General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 1
$ALE OF A LAW PRACTICE
BY ROBERT L. OSTERTAG
For as long as I can remember, lawyers everywhere have wondered why it is that virtually every entrepreneurial asset known to the free world's business and professional community is marketable, except for the goodwill aspect of an American law practice. Must American lawyers always be treated differently from other professionals, almost always to their detriment?
Witness the ownership of "client" files and, in some states at least, contractual statutes of limitations applicable to lawyers' malpractice cases, as opposed to the shorter tort law statutes applicable to physicians and others. Why? We repeatedly have been told that the sale of a law practice necessarily involves the disclosure of client confidences and secrets; thus, lawyers cannot sell their practices as going businesses without violating the core principle of confidentiality.
For years and years, ethics opinions from national, state, and local bar associations have held ad nauseam that the goodwill aspect of a lawyer's law practice is not a vendible commodity, that clients are not merchandise, and that lawyers are not tradesmen. They've opined that lawyers have nothing to sell but personal service, their desks, their typewriters (you remember them), and their law libraries. The canons have told us again and again that a lawyer referral should be free of pecuniary influence, and that fiduciaries (i.e., lawyers) should not profit from the sale of their positions of trust and confidence.
Courts Weighed In
Significant court decisions and ethics opinions consistent with such views have emanated over the years from states such as California, Florida, Illinois, Kentucky, Michigan, New Hampshire, New York, Ohio, Pennsylvania, Vermont, and Virginia.
An Illinois decision involving a slightly different set of facts in the case of O'Hara v. Ahlgren, et al. (127 Ill.2d 333, 537 N.E.2d 730 (1989)), an often cited authority, held that even the widow of a deceased solo practitioner could not sell the goodwill aspect of her husband's law practice. She had contracted with a law firm to do so in consideration of a percentage of whatever net income might derive from her husband's clients for five years. After about three and a half years, the firm had earned enough from the agreement to owe her a reasonably substantial sum, but she thought it owed more and sought a judicial accounting.
In its defense the firm claimed that its contract with her was unsupported by legal consideration and that it was unenforceable as public policy. It alleged that the contract called for a sharing of fees between the law firm and the nonlawyer widow, which violated the Illinois Code of Professional Responsibility-a disingenuous position under the circumstances, subject, perhaps, to the doctrine of estoppel.
The lower court, however, granted the firm summary judgment, and its decision was ultimately affirmed, first at the intermediate level and then by the state supreme court. The court opined that such arrangements would likely motivate nonlawyer sellers to refer clients to firms, not for the benefit of clients but merely for the purpose of income production. It also conjectured that law firms might provide less professional attention to files for which they shared fees. And, of course, it held that the agreement failed to meet any of the exceptions to fee sharing with nonlawyers incorporated into the Illinois Code of Professional Responsibility.
The court cited the California case of Linnick v. California State Bar (62 Cal.2d 17, 396 P.2d 33 (1964)) for the proposition that nonlawyers might enter into such arrangements primarily for financial gain. But it failed to note (perhaps it was not aware) that the California Supreme Court had recently approved a new rule of professional conduct that for the first time allowed the sale of the goodwill aspect of a deceased lawyer's practice by a surviving spouse or an estate. Finally, there was a breakthrough.
A Few Good Proponents
California's approval of the sale of law practices did not occur accidentally. While the impetus for such a rule existed within the state's practicing bar, there also was movement within the ABA, and more specifically within its General Practice Section (now known as the General Practice, Solo and Small Firm Division), for such a rule. John Krsul, then in a leadership role, asked Section member Alan DeWoskin and others to render whatever assistance they could to the California bar. They helped craft the wording of the proposal so it was compatible with, and could later become an amendment to, the ABA Model Rules.
After much effort and Alan's acquisition of substantial frequent-flyer mileage, the California proposal did pass the state bar's Board of Governors and its governing body; in 1990 a similar proposal was adopted by the ABA House of Delegates as Model Rule 1.17.
Lawyers in large firm settings have always found ways, mainly through partnership arrangements, to avoid proscriptions against the sale of law practices, but this is not true for solo and many small firm practitioners. Solo and small firm practitioners (meaning firms of from one to five lawyers) comprise about 63 percent of the privately practicing bar in this country, and solo practitioners, about 46 percent. Another 8 percent or so practice in firms of from six to nine lawyers.
The discrimination against solo practitioners throughout the decades affected almost half of the private practitioners in the United States; to the extent that it touched small firm practitioners as well, it affected almost two out of every three. Unlike the large majority of lawyers, mid- to large-firm practitioners, a substantial minority, could enjoy the benefit of income from the sale of the goodwill aspects of their practices.
A law practice, like any other professional practice, is dedicated to rendering service, and its most important financial component is its goodwill. The adoption of Model Rule 1.17 finally gave meaningful value to goodwill while also protecting clients whose lawyers had retired, become disabled, or died. Rule 1.17 emphasized the message that, while clients could not be sold, the opportunity to handle their files had value that was transferable to other professionals.
Enter Donald Rikli
Donald Rikli wasn't a high-priced litigator and didn't practice out of a downtown mega-firm in a major metropolitan area. He wasn't a powerful icon of the profession and didn't even have partners. He was a solo practitioner who practiced his profession in Highland, Illinois-population about 7,500.
He had no corporate conglomerates for clients, and he didn't specialize in mergers and acquisitions, antitrust litigation, or international finance. His clients were the folks around his town and its environs-small businesses, maybe a small local government entity from time to time-the kind of clients most familiar to small-town and uptown practitioners: just plain people, for the most part. If you consider a community of 7,500 rural, then you might think of him as "just" a country lawyer.
But Don was more than that. He was a lawyer's lawyer, and while he was pretty good at what he did and did pretty well at it, he also revered the profession he practiced and was concerned about it and about his solo and small firm colleagues. Many years earlier, in an effort to give something back, he had become actively involved in organized bar activities, first locally, then on a state level, and eventually on the national level.
For years, Don thought the ethical proscription against the sale of law practices was just high-and-mighty nonsense imposed upon us by people in high-and-mighty places who had never practiced law, didn't know how, and didn't know what they were talking about. "Why?" he asked, referring to this limitation. He agreed, certainly, that clients were not merchandise and that lawyers were not tradesmen. He had little trouble with the notion that lawyers had nothing or little else to sell but personal service. He agreed that monetary profit should not be the controlling factor in referring a lawyer, and that lawyers should not profit from their positions of trust and confidence.
But Don did not agree that the sale of the goodwill aspect of a law practice by a retiring or disabled lawyer or the lawyer's estate necessarily involved the disclosure of client confidences and secrets, or that the practice violated public policy. What "public" policy? With the impetus of California's and the ABA's adoption of Rule 1.17, and a lot of encouragement, Don set out, pretty much on his own, to change what he considered to be a court-imposed policy of discrimination against solo and small firm practitioners, not just in Highland, Illinois, but nationally. He worked especially hard in his own state of Illinois, hoping that perhaps it could become a model. Don called lawyers around the country whom he'd met through his ABA activities and told them what he had in mind, what he hoped to accomplish, and that he hoped they'd participate. Many did; and through many of them, many others did as well, so that eventually Don created a nationwide network. Solo and small firm general practitioners, at least one in every state, actively urged their bar associations to adopt resolutions on a state-by-state basis that would allow the sale of law practices. Obviously, these were uncharted waters that were likely to elicit resistance. No matter.
The Ball Started Rolling
It wasn't long after California and the ABA adopted such rules that Michigan, Wisconsin, and the Virgin Islands followed suit; suddenly, in large measure through Don's efforts and his network of supporters, the ball began to roll. One jurisdiction after another took up the issue, and all but one adopted a similar rule.
Now, almost a decade later, some 28 jurisdictions (Alaska, Arkansas, California, Colorado, Florida, Hawaii, Idaho, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Utah, Vermont, Virgin Islands, Virginia, West Virginia, and Wisconsin) have adopted Rule 1.17 or significant elements of it. Another three have allowed the sale of law practices by some other means (Kansas, Tennessee, and Washington).
Ten states have similar rules pending before their supreme courts (Georgia, Kentucky, Louisiana, Maine, Maryland, Montana, New Hampshire, New Mexico, Ohio, and Pennsylvania), and three jurisdictions (Nebraska, Texas, and Puerto Rico) have rules in various stages of consideration. Only eight jurisdictions have yet to address the subject (Alabama, Arizona, Connecticut, Delaware, District of Columbia, Nevada, Rhode Island, and Wyoming). And then, of course, there is Illinois: The supreme court of Illinois stands alone as the only court in the nation that has considered but rejected the sale of attorneys' goodwill.
Looking to the Future
To date, the rule and its state counterparts seem to have worked well. A body of law is developing, procedural issues are successfully being addressed, and lawyers are finally no longer second-class citizens with regard to the value of their life's work.
Ironically, Don Rikli, the moving force, died a few years ago. His widow made no effort to sell his Illinois law practice. She couldn't. Illinois, after all, stands alone in having affirmatively rejected the concept.
Alan DeWoskin (Missouri) and I (New York) have taken up Don's work. Most recently, Alan had direct input in Arkansas' adoption of its own Rule 1.17, and he has affirmatively assisted other jurisdictions as well, including Missouri. I pushed, however insignificantly but successfully, in New York and have provided support elsewhere as well. Together, we continue to urge the adoption of the rule upon those few jurisdictions that have not yet considered it. I'm even still working on Illinois.
For practitioners interested in pursuing such arrangements, there is practical guidance. Edward Poll, a California-based lawyer-turned-law practice management consultant, has authored The Tool Kit for Buying or Selling a Law Practice, now in its second edition, published by LawBiz Publishing Co. (800/837-5880; www.lawbiz.com). This excellent kit describes various theories used to value a practice. It contains forms necessary to format such information, both in hard copy and on diskette, and lists applicable state code sections and the exact requirements necessary to complete them. It also discusses, in audiotape format, selected negotiation techniques that will help parties complete the transition successfully. The kit is a valuable resource for both buyers and sellers.
Almost inevitably, the rule will become universal within the next few years, and solo and small firm practitioners throughout the nation will no longer suffer discrimination at the altar of "public policy." Wherever Don Rikli is, no doubt he's smiling.
Robert L. Ostertag, a former president of the New York State Bar Association, is a small firm practitioner in Poughkeepsie, New York. He was the creator of the ABA General Practice, Solo and Small Firm Division's GP Link.