Law Firm Break-Ups: FAQs
Do I keep my clients? Understanding and dealing with the dichotomy of the lawyer-client relationship and lawyer-firm relationship is essential. They are not the same, yet they are often confused. Law firms have an ownership interest in accounts receivable, but not in the clients themselves or their cases. When a lawyer leaves and his clients propose to go with him or her, the firm may initially take the position that it has ownership of the client or his case file. This is incorrect. The client in such circumstances has three choices: to remain with the firm; to depart with the lawyer; or to find different representation. Each client must be given these three choices according to the Washington State Bar Association ethics opinions. What the client elects to do is final.
Do I have to share my fees with the old firm? Perhaps. This is obviously a big issue with contingency fee cases. Contingency fees should be shared proportionally based principally on time and expense spent on the case before departure and the amount of work and expense yet to come. The Rules of Professional Conduct permit flat percentage divisions but only subject to the requirement of proportionality or in the alternative shared joint responsibility for the case. Fair arrangements are routinely reached regarding shared entitlement, on a case-by-case basis.
What about recovered costs? Most contingency fee agreements expressly obligate clients to reimburse advanced costs. And when cases are settled or won at trial, costs are routinely repaid and the departed firm’s advanced costs should be reimbursed first. The more difficult question is what happens when the case is unsuccessful. The client remains legally obligated to reimburse costs, but commonly no action is taken to collect if the case fails. Sometimes firms will demand repayment of costs at the time of the lawyer’s departure. This presents a more difficult situation. In our experience, agreements can be reached that costs will be reimbursed only upon successful completion of the case.
What about attorney’s liens? A question we’re often asked is whether the departed firm can secure its claims of entitlement to future fees with statutory attorney’s liens. The simple answer is maybe not. RCW chapter 60.40 which creates attorney’s lien rights confers those rights on persons (attorneys) not enterprises (law firms). The statute speaks in terms of “his or her compensation.” The lien statute does not cover advanced costs.
What about my noncompete agreement? Law firm operating agreements, employment agreements or shareholder agreements may contain restrictions on lawyer competition. The short answer is this: lawyers cannot legally be restricted from practicing law by noncompetition covenants, no matter how knowledgeably they were entered into. The principal exception to this rule involves retirement. Many firms include in their agreements provisions covering the retirement of partners and benefits relating to retirement. A lawyer who retires and accepts those benefits may be subject to liability if he or she re-enters the legal market.
I’m thinking of leaving. What should I not do? If you are an employee, you are bound by a legal duty of loyalty to your firm. If you are a partner, there may also be fiduciary obligations owed. As a rule of the thumb, soliciting clients before leaving the employment of the firm violates the duty of loyalty and can result in liability, which could take the form of disgorgement of collected fees. You are free to inform clients of your plans to leave, but the landscape between informing and soliciting is dangerous ground. Tread or of fiduciary Money is still owed to you under a compensation formula. What can you expect to happen? Well, if you are a W-2 employee, or if your compensation is paid in accordance with an employment agreement (whether you get a W-2 or not), then the money owed to you may be a “wage.” That term is liberally defined by statute. Failure to pay a wage, if willful, exposes not only the firm, but the “managers” of the firm individually to liability for the wages, doubled, and legal costs in collecting the wage. If you are not an employee, a lot depends upon the methodology employed by the firm in compensating attorneys. A non-wage fight can be complicated and few generalizations are helpful.
Does it matter if I’m a partner when I leave? What is generically referred to as a “partner” could be several other things from a legal standpoint: a “member” of an LLC; a “partner” of a limited liability partnership; a shareholder of a personal services corporation; or a general partner of a partnership. Your legal rights will vary based on your status. For instance, fiduciary duties are owed among partners in a general partnership and between members of an LLC, and those can be problematic. You may also be an “employee” in addition to one of the legal characterizations above. If you receive a W-2 instead of a K-1 or 1099, or if there is an employment agreement, you may be a common law employee. This gives rise to a duty of loyalty which restricts how you can plan a move cases and clients from your firm.
Should I hire a lawyer? Yes. There are a bewildering array of law firm structures governing everything from employment of associates, to partnership rights and obligations, compensation and any number of other factors which can come into play when a lawyer or lawyers leave (or are asked to leave) their firm. Professional guidance through the process guarantees a smoother transition of clients and cases, and goes a long way to minimizing the tensions which often accompany a lawyer’s departure. Leaving a law firm, particularly after a long time, is emotionally taxing. Avoid the acrimony of dealing directly with persons with whom you may have complicated relationships. Going it alone can lead you into deals driven more by the desire to be magnanimous than the need to be practical.
Who should I hire? Find a lawyer whom you can relate to on a personal level, with whom you can share all pertinent facts: even the embarrassing ones. But make sure that who you hire has an established track record of representing lawyers in firm departures. No two departure scenarios are the same. Each presents its own set of unique facts and challenges. Knowing how to navigate those challenges is essential.
How much is it going to cost me if I hire counsel? The better question is, How much is it going to cost you if you don’t, or you hire the wrong lawyers? Once problems are taken out of the hands of lawyers who are normally profoundly emotionally invested in a change of work environment, solutions often appear minimizing legal expense. If, however, litigation is involved, costs can mount quickly. Experienced counsel stay focused on the prospect of early agreement wherever possible. Quickly identifying and addressing the right issues, factual, legal and emotional, requires experience and is the best guarantee of reasonable cost and outcome.