Ethics for Solo Start-up Firms

By Joel Mark

As more and more law firms and corporations are trimming their sails in these stormy economic times, more and more of their employee lawyers are finding themselves “suddenly solo”—cast out of the mother ship and on their own. Whether let go with a generous severance package or unceremoniously tossed over the side as so much jetsam, these lawyers must find a way to land on their feet; usually, the only viable option is to start a solo practice.

This article discusses some of the ethical issues that these suddenly solo lawyers can face, including conflicts of interest, restrictions on soliciting clients from their former firms, solicitation of former co-workers, advertising, competency, trust accounts, and other ethical issues of which they must be mindful as they set out to develop a viable and successful solo law practice as quickly as possible and, one hopes, as ethically as possible. This article is not a scholarly presentation of the answers to the challenges these suddenly solo lawyers may face, as ethics rules, decisional authority, and formal ethics opinions can vary widely from state to state.

Duties to Your Former Firm
To state the obvious, the first concern you will have as a suddenly solo lawyer is figuring out where the clients are going to come from. The good news is that, once you formally have been let go by a law firm, the firm’s clients can be fair game. Well, mostly so. In fact, when the departing lawyer seeking to take a client along has worked directly for the client, the applicable ethical rules in most states usually burden both the withdrawing lawyer and the firm with the joint duty to notify clients of their right to stay with the firm or to go with the departing associate.

However, even departing associates may have some fiduciary duties to their former firm, albeit limited duties. The key is fairness—both to the former firm and to the clients. In the few cases where departing lawyers have found themselves in trouble—sometimes at the wrong end of litigation with their former colleagues—usually some unfair means have been used. This has included recruiting clients before being let go and with no notice to the law firm, use of client information not readily available to the departing lawyer (such as unauthorized access to databases, etc.), or in one extreme case intentionally disabling the firm’s computer system in order to impede the firm’s attempts to retain its own clients that were being solicited by the departing associates.

In another case, departing associates sent mass solicitation letters to the former firm’s entire client list, along with substitution-of-attorney forms with prepaid return envelopes. The court found that the associates, as former agents of their former firm, had continuing fiduciary duties not to take unfair advantage of the firm’s confidential business information, and their mass solicitations were enjoined.

On the other hand, contacting clients with whom you had a direct relationship is generally considered fair game, provided that the solicitations otherwise comply with your state’s ethical rules governing solicitations.

When a client is successfully induced to leave the firm along with you, you will have to provide the former firm with the appropriate authorization to receive the file or the required substitution-of-attorney form in litigation matters. In the case of contingent fee matters, you must take care to ensure that everyone—especially the client—appreciates that the former firm may have an interest in the contingent fee when it is recovered, usually measured by the reasonable value of the services provided by the former firm. In several jurisdictions, where a successor attorney failed to honor liens or other rights of the former counsel, the successor attorney has been sued successfully for interference with contractual relations.

Additionally, on hourly matters where the client leaves the former firm owing an account balance, you still should take care not to interfere with the firm’s right to have that account paid in full. Except in the rare case where there may be a legitimate basis to withhold payment, such as a genuine dispute over the value of the services at issue, your better course is to encourage the client to settle accounts with your former firm promptly.

When clients decline your invitation to depart with you, you still have an ongoing fiduciary duty not to do anything that may prejudice their interests by the manner in which you depart. This obligation requires you, at a minimum, to make sure that you convey to your former firm all that they may need to know to continue representing the client competently after you are gone.

The same “fairness” rules of the road that apply to soliciting your former firm’s clients also apply to soliciting its employees. In most states, contractual prohibitions on solicitation of former co-workers are prohibited as a matter of public policy. But, in some cases, secret pre-departure attempts to induce staff to leave have resulted in litigated claims of breach of fiduciary duty.

Finally, ethical considerations aside, maintaining good relations with your former firm as often as not will be an aid in building a new practice. The suddenly solo lawyer—let go usually for economic rather than performance reasons—presumably will continue to be held in the same esteem as when originally hired by the firm, if not higher. Therefore, the chances of receiving future referrals should remain relatively high. But if the departing lawyer acts detrimentally toward the former firm by taking clients or soliciting former co-workers—whether done ethically or not—or by making negative remarks about the old firm to its clients, the chances of obtaining referrals from the former firm will decrease, usually dramatically.

The Ethics of Advertising
Advertising can be another good way to find clients as you start building your new practice. But remember: Although the U.S. Supreme Court has held that advertising by lawyers is constitutionally protected commercial speech, it also has held that advertising by lawyers is subject to reasonable regulation. These regulations govern every communication by a lawyer seeking to obtain new clients, including letterheads, office signs, firm names, websites, and domain names. According to at least one state’s formal ethics opinion, the domain name “best_lawyer.com” was considered to be a misleading and deceptive advertisement.

There is an apparent split of authority, or at least a split of ethical thinking, over whether participation on a listserve or Internet chat room can be a regulated advertisement or solicitation. Even where not prohibited, however, such participation should be done carefully. Some ethics opinions regarding chat room participation have cautioned that, depending on the mental state of potential client participants, direct solicitation following a chat room introduction may be unethical. Others have cautioned about communications where the chat room participants are known to be members of the judiciary—giving rise to the possibility of some unauthorized ex parte communication with a judicial officer.

As a general rule, attorney advertising in any medium must be truthful and not misleading either in itself or owing to context. It may not guarantee any particular result. It may not imply some certification or governmental title that is not approved by the state. Targeted letters to potential clients are permissible, but they must be labeled or identified as an “advertisement.” Also, records of advertisements must be maintained in accordance with applicable ethics rules or other state regulations, including all statements made on and “screen shots” of websites. Become thoroughly familiar with your state’s ethical rules regulating attorney advertising at the outset.

Other Sources of Clients
Although they may appear to be a tempting potential source of income until your own clients are developed, be careful of interim “of counsel” and “contract attorney” relationships. Any clients with whom you may work in either of these roles most likely will be able to have you disqualified if you later are successful in obtaining any clients with matters adverse to them.

Another source of new business is referrals from colleagues. Receiving referrals from other lawyers is permitted. Paying for them may not be, except with the informed written consent of the client. Receiving referrals from nonlawyers is permitted as well. Paying for these referrals from nonlawyers, however, is not permissible under any circumstances. Some ethics opinions have dealt with arrangements where lawyers refer clients to some provider of other services, such as insurance or real estate brokerage. Most opinions have found these cross-referral arrangements to be ethically permissible but usually only where the client is informed of the relationship.

In the case of a departing attorney seeking to join another group or start a small firm with others who are asked to leave as well, the departing lawyers may share with potential new partners financial information regarding the lawyer’s economic situation at the former firm, but only the “minimum necessary” for the potential new partners to evaluate the departing lawyer’s practice. This would permit disclosure of the lawyer’s personal economic statistics and potential clients for checking on conflicts of interest, but it would not authorize revelation of the former firm’s economic information unrelated to evaluating the economic value of the departing lawyer’s practice.

And, speaking of economic concerns, you also will want to survey the market to be sure that the fees you begin to charge are not unethical or unconscionably excessive. You also will want to have a standard engagement letter. Every engagement has the potential, however remote, to wind up in a fee dispute. Experience has shown that these disputes almost invariably go better for the lawyer where a written engagement letter is in place. (See the State Bar of California website, www.calbar.ca.gov, for examples of such letters.)

Your New Solo Practice
Once you have successfully started your suddenly solo practice, and the clients are beating down the doors, your next challenge is to sort out which of your former firm’s clients who may stay with the firm may be fair game for a suit against them by one of your new clients. Once an attorney departs the former firm, the departing attorney no longer is subject to imputation rules that would have disabled the attorney while remaining at the former firm. The only ethical disability is where the departing attorney actually worked for the client being sued or otherwise was in a position to have obtained confidential information about the client that may be material to the dispute with the new client. So, unless you have decided that you have more to gain by remaining close with your former firm, you are good to go should any new client have a matter against a party represented by your old firm.

Another issue you have to consider once you have landed all your new clients is competency. Do you have the expertise as a solo to represent the client’s interests competently and vigorously? Do you have the resources to handle the matter? If the answer is no, all is not lost; you can associate with other lawyers possessing the required expertise or add staff on a contract basis to help you put out the fires. There also are benefits from such associations: They allow you to learn from more experienced lawyers and can create an incentive for a referral back to you once the associated lawyer learns how quickly you have come up to speed in the involved area of law.

Of course, before the money starts rolling in, the suddenly solo attorney should set up office accounts, including trust accounts, in accordance with any applicable IOLTA (interest on lawyers trust accounts) requirements. In most states, credit cards can be used to accept payments for services into the general account. Use of credit cards to accept payment for advances that are required to be placed immediately into trust, on the other hand, can present problems owing to the way most credit card companies comingle credit card receipts generally.

Conclusion
I feel compelled to conclude with one final caution. Perhaps my favorite “suddenly solo” situation arose in California, where the released lawyer was unsatisfied with his meager severance from his former firm. As a result, he filed liens in all of the matters on which he had worked while at the firm and asserted an interest in the ultimate contingent fee recoveries based on what he alleged was the reasonable value of his services while at the former firm. Although the court was very impressed with the novelty of the argument, it held that the liens were improper and unenforceable. But you have to hand it to the associate for trying.

Finally, for all of you who find yourself “suddenly solo” for whatever reason, I wish you the best of luck and good fortune as you work to build your new practice into a successful—and ethical—one.

 

 

  • Joel Mark is a senior partner and chair of the Litigation Group at Nordman Cormany Hair & Compton LLP, in Oxnard, California. He previously served as a member of the California State Bar’s Ethics Committee and currently serves as the presiding arbitrator of the California State Bar Committee on Mandatory Fee Arbitration. He may be reached at jmark@nchc.com .

    Copyright 2010

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