General Practice, Solo & Small Firm Division
American Bar Association
General Practice, Solo, and Small Firm Division The Compleat Lawyer
Fall 1997 copyright American Bar Association. All rights reserved.
The Sale of a Law Practice
BY ALAN E. DeWOSKIN
Alan E. DeWoskin is a sole practitioner in St. Louis, Missouri. He is past chair of the ABA General Practice, Solo and Small Firm Division. He was a writer of ABA Model Rule 1.17 and Missouri's Rule 4.1.17.
Sell a law practice? Never. Impossible. A violation of the rules fee-splitting, client confidentiality, commercialism. Never!
How could a lawyer sell his or her law practice? For ten years, the State Bar of California grappled with this issue before the Supreme Court of California adopted Rule 3-200 in 1989 to permit the sale of a law practice. In the same year, the ABA General Practice Section concurred with the State Bar of California and adopted the concept in principle.
Together, both groups fashioned the draft rule in ABA Model Rule format. Soon the ABA Law Practice Management Section and the Senior Lawyers Division spread endorsement of the Model Rule to every entity within the ABA who might be affected. In February 1990, the ABA House of Delegates adopted the new Model Rule 1.17.
Perceptive lawyers have long realized the widening gulf between the large firm lawyer and the sole practitioner and small firm lawyer. Why should a mode of practice dictate whether or not a lawyer could sell his or her law practice? After all, law firm mergers regularly take place without concerns for client rights and confidentiality of files. These sales are unregulated without concern for client rights. Still, lawyers could not sell their law practices under the Model Rules until 1990. Meanwhile, domestic relations courts across the country could value lawyers' practices, and a sole practitioner's practice was worth more to a divorcing spouse than to a widow.
When the ABA House of Delegates amended the Model Rules of Professional Conduct in 1990, adding Rule 1.17 and amending Rules 5.4(c), 5.6, and 7.2(c), it resolved the ethical problems that blocked a sole practitioner from the sale of the law practice. Since then, 15 states and one territory have approved and adopted Rule 1.17 (or a similar rule), and lawyers continue to pursue its adoption in all jurisdictions (see "Status of the Campaign for the Adoption of ABA Rule 1.17").
Because lawyers with an interest in a partnership or corporate entity may currently be paid for their interest or shares, Model Rule 1.17 benefits the sole practitioner. Sole practitioners make up a large percentage of the legal profession. A 1991 Lawyer Statistical Report showed that 44.7 percent of all lawyers who are in private practice, practice alone (The U.S. Legal Profession in the 1990s, B. Curran and C. Carson, American Bar Foundation).
Today, a sole practitioner planning retirement must make sure that clients find other counsel, as he or she phases out the practice, or else the solo needs to attract an associate or partner to whom the practice can later be sold.
Rule 1.17's guidelines, designed to protect clients' interests, eliminate the old subterfuge where some lawyers negotiated inflated values for the practice's physical assets or accounts receivable. The new rule also benefits an estate of a deceased lawyer, permitted the sale of a law practice, including its goodwill, in a single transaction. By prescribing ethical conduct in the sale, and safeguarding client confidentiality, Model Rule 1.17 protects the client. The opportunity to represent those clients who consent to the transfer of their files to the buyer becomes part of the sales transaction. The seller may transfer client files and records to the buyer, unless the client requests that the file be transferred to another lawyer.
Rule 1.17(c) does permit the purchaser to increase or change the fee previously agreed to by the seller and the client, with the client's consent, provided the fee does not exceed the fee charged by the purchaser for rendering substantially similar services. Although it may seem unfair from the client's perspective that his or her fee agreement with the seller may be altered as a condition for the purchaser undertaking the representation, the client is in no different position than if the seller retired, moved, or died without the practice being sold. The client would need to find other counsel who would not be bound by the prior fee arrangement. Rule 1.17(d) contains certain safeguards. Fees cannot be increased above the lawyer's customary charge to finance the purchase or to weed out less desirable cases.
As sole practitioners retire and die, their practices disappear. We don't know what happens to their clients. Before Model Rule 1.17, the client was adrift in a No Man's Land. Model Rule 1.17 creates a new path and new protections for a retired lawyer's clientele.
Valuation of a Law Firm by Carl Kleinman