawyer's Removal of Documents and Files

In packing up his or her office for the move to a new firm, what documents—outside of the files clients have authorized to be transferred—is the departing lawyer entitled to keep? The ABA ethics committee concluded that the lawyer may properly take copies of research or CLE materials, pleadings, and form or template documents "to the extent they are prepared by the lawyer" and/or could be "considered in the public domain."6 Even if the "title" to such documents might technically belong to the firm, it generally serves no goal other than spitefulness for a firm to prevent a departing lawyer to take such documents.

With respect to the potentially sensitive matter of client lists, the departing lawyer may, in preparation of his or her move, create such a list. The departing lawyer may even do so for the purpose of obtaining financing for the new practice. But, whatever the purpose of the client list, he or she can create it based only on information either already known to the lawyer about each client in question, or available publicly.

As in the case of pre-departing solicitation of clients or staff, secretive or devious removal of the firm's records could amount to a breach of the departing lawyer' s fiduciary duties to the firm.

And there is a dividing line between documents arguably related to professional practice—research memos and forms— and those reflecting the firm's internal operations, compensation and personnel policies, or business development or expansion plans.7

Contingency Fee Cases: The Departing Lawyer's Duty to Protect the Firm's Interest in Any Recovery

Both the departing lawyer and the firm have particular obligations where the transferred client matter is subject to a contingency fee arrangement. In Revised Formal Opinion 31 (1988), the CBA's Committee on Professional Ethics addressed the limits on a Connecticut law firm's common law right to a "retaining" lien—to secure fees—on the file of a contingency fee client who has discharged the firm in favor of another firm. The committee sensibly concluded that if the replacement counsel—whether a lawyer who has departed the firm or a lawyer without any previous affiliation with the firm—has delivered a "letter of protection" to the client's prior firm promising to safeguard the prior firm's interest in the fee generated in the case from any settlement or verdict, the prior firm is obligated to transfer the file to the lawyer.

The Connecticut RPC specifically recognize such a "letter of protection" as among the lien-like instruments that are "directly related to the property held by the lawyer" and which thereby trigger the lawyer's obligation to segregate and hold any recovery at which the protection letter is targeted.8

And as with its other obligations to facilitate a prompt transition of the client's matter to meet the client's wishes, the prior law firm may not delay or impede the transfer of the client's file once it receives (whether solicited or not] the successor lawyer's "letter of protection."

Conclusion

Whenever a law firm breaks up or a colleague takes up a new affiliation (even with a competitor), both the firm and the departing lawyer are best served by avoiding the impulse for retribution. As mentioned, both the firm and the departing lawyer have ethical duties to ensure a smooth transition of client files in recognition of the paramount interest at stake: the client's unrestricted right to the counsel of its choosing. Neither the firm nor the lawyer should delay or obstruct the other in meeting the other's obligations. A full exchange of information and a coordinated notice to each affected client is the best way to minimize or avoid the distrust that all too often triggers a wasteful, and unseemly, lawyer vs. lawyer battle over which clients "belong" to which side.

After all, like divorcing parents urged to compromise "for the sake of the children," lawyers who are splitting up should act "for the sake of" the clients.

Notes

  1. See ABA Formal Opinion 99-414 (Sept. 8, 1999) ("Ethical Obligations When A Lawyer Changes Firms").
  2. CBA Informal Opinion 00-25 (Dec. 29, 2000) ("Notification of Clients of Lawyer's Upcoming Departure From Firm").
  3. RPC 1.6 ("Confidentiality of Information").
  4. RPC 1.6(a) commentary.
  5. RPC 1.6(c)(5).
  6. ABA Formal Op. 99-414.
  7. See Pepe & Hazard v.Jones, 2002 WL 31255522 *5 (Conn. Super. Ct. Sept. 11, 2002) (damages claims against departing law firm partner based on allegations that, among other things, he disclosed to his new firm, without the old firm's consent, records of the "financial data," including billing rates, "receipts and expenses," "forecasts for future growth," "strategic plans," "past financial history" and "realization rates on billings").
  8. RPC 1.15(f), Official Commentary Connecticut.

David P. Atkins is the chairman of the Litigation Department and the Professional Liability Section of Pullman & Comley LLC. He focuses his practice on defending lawyers and law firms as well as practice groups in other professions, in malpractice and professional liability actions and in disciplinary proceedings. He also routinely assists professionals, including lawyers, resolve disputes over partner departures and practice group dissolutions.